The world’s largest explosives provider, Orica (ASX: ORI), says the positive momentum that underpinned a strong first-half fiscal 2025 performance has continued into the second half. Earnings across segments are expected to be higher than for the same period last year.

Why it matters: The improvement is pleasing, given our investment thesis rests on margin growth to a midcycle 21%. Anticipated earnings increase from higher-margin premium products and technology is at the core.

  • Our fiscal 2025 EPS forecast declines marginally to $1.08 from $1.11. Orica is guiding for net finance costs at the upper end of the previously slated $190 million-$200 million range. And anticipated minority interest of $28 million-$31 million is, similarly, slightly higher than we’d factored.
  • Shares on issue have declined 2.3% with 55% of the $400 million on-market share buyback announced in March 2025 completed. Some were bought back below our fair value, but the share price is now at a premium, and to continue would not be a good use of capital, in our view, though immaterial.

The bottom line: We increase our fair value estimate for no-moat Orica by 3% to $18.50. The time value of money is the key contributor. We project an unchanged five-year EBITDA compound annual growth rate of 8.5% to $1.7 billion by fiscal 2029, expected to come chiefly via EBITDA margin improvement.

  • Margin gains are expected to come via more uptake of technology-based blasting solutions as customers seek improved productivity and sustainability outcomes. We project a midcycle EBITDA margin of 21%, against first-half fiscal 2025’s 17%.
  • Orica shares have improved 40% from April 2025 lows, and at $21 are now somewhat overvalued, in 2-star territory. We think the market is overly optimistic about earnings improvement. Margins are likely to improve, but we see some longer-term demand headwinds.

Strong fiscal 2025 first-half performance continues into the second

Orica has expanded its mining services business around a leading global market share in explosives. Earnings are leveraged to mining volume and commodity prices. The Australian explosives duopoly affords relatively high margins and returns; however, these are coming under pressure as Orica’s more lucrative three- to four-year contracts mature and are replaced with longer-duration and lower-margin contracts. Orica benefits from resources development activity in Latin America, South Africa, and Russia. Non-Australian explosives usage also depends on construction demand, which is somewhat less cyclical.

Orica has grown its explosives business by both organic and acquisitive means. In fiscal 2006 it bought the European, Middle Eastern, African, Asian, and Latin American businesses of Dyno Nobel, which helped provide scale and lower costs. This was followed by divestment of a 70% interest in fertilizer business Incitec Pivot. In fiscal 2007, Orica expanded capacity at its Queensland ammonium nitrate plant and increased capacity at Kooragang Island, New South Wales. An ammonium nitrate plant in Bontang, Indonesia started production in 2012, and there were plans to double capacity at Kooragang Island, but timing will depend on market demand. Orica also participates in an ammonium-nitrate plant joint venture in the Pilbara iron ore region in Western Australia.

We estimate Orica’s Australian explosives market share at 55%-60%, with the remainder largely held by peer Incitec Pivot. We include Incitec Pivot’s Moranbah, Queensland, plant in our market estimates. In the US, the explosives industry is a concentrated market. Orica has a well-established presence with an estimated market share of 30%-35%. The key competitors are Dyno Nobel (owned by Incitec Pivot), which has similar market share, and Austin Powder. The key markets for explosives in the US are coal and metals mining, as well as construction and quarrying.

A focus on higher shareholder returns has improved with investment options subjected to disciplined returns criteria. Orica will not invest in new plant unless an 18% return on net assets can be achieved.

Bulls say

  • Orica is a global leader in explosives and part of a duopoly in Australia. It is leveraged to ongoing regional resources demand driven by the industrialization and urbanization of China and India.
  • The intensity of explosives and chemicals used in mining is increasing as ore grades decline and strip ratios increase.
  • There are a number of organic growth opportunities available to the Orica, particularly the expansion of ammonium nitrate capacity and explosives production.

Bears say

  • Orica is primarily exposed to mining, where explosives demand softened as a result of the end of the China boom.
  • Continued production capacity expansion has led to industry overcapacity, and mining volumes are now falling.
  • Cleanup legacy issues continue, and past chemical spills have affected earnings and damaged the company’s reputation.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.