Orica Limited (PRI) – Supply ANxieties

Orica manufactures, distributes, and sells commercial blasting systems, explosives, mining and tunnelling support systems to the mining industry, and various chemical products and services in Australia, Canada, the US, and internationally. The company was formerly known as ICI Australia and changed its name to Orica in February 1998. Orica was founded in 1874 and is headquartered in East Melbourne, Australia.

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Investors remain concerned about Orica’s (ORI) North American ammonium nitrate (AN) supply arrangements following the termination of a key contract with CF Industries, which supplied around half of ORI’s North American blasting business. This comes at a time when AN supply and demand conditions in the US have tightened, which could make it more difficult for ORI to secure new contracts on attractive terms.

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The North American blasting business represented around 10% of ORI’s FY25 earnings before interest and tax. The modest contribution of this division (noting the portion related to the CF Industries contract would have contributed even less), should mean the earnings impact is manageable. Management is also reviewing the cost structure of the segment, which could help mitigate any pressure on margins. More importantly, strengthening conditions in the sodium cyanide (NaCN) market could more than compensate for these headwinds. NaCN is a critical reagent used in gold extraction, and the two largest global producers, Orica and Draslovka, have both indicated their production capacity is fully committed. With supply effectively sold out, pricing power is improving, as evidenced by recent Australian trade data.

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In addition, NaCN costs have not increased at the same pace as broader mining costs despite being an essential input and the gold miners enjoying elevated profitability from strong gold prices. This suggests further pricing upside may be achievable. Stronger NaCN pricing and improved plant utilisation could drive returns in ORI’s chemicals division back towards historical levels (before the acquisition of Cyanco in 2024) and closer to the company’s broader target range of 13%– 15%. We increase our earnings forecasts for the chemicals segment to capture the stronger market fundamentals in NaCN. However, this has been more than offset by a stronger Australian dollar since our last note. Consequently, our EPS estimates are revised down by 1.9%, 2.9%, and 3.3% in FY26, FY27, and FY28, respectively. Our target price of $26 is unchanged.

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We retain a Buy recommendation. ORI could provide a business update in September, as it has in prior years, which could include some discussion on the supply changes in the US.

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