ASX-listed explosives maker Orica is trimming its portfolio with the closure of three overseas manufacturing plants and has confirmed that sales volumes of its key ammonium nitrate product were well below its pre-COVID expectations because of disruptions to mining.
The three plants are all in North America and make detonating systems, and Orica has plans for more rationalisation as it absorbs operations from the South American business Exsa, which it bought early this year in a $US203 million ($302 million) deal.
Orica, whose financial year ended on September 30 and will report next month, is expecting full-year EBIT (earnings before interest and tax) for 2019-20 to be slightly above $600 million. This is line with market expectations but down from $665 million in 2018-19.
In a business update Orica said its ammonium nitrate sales volumes for the second half of 2019-20 would be almost 15 per cent below the expected pre-COVID-19 volumes. This is in line with earlier guidance for sales volumes to be 10-15 per cent below expected pre-COVID-19 volumes.
Orica shares closed down 3.2 per cent to $16.11 in the wake of the news, but Morgans analyst Belinda Moore said Orica was poised for a better year in the 2020-21 financial year, the business had growth potential and its key Australian arm was performing well.
“We expect earnings growth in 2020-21 versus 2019-20, given they’ve got a number of growth projects and some of the regions are unaffected,” she said.
“We expect a better year,” she said.
Orica’s 2019-20 financial year earnings were affected by disruptions to mining activity in some countries because of COVID-19 outbreaks and restrictions.
“As we know some of their operations, particularly in emerging regions such as Latin America, have been severely impacted by COVID, mine shutdowns and everything else and rising cases. It’s been a tough second half but the good thing is the result has largely come in in line with consensus,” Ms Moore said.
“We look forward to presenting our results next month and giving an update on our strategic agenda to improve performance, extend our position as manufacturing and technology market leaders and drive further value for our shareholders,” said Orica chief executive Alberto Calderon.
In its update Orica also unveiled $170 million (pre-tax) of significant items, with $105 million in non-cash costs and $65 million in cash costs. The closure of the three North American plants is expected to generate costs of about $80 million.
The other significant items include a non-cash impairment of IT assets of about $65 million, and about $25 million of redundancy costs. The post-tax impact of all the significant items is expected to be about $130 million.
Credit Suisse analyst Grant Saligari said Orica’s lower EBIT for 2020 was not a surprise given the impact of COVID-19 on mining activities in some places. Total mining production in South Africa was down by about 10 per cent in July and underground mining in Peru had been “significantly disrupted”.
“I think you can attribute the impact on Orica’s numbers and on their volumes as almost entirely driven by end-use demand in those markets. I’d say Latin America and Africa would be the overwhelming majority of the impact,” he said.
Source: Thanks smh.com