Incitec Pivot demerger plan provokes more questions than answers

Just 14 years after the century-old fertiliser company absorbed US explosives giant Dyno Nobel to help stabilise and underpin its earnings from the volatile crop nutrition sector, Incitec Pivot now wants shareholders to approve a separation again, and independent listings on the Australian Securities Exchange next year.

Given Incitec is in the throes of closing its big urea production plant in Brisbane, many are unsure how the announcement fits with the company remaining a significant local player in the highly competitive market.

It will source more imports to compensate for the Gibson Island shutdown.

Despite it achieving a decisive profit leap from $36 million to $384m for the six months to March 31, investors have not exactly rejoiced at Incitec's demerger news.

Instead, IPL's share price drifted lower from last month's $4.16 peak to about $3.50 each this week, although that is still above February's $3 low point for the past year.

"There are mixed views about getting rid of the fertiliser business' (Dyno Nobel) safety net," observed agribusiness analyst with Morgans stockbrokers, Belinda Moore.

"The market wants a lot more detail about what's planned, including the debt Incitec Pivot Fertilisers will carry and likely corporate costs."

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On the back of strong demand and prices skyrocketing to recent records, Ms Moore said the fertiliser division had lately generated strong profits and cash flow for the greater Incitec Pivot business, but fert markets were prone to unpredictable and big fluctuations which may not be so rewarding in future.

"I can eventually see the fertiliser business being a takeover target," she said.

"Although, with the right management, minimal debt and a strong balance sheet it's also quite understandable that the unloved child in any demerger process could become something strong and quite sustainable."

Incitec Pivot Limited managing director, Jeanne Johns, insisted "the timing is right to separate" and the fertiliser company's balance sheet was also in "great shape".

"As part of the proposal, the fertilisers business will be set up for success with a very strong balance sheet, appropriate for the company through the cycle," she said.

Aside from its Brisbane plant, Incitec's fertiliser division includes western Queensland's Phosphate Hill mine near Mt Isa, a single superphosphate plant at Geelong, Victoria, and a recently acquired majority stake in Australian Bio Fert which is building a plant near Geelong to make 75,000 tonnes of soil-friendly granular product a year from organic waste, carbon and fertiliser products.

Incitec Pivot has been prominent in Australia's fertiliser scene since it began as Victoria's Phosphate Co-operative Company in 1919, later renamed Pivot Limited.

Pivot and Incitec Fertilisers merged in 2003 and in 2006 acquired Southern Cross Fertilisers, which included Phosphate Hill.

Victorian farmer and GrainGrowers chairman, Brett Hosking, said while not pretending to understand the corporate thinking behind the demerger, he would have thought the current alignment between the fertiliser and explosives divisions was sensible and pragmatic.

"If we're hit by a drought, it could hurt the standalone fertiliser business pretty hard, like all of us," he said.

Like many with long links to the Pivot name he hoped the demerger move was not an indication the big eastern states player might be shifting away from its traditional business base, and particularly local fertiliser production in favour of imports.

"Our industry would love more nitrogen and phosphate manufacturing within Australia, ideally using greener production technologies than already exist," he said.

"Fertiliser usage has increased a lot in the past few years and we're hearing there may not be enough nitrogen in the country to satisfy this season's demand given the good start in the eastern states, through South Australia and WA."

At the same time, he noted, "there's a lot of carbon footprint in imported fertiliser products".

"Farmers inherit 40 per cent of our emissions from product we buy in."

Grain Producers Australia's chief executive, Colin Bettles, could not judge Incitec's demerger strategy, but said there was a real need for more domestic investment, not less.

GPA applauded initiatives by potential newcomers to the local nitrogen fertiliser industry.

While the grain industry fully appreciated the fertiliser sector's big production and cost challenges, imports exposed farmers to greater price volatility, supply uncertainty and imported biosecurity risks.

GPA also applauded the Northern Australia Infrastructure Fund's help with infrastructure support for WA's Perdaman urea plant, which Incitec hopes to tap into when the $4.3 billion is eventually built.

The grower body had liaised closely with new industry hopefuls Strike Energy and NeuRizer which plan low emission urea plants on gas fields near Geraldton in WA and Leigh Creek in SA, as early as 2024.

Commenting on Australia's changing fertiliser scene, Incitec's Ms Johns noted there was more to meeting customer's expectations than nitrogen production.

"Investment has focused on growing our distribution platform, including expanding the product portfolio across enhanced efficiency and liquid fertilisers, building on our soil health and agronomic services expertise," she said.

"We have invested substantially in growing our fertilisers business to make it more resilient.

"As a separate company, Incitec Pivot Fertilisers will be well positioned to accelerate its growth ambitions to meet farmers' needs and unlock significant value for shareholders."

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