Orica buys Axis, launches $650m equity raising, but warns on economic outlook
The explosives major snaps up geospatial operator Axis Mining and launched a $650m equity raising to fund the deal and beef-up its balance sheet amid economic jitters.
Explosives major Orica has bought geospatial operator Axis Mining Technology for a price that could rise to $350m and launched a $650m equity raising to beef-up its balance sheet as it warned of supply chains snags and inflationary pressures.
The deal for Axis, which makes geospatial tools for the mining industry, will see Orica pay $260m in cash and a deferred earnout payment capped at $90m depending on financial performance.
Nearly half of money raised from the equity raising will be used to beef-up its balance sheet and boost its working capital needs due to global supply chain dislocations.
Geopolitical and supply chain disruptions along with spiralling inflation had all emerged as issues to juggle for the business, Orica chief executive Sanjeev Gandhi said.
“I don’t know what will happen in China or in Asia tomorrow. So that’s a new challenge that might occur,” Mr Gandhi told The Australian.
“The second is obviously supply chain disruptions because of Russia, Ukraine and everything else that has happened. And thirdly, its inflation, and the rate hikes and the impacts of this on global economies.”
Working capital has also become a focus for the company as raw material prices like ammonia and gas have jumped.
“This meant that even though we did not increase our inventories, the value of our inventory went up. Now from a business point of view, we are obviously able to push those high costs to our customers through our contractual formulas and everything else. But meanwhile, our working capital value has gone up significantly,” Mr Gandhi said.
“We are being a bit prudent because I don’t know what will hit global economies tomorrow. So in terms of being prudent, in terms of keeping our credit rating, we decided to do a bit of an over raise here so that we are able to manage any unforeseen fluctuations.”
“This has got nothing to do with our underlying business which stays healthy. And that’s why we have not changed any of our forecasts for this year. And I feel very comfortable where we are with our business.”
Orica has in the past been a critic of high gas prices in Australia and said the shortfall predicted by the competition regulator for 2023 was disappointing.
“It’s an unfortunate situation and industry in Australia has been calling this out for several years,” Mr Gandhi said. “I’m hoping now that the regulator has understood what we were saying, and that we come to a reasonable agreement between gas suppliers and gas consumers so that there’s adequate supply for domestic industry in this country.”
The upfront cash payment of $260m implies a deal multiple of 11.8 times 2022 financial year earnings before interest, tax, depreciation and amortisation.
The buyout will be funded through an underwritten $650m capital raising at $16 a share, a 7 per cent discount to its last traded price of $17.20 on August 2. Some 40.6 million shares will be issued, representing 9.9 per cent of Orica’s existing issued capital.
A $75m non-underwritten share purchase plan was also be rolled out for shareholders in Australia and New Zealand.
Orica retained its outlook for the 2022 financial year but pointed to a series of pressures on its business noting “continued inflationary pressures and higher energy costs, as well as supply chain dislocations, will remain an ongoing challenge in the 2023 financial year.”
Axis, based in Western Australia, is being touted as lifting Orica’s ability to support new mineral discoveries needed for decarbonisation, with new finds increasingly located at greater depths and demanding more precise geophysics.
Orica said Axis’ gold and copper exposure also accelerates Orica’s broader commodity mix targets with its operations spanning 100 countries.
“There’s an ongoing future demand for what I call future facing commodities, which will enable the ESG and the energy transition of the world. And those resources are difficult to access,” Mr Gandhi said.
“They are deeper in the ground. The Axis business is very high growth and a very high margin business for us. It fits into our Orica digital solutions vertical offering, and it’s a low capital business growing very, very quickly. Bringing it into the Orica fold, we will be will be able to scale it up given our global reach.”