Shares in Orica Ltd (ASX: ORI), the world’s largest provider of commercial explosive for the mining industry, were down 7% in early trade this morning after the company announced a $229 million half year loss.
Here are some highlights from the announcement:
- The loss announced includes individually significant items such as a $204 million impairment charge for Minova goodwill
- Previously announced operational issues led to additional sourcing and freight costs
- Management expect a ‘substantial uplift’ in second half performance
- The stronger run rate from 2H18 is expected to continue into FY 19
- An unfranked dividend of 20 cents per share, which represents a 61% payout ratio, was announced
Despite the poor first half performance, the share market is forward looking and all that matters for investors now is the outlook going forward. Management expect ammonium nitrate volumes to pick up as well as a positive contribution from the recently acquired GroundProbe business.
It’s not the first time that Orica has faced asset write downs and operational issues which have necessitated a restructuring of the business in the past. There are also additional risks that investors in Orica need to consider particularly given the company’s exposure to the mining sector which is highly cyclical. There is also the threat of slowing demand from China which could heavily impact the business.
One positive for the company is that despite competition from Incitec Pivot Ltd (ASX: IPL) and to a small extent Wesfarmers Ltd (ASX: WES), Orica remains the most dominant player in the explosives market and it’s likely to perform well as long as the resources sector is booming. It also provides shareholders with exposure to the resources sector outside of the traditional big miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
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The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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