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Operational issues hamper Orica

Unplanned maintenance issues, particularly at the Burrup Technical Ammonium Nitrate Plant in Western Australia’s Pilbara region, have hit explosives giant Orica’s (ASX: ORI) first half trading performance, even as miners start to demand more explosives.

Noel Dyson*

Mets Investor > Stocks-market-insight

Operational issues hamper Orica

Unplanned maintenance issues, particularly at the Burrup Technical Ammonium Nitrate Plant in Western Australia’s Pilbara region, have hit explosives giant Orica’s (ASX: ORI) first half trading performance, even as miners start to demand more explosives.

Noel Dyson*

Operational issues hamper Orica

Orica has reported a first half statutory net loss of A$229 million on 4% lower revenues of A$2.53 billion, year-on-year for the six-month period ending March 31, with earnings before interest and tax (EBIT) down 20% yoy to $252 million.

In Australia, Pacific and Asia - which makes up for 60% of Orica's business - volumes and revenues rose 10% and 8%, respectively, however EBIT was down 3%.

"The stabilisation in prices seen in the second half of last year has also continued," Orica CEO Alberto Calderon said.

"Nevertheless, we are disappointed that the underlying financial performance in the first half was impacted by operational issues and we are working hard to increasing manufacturing reliability, operational discipline and excellence.

"We are on track to deliver full year sales volumes at the upper end of guidance and improved operational performance across all regions will support a stronger performance in the second half of the financial year."

The EBIT fall in Australia was pinned on unplanned maintenance at Yarwun in Queensland and Kooragang Island in New South Wales, and operational issues at the Burrup TANP. That led to additional sourcing and freight costs to meet customers' supply requirements. The bulk of that material came from Yarwun, putting increased manufacturing pressures on it that led to unplanned maintenance issues.

Both Orica's Bontang plant in Indonesia and Wesfarmers CSBP plant in Perth had no extra capacity to give.

The Burrup TANP problems are tied to quality issues with its heat exchangers and Orica's joint venture partner and the operation of the TANP, Yara, is progressing repairs. The repaired heat exchangers are expected to be replaced in the second half of the 2018-19 financial year.

Adding to Burrup problems, there is also a major turnaround planned for the upstream ammonia plant owned by Orica's TANP partner Yara.

Calderon said Orica was expecting very little output from the Burrup TANP this year and if it reached even 60% reliability the company would have a better FY19.

The Burrup issues are disappointing because Orica wrested key Pilbara clients BHP Iron Ore and Roy Hill away from key competitor Dyno Nobel. The Roy Hill contract started in February and the BHP contract comes into effect in November next year.

Calderon expects the Burrup TANP to be in full operation by then. He said Yara was working with the Spanish company that built the TANP on the issue of redress. A performance bond has been withheld.

Interestingly, when the Burrup plant gets back to full reliability, Calderon believes Orica will be the only AN producer in Australia with extra capacity.

"I think we'll have about 100,000t of extra capacity at Yarwun," he said.

That has led Orica to look to some debottlenecking works at Yarwun, Kooragang Island and Bontang.

While AN is a big part of Orica's results, the company sold a higher proportion of higher cost emulsion blasting product. Calderon said that was due to it being able to show customers the productivity benefits in emulsion.

Total detonator sales volumes fell 3%, compared to the prior corresponding period, however, sales of electronic blasting systems increased across most regions. There was a 22% growth in EBS volumes year on year.

The company also secured the first sale of its Webgen wireless blasting system to a Canadian underground miner and is close to securing the first sale of the system to a surface mine - also in Canada.

Another issue facing Orica is the continued poor performance of its Minova ground control business. Orica has written off all goodwill in that business. Calderon said a new management team had been put in place there and he hoped that by November it would be able to be reporting monthly EBIT of A$1 million to $1.5 million.

"At the moment it just needs to be run better," Calderon said. "We probably should have gone quicker.

"I think it will be an interesting contributor."

Groundprobe is a business Calderon is particularly interested in. Its ground stability monitoring technology plays a key part in Orica's Auxiliaries business along with Nitroconsult, which monitors blast vibrations. Calderon said the Groundprobe business was about 95% integrated.

Looking to the second half, Calderon believes the increase in run rate to achieve the uplift in performance needed had already begun.

"The second quarter results indicate we are on track to deliver a substantial uplift in the third and final quarters of the year and we expect this momentum to continue into the next financial year," he said.

"We remain positive that the majority of headwinds are behind us and we can capitalise on the improved outlook for volume demand and firmer pricing."

Orica shares were down 6.5% by mid-afternoon today, to A$18.96. The shares hit a 12-month low of A$17.10 early December last year.

The company was capitalised at A$7.17 billion this week.

*Noel Dyson is editor of www.miningmonthly.com

 

 

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