Orica, best known as a manufacturer of chemicals and explosives, decided that it’s time to dump one of its divisions to focus on what management thinks will generate the highest returns in the future.
Because profits posted by mining companies have been drying up it was thought that the future direction of Orica would be its traditional chemical business which dates back to the company’s roots as ICI Australia, a business created by its ultimate parent, Imperial Chemical Industries of Britain.
In fact, Orica has gone the other way and dumped its chemical division because profits from making explosives for the mining industry offer a more profitable future.
The deal confirming Orica’s big switch was announced two weeks ago and while it attracted some interest from investors and the media, there wasn’t the sort of reaction that might have been expected by such a momentous change for such a big company, or that fact that it chose mining over chemicals.
What Orica seems to have worked out is that its profits from explosives have limited exposure to commodity prices, and maximum exposure to the volume of material shifted, whether it is ore or waste.
It might be stretching the point but what that boils down to is a view that problems confronting the mining industry today are not so much a decline in demand as a surplus of supply, a situation which will see volumes of material mined continue to expand.
For Orica, it really is a case of the more rocks that are blown up the better, but for the mining industry there is a subtler signal being sent and that is a view from a key supplier of essential consumables that the outlook is not as bad as some people might believe.
In fact, the outlook must be rather good from where Orica is sitting because it’s prepared to cut the strings which once connected it to its past and embark on a future which is totally committed to mining.
If there is a sting in the tale, it lies in the fact that Orica’s explosives-only future is not necessarily a comment on the outlook for the Australian mining industry. It’s a comment on the global industry because explosives are an essential part of the mining process everywhere.
What’s happening at Orica started earlier this year when the company’s chief executive and former mining company boss, Ian Smith, launched a program of transformation that will include the elimination of more than 2000 jobs by the time the chemicals business is cut-free.
Originally planned as a spin-off to create a separate stock-exchange listed company the chemicals division is being sold to funds advised by the US-based private equity firm, Blackstone, for a handy $750 million in cash.
Smith acknowledged that the Blackstone sale meant Orica had become a “pure-play mining services company” which, when you think about it is an interesting move at a time when commodity prices are down and there is an over-supply of almost everything used in mining.
However, he also said that the future for Orica was not tied to Australian mining.
“We are an international company,” he said. “We have lots of growth opportunities. We have a lot of ways to maintain or grow margins not just based on the price of ammonium nitrate.”
Lowering prices to secure long-term contracts is one of the options which might be pursued by Orica though Smith is keen to see his customers shift their focus from cost-cutting to improved productivity.
“You can cut costs by not filling your car up (with petrol) but eventually your car will stop,” he said. “Eventually you have to go back to productivity improvements.”
One of the growth options for Orica is to offer higher profit margins blast services and technology such as high-energy blasting which can enhance the power of ammonium nitrate and improve milling performance by delivering smaller rocks.
The detail of what Orica does next are important for the company itself but there is a more important message for everyone on the outside, and that is the decision of major supplier to the mining industry to expand at a time when others are thinking of getting out.
