Orica looks to reboot Kooragang Island plant

ORICA hopes to have its Kooragang Island ammonia plant back up and running by the end of the year after being forced into an extended shutdown after a toxic gas leak in August.

By InvestSMART · 8 Nov 2011

By InvestSMART ·
8 Nov 2011

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ORICA hopes to have its Kooragang Island ammonia plant back up and running by the end of the year after being forced into an extended shutdown after a toxic gas leak in August.

The chemical and explosives supplier said the plant's inactivity - due to a leak of carcinogenic hexavalent chromium which sparked outrage from residents and environmental groups - had cost it $21 million so far.

But it did not stop the company posting a net profit of $642.3 million for the year to September, which surpassed consensus analyst forecasts of $621 million.

"The company is working with authorities and the community to rebuild confidence in its operations and we expect to restart the plant later this calendar year," the chief executive, Graeme Liebelt, said.

Orica's profit rose 3.8 per cent on last year, when excluding the effect of the demerger of the DuluxGroup paint business at the start of the financial year. Shares in Orica, the world's largest producer of explosives used in mining and construction, surged 4.57 per cent, closing at $25.41 yesterday.

Mr Liebelt said independent toxicology studies had concluded the leak, near Newcastle, posed no threat to human health and that design changes had been made to ensure there would be no repeat of the incident.

Mr Liebelt, who has brought forward his retirement date to March to accommodate the arrival of former Newcrest Mining boss Ian Smith, was upbeat about the company's prospects of profit growth next year, with strong explodemand for explosives from miners, and volatility in currency markets expected to settle down.

"I think we go into 2012 with reasonably good momentum," he said. "The key thing for us is that China continues to show reasonable growth."

Orica's performance was held back by a poor showing from its Minova underground mining chemicals business, which was hit by a price war in North America.

Minova's earnings fell 29 per cent on last year to $105 million.

AT A GLANCE

2011 Change

Revenue $6.18b -5.5%

Profit $642m -51.3%

EPS $1.74 -52.6%

Dividend 53? 54?

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Frequently Asked Questions about this Article…

What happened at Orica’s Kooragang Island ammonia plant and when will it restart?

Orica shut its Kooragang Island ammonia plant after a toxic gas leak in August that released carcinogenic hexavalent chromium. The company says the shutdown has cost about $21 million so far and it hopes to have the plant back up and running later this calendar year.

Did the hexavalent chromium leak at Orica pose a health risk?

According to Orica, independent toxicology studies concluded the leak posed no threat to human health. The incident still sparked outrage from residents and environmental groups, and Orica says it has made design changes to reduce the chance of a repeat.

How did the Kooragang shutdown affect Orica’s financial results?

Orica said the Kooragang plant inactivity cost the company about $21 million. Despite that hit, Orica reported a net profit of $642.3 million for the year to September, which beat consensus analyst forecasts of $621 million.

Why do Orica’s reported profit figures seem inconsistent?

The company reported a net profit of $642.3 million for the year to September. Orica also noted that, when you exclude the effect of the DuluxGroup paint business demerger, profit rose about 3.8% on last year. The demerger and one-off items can make headline year-on-year percentages look different from underlying business performance.

How did Orica’s shares react to the results and news about the plant?

Orica’s shares rallied on the update, rising 4.57% and closing at $25.41 the day the results were reported.

How did Orica’s Minova underground mining chemicals business perform and what impact did that have?

Orica said its Minova underground mining chemicals business was hurt by a price war in North America. Minova’s earnings fell 29% year on year to $105 million, and the weak performance held back the group’s overall results.

Are there any management changes at Orica that investors should know about?

Yes. CEO Graeme Liebelt has brought forward his retirement to March to make way for incoming chief executive Ian Smith, who was formerly boss at Newcrest Mining.

What are Orica’s prospects and what should everyday investors watch next?

Orica is optimistic about profit growth next year, citing strong demand for explosives from miners, an expectation that currency volatility will settle, and reasonable growth in China. Everyday investors may want to watch the Kooragang plant restart timeline, any further regulatory or remediation developments related to the leak, Minova’s recovery from the North American price war, and how management’s transition unfolds.