As I wrote in November last year, Orica Ltd (ASX: ORI) shareholders were in for some big changes, with the group divesting its chemicals division to focus solely on its mining services (explosives) business.
That transfer has finally taken place, with management announcing yesterday that up to $400m of the $750m sale price would be spent on buying back shares in order to improve earnings for shareholders.
Assuming the buyback targets prices at around their current level, that's a potential 20 million shares to be bought back, roughly 5% of the company's total shares on issue. Expect a corresponding increase in earnings per share if the buyback goes ahead.
The buyback also allows Orica the 'flexibility to respond to any further changes in market conditions or take advantage of growth opportunities that may present in the future'.
One item that is probably the elephant in the room for shareholders is the fact that Orica is now focussed solely on the mining, quarrying, and blasting sectors going forward.
This is both a bigger, and smaller issue than readers may think, especially given the decline in mining investment in recent months.
On the one hand, Orica is set to benefit from a huge increase in demand for explosives – even though investment is declining, miners all over the world are ramping up their output in order to bring their aggregate costs lower.
Australia's BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are leading the charge, with massive expansions to their iron ore production.
On the other hand, it does raise a question mark over future explosives demand, especially if resource markets take a turn for the worse as a result of a supply glut.
But with a newly streamlined operating structure and a number of efficiencies implemented in 2014, not to mention a strong cash balance, Orica is in about as good a position as any company to weather the down-times, and poised to capitalise on the good ones when they come.
