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Is Orica hiding evidence of environmental harm?

Investors in Australia’s premier manufacturer of ammonium nitrate, Orica (ASX: ORI), have had a poor run in the last year, with shares down over 15% against a rising market. Orica manufactures a variety of chemicals for a variety of uses, and has a history of causing harm to the environment. Its most important customers are Australian mining companies.

One complicating factor in assessing Orica’s environmental impact is that the media has at times exaggerated the facts and Orica has denied certain reports. However, one can safely say that the company has breached its pollution license well over 100 times in the last decade.

To date, the company has been fortunate that the cost of these breaches (to the company) have been insubstantial. For example, it announced in August that it had spent $33 million on remediation efforts at Botany Industrial Park since 2010. To put that figure in perspective, the company reported NPAT of $276 million in the last half.

It has recently been revealed that a report written 20 years ago concluded that mercury was going down the drain at the Botany site (and eventually into the ocean at Malabar headland). The Sydney Morning Herald reports that local residents are questioning what other information the company might be withholding.

It isn’t just mercury that Orica leaks into the environment; in 2011, the company released hexavalent chromium and then arsenic from its plant near Newcastle. The former leak was considered a threat to residents, and the company was heavily criticized for taking three days to notify authorities. Inhalation of hexavalent chromium increases the risk of lung cancer, and arguably the company should have alerted nearby residents immediately.

The leaks in 2011 resulted in $90 million of lost earnings, as the Kooragang plant was temporarily closed. Andrew Helps, who runs a company that specialises in cleaning up mercury contamination, has claimed that there is “a very serious problem with mercury and incidentally chromium in the sediment in Port Botany.” What could this mean for Orica in the future?

Investors must consider the risk that one day the company could face a class action. The history of releasing dangerous chemicals suggests that there will likely be accidents in the future; how sure can stockholders be that incidents will be properly managed? Surely, the best thing Orica can do when it releases toxic chemicals is to report it immediately, although that may result in reduced productivity while repairs and remediation take place.

Although Orica is a big polluter, it cannot be said that the company makes no effort to help the environment. Orica is a major partner in Mineral Carbonation International, a new venture that hopes to commercialise technology that can capture carbon dioxide in a solid state. This could result in a meaningful contribution to the mitigation of climate change, if Orica has the resolve to see the project through.

Foolish takeaway

There are many reasons investors might be drawn to Orica’s business model. However, court actions and tighter regulation could result from environmental harm, and this is a risk that potential investors should consider. On the other hand, more stringent regulation could work in the company’s favour, as it might discourage potential new competitors.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. 

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