Explosives and mining services supplier Orica is considering selling its specialty bolts and chemicals business, Minova, unless the business improves.
Orica reported a four per cent rise in underlying full year profit and forecast profit growth for the year ahead, helping the shares jump more than five per cent on Monday.
But the Minova business, which makes equipment for underground mines and tunnels, had a 29 per cent drop in earnings before interest and tax (EBIT) to $105 million.
Chief executive Graeme Liebelt said Orica still believed that Minova was a good strategic fit because it shared many of the characteristics of Orica’s explosives business.
“Whilst it has certainly under-performed versus our original expectations, it’s very much on strategy, and we think we can still make it work,” Mr Liebelt told reporters on Monday.
“That being said, nothing is going to last forever, and if we can’t get some improvement coming out of the business, then the board would have to review that strategy.”
Responding to a suggestion by some market analysts that Orica may have paid too much for Minova, Mr Liebelt said: “We have certainly not delivered what we had in our expenditure proposal when we bought the business”.
Orica acquired Minova for $857 million in 2006.
Morningstar analyst Peter Rae said the performance of Minova continued to be disappointing.
“I don’t know what they’re going to do with that business,” he said.
“They talk about it probably bottoming out, but I can’t see any significant upside at this point in time.”
Mr Liebelt said Minova had been affected by aggressive competition, particularly in the United States, and weak volumes in China.
But Orica believed that Minova was now over the worst and improvement was expected in the next year.
Orica posted a net profit of $642.3 million for the year to September 30, down 51 per cent from its $1.3 billion net profit in the prior year.
The previous year’s net profit was boosted by a $794 million gain on the demerger of the DuluxGroup paints and adhesives business in July 2010.
Shares in Orica rose $1.34, or 5.5 per cent, to $25.64 by 1537 AEDT on Monday.
Orica expects group net profit before one-off items in fiscal 2012 to be higher than that in 2011, subject to global economic conditions.
Mr Liebelt said 2011 had been a challenging year given the high value of the Australian dollar, adverse weather, price competition in the Minova business, plus the continued shutdown of its Kooragang Island ammonia plant, in the NSW Hunter region.
Mr Liebelt said growth was generated by improved volumes and prices.
However, costs rose. Although there were productivity improvements, they were not enough to offset the rises in costs.
Foreign exchange movements had a negative effect on Orica’s earnings of $60 million.
Morningstar’s Mr Rae said Orica’s result was reasonable given that the group had been adversely affected by some plant shutdowns, floods in Queensland and the strong Australian dollar.
“In the absence of all these things you should see a fairly good turnaround in earnings in 2012,” Mr Rae said.