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Orica Ltd

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Orica Continues to be Troubled by Minova

We review Orica ORI ahead of the release of its first-half fiscal 2013 results on 6 May and in light of weaker trading conditions, particularly for the troubled Minova mining supplies business. We lower our fiscal 2013 net profit after tax (NPAT) forecast 6%, to allow for lower domestic volumes due to weather impacts on the Australian east coast, and also lower volumes and pricing pressure in Minova's core markets. Fiscal 2014 also falls 6% on lower domestic explosives growth assumptions and continued weakness in Minova. Our fair value estimate falls from AUD 27 to AUD 26. Despite the earnings downgrades we continue to view Orica as well-positioned to benefit from medium-term growth in demand for explosives as mining capacity expansion leads to increased production. Our narrow moat rating is unchanged with the global commercial explosives industry retaining its oligopolistic type characteristics. Orica continues to trade at a discount to our lower fair value estimate with the market taking a more pessimistic view. We would now prefer to see the stock trade at slightly lower levels before purchase.

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