James Gruber: Mark, I've got you in today to talk about Incitec Pivot. It's a company that you're quite positive on. I'd like to start with the basics and how the company makes money on its two segments of explosives and fertilizers. Could you detail that a bit?

Mark Taylor: Sure. Well, it's an ammonia product supplier. What that means is it's essentially taking natural gas, extracting the hydrogen atoms via steam reforming, combining them with nitrogen atoms just simply from the air. And then via various processes, you've repackaged those up into various ammonia products, including in a fertilizer space, urea, diammonium phosphate. And in the explosives space, ammonium nitrate. And it then sells those to, in the mining industry, to major mining customers. And they can become quite embedded in the customer's operations because it's an absolutely vital element to their operations. And because there is so much money at stake, they quite often loathe to risk swapping out suppliers or doing anything that's going to interrupt the regularity of their operations. So it can be quite advantageous to a supplier like Incitec Pivot. And then on the fertilizers front, then it's just to fertilizers it sells to the farmers, basically ammonium phosphates and urea and that sort of thing.

Gruber: The big news over the past year has been the demerger proposal that the company has put forward. Where is that at now?

Taylor: Yeah, it's a bit up in the air. Originally, what was proposed was a demerger of the fertilizer business via perhaps an in-specie distribution to existing shareholders. That got held up a bit when the company decided to sell its WALA ammonia plant in Louisiana in the U.S. And then subsequently to that, they've said that they had expressions of interest from third parties for an outright sale. And so I think they're still going through that process of looking at offers, doing due diligence, that sort of thing. So it's not really certain when this thing's going to eventually fold one way or the other towards a demerger or a sale. But I'd be suggesting perhaps early next year something like that.

Gruber: And to be clear, that's a sale of the fertilizer business rather than the business as a whole?

Taylor: Absolutely, just the fertilizer component.

Gruber: And what was the objective of that? Was it that the explosives business would be more attractive on its own in terms of valuation? Was that the objective?

Taylor: I think there's a number of elements. One is that it just perhaps makes sense they can focus on one particular product line. But the fertilizer business is also far more cyclical than explosives. So you get sort of one year in every 10 as an absolute monster like we've just had in fiscal 2022 where you had record earnings. And then other years can be very, very slim pickings where you've got drought and unfavorable farming conditions. It's funny, the returns on invested capital from fertilizers is actually pretty good. I think it's been better than explosives, but only on average. And it's only because you get that one exceptional year every now and again. So demerging or selling is probably advantageous in terms of taking some of the cyclicality out of the earnings from the business and allowing you to allocate capital more effectively in a business that's sort of more consistent.

Gruber: Your bullishness on the stock is primarily around a turnaround in the explosives market. Can you outline that?

Taylor: Right. Well, just to give you an example, a key explosive manufacturing plant that they've got is the Moranbah plant in Queensland. It was a plant that was customer sponsored. Its construction was customer sponsored. Customers wanted another player in the market for diversity and security of supply. And so for the first 10 years of its operation, it had very, very favorable prices locked in. And then when those contracts started rolling over, it was into a much deteriorated market. There was oversupply, prices were lower. So you then had a period of comparatively poor pricing. Now that subsequent period is being rolled over into a new phase of repricing of contracts. And it's been very favorable. Market's been much tighter. I think the whole thing's been sort of set alight by the Russia-Ukraine situation and high energy prices and higher fertilizer prices indirectly. So yeah, the prices that have been contracted now are much better than they have been. And I think you're really going to drive some interesting earnings in coming years.

Gruber: I was going to touch on that in terms of earnings in coming years. How does that turn around factor in in terms of growth going forward?

Taylor: Overall, we're looking -- for the group overall, including fertilizers, we're looking at about on average 2% per annum growth in revenue and slightly higher annual average growth in EBITDA. So we're not…

Gruber: Doesn't sound like a lot.

Taylor: No, we're not going out on a limb here in terms of what's underpinning our fair value estimate. So it's quite a modest outlook. And yet that supports quite a healthy fair value relative to the share price.

Gruber: That probably also reflects a deteriorating fertilizer.

Taylor: Absolutely. Yeah. You're spot on. So the explosives will be doing much better and turning around. But the fertilizers are normalizing from those extraordinarily high levels that were seen in fiscal 2022.

Gruber: And what's your fair value for the stock and what are the risks around?

Taylor: Fair value estimate is $3 a share. The risks, I guess, are that with, for example, El Nino weather patterns now sort of expected to sort of hit the East Coast of Australia, for example, that the fertilizer business could do worse than we're expecting. And it may fall below normalized levels in terms of earnings. I guess you could get slower than expected volume growth in explosives and a deterioration in pricing gradually that is always a possibility. And it's one of a range of possibilities that you have to try and take a best guess of where the average or the most likely outcomes going to be, which is what our base case is.