Incitec Pivot drops but chief says demerger of explosives arm is still on the table

The company’s Australian fertiliser earnings before interest and tax of $40m-$45m was up to $25m lower than $65m analysts’ consensus figures.

Incitec Pivot says fertiliser volumes have dropped due to lower demand while gas supply snags at its Queensland Phosphate Hill plant have added $45m to costs.

The news comes as it moves ahead with a demerger in 2023 to boost investor returns.

The company guided Australian fertiliser distribution earnings before interest and tax to come in at $40m-$45m for the 2022 financial year, up to $25m lower than the $65m consensus figure of analysts.

It has also been forced to wear $45m in extra energy costs due to disruptions with its supplier, Power and Water Corporation, and full volumes are not set to be restored until February 2023. Incitec has to buy extra top-up volumes in the interim to bridge any shortfall.

Incitec’s Waggaman ammonia plant in the US has produced above-nameplate capacity since restarting, although ammonia realised pricing at $US816 a tonne was below a Credit Suisse forecast of $US963 per tonne.

“Incitec’s trading update looks like it is a miss to consensus with a lower-than-assumed realised ammonia price from Waggaman, gas supply disruption driving higher gas costs at Phosphate Hill and lower-than-expected Australian fertiliser distribution profit driving the miss,” Macquarie said.

Incitec Pivot chief Jeanne Johns. Picture: Arsineh Houspian

Despite the mixed trading update, Incitec chief executive Jeanne Johns said investors had swung in behind the revival of a plan to spin out its fertiliser division and it was hopeful of boosting investor returns.

It revealed in May a scheme to unwind its acquisition of explosives pioneer Dyno Nobel and separate its explosives and fertiliser arms into two listed companies.

“As I went internationally, the support for the separation of the two businesses was very strong. I was very impressed with how much interest there was in one or the other business,” Ms Johns said.

“But also it reconfirmed the thesis that actually people didn’t want both businesses’ exposures. Some wanted the global explosives exposure and some wanted the Australian agriculture exposure, but very few actually want the current combination that we have … That just really sets us up well for a potential re-rate as the universe of investors grows.”

The Incitec chief has been a long-time critic of the east coast gas market – and cited the inability to find a long-term gas contract at acceptable prices for the company’s Gibson Island fertiliser plant in Brisbane as a major factor in the company’s decision to close the facility at the end of 2022.

Incitec Pivot’s Phosphate Hill plant.

Incitec had been seeking a supply agreement to provide gas between 2023 and 2027 and said it continued to be concerned by the outlook, underlined by a competition regulator warning of a potential supply gap emerging next year.

The government is reviewing the trigger, known as the Australian Domestic Gas Security Mechanism, amid a national energy crunch sparked in part by a squeeze on gas supplies for users.

“I’m very pleased that the government is taking input and thinking through how to make the ADGSM function as intended, basically to safeguard the domestic market from price spikes, and not importing that inflation into the domestic economy,” she said.

Expectations are growing that the government will now act on the threat declared by the competition watchdog, a fresh concern for producers given the mechanism has never been triggered since its introduction in 2017 as there were enough supplies made available to avoid a shortfall year.

Incitec shares fell 3.7 per cent, or 14c, to $3.69 on Tuesday.