Incitec Pivot Considers Greening Gibson Island

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Incitec Pivot will run out of gas bought at the “right” price by the end of 2022 and is now considering options for its Gibson Island site including green ammonia.

-Gibson Island closure to mean ammonia will need to be sourced offshore
-Feasibility study on producing green ammonia from the site
-High fertiliser prices add upside risk for Incitec Pivot's FY21 results
 

By Eva Brocklehurst

Incitec Pivot ((IPL)) has failed to secure a viable long-term gas supply agreement for its Gibson Island ammonia plant in Brisbane and will eventually have to source around 20,000tpa of ammonia offshore to supply its Queensland explosives operations.

The Gibson Island plant produces ammonia, urea and ammonium sulphate and will cease manufacturing at the end of 2022 when the current supply agreement for gas ends.

In the absence of a gas contract below $9/gigajoule, Credit Suisse assesses the plant would probably be operating in the negative in terms of operating earnings, using five and 10-year average urea prices.

The cash costs of the closure are estimated at -$83.5m. Macquarie calculates stranded corporate and insurance costs are likely to be around -$10m per annum and there will be -$15-20m in additional operating costs for insurance and alternative arrangements.

The company points out there could be a potential for $45m in proceeds from land sales, depending on a final decision relating to the future use of the site.

Macquarie had suspected Gibson Island could close, although the decision has been made earlier than anticipated as there is still one year to run on the current gas contract. The plant is breaking even at long-term urea prices based on the existing gas contract while profitable at current urea prices.

While the closure will reduce the long-term leverage to the urea price, Incitec Pivot will be able to take advantage of strong urea prices over the next 12 months. The company remains committed to being a leading supplier of fertilisers and soil health services to the agricultural sector.

Urea, sulphate of ammonia and other specialty products will be sourced from existing international supply chains and replace manufactured products. The Brisbane fertiliser distribution centre will continue to operate.

Credit Suisse was also not surprised by the prospect of closure, assessing a continuation of manufacturing would have required expenditure of -$60m on plant turnaround in 2022 with an assumption that prices will hold up sufficiently to ensure profitability through to the following turnaround in 2025-26.

The knock-on effect of reduced ammonia availability will also lead to a slight tightening of the east coast ammonium nitrate market. Morgan Stanley points out the facility has been in doubt for some time, yet estimates it comprises only a low proportion of Incitec Pivot's earnings.

Green Ammonia

A feasibility study into industrial-scale production of green ammonia at Gibson Island will be brought to the fore, to potentially re-invigorate the facility. The study is expected to be completed by the end of 2021 and closure costs should be much less if the plant can be re-purposed. To this end, an MOU has been signed with Fortescue Metals' ((FMG)) Fortescue Future Industries.

While it is early days regarding green ammonia it could place a higher, more sustainable value on what is a well-located plant with existing infrastructure, Macquarie asserts, although a project will take time to be developed.

Pricing

Credit Suisse is of the view that ammonia prices will fall by the middle of 2022, contingent on a resumption of European ammonia manufacturing and a return to China's phosphate exports.

The broker forecasts Black Sea ammonia pricing around US$776/t at the end of 2021 and falling to US$675/t by the March quarter of 2022. Tampa prices are expected to remain at a premium to Black Sea.

Morgan Stanley believes the benefit from higher fertiliser prices without corresponding input pricing pressure for Incitec Pivot should bring on margin expansion. Including spot prices for fertiliser in modelling implies a 50% upgrade to group earnings forecasts for FY22 and Morgan Stanley thus believes the risk lays to the upside.

As a result, the focus is to the upside in the outlook when the company reports its results on November 15. Citi notes the company will take a pre-tax non-cash writedown of $102.5m in its FY21 financials and forecasts FY21 underlying net profit of $369m, up 3% on tweaking fertiliser price assumptions.

The broker reduces its estimates for FY23, affected by the closure of Gibson Island, with underlying net profit reduced -6% to $338m. The full impact of the closure is expected to be felt in FY24.

Macquarie notes Incitec Pivot is trading at a large discount to Orica ((ORI)) on FY21 and FY22 multiples, yet the former is expected to benefit from higher fertiliser prices and a more normal production year going forward, as FY21 was affected by turnarounds and other issues.

FNArena's database has six Buy ratings and one Hold (Credit Suisse). The consensus target is $3.24, suggesting 4.8% upside to the last share price.

See also Lofty Prices Stand Incitec Pivot In Good Stead on September 15, 2021.

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