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Incitec Pivot mulls sale of drought-hurt fertilizer business

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Incitec Pivot said it may sell its 104-year-old fertilizer operation as it blamed the business, hurt by eastern Australia’s prolonged drought, and an output shortfall at its US ammonia plant for a cut to profits hopes.

 

The Victoria-based group, which also owns the Dyno Nobel explosives operation, revealed a strategic review of its Fertilizers Asia Pacific business, which will assess options including a “potential sale” of the unit, or a demerger.

 

Incitec Pivot, which may also retain the business and invest in its expansion, said that the review’s “objective… is to maximise shareholder value”, whilst also “having regard to the interests of other stakeholders including employees, customers and suppliers”.

 

The review - set to progress “over the course of” the group’s 2020 financial year, which starts next month – will “assist the board in making decisions that will best position [Incitec Pivot’s] portfolio to deliver long term shareholder value”, said Brian Kruger, the group’s chairman.

 

Incitec Pivot shares plunged 14.6% at one point, their worst performance in a decade, before closing at Aus$3.06, down 4.4% on the day, matching their weakest close since November 2016.

 

‘Continued drought impacts’

The announcement came as Incitec Pivot revealed it was cutting to Aus$285m-295m, from Aus$370m-415m, its forecast for operating profits in the current financial year, as ends this month.

 

Some Aus$50m of the downgrade - which would put the group on course for a sharp drop in profits from the Aus$556.7m reported last year - was attributed to foreign exchange factors.

 

However, the group also cited a “reassessment of earnings estimates”, which had been reduced “mainly due to lower-than-forecast ammonia production” at its Louisiana-based Waggaman plant and “lower fertilizers earnings.”

 

Nutrient profit hopes had been hurt “mainly as a result of continued drought impacts in New South Wales and Queensland, and increased gas costs” at a Brisbane plant.

 

Weaker prices

While Incitec Pivot had, in May, said that its forecasts were based on the assumption of “normal weather conditions”, the official Bureau of Meteorology said last week that winter had been “one of the driest… on record for large parts of the country”.

 

The comments came as the bureau forecast that “most of Australia is likely to experience warmer- and drier-than-average conditions in the coming three months”, spurring concerns that Australia is poised for a third successive drought-hit harvest.

 

The dryness has been blamed by many crop input groups for stemming demand from Australian farmers, at a time when global prices of some products have been depressed by factors such as the wet US spring, which in curtailing sowings undermined demand for the likes of sprays and nutrients.

 

Incitec Pivot revealed a Aus$49m hit to operating profits from lowered expectations for prices of the likes of phosphates and ammonia.

 

‘Strategic milestones’

Incitec Pivot said that its fertilizer business – “the pre-eminent distributor of fertilizers in Australia”, as well as the only manufacturer of phosphate and nitrogen nutrients on the country’s east coast – had nonetheless “made good progress on a number of strategic milestones” this financial year.

 

These milestones included a phosphate operation rationalisation at Geelong, in Victoria, and a return of a Queensland phosphate plant to “reliable production”.

 

The business had “attractive growth opportunities”.

 

Jeanne Johns, the Incitec chief executive said that the unit “has a long proud history, a unique market position in Australian agriculture and is well placed to benefit from an improvement in the commodity cycle.

 

“Now is a logical time to initiate a strategic review, with the business well positioned to benefit from the emergence of ag tech and to leverage its strong platform in the Australian market.”

 

More than a century old

Incitec Pivot’s fertiliser arm traces its history to the formation of Australian Co-operative Fertilizers commenced in Toowoomba, Queensland in 1915, although a phosphates company it bought five years later dates back to 1862.

 

The fertilizer company merged with Pivot Limited 16 years ago to form Incitec Pivot, and saw hefty expansion in nutrient production in 2006 with the takeover of Southern Cross Fertilisers.

 

The Fertilisers Asia Pacific division fell to an operating loss of Aus$32.5m for the October-to-March half, compared with a profit of Aus$23.3m a year before, on revenues down 0.7% at Aus$553.0m.

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