Incitec Pivot takes profit hit, ditches dividend
Incitec Pivot is pinning its hopes on a federal government gas overhaul to keep prices competitive, after operating at a loss over the last year.
Incitec Pivot boss Jeanne Johns says she’s increasingly confident the federal government’s east coast gas reset can deliver the cheaper gas needed to keep major Australian manufacturers alive.
The federal government is believed to be holding a new round of talks with gas producers this week, over a renewed heads of agreement aimed at pushing excess gas into the domestic market to drive down local prices.
The current agreement expires at the end of November and works by ensuring LNG exporters offer uncontracted gas to the domestic market in the event of a shortfall, allowing local users volumes of gas before it is offered offshore to Asian buyers.
Speaking to analysts after delivering Incitic’s annual financial results on Tuesday, Ms Johns again highlighted the threat current gas prices pose to the company’s manufacturing operations, saying that, despite a 2019 gas agreement that saved the facility’s life, it still operated at a loss over the last year and was forecast to only break even on a cash basis for the remaining life of the gas contracts, which expire in 2022.
“The Australian government’s east coast gas reset could provide the plant with life beyond 2022, if international competitively priced gas is available. We are working with gas producers and with the Australian government to access the gas required, as well as having contingency plans in place if we’re unsuccessful,” she said.
Ms Johns told The Australian Incitec had abandoned a tendering process launched earlier this year to win a long-dated gas contract extending beyond 2022 for the plant, but hoped the Federal government would make good on promises to drive down domestic gas prices.
In addition to the heads of agreement with producers, the government recently launched a consultation process on a domestic gas reservation policy.
“I think the domestic gas reservation, while welcome, is a long-term issue. Really what we’re looking for is short-term action that translates into contracts that can underpin manufacturing investments in jobs. Without those longer-term contracts manufacturing investment can‘t happen and the jobs can’t stay here in Australia,” she said.
“Earlier this year we went out to tender, we didn’t get the kind of offers that would lead us to sign up to anything – only one was actually the volume we needed and that was at historically high pricing. So we obviously didn’t go ahead. But we’re hopeful that after the government heads of agreement and code of conduct that we’d be able to re-tender and get a contract in place at internationally competitive gas pricing. That’s what’s required to keep Gibson Island open.”
Despite the difficulties posed by the global coronavirus pandemic, Incitec has booked a $123.4m net profit for its full financial year, but ditched its dividend payment “in light of the ongoing uncertainty due to COVID-19”.
Incitec has a policy of paying 30-60 per cent of net profits as its annual dividend. But, after raising $646m in May to pay down debts and strengthen its balance sheet, its board elected not to pay a final dividend for the year, citing the raising and oncoming uncertainty around its business as a result of the coronavirus pandemic.
Incitec had $1bn in net debt at the end of September and Ms Johns said the company had elected to preserve cash amid the ongoing uncertainty across the globe, and after pledging to use the proceeds of its May capital raising to ease concerns over its balance sheet.
While the company’s net profit fell 19 per cent for the year, underlying earnings – excluding impairments and one-off costs after-tax costs of $64.8m – lifted 24 per cent, or $35.8m, to $188.2m.
The explosives, mining services and fertiliser company said its annual revenue lifted marginally to $3.9bn, with earnings before interest and tax up $70.8m to $374.5m.
Incitec booked impairments of $41m and restructuring costs worth $46.9m, weighing on its statutory result.
But, despite the fact the bulk of Australia’s mining industry powered on through the pandemic, a more competitive environment in the WA iron ore market led to lower contract prices and EBIT in Incitec’s Asia Pacific explosives business fell 17 per cent to $149m, with earnings from its US explosives business down only 1 per cent to $231m.
But the company’s fertilisers business – which the company elected to retain after an extensive review earlier this year, helped vindicate that decision as the drought broke in eastern Australia, booking a 133 per cent turnaround to a $26m annual profit, before interest and tax.
Incitec shares closed down 6c on Tuesday at $2.10.