Orica shares tumble after profit warning
Orica blamed large mine closures in Indonesia, weaker conditions in Europe and North America and higher than expected costs relating to the integration of its tunnelling business for the revised outlook.
It announced the profit downgrade to the Australian Securities Exchange on Friday, prompting shares in the mining services company to fall by more than 13 per cent, or $2.81, to $18.19.
Speaking to analysts, Orica chief executive Ian Smith said several factors led to the downgrade, in particular higher than expected costs relating to the integration of its struggling tunnelling unit with its mining services business.
"Due to the timing of the integration, North America and Europe won't have a positive effect until the 2014 financial year," he said.
The ground support unit provides tunnelling equipment such as bolts and anchors to mining companies, in particular underground coalminers. "Ground support has dropped by another $15 million to $20 million from what we flagged at the half year," Mr Smith said.
"It's really a whole group of positions right across the business and right across the world, where the rate of improvement we expected in the second half is not going to be delivered."
Weak European and US markets have dogged the company for some time, particularly the struggling tunnelling and engineering arm.
The company's full-year earnings have also been beset by the closure of two major mines in Indonesia, Mr Smith said.
"We were expecting Indonesia to be flat in volumes. That has not occurred," he said, adding that the deterioration in the Indonesian market would mean forecasts for the country were $10 million to $15 million lower than expected.
Mining services have suffered recently on account of the resources sector scaling back business amid a drop in demand, and companies renegotiating contracts at lower prices to reflect the slower climate.
Mr Smith said that while some contracts had been renegotiated at a lower price, "our general statement is, we have not been dropping our prices across the market".
Weakness in the mining sector had also affected demand for explosives and sodium cyanide.
Orica is the world's largest maker of industrial explosives. The company reported a net profit of $650.2 million last year.
Mr Smith, the former chief executive of Newcrest Mining, defended Orica's decision to go ahead with the ground support integration.
"Next year we won't have the optimisation costs, and we will get the benefits of the [integration]."
Frequently Asked Questions about this Article…
Orica warned its full-year profit would be about 10% lower than the prior year, citing large mine closures in Indonesia, weaker market conditions in Europe and North America, and higher-than-expected costs tied to integrating its tunnelling (ground support) business. The announcement prompted Orica shares to fall more than 13%, or $2.81, to $18.19.
Orica announced its full-year profit was expected to be approximately 10% lower than the previous year.
Orica said higher-than-expected costs from integrating its struggling tunnelling or ground support unit with its mining services business drove part of the downgrade. Management flagged optimisation and integration costs that reduced near-term profits and said the benefits won’t be realised in North America and Europe until the 2014 financial year.
Management said the ground support unit’s performance worsened, reducing expected earnings by another $15 million to $20 million from what was flagged at the half year, contributing materially to the full-year downgrade.
Weakness in the mining sector has reduced demand for explosives and sodium cyanide and led some customers to renegotiate contracts at lower prices. Orica noted some contract renegotiations but said it hasn’t broadly cut prices across the market.
Orica said the closure of two major mines in Indonesia caused volumes to fall instead of remaining flat as expected, lowering forecasts for that market by roughly $10 million to $15 million and contributing to the profit downgrade.
Orica is the world’s largest maker of industrial explosives. The company reported a net profit of $650.2 million in the prior year.
CEO Ian Smith defended the integration, saying the short-term optimisation costs are responsible for the hit now but that next year Orica won’t have those costs and will realise the benefits of the merger between ground support and mining services.
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