Orica’s core blasting systems and commercial explosives tie the company’s fortunes to volume growth in the mining and infrastructure industries.
ORI has four main business exposures – mining, quarry and construction, digital, and mining chemicals. The mining segment is dependent on blasting demand in the metals, thermal coal and metallurgical coal industries.
The global decarbonisation theme is placing pressure on ORI’s coal exposure. Currently, there is very strong customer demand due to high coal prices and this theme is consistent in metals. ORI’s strategy is to increase its exposure to ‘future facing’ metals such as copper, nickel and lithium.
ORI’s extensive accumulated technological knowledge and expertise is now being brought to the fore as a division in its own right. Digital Solutions will focus on end to-end integrated digital workflows from orebody intelligence to blast design and execution, to downstream measurement and optimisation. Understanding where the rock mass has moved after blasting is critical to effectively separating ore from waste. This can unlock significant value for customers.
ORI has developed a leading wireless blasting initiation technology (WebGen) particularly for underground mining operations. WebGen also provides a step change in detonator security by requiring sophisticated encryption codes and a specific voltage for initiation.
Global ammonia costs have been rising putting pressure on ORI’s time-lagged ability to pass these costs through to customers. ORI is a major global buyer of technical AN and has been able to successfully negotiate alternative supplies to bypass Russian supply.
The company also manufactures AN in Australia and therefore needs a dependable and affordable supply of natural gas. ORI rolls over about 20-30% of its gas book each year. It has secured supply through to 2027 and while gas costs are rising, ORI has said no meaningful change to its average gas cost has been felt.
The company’s Kooragang Island facility in Newcastle produces 360ktpa of ammonia using natural gas, so the supply and price of the input is important. The same facility then produces about 400ktpa of AN (ammonium nitrate) to manufacture explosives for the mining and agriculture industries. ORI’s Yarwun plant in Queensland also produces AN as well as sodium cyanide, used in gold mining.
The domestic facilities have been running near full capacity as an offset to bypassing Russian AN supply.
The global fertiliser manufacturing market is massive and ORI’s CEO Sanjeev Gandhi describes the explosives industry as the ‘tail of the tiger’. ORI says it will take any tonnes of AN it can get its hands on, indicating the tightness of the global market.
Investment view
ORI’s refreshed strategy is applying its expertise to provide more sophisticated solutions for its customers. This can add value and is showing early signs of success.
The business remains reliant on consistent and growing activity in the mining and agriculture industries, but these can be subject to changes. The decision to gain greater exposure to copper, nickel and lithium is sensible and could help to offset any structural decline in coal activity. Even traditional quarry and construction activity can benefit from greater infrastructure investment.
ORI’s balance sheet has gearing of 35%, right in the middle of its target 30-40% range and has plenty of headroom against debt covenants.
Risks to investment view
Changes to input prices for AN ingredient (mainly natural gas) or demand from customers for ORI’s main products and services would affect earnings. Global activity in mining and agricultural activity would also affect earnings if demand changed.
Recommendation
We have initiated our coverage of ORI with a Hold recommendation.
