For investors interested in the mining sector, it is always good to know the companies that provide products and services for it.
Suppliers to mining companies ride the cyclical wave of the industry. If they are adequately diversified by geographical region and resource category, they can have better performance and more stable business.
Orica Limited (ASX: ORI), the industrial and mining chemical and commercial explosives producer, has about 92% of its earnings before interest and tax coming from the mining industry. It is still the world's leading provider of explosives for the mining and infrastructure sectors.
Capex to decrease
Its underlying net profit for the 12 months ended 30 September 2013 was down 7% on the full year 2012 result. Capital expenditures and acquisition investments are expected to decrease in FY2014 about 24% to $589 million, freeing up about $187 million.
Production rising to meet demand
Its Burrup ammonium nitrate plant in WA, of which it owns a 45% stake through a joint venture, is proceeding towards its commissioning due in mid-to-late 2015. Once fully completed near the end of 2016, it will have a production capacity of 330 kilotonnes per annum (ktpa).
Its Indonesian ammonium nitrate plant will be supplying WA while the Burrup plant is being developed. In south east Australia, where supply is expected to be outstripped by demand, the production capacity of its Kooragang Island plant will be raised to 500 ktpa by mid-calendar year 2015. Further development is planned to increase capacity to 750 ktpa.
Mining companies are cutting back on greenfield exploration and new projects, but production operations are mostly moving ahead, especially in the WA iron ore regions. Explosives and mining chemicals are still much in use.
Financial performance ratios and dividends
The company's return on equity and return on capital are a decent 15.8% and 12% respectively. Dividends have been relatively steady over the past five years and shares offer a 4.4% dividend yield currently.
Underlying net profit has been stable, rising somewhat during the recent mining surge. Revenue is expected to rise in line with the forecast product demand as expenditure decreases. Earnings may grow over the next one or two years as production capacity is expanded.
Foolish takeaway
Challenges may come, yet as a market leader the company is powering ahead. It is expanding to meet the projected demand for its products in the future. Mining activity is normalising domestically, so Orica can supplement that with its overseas business.
Investors can also follow Incitec Pivot Limited (ASX: IPL), the company's industry peer, to compare performance and understand the business better.
