We recently researched Orica (ASX:ORI) in The Dynamic Investor after the Company reported a strong underlying result for the six months to 31 March 2025 (1H25), which exceeded consensus estimates. Market sentiment towards ORI has improved markedly over the last 18 months. The market placing greater weight on the potential for margin expansion over the medium term from pricing growth in domestic ammonium nitrate markets and further penetration of value-added products.

With the shares having recovered well off its recent lows in early April, we consider whether the risk-reward balance is favourable.

About Orica

Orica is the world’s largest manufacturer and supplier of commercial explosives and blasting systems to the mining, quarrying, oil and gas and construction markets. The Company also supplies sodium cyanide for gold extraction and provides ground support services in mining and tunnelling.

Following recent acquisitions, ORI is now not only the world’s largest explosives company, but the global leader in geotechnical and structural monitoring in mining and civil infrastructure. ORI also has a leading technology offering.

The Company now reports across three core segments: Blasting Solutions (core explosives business), Digital Solutions (including the Terra Insights acquisition), and Specialty Mining Chemicals (integrating the Cyanco acquisition). The Blasting Solutions segment accounts for 84% of group earnings.

The new segment reporting highlights the Company’s strategic shift from a traditional explosives company to a diversified mining solutions provider. Also, separate reporting of financials for the Digital Solutions and Specialty Mining Chemicals segments provides greater insight into these high-growth areas.

Key Fundamental Drivers

Reduced Sensitivity to Volumes

ORI’s group EBIT margin rose materially to 12.0% (1H24: 9.7%). Despite Blasting Solutions volumes falling by 2.7% due to adverse weather and turnaround activity, EBIT increased by 29% and EBIT per tonne increased to A$221.1/t vs A$166.9/t. This proves that ORI doesn’t require rising ammonium nitrate volumes to grow but is now a mix and margin improvement story.

As an illustration, in the 1H25 period, the North America region was impacted by softer volumes in Thermal Coal and Quarry & Construction (Q&C), as well as a global TNT shortage (although the latter is abating). The EBIT margin declined to 8.2% (1H24: 8.4%), however EBIT/t actually increased to A$133/t from A$130/t.

Is Orica Exposed to a Slowdown in Global Growth?

As ORI’s exposure is to commodity volumes, rather than prices, the outlook is relatively supportive despite the risk of slowing economic growth. Combined, gold and copper now represent ~45% of ORI’s 1H25 revenues. Notably, the outlook for both gold and copper remains robust.

The Company is not seeing any slowdown despite global growth concerns. Management said that its customers globally are running behind mine plans (weather-related or supply chain disruptions). This means that those customers have more demand for sustainability-based solutions, for productivity solutions and cost mitigation products which ORI offers. Further, customers want to capitalise on high commodity prices. ORI reiterated that in the last couple of months, it has seen an uptick in exploration which started with gold and is now moving into copper which should benefit its Digital Solutions business from the 2H25 onwards.

ORI has demonstrated increasing take-up of its premium products, largely driven by Electronic Blasting System, WebGen (comprising ~10% of annual blasts for ORI) and 4D. These have offset lower volumes vs expectations delivered across ORI’s Blasting Solutions business. With volumes likely to trend upward and the progressive increase in the adoption of premium products leading to further improvement in price/mix (reflected in higher EBIT/t), there is potential margin upside for ORI over FY26 and FY27.

Balance Sheet Capacity for Further Capital Management

Gearing (on a net debt to EBITDA basis) is 1.45x was within ORI’s target range of 1.25x – 2.00x. After a sustained period of acquisitions (~24 months), ORI’s focus is now on integration and scaling the acquired businesses.

Hence, further Merger & Acquisition (M&A) opportunities appear unlikely in near term. as evidenced by the March 2025 announcement of a $400m share buyback over 12 months. The share buyback, with a pre-tax cost of debt between 5-7%, could enhance earnings per share by 1-2%. ORI had previously flagged capital management at the FY24 results release in November, with gearing at that time also below the target range.

The Company reported strong operating cashflow, despite what is generally a seasonally weaker 1st half period. We expect the continuation of strong free cash flow generation to provide support for further capital returns to shareholders. Notably, a further on-market share buyback of similar magnitude to the current one (~$400m per annum) would require modest balance sheet support. This could potentially boost any core EPS accretion, even as the share price rises.

Fundamental View

ORI shares are currently trading on a 1-year forward P/E multiple of ~16.5x – which is not significantly below both the 2-year and 5-year average of ~17x and ~18x, respectively. At current levels, we consider that the market is starting to factor in: i) The prospects for further capital management initiatives as well as ii) The potential for margin expansion over the medium term from pricing growth in domestic AN markets and further penetration of value-added products.

Charting View

ORI bounced strongly off trend-line support in early April. It then broke above a major resistance level near $18.80. Because of the break above resistance near $18.80, this should lead to a new uptrend.

 

Michael Gable is managing director of Fairmont Equities.

 

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