By Jared Lynch
The boss of the world's biggest explosives maker, Orica, says it is impossible to say when a "deteriorating" mining industry will start to improve after the company's half-year profit tumbled 33 per cent and it halved its interim dividend.
Speaking a week after former Rio Tinto head, Tom Albanese, called the bottom of the commodities cycle, Orica chief executive Alberto Calderon said there was too much uncertainty to give an accurate forecast.
Orica chief executive Alberto Calderon says the future for commodity markets remains uncertain.Credit: Luis Enrique Ascui
Mr Calderon's comments came after Orica's net profit for the six months to March 31 fell to $149 million. This compares with $222 million for the same period last year.
Revenue, meanwhile, plunged 22 per cent to $2.6 billion. Mr Calderon, a former BHP Billiton executive, said commodity markets worsened more than expected, particularly in January and February, and would remain "challenged for the foreseeable future".
But he said the result was credible, considering the company had confined its slide in earnings before interest and tax to 4 per cent.
Investors, however, were still rattled, and Orica's shares dived 12.3 per cent to $13.53. This compared with the broader market firming 0.5 per cent.
"I sort of feel that the market won't get sustainably worse than it is today," Mr Calderon said about the mining industry downturn.
"But we can't call it and I know that may cause some angst but we are just being honest.
"It's better not to put out a forecast or spin that, in the end, will help defeat you."
Mr Calderon said the industry was experiencing its worst downturn in more than a decade, but he said it was different from the last rout because it was more unpredictable.
"I remember in 2002 when there were some issues, but it was more predictive. There was clearly an issue of supply and demand.
"What is puzzling here is the impact not only of volatility but also on the world economics. That's what we saw in January and February, the stock market and everything went way beyond commodities. So, it's making it extremely difficult."
Despite the challenging market and profit plunge, which included a $41 million expense in relation to is tax avoidance dispute with the Australian Taxation Office, Standard & Poors maintained the company's investment rating at BBB.
Its decision came after Orica followed BHP Billiton and Rio Tinto in ditching its progressive dividend policy in favour of a payout ratio.
The company now intends to pay shareholders between 40 and 70 per cent of underlying earnings. This equated to an interim dividend of 20.5¢, compared with the 40¢ payout in the year-earlier period.
That, combined with the company slashing its capital expenditure, its focus on efficiencies and a 10 per cent reduction in staff, was enough for S&P to maintain Orica's investment rating.
"The ongoing weakness in the mining sector may see Orica's adjusted funds from operations (FFO) to debt remain at the lower end of our rating expectation for the second consecutive year, leaving a minimal buffer at the current 'BBB' rating," S&P said in a statement.
"However, a reduction in capital expenditure and a more flexible dividend policy should support a return to FFO to debt of more than 30 per cent in the year ending September 30, 2017."
Mr Calderon said S&P's announcement was a vote of confidence in the company.
"They basically said 'we're trusting these guys because management are doing the right thing in what is a very tough environment'."
The company cut its explosives volumes forecast for the year from 3.8 million tonnes to 3.45 million tonnes. It is also expecting an $85 million hit from price resets and contract renewals, compared with previous guidance of a $55-$60 million knock.
But Mr Calderon said the company would "aggressively" target costs and efficiencies, and its business improvement program had already delivered $52 million in net benefits in the first half of the year.
Morgans analyst Belinda Moore said, despite the challenges facing the industry, Orica reported a "reasonable" result.
"Management is doing a solid job taking out costs from the business," Ms Moore said.
"The company should also generate strong FCF [free cash flow] moving forward, given Orica's capex requirements will fall following the commissioning of [the company's ammonium nitrate plant at] Burrup.
"The concern is that full-year guidance hasn't been reiterated."