Why Orica hit a 52-week low last week

Orica plunges on earnings downgrade

The Orica share price plunged more than 20% last Friday after the commercial explosives and blasting systems company revealed a number of factors it said would negatively impact H1 earnings.

Essentially, Orica said that lower mining activity across the half was expected to drag on earnings, noted that there had been unfavourable currency moves during in the last six months, and that certain costs were expected to be higher than previously thought.

Investors responded swiftly and brutally to this update: The stock fell as much as 27% in response, touching an intraday low of $11.17 last Friday, though closed out the session at $12.56, slightly off that trough.

So what exactly did Orica tell the market?

Mining activity weaker

Centrally, Orica said it expected its H1 earnings (EBIT) to come in lower, a result which the company primarily attributed to weaker mining activity across a number of its key geographies. This is set to result in a $70-80 million earnings impact, management flagged.

Here it was noted that mining activity in Columbia has been 'significantly lower' across the half, social issues in Peru have hurt demand for Orica’s products, and that mining activity has also been 'severely disrupted' across the company’s European, African and Mexico operations.

Mining activity across Australia, the US and Canada by comparison has proven resilient despite the pandemic.

Adverse currency moves

Beyond weaker mining activity, the strength of the Australian dollar is expected to hurt Orica’s offshore earnings, with the company flagging a AUD$20-25 million earnings hit as a result.

'This has driven an unfavourable FX impact to the translation of foreign currency earnings,' the company said.

Over the last month the AUD/USD has rallied 2.5%.

Higher costs

Finally, management noted that additional 'arbitration costs relating to the Burrup plant and additional SAP system stabilisation costs' are expected to hit earnings by between AUD$15-20 million.

A new CEO

Besides informing the market of these revised interim earnings expectations, Orica also revealed that its CEO and Managing Director, Alberto Calderon, would be stepping down from the role. Mr Calderon, who has served the company for six years, is set to be replaced by Sanjeev Gandhi, a man with significant chemical industry experience.

Commenting on this decision, Mr Calderon said:

‘It has been a privilege to work alongside the talented women and men of Orica. I am extremely proud of all that we have achieved, making the company more product and, I hope, a much better place to work.'

Looking ahead, Orica will be bound by an investor communications period between 29 March and 12 May, and then release its first half results and interim dividend plans on 13 May.

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