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Explosives-Maker Orica Hammered by Pandemic, Sour Australia-China Relations

(AFR) — Multinational explosives company Orica’s profit has been slashed in half after its major mining customers were hit with the one-two punch of Covid-19 curbing mining activity and Canberra’s souring diplomatic relations with Beijing hitting Australian coal exports.

India has taken some of the coal rejected by China but Orica’s new chief executive officer Sanjeev Gandhi said the devastating Covid-19 outbreak on the subcontinent might curb the appetite for the Australian export.

The uncertainty around rising Australia-China trade tensions and the pandemic means Gandhi won’t issue firm guidance after first half profit dived 53.6% to A$76.7 million ($59.2 million) and revenue declined 8.9% to A$2.6 billion.

Gandhi also announced in the half year results Orica wants to sell Minova — mining and civil engineering business — which it bought for about A$1.5 billion in 2007 but after a series of major writedowns is now worth just A$90 million.

Gandhi said the results were in line with its February update — where the company warned of a A$125 million earnings downgrade — and “reflect the impact of various market factors.”

“In the last few days, the rhetoric between Australia China just escalated which is unfortunate because both economies are interdependent, and need each other,” he said.

He hopes the political tensions will de-escalate because the two country’s commercial “inter-dependencies are so strong.”

“But that is just the hope, when that will happen in anybody’s guess. And that’s why I’ve been a bit prudent and cautious about the outlook for the second half of the year.“

Gandhi said Orica has observed that its Australian mining clients have found alternative coal markets — in Japan, South Korea, Taiwan and India.

But he said there were two unquantifiable uncertainties: the impact of Covid currently on India, which takes a significant share of Australian coal exports and is recording 400,000 Covid cases per day; and whether this will mean less demand for Orica products and services in the coal sector in Australia.

The recent surge in Covid-19 cases in Canada, mine closures and curtailment in Europe, Africa and Latin America, social unrest in Peru and strikes in Chile have also reduced demand for Orica’s services.

Orica is the world’s largest provider of explosives and commercial blasting systems, supplying the mining, oil and gas and construction customers.

“While we expect a better second half than the first, given uncertainties remain around market factors, we expect the second half EBIT [earnings before interest and tax] to be lower than the [previous corresponding period],” said Gandhi.

“We remain cautious about the short-term outlook.”

The strong Australian dollar has appreciated significantly against most of Orica’s major trading currencies, negatively reducing earnings when translated into the local currency across all segments.

Orica told the market it intends to run a sale process for the Minova business, which provides ground control solutions for the mining, civil, tunnelling, geotechnical and construction industries.

“While Minova has delivered a substantially improved performance in recent times, it has been identified as non-core. Therefore, we will consider selling at an appropriate price,” Gandhi said.

Gandhi took over from former chief executive Alberto Calderon in February.

This story was first published in The Australian Financial Review.

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