Why Orica Shares Slumped Today

What Happened to Orica Shares?

Shares in explosives and chemicals maker Orica Ltd [ASX:ORI] fell by nearly 4% today after the company reported disappointing earnings for the six months ending March 31 2014. Orica has now slumped to a new six-month low.

Why Did this Happen to Orica?

Back in March, Orica told the market that it would earn less money this half than it did in the same period a year earlier. Today, Orica’s managing director Ian Smith reminded everyone that conditions remain “challenging”…so much so that net profit fell by 7.8% to $242 million. Markets hate surprises of that magnitude for companies in the ASX 50…hence today’s savage price action.

What Now for Orica?

There’s no denying that resource-linked companies have been doing it tough lately. Although you might think you’re gaining diverse chemical exposure with Orica, it’s important to remember that 92% of Orica’s earnings before tax come from mining-related industries. So when global miners lean towards cost-cutting, companies like Orica get crunched.

But selling Orica shares now might be an overreaction. Mining companies will always need explosives…even more so if they want to work existing mines harder. That will guarantee demand for Orica’s products into the future. And any cyclical upswing in commodity markets would bode well for this stock. In any case, you’ll be paid a reasonable dividend to own the shares until that day comes.

Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator

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