“The board still feels the demerger is a tax efficient way of unlocking value for shareholders, but looking at the optimal timing will be a focus in the second half of the year,” she said.
The sale process coincided with very strong performance at the Waggaman plant, after years of frequent outages and underperformance.
Over the past six months, the plant produced more ammonia than its official “nameplate” capacity would suggest is possible, and Waggaman generated $304 million of earnings, up from $129 million in the equivalent period last year.
It is now a year since Incitec floated the demerger plan, and over that time interest rates have risen dramatically in Incitec’s key markets while prices for its flagship fertiliser product (di-ammonium phosphate) have slumped by 18 per cent.
Asked whether she had seen anything in the external environment over the past year that made the demerger less attractive, Ms Johns said: “we don’t think so”.
“But the beauty of a demerger is that you don’t have to time it with the market – obviously commodity prices have come off, but our shareholders are exposed to that whether the fertilisers is part of IPL or it is demerged.
“So the commodity cycle should not really play into it.”
Ms Johns said the deal struck in April to buy 20 years worth of urea from the Perdaman Chemicals plant near Karratha in Western Australia provided confidence that the fertiliser division had access to competitively priced, long-term supply of an important feedstock.
“We do think the Perdaman transaction makes a much more compelling case and helps strengthen the fertiliser business as a standalone business,” she said.
One institutional shareholder spoken to by The Australian Financial Review on Wednesday said the extreme volatility in fertiliser earnings over the past year illustrated why the demerger was a bad idea. The shareholder said the separated businesses would be smaller, weaker and have a higher cost of capital.
Ms Johns said she expected demand for fertiliser to improve in the next six months as agricultural markets recover from flooding and start to demand more fertiliser volumes.
Moody’s Investor Services analyst Maadhavi Barber agreed.
“Fertiliser earnings will benefit from the Australian winter planting season, while explosives earnings will benefit from the company’s growing customer base, price resets and cost reduction initiatives,” she said.
“Moody’s expects Incitec Pivot to have sufficient liquidity for its share buyback of up to $400 million, without significantly impacting credit metrics.”
Methane gas is the prime feedstock for Incitec’s fertilisers and explosives, and Ms Johns said extremely high gas prices over the past year had made for a very “challenging” time.
Ms Johns expressed disappointment that the Northern Territory government agency that supplies gas to Incitec’s Phosphate Hill mine in Queensland was still struggling to supply the promised volumes.
Italian oil giant ENI has been hired by the NT government to operate the field that supplies the gas, and initial promises to restore gas supply by February have now been pushed back to June.
Ms Johns said the Phosphate Hill mine had been able to continue operating by securing gas in spot markets.
Incitec announced a new gas supply deal for its Moranbah explosives plant in Queensland, which will result in the plant being fed waste methane that dissipates from the coking coal mines in the region.
Aside from being a good environmental initiative, Ms Johns said that gas was competitively priced because it was effectively a “stranded” waste product.
Incitec last year shut its Gibson Island fertiliser plant near Brisbane, and Ms Johns said that had proved to be an excellent decision given high gas prices would have severely challenged its viability had it stayed open.
Studies into a possible retrofit of Gibson Island are under way in partnership with Fortescue Metals Group, investigating whether green hydrogen can be used as the feedstock rather than methane.
The plan would make “green ammonia” and a final investment decision is due before December.
Ms Johns said no decision had been taken on whether to sell Gibson Island’s ammonia to foreign or domestic buyers, although she said “various players are very interested in using it here in Australia”.
Marketing of Gibson Island’s green ammonia will be determined by Fortescue if the project goes ahead.
“We hope we can make it happen, it is an innovative solution making green ammonia at scale here in Australia, and it’s the beginning of a new industry that I think we would be quite excited to be part of,” she said.
Incitec shareholders will receive a 10¢ interim dividend and the company plans to buy back $400 million of its own shares before December.