Although there has been considerable discussion and comment on the downturn of mining exploration and development in Australia, the actual production from mining here and overseas has increased.
Companies that directly provide goods and services for mining production are beneficiaries of the ongoing mining boom, which will continue while there is strong demand from China, India and southeast Asian countries. Incitec Pivot Limited (ASX: IPL) and Orica Limited (ASX: ORI) both produce explosives for the local and overseas mining industry.
Incitec Pivot and Orica have substantial interests in providing fertilisers to agribusiness here and overseas. Competitive strengths for Incitec Pivot include its Australian east coast fertiliser distribution network. Both companies have a portfolio of manufacturing and distribution of explosive and fertiliser assets strategically located across Australia and overseas. Both companies manufacture, market and distribute a broad range of industrial explosives, fertilisers, related products and services. Incitec Pivot owns and operates manufacturing plants in Australia, USA, Canada, Turkey, Mexico, Chile and Indonesia and has joint venture operations in South Africa, Malaysia and China.
Incitec Pivot will have the better facilities for the Australian market in explosives once it has completed construction of a large scale ammonium nitrate plant at Moranab, Queensland, in 2015. Likewise, Incitec Pivot is constructing a massive ammonium nitrate plant in Louisania, United States, to service the shale gas boom in that country. Thus Incitec Pivot is positioning itself to play the dominant role for growth in the local and American mining explosives markets.
Incitec Pivot supplies more than 50% of Australia's agricultural plant nutrient needs, and continues to be a low-cost supplier. It supplies to farmers via retail channels (independent and corporate dealers and agents).
Earnings for Incitec Pivot are expected to be similar for the year ending September 2014 to that of the previous year. However, on a per share basis, as the new facilities in Louisiana and Moranbah kick in expectation is for earnings to reach 25.9 cents for the year ending September 2015.
Foolish takeaway
Assuming a steady price earnings ratio of 15.8 times, the share price could be expected to be $4.09 within a year or two based on the expected 2015 earnings. Any improvement on the earnings in the explosives and fertiliser businesses would no doubt flow through to an even better price in the same time frame.
As part of a diversified portfolio, Incitec Pivot presents a very good buy if the price were to dip back to its long term level of $2.75. As the dividend is currently yielding only 3.2% with 75% franking, I would be buying Incitec Pivot more for capital growth in the medium to long term rather than than income.
