Australia | 1:16 PM
Orica has guided to only a slightly better first half, dragged down by its primary explosives business, but strong growth in other businesses leave brokers unanimously positive.
- Orica’s 1H26 earnings to be only slightly ahead year on year
- Issues for Blasting Solutions lead to slightly lower guidance
- Digital Solutions and Specialty Mining Chemicals to grow strongly
- With the shares trading well-below valuations, brokers line up with Buy ratings
By Greg Peel
“We are one of the world’s leading mining and infrastructure solutions providers”, Orica ((ORI)) explains on its website.
“From the production and supply of explosives, blasting systems, specialty mining chemicals, to our cutting-edge digital solutions from orebody intelligence to geosolutions and comprehensive range of services, we sustainably mobilise the earth’s resources”.
Suffice to say Orica is a major products and services supplier to the mining industry in particular, and also to civil construction. The company operates under three main segments.
Blasting Solutions, somewhat self-explanatory, provides expert market solutions in surface and underground mining and construction.
Digital Solutions integrates end-to end digital workflows across the mining and civil infrastructure value chain.
Specialty Mining Chemicals supplies, most notably sodium cyanide, required for gold processing.
Orica’s share price had fallen some -20% from its February peak leading into a trading update provided by the company this week, ahead of its earnings result due in May.
Drivers of the fall include the rising Aussie dollar, a supply outage in the US of ammonium nitrate (used to make explosives), and more recently, Middle East geopolitical and petrochemical risks (noting significant exports of fertiliser typically flow through the Strait of Hormuz).
Yesterday's trading update disappointed, predominantly because of management's guidance for Blasting Solutions, and thus the share price has continued weakening.
Mixed Update
The trading update revealed Orica anticipates first half FY26 (September year-end) earnings (EBIT) “slightly higher” than the first half FY25 result of $488m, which is broadly consistent with the current consensus forecast of $493m.
UBS notes consensus estimates have been moving lower given the recent appreciation in the exchange rate.
Blasting Solutions, which up until FY25 represented some 60% of Orica’s earnings, will nevertheless produce “slightly lower” earnings in the half.
Orica said underlying demand for its premium blasting products and technology remained strong, but the strength of the Aussie dollar (up to circa US$0.70 from US$0.66 since 30 September) and lower coal production quotas in Indonesia would drag on that division.
On a constant-currency basis, the blasting solutions business was expected to be “broadly in line”.
Citi believes operational disruptions from Orica’s decision to divert excess capacity from Australia and Indonesia to ensure continuity of supply for customers in North America would also have played their part.
Given the company’s global footprint, scale and reputation, Citi thinks it is well placed to lock in medium-term contracts in North America in the near-term to plug the supply gap. This should see significant items relating to supply disruption moderate meaningfully in the second half versus the first.
On the other hand, Digital Solutions’ earnings are guided to 15% year on year growth and Specialty Mining Chemicals' is guided to 20%.
The chemicals business has been boosted by strong demand from the gold sector for sodium cyanide, while the digital solutions unit has been supported by solid fundamentals in the gold and copper markets, increased exploration activity and greater cross-selling across the portfolio.
Management, however, noted first half and FY26 cash flows will be lower year on year given forex, the US ammonium nitrate outage, and litigation costs.
Contracted ammonium nitrate (AN) supplier CF Industries’ delightfully named Yazoo City plant in Mississippi was shutdown following an explosion in November last year.
Yazoo City is likely to be down until the end of 2026. As such, UBS forecasts the full year impact at circa -$60m (post tax), though notes Orica has elected to treat these costs as non-recurring.
It is possible for Orica to source AN supply from other US plants or import AN from its Bontang facility on Borneo Island in Indonesia, Ord Minnett suggests, noting the weaker demand in that country.
Nevertheless, Ord Minnett assumes the Yazoo City plant outage means Orica will incur further charges of -$20m for supply chain costs in both the second half of FY26 and the first half of FY27, before an insurance payout of circa $50m in the second half of FY27 that will somewhat compensate for the impact of the outage.
Aforementioned litigation costs relate to a contractual dispute between Orica and CF Industries that dates back to 2023.
With regard the Middle East, Orica noted it is not seeing any constraints as yet, and its products (and inputs) are not typically transported through the Strait of Hormuz.
Orica will monitor the situation and mitigate potential impacts through its global manufacturing and sourcing network.
Cost-Out
The company launched an efficiency program aiming for more than $100m in gross cost savings in the next three years, although there is a lack of detail on just where the savings will come from. This leads Ord Minnett to incorporate only $68m of the $100m target into its modeling at this stage.
Orica's cost savings target is positive, Macquarie suggests, and was foreshadowed by this broker back in December, when Macquarie highlighted an opportunity for Orica to close the margin gap to rival Dyno Nobel ((DNL)) through cost-out and mix benefit as higher-margin Digital Solutions and Specialty Mining Chemicals grow faster than Blasting Solutions.
As a scenario, narrowing the gap by half over next three-four years would equate to circa $100m of earnings and a 10% benefit to Macquarie’s FY29 earnings forecast (all else equal).
The context to the cost-out program is important, Macquarie suggests. If revenues are falling, cost-outs are needed to "run faster to stand still".
This broker thinks Orica’s current context is conducive to success with robust explosives demand and pricing generally rational, suggesting cost-outs from position of strength, although Macquarie has not factored in cost-out benefits explicitly in its forecasts at this stage.
Macquarie also points out Orica’s balance sheet remains in good shape, with potential for a further up to $500m buyback in FY27 and further land sales to come.
Citi agrees, with the current buyback substantially complete, solid balance sheet metrics surplus, and land sale at Deer Park on the cards for the second half, Orica could look to its capital management framework which sets out scope for further buyback in the absence of near-term acquisition opportunities.
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