Incitec Pivot still keen on fertiliser split despite slump in earnings

High prices on gas spot markets undermined Incitec Pivot’s first-half result, with shares battered on the back of the earnings dive in its fertiliser ­business.

High prices on gas spot markets undermined Incitec Pivot’s first-half result after the company was forced to pay top dollar for gas on the ongoing failure of a key supplier to deliver.

Incitec shares slumped on Wednesday after the company delivered an underwhelming first-half profit result on the back of the earnings dive in its fertiliser ­business.

Incitec managing director Jeanne Johns said the company still planned to put the demerger of its explosives and fertiliser business to shareholders, probably after the close of the sale of its Waggaman plant in the US, which is waiting on a final call from antitrust regulators before the sale can be completed.

Earnings before interest and tax in Incitec’s Asia-Pacific fertiliser business fell sharply compared to the same period last financial year, down 58 per cent at $108m, largely due to ongoing gas supply problems at its Phosphate Hill operations in Queensland.

The manufacturing plant is supplied from an ENI-operated gas field in the Northern Territory, and gas volumes flowing from the field have fallen short of contracted volumes since 2022, with promises of a February fix having fallen through.

Buying gas on the spot market added another $40m to the costs of running the plant – on top of what Incitec would have paid for its contracted volumes – with sharp falls in the price of urea and more Queensland flooding adding to the division’s woes.

Despite the profit crunch in the key division, Ms Johns said the company still planned to press ahead with the demerger, with a new drilling rig expected to return gas flows to Phosphate Hill in the second half of the company’s ­financial year.

“The board still feels as though the merger is a tax-efficient way of unlocking value for shareholders. But looking at the optimal timing will be a focus in the second half of the year,” Ms Johns told analysts.

Incitec Pivot will pay a 10c-a-share partly franked interim dividend after booking a $353.6m net profit for the first half of the financial year.

The statutory result is down 7.9 per cent from the first half of the previous financial year, with earnings before interest and tax – excluding the costs of the company’s preparation for the demerger of its fertiliser business – down 2.9 per cent at $551.6m.

Revenue at the fertiliser and explosives major increased 20 per cent in the period, but inflationary pressures helped push up fixed cash costs across the company by almost 25 per cent compared to the first half of the previous financial year.

Ms Johns said the company was expected a stronger performance in the second half as better pricing from new explosives contracts flowed into the business, and the gas fix lowered costs at Phosphate Hill.

Incitec’s previous round of explosives contracts in Australia was signed amid an oversupply of ammonium nitrate after production expansions from Incitec’s major competitor, Orica, undermined the company’s market position.

But Ms Johns said the strength of Australia’s mining sector, plus market disruptions caused by Russia’s war in Ukraine, meant ammonium nitrate supply in the country was now “very finely balanced”, with the company confident it can return the profitability of its explosives business to the high marks achieved in 2018.

“So it’s a significantly stronger environment, and therefore those earnings outlooks will improve as those contracts flow through. We see that increasing over the 2024 and 2025 financial years. And we are confident that we’ll be able to return that business to its historic high,” Ms Johns told analysts.

That will also be helped by the company’s ability to lock in a new long-term supply contract for its Australian explosives plant at Moranbah in Queensland, after Incitec signed a deal with Queensland Pacific Metals for continued supply from the nearby Moranbah coal-seam gas project, which the ASX-listed junior is buying from Arrow Energy with support from Incitec.

Incitec shares closed down 25.5c, or 8 per cent, at $2.935.