S&P/ASX 200 Index (ASX: XJO) stock Orica Ltd (ASX: ORI) has slowly climbed back from yearly lows hit in March of this year.
Since that time, its share price is up 20%.
The company manufactures, distributes, and sells commercial blasting systems, explosives, and mining and tunnelling support systems to the mining industry, as well as various chemical products and services in Australia, Canada, the US, and internationally.
Image source: Getty Images
Investor concerns
Lately, there has been concern surrounding the company's North American ammonium nitrate (AN) supply arrangements.
This has come following the termination of a key contract with CF Industries (NYSE: CF), which supplied around half of the company's North American blasting business.
This comes at a time when the AN supply and demand conditions in the US have tightened.
Subsequently, this could make it more difficult for Orica to secure new contracts on attractive terms.
Why the concerns may be overblown
However, the team at Ord Minnett appear less concerned.
The broker said the North American blasting business generated only about 10% of Orica's FY25 operating profit (EBIT).
And the part connected to the CF Industries contract was only a portion of that.
So, even if this business becomes less profitable, the overall impact on Orica could be manageable rather than disastrous.
Orica is also looking at ways to reduce costs in this division, which could help protect its profit margins.
There is another, potentially more important story.
Orica also produces sodium cyanide (NaCN).
Sodium cyanide is a chemical that is very important for extracting gold from ore.
Demand for this chemical is strong, and supply is tight.
The two biggest producers, one of which is Orica, have said their production capacity is essentially fully booked.
Target price intact
The team at Ord Minnett said stronger NaCN pricing and improved plant utilisation could drive returns in the company's chemicals division back towards historical levels (before the acquisition of Cyanco in 2024) and closer to the company's broader target range of 13% to 15%.
We increase our earnings forecasts for the chemicals segment to capture the stronger market fundamentals in NaCN. However, this has been more than offset by a stronger Australian dollar since our last note. Consequently, our EPS estimates are revised down by 1.9%, 2.9%, and 3.3% in FY26, FY27, and FY28, respectively. Our target price of $26 is unchanged.
This ASX 200 stock closed trading last week at $22.61.
Based on the retained price target from Ord Minnett, there is 15% upside for this ASX 200 company.
