Mining explosives maker Orica has warned continuing low commodity prices will take a toll in the 2018 financial year as the company renegotiates contracts at lower rates and faces rising costs.
Chief executive Alberto Calderon on Monday said challenging market conditions from 2016/17 would extend into the new year, resulting in a $50-$55 million earnings hit from contract rollovers, and another $10 million on account of increased costs from previously negotiated contracts.
"In 2017 the mining sector began to recover from the severe downturn that began in 2015," he said.
"We expect this recovery, and normalisation of long term mining plans that it implies, to continue in 2018. However, there will be a lag before this makes a material difference to the services sector."
Orica, the the world's biggest supplier of commercial explosives, reported full-year net profit of $386.2 million, a 13 per cent increase on the previous year.
However, excluding several one-off items in the previous year - a settlement with the Australian Taxation Office, profit from the sale of a business and expenses related to a Chile plant accident - its underlying profit for the year to September 30 was actually down one per cent.
Revenue for the year to September 30 slipped one per cent, to $5.04 billion.
Increases in gas and ammonia prices reduced earnings by $59 million, while a stronger Australian dollar trimmed $15 million off pre-tax profits in the year, the company said.
"While the mining sector has begun to recover and mine plans are beginning to normalise, the 2017 year continued to be challenging, with substantial headwinds across every region," Mr Calderon said.
Orica, whose fortunes are closely tied to the resources industry, expects to benefit from the partial recovery in prices of key commodities such as iron ore, oil and coal.
The company said volumes in its largest business - Australia-Pacific and Indonesia -grew by 10 per cent on the back of strong demand from Australian coal and iron ore miners.
Business improvement initiatives also delivered a net $127 million benefit in the year, the company said.
It expects to complete renegotiation of older contracts to be completed in FY18, meaning there will be no headwinds beyond the current fiscal year.
That news did little to cheer up investors, with shares in the company dropping more than 10 per cent on the news.
The weaker result and guidance on higher raw material costs and price resets would suggest a downgrade to Orica's FY18 consensus estimates, Citi analysts said.
"Expect the stock to be weaker particularly given FY18 consensus has 10 per cent growth baked in from the $386 million new base," Citi's team said in a note.
Orica will pay an unfranked final dividend of 28 cents a share, one cent lower than the previous year's partially franked distribution.
By 1438 AEDT, Orica shares were down nine per cent to $19.44 - their lowest level since May.
ORICA NET PROFIT HIGHER BUT COSTS, REVENUE WEIGH ON RESULT
* Statutory net profit of $386.2m up 12.7pct
* Revenue down 1pct to $5.04b
* Unfranked final dividend of 28 cents a share
