Orica shares tumble after profit warning

Shares in chemicals and explosives maker Orica fell after the company announced its full-year profit would be 10 per cent lower than the previous year due to deteriorating market conditions.

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]."