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The week of 18 August– 24 August 2016
Volume 28 Number 01
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B.2. Incitec Pivot (INCITEC, IPL)
Principal activities
Manufacturer and supplier
of fertiliser, explosives and
industrial chemicals.
Major shareholder/s
Harris Associates, Schroder
Investment Management,
Commonwealth Bank of
Australia.
Latest paid-up
1.68 bln shares
Market capitalisation
A$4.81 bln @A$2.85
2016 P/E Ratio
Around 14 times @A$2.85
Sources: Incitec Pivot, Australian Stock
Exchange, Capital Dynamics
Financial highlights (A$ mln) – 30 September
2006 2007 2008 2009
2010 2011 2012 2013 2014
2015
Sales
1,111 1,373 2,918 3,419 2,932 3,545 3,501 3,404 3,352 3,643
Pre-tax profit
59.3 287.7 836.5 -314.6 539.9 621.4 711.7 348.8 311.7 507.7
Net profit
46.7 205.3 604.6 -221.4 410.5 463.2 510.7 367.1 247.1 398.6
Adjusted net profit
79.4 196.6 612.2 334.9 412.1 507.8 392.9 281.6 311.5 366.0
Depreciation
33.1 36.1 70.3 170.5 139.0 148.2 155.8 183.7 223.3 249.1
Finance cost
14.9 34.1 95.2 126.1 58.3 63.1 66.6 92.3 95.0 81.6
Current assets
597 909 1,867 1,034 979 1,388 1,021 1,175 834 1,344
Current liabilities
363 357 3,701 1,175 915 1,163 1,092 1,161 990 1,896
Fixed assets
441 502 1,671 1,663 1,844 2,283 2,739 3,034 3,511 4,004
Total Assets
1,305 1,639 8,185 6,590 6,310 7,002 7,013 7,684 7,970 9,196
Total Debt
437 630 2,510 1,589 1,146 1,569 1,441 1,654 1,743 2,554
Return on equity (%)
16.9 43.0 33.2 10.3 11.9 13.9 10.2 6.8 7.2 8.0
Half Yearly A$ mln
31/03/16 31/03/15
Sales
1,524.0 1,594.9
Pretax profit
22.1 186.6
Net profit
31.9 146.5
Finance cost
30.8
36.2
Depreciation 125.3 121.7
Cash & cash
Equivalents
83.0
91.5
Source: Incitec Pivot
Incitec Pivot’s Louisiana Plant – Under Construction
Figure 1 Incitec Pivot Tonnes of Urea Sold vs. Urea Price
Table 1: Global Supply and Demand of Urea (mln tonnes)
2012
2013
2014
2015
2016F
Supply
170.9
175.7
174.5
179.0
187.3
Demand
163.4
167.8
166.2
168.8
173.2
Balance
7.5
7.9
8.3
10.2
14.1
Sources: IFA, ICIS
This week,
i
Capital
updates Incitec Pivot
Limited (IPL), an industrial
chemicals company listed
on the Australian Stock
Exchange. The business
manufactures and supplies
fertilisers and industrial
explosives products and
services to the agriculture
and mining industries. IPL’s
long-term strategy is to
leverage on demand growth
for hard/soft commodities
from the industrialisation of
Asia and to take advantage
of the fall in international
gas prices due to the shale
revolution in the US. Its
strategy is predicated on its
core nitrogen manufacturing
capability, a key input in the
production of fertilisers and
explosives.
Fertiliser Business
IPL’s fertiliser distribution
business suffered its lowest
sales in recent years, with
fertiliser sales for 1HFY16
at 615,400 tonnes against
816,000 in 1HFY15. This
effect was compounded by
the continued free-fall in
urea prices in the Middle
East, incentivising farmers
to hold off their purchases in
anticipation of lower prices
in the future – see
figure
1
. This price trend is also
not expected to reverse
materially anytime soon
because the urea market
remains well oversupplied
– see
table 1.
Fortunately
for IPL, the weakening of
the A$ has reduced the
negative impact of its results.
Nevertheless, the future
outlook of urea production
at IPL’s Gibson Island (GI)
plant is bleak. The process
of manufacturing urea is
relatively simple – a plant
needs to convert a source
of carbon, whether natural
gas or coal, and combine
it with nitrogen from the air
to produce ammonia. The
ammonia is then reacted with
carbon dioxide to produce
ammonium carbonate
which subsequently turns
into urea with water as a
by-product. Hence, the
highest raw material cost in
the production of urea is the
source of carbon – which
in IPL’s case is natural gas
(~70%+).
As
i
Capital highlighted in
its previous update (see
i
Capital dated 14/12/2015),
businesses that compete
within the commodity
space are price takers,
and therefore the only line
of defence is its operating
costs. Therefore the price
with which IPL procures
natural gas is critical towards
the viability of its plants,
especially considering that
both its Australian plants
at GI and Phosphate Hill
(PH) are over 40 years old.
GI’s current break-even
cost of producing urea is
US$215/tonne, just shy
of the most recent market
price of US$237/tonne. This
cost however is based on a
10-year legacy natural gas
supply contract which expires
in Sep 2017. For GI to
remain viable, its contracted
natural gas price needs to
be less than A$6.50/mmBtu.
This is a highly unlikely
outcome due to structural
changes taking place in the
gas market on Australia’s
East Coast – see
figure 2.
IPL’s GI plant is located at
the mouth of the Brisbane
river, which is at the end of
the Moomba to Brisbane
Pipeline. This means that the
only real source of natural
gas for GI is either from the
Queensland (QLD) Coal
Seam Gas (CSG) fields or
from Moomba. The only
other potential source is
located thousands of kms
further afield down south in
Victoria’s (VIC’s) offshore
basins, making gas transport
costs prohibitively expensive.
At present, Australia’s
east coast is undergoing a
historic liquefied natural-gas
exporting boom, effectively
tripling the annual natural
gas consumption in the
region and bringing about
a structural change in the
market. The LNG is being
exported via Gladstone,
which means all gas needs to
pass through the Wallumbilla
Hub, located just hundreds
of kms from IPL’s GI plant.
Due to the sheer volume
of gas passing through
Wallumbilla for exports, the
hub sets a reference spot
price for producers selling
to the LNG gas exporters.
Given the uncertain nature
of unconventional CSG,
the mega LNG project
proponents have signed-up
long-term contracts with
other local natural gas
producers and shippers to
ensure they can fill-up their
contracts. This means that
there are even less free gas
available to be marketed
to the Australian industry
because the opening up of
the gas market to export
means that gas producers
in QLD and to some extent
the south are cognisant of
the fact that they may forego
future higher price sales
opportunities should they
agree to long-term contracts
at lower prices. The basic
economics of the plant was
predicated on low-gas prices
of a land-locked east coast
gas market.
To make matters worse,
state government’s across
the whole east coast is
placing a moratorium
on onshore oil and
gas exploration due to
environmental concerns,
further reducing the
potential for offtake funding
opportunities. Due to high
prices in QLD, Orica’s
Kooragang Island plant
contracted with BHP/Exxon’s
offshore VIC Gippsland
Basin in the south instead
of taking on supplies from
Moomba. IPL’s PH plant near
Mt. Isa, though reliant on
B
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