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David Herro Comments on Orica

January 09, 2014 | About:

Falling 15%, the largest detractor for the year was Orica (ASX:ORI), the largest provider of explosives for the mining industry.  Shares were weakened by a reduction in guidance in July and by the market’s anticipation that the company would miss its 2013 fiscal-year targets.  However, shares rebounded when Orica’s fiscal-year results showed 3% revenue growth and relatively flat margins, which put the company in line with expectations.  This demonstrated that Orica’s explosives business is much more resilient than most other areas of mining services.  Management has indicated earnings will be higher this year than last but that the environment is leading to higher than normal volatility.  During the year 90% of its contracts that were up for renewal were renewed, and any clients they lost were replaced two times over by new contract wins or greenfield business.  Also, a year ago two-thirds of contracts were only for products, while today two-thirds of renewal contracts include a service component.  We expect Orica to continue its capital-light strategy and that it will produce better cash flow in the future. 

From David Herro (Trades, Portfolio)’s fourth quarter 2013 commentary.


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