UPDATE 1-Australia's Incitec Pivot H1 profit drops, explosives unit surprises

Sun May 13, 2012 8:51pm EDT

* Fertiliser earnings fall more than expected

* Remains comfortable with fertiliser business

* Weak coal mine demand to hit H2 U.S. explosives sales

* Considers building ammonia plant in United States

* Incitec shares inch up

MELBOURNE, May 14 (Reuters) - Australia's Incitec Pivot reported a 20 percent fall in first-half underlying profit on Monday, hit by a sharp drop in fertiliser earnings, but its explosives earnings surprised, vindicating its expansion in that business.

As expected, Australia's top fertiliser maker and world no.2 explosives maker did not reaffirm its earlier outlook for modest profit growth this year after it was hit by volatile fertiliser pricing and a problem at one of its Australian plants.

Incitec, whose earnings have typically been split 50-50 between fertiliser and explosives, is expanding in explosives to tap into Australia's mining boom.

It expects strong growth next year after its $935 million Moranbah ammonium nitrate plant in Australia opens in July.

"We're very confident that we've got the right strategy in place. It's all around investing in explosives and that'll generate stable, predictable earnings," Chief Executive James Fazzino told reporters.

However, Incitec warned explosives sales in North America in the second half of this year would suffer due to falling demand from U.S. coal mines. Coal production has dropped as power generators switch from burning coal to cheaper natural gas.

Its profit before one-offs fell to A$143.5 million for the six months to March from A$178.6 million a year earlier, compared with an average forecast of A$147 million from nine analysts.

Fertiliser earnings fell 56 percent, which Fazzino said was due to volatile prices, bad currency hedges, and, as flagged, the costs of major maintenance at its Mt Isa acid plant.

Fazzino deflected speculation the company may look to spin off the fertiliser unit, saying the business was still valuable, with strong assets, dominant market positions, and significant free cash flow.

"So I'm comfortable with that business," he told reporters.

Explosives earnings grew 21 percent, helped by a recovery in Australian sales volumes after floods hit coal mines last year, and by strong growth in its Canadian explosives business.

With the Moranbah explosives plant nearly complete, Incitec is studying whether to build a large ammonium nitrate plant to serve coal mines in Australia's Hunter Valley, competing against the region's main supplier, Orica.

It is also considering taking advantage of cheap U.S. natural gas prices by building an ammonia plant there.

It plans to decide early in 2013 whether to go ahead with either of those plants.

Incitec Pivot's shares rose 0.6 percent to A$3.18 after dipping in early trade, outpacing a 0.1 percent rise in the broader market. However, its shares have lagged the broader market's rise so far this year.

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