Orica Limited today announced the write-down for the defective components of its Burrup Technical Ammonium Nitrate (TAN) plant positioned in the heart of the Pilbara. The news sent the stock price to decline by 1.079% in a day trade to stand at $18.800 on 29 April 2019 (3:37 PM AEST).
In the market announcement to the Australian Securities Exchange, Orica Limited (ASX: ORI) stated that it expects to recognise approximately $191 million in non-cash adjustments in its 2019 first-half results. These results are due to be released on 9 May 2019.
The write-downs underscore the ongoing rectification works at the TAN plant with the objective to replace the defective components with newly manufactured replacement components to get the plant commissioned in the first half of the 2020 financial year.
As these rectification and capital works have progressed over the last six months, the company has reportedly identified a number of assets that need to be replaced or repaired and must recognise the reduced value of plant and equipment that is classified as defective, in line with the accounting standards. It also includes capitalised costs directly attributable to the construction of the plant. Accordingly, Orica forecasts to recognise a non-cash impact of ~$155 million ($109 million after-tax) in its 2019 half-year results.
Technical Ammonium Nitrate (TAN) plant remains an essential component of Orica’s domestic supply strategy being a 30-plus-year asset located in Pilbara where the strip ratios are estimated to grow at a 3%-plus CAGR over the next five years.
The company further assured that the accounting recognition of the defective components would not affect its long term commercial and strategic value of the Burrup TAN plant. And the value of these replacement components and any directly attributable costs will reportedly be capitalised in future periods.
With respect to impairment of IT and other assets, Orica announced the impairment of $36 million for the assets no longer being utilised by the business as it has implemented the final stages of its new SAP operating system.
After securing several substantial contracts over the past 18 months and the contract profile, Orica expects that the plant will be essentially loaded in 2020. The plant’s utilisation in the 2019 financial year will reportedly be lower than the previously anticipated 20 per cent; however, the overall Group outlook for the 2019 financial year remains unchanged from November 2018, with the earnings expected to be weighted approximately 45/55 to the second half.
Orica is an Australia-based materials sector company which is into the provision of commercial explosives and innovative blasting systems to the quarrying, mining, oil and gas and construction markets.
The stock price of Orica Limited has dipped 2.06% over the past 12 months, despite the attractive positive price movement of 15.57% over the past six months. In the last one month, ORI has gone up by 4.40%.
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