Under the Spotlight AUS: Incitec Pivot (IPL)

Incitec Pivot’s ($IPL) connection with Alfred Nobel may not be obvious. One is renowned for funding prizes for groundbreaking research, while the former is known for just ground breaking. 

But it was Incitec’s 2008 acquisition of Dyno Nobel – founded by Nobel himself, the inventor of dynamite – that transformed the company into one of the world’s leading suppliers of explosives to the mining industry. New CEO Mauro Neves de Moraes has made it clear Nobel’s legacy will live on, announcing plans to double the earnings of the explosives business over the next three to four years. 

Neves casts himself as a change maker, willing to separate the fertiliser business – which traces its origins back to 1919 and was central to Incitec Pivot’s 2003 IPO – as he chases higher margins. Shares have rallied 19% since February lows, despite the gloom in the mining industry that’s pushed the All Resources Index down 3% in the period. 

Heavy metal

The dark clouds over the mining industry due to China’s faltering economy provide an opportunity for Incitec Pivot to shine.

As customers like BHP ($BHP), Rio Tinto ($RIO), Fortescue ($FMG) and Vale ($VALE) confront falling prices for commodities like iron ore and copper, Incitec Pivot offers a range of technologies that improve mining efficiencies.

The company’s ‘drill to mill’ approach helps miners as they face falling grades and rising costs. For example, advanced explosives can deliver optimised fragmentation for more suitably sized chunks of ore. This can allow more tonnes to be moved and more efficient handling at processing plants. 

Proprietary detonators and delivery systems underpin long-term contracts, and selling more advanced products also brings a greater share of earnings and fatter margins. Commodity products, such as bulk and packaged explosives, contribute 40% to 50% of revenue but with lower margins. 

Neves also has his eyes on winning more business from the energy transition. Increased electrification means more demand for metals like copper. More copper mining will allow the company to offset falling demand for explosives from the thermal coal industry over the longer term. 

Big bang

The strategy to double Dyno Nobel’s earnings from around $300m in FY23 to $600m is off to a solid start. Around $50m of additional EBIT will be delivered in FY24 and around 40% to 50% of the targeted EBIT increase will be achieved by the end of FY25. 

Around 45% to 55% of this increase in earnings is planned to come from operational changes, such as reducing fixed costs and streamlining procurement. Senior management has been reduced by 10%. More technology is being used to save costs, such as the opening of a fully automated electronic detonator plant in Queensland. 

Commercial levers, such as customer recontracting, should deliver another 25% to 35% of the increase in earnings. Key customers have been recontracted through a bundled offering, delivering $40m of EBIT in FY24. 

Finally, around 15% to 25% of the extra $300m of EBIT is expected from growth options such as winning new customers in high value markets like Africa and Latin America. Incitec Pivot recently established a new, long-term supply contract with AngloGold Ashanti ($AU), which has gold mines across Africa.

Dirt file

For leadership focused on the explosives business, Incitec Pivot’s fertiliser business is an unwanted child. Negotiations to sell it to Indonesia’s PT Pupuk Kalimantan Timur fell through in July after more than a year of negotiation. 

But Neves is intent on separating the businesses to reduce earnings volatility and capital intensity. He told analysts earlier this month that ‘we’ll leave no stone unturned’ in considering options for the fertiliser business, whether it be a sale or selling off parts. He added that a demerger was not being considered ‘at the moment’. 

Neves views the separation of fertiliser as key to his plans to not only transform his explosives business, but ultimately take part in explosives industry consolidation, should the right deal at the right price be found. Fertilisers posted EBIT of $10m in the first half of FY24. Full year results due on 11 November will deliver an update on this business.

Drilling down

Incitec’s shares have lifted on the ambitious explosives strategy and have been supported by the ongoing $900m buyback. To keep investors onside, Neves needs to prove that the company strategy is rock solid.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.