Mining, Value-adds Underpin Orica’s Outlook

Australia | 11:54 AM

Flat first half earnings growth for Orica’s core explosives business was better than feared, while other divisions offer solid growth.

• Orica’s first half result beat consensus across all business units
• Flat, rather than lower, growth for Blasting is welcomed
• New sources of ammonium nitrate being sought
• Acquisitions provide diversity

By Greg Peel

Orica ((ORI)) 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 of Blasting Solutions (ie explosives), Digital Solutions (integrates digital workflows) and Specialty Mining Chemicals (for minerals processing).

Orica provided a trading update in March which disappointed the market, largely because Blasting Solutions, which up until FY25 represented some 60% of group earnings, was guided to produce “slightly lower” earnings in the first half (September year-end).

Management said at the time underlying demand for its premium blasting products and technology remained strong, but the strength of the Aussie dollar and lower coal production quotas in Indonesia would drag on that division.

The market looked past Digital Solutions guidance of 15% year on year growth and Specialty Mining Chemicals of 20%. The stock fell around -24% through March before finding a bottom and rallying 16% into May.

Last week Orica delivered its first half FY26 result.

It’s A Beat

The interim result beat consensus estimates across all business units.

Cashflow was much stronger than feared and the balance sheet is in strong shape, Morgans notes. Consequently, the board rewarded shareholders with a step-up in the dividend to 28.5cps (unfranked), up from 25cps in the first half FY25.

Underlying earnings and profit increased 5% and 8% year on year. In Morgans’ view, modest growth at a group level is a reasonable outcome given last year included a $15m one-off carbon credit benefit and the first half FY26 was impacted by a higher AUD (-$10m earnings hit) and lower Indonesian coal production.

At a divisional level, Blasting Solutions earnings were flat, compared to March trading update guidance of “slightly lower”.

Digital Solutions increased earnings by 25% (strong leverage to improved exploration activity) and Specialty Mining Chemicals earnings were up 20% (strong demand for sodium cyanide given high gold prices and improved manufacturing performance).

Pleasingly for brokers, Global Support costs fell -12.6% due to the initial benefits from Orica’s cost out program. The group earnings margin rose to 13.2% from 12.4%.

In line with guidance but materially better than Morgans expected, cashflow was down -6% year on year given adverse FX, one-off costs and higher working capital.

Importantly, the balance sheet is strong with gearing towards the lower end of management's target range despite the company completing its $500m on-market share buyback.

Return on net assets increased to 14.7% from 13.8% a year ago.

Disclosure

Orica's first half earnings came in around 3% ahead of market expectations. Importantly, the earnings beat was high quality, Ord Minnett suggests, underpinned by stronger operating cash flow and constructive outlook commentary from management.

Ord Minnett was encouraged by how management addressed key investor concerns, particularly around the transition away from the CF Industries ammonium nitrate contract in the US and recent plant disruptions in Australia, while also highlighting several attractive growth opportunities.

Jarden nevertheless has a nit to pick.

Orica has reduced the level of disclosure across the Blasting Solutions business, no longer providing volume or regional performance splits, hampering investor visibility of underlying performance, in Jarden’s view.

Jarden sees this occurring at a critically important juncture given:

1) considerable evolution of the North Americas Blasting Solutions operations (exit from CF Industries contract; acquisition of US explosives business Nelson Brothers);

2) the prospect that Blasting Solutions has seen considerable margin benefits from re-contracting and potential positive developments in Indonesian markets; and

3) the underlying performance of Europe, Middle East & Africa operations.

While business performance remains more leveraged to price/mix and cost-out than history, Jarden thinks the lessening disclosure introduces a greater degree of forecasting error to Orica's largest segment. 

Ammonium Nitrate

The end of the CF Industries ammonium nitrate (AN) contract left investors concerned about Orica’s ability to source sufficient AN supply to feed its explosives business, which was evident in the -24% share price fall in March.

In the US, Orica has been sourcing AN on the spot market since November 2025 following the expiry of the contract.

Despite tightening conditions in the North American AN market, exacerbated by CF Industries’ Yazoo City (Mississippi) plant outage in November, and global nitrogen disruptions linked to ongoing geopolitical conflicts, management described discussions with potential new suppliers as “very, very positive”, Ord Minnett reports.

Orica expects to secure new supply contracts by September.

While the previous CF Industries arrangement was economically attractive, management noted it was operationally inefficient, given restrictions on imports and reliance on a single plant.

Future supply is expected to be sourced from multiple North American locations, with potential incremental volume from debottlenecking nitric acid and AN capacity at the Carseland plant in Canada, which comes back on line in June.

Orica has commenced a request-for-proposal process with potential suppliers for long term AN offtake in the US, and has emphasised it will focus on diversifying its supply network to reduce freight/transport costs.

Outcomes are expected over next few months (likely a mix of domestic and global sourcing). Diversity of supply is a key focus as well as low cost delivered-to-customer via optimised logistics.

In this regard, the company expects to source closer to customers, Citi notes, which should reduce logistics and increase reliability.

In Australia, recent outages at the Kooragang Island and Pilbara ammonia plants have not had a material earnings impact, Ord Minnett reports.

Orica has mitigated disruption through imports from Indonesia and appears well positioned to benefit from global ammonia shortages and elevated freight costs.

With roughly one-third of the east coast contract book repricing each year, Ord Minnett notes there is scope for margin expansion.

Acquisitions

In early 2024, Orica acquired US-based Cyanco, a leading manufacturer and distributor of sodium cyanide, necessary for gold processing.

Cyanco has been a transformative acquisition for Orica, Jarden suggests, and continues to perform strongly. First half underlying earnings grew 20% and underlying earnings margins lifted 186bps, driven by gold/copper miner demand amidst elevated prices.

Orica remains committed to its mid-term target to deliver "high single digit" earnings growth for the segment, but Jarden thinks this could prove conservative given:

1) underlying demand strength in gold and copper markets;

2) the ability to unlock latent capacity from de bottlenecking at chemical plants in Winnemucca (Nevada) and Yarwun (Queensland); and

3) margin mix benefits from less reliance on external suppliers when market demand exceeds Cyanco's productive capacity (higher network costs).

Back in March, Orica confirmed it has reached a settlement agreement with CF Industries, effectively ending litigation that commenced in October 2023.

That settlement was designed to remove persistent litigation uncertainty and allow the firm to establish a more diversified and secure supply base for AN within the US.

Simultaneously, Orica has reached an agreement with its joint venture partner, Nelson Brothers (Alabama), to acquire 100% of their explosives business.

Last month, Orica announced it has expanded into copper processing chemistry with the acquisition of the Danafloat, which has an established mining industry customer base across Europe, Middle East and Africa and Latin America.

The acquisition of Danafloat further strengthens Orica’s portfolio, Ord Minnett notes, expanding its exposure to zinc and copper processing chemistry. The transaction is capital-light, involves acquiring intellectual property and licensing only, and targets a total addressable market estimated at US$5bn.

Ord Minnett views this as disciplined, high-return merger and acquisition activity.

Danafloat diversifies Orica’s Specialty Chemicals division away from reliance on Cyanco’s sodium nitrate production.

Together, these adjacencies are delivering faster growth, stronger margins and greater earnings resilience, Morgan Stanley notes, helping to offset lower growth in the core Blasting business (flat in the first half).

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