Tronox – Time To Focus On The Future

Reposted from Seeking Alpha
By Brian Langis

I have been a shareholder of Tronox for about a year. Every year I review my positions and verify that the reasons why I invested are still valid. I originally invested in Tronox because I believed it was undervalued. Now that I am reviewing this investment, I can’t help noticing that the case only got stronger. Despite the headwinds in the industry, the stock did well during the last year, especially with its hefty dividend. I decided to share with you my investment thesis.

Tronox (TROX) mines and processes titanium ore, zircon and other minerals, and manufactures titanium dioxide (TiO2) pigments that add brightness and durability to paints, plastics, paper, cosmetics, toothpaste and other everyday products. Tronox is a vertically integrated company since it has acquired Exxaro’s Mineral Sands Operations in 2012. That means it’s a fully integrated producer of titanium ore and TiO2. Titanium ore is the feedstock required to produce Ti02. By controlling both the ore and the facilities necessary to produce TiO2 will make Tronox one of the lowest-cost providers in the business, providing the company with a major competitive advantage.

Tronox’s past problems are well known. The bankruptcy in 2011 and the dispute with Anadarko seem to have overshadowed the merits of Tronox. The lengthy trial was finally settled. Even though the value of the settlement is much lower than was expected, the settlement can only mean good for the company.

The table below provides a bird’s eye view of Tronox.



It’s certainly not the most exiting chart to display. As the chart demonstrates, TROX has clearly underperformed on the market but has bounced back from its lows. Tronox had a lot of ups and downs and reflects the problems in the TiO2 industry. The problems are starting to clear up and the stock should improve over time.

Investment Thesis

Why do I think Tronox is a good investment?

Tronox is sitting on $1.47 billion in cash and has about ~$10 billion in tax shield. The pigment industry is stabilizing, its bankruptcy and legal problems are behind, free cash flow is generated and parts of it are returned to shareholders via dividend or share buybacks. Tronox could also benefit from the industry consolidation. Tronox has the means to be a buyer and could also be a target.

I believe that Tronox is undervalued and there’s potential for 30% to 53% upside from the current ~$26 market price. There’s more detail on my valuation below.

Weak demand for titanium dioxide and low prices has weighed on the results of Tronox. Last year, Tronox swung from a $1.1 billion profit in 2012 to a $90 million loss (non-adjusted). The industry is in part responsible for the mess by over producing during good times. In the last couple quarters excess inventories have dwindled down and the playground for better times is being prepared. You can position yourself for better times ahead and take advantage of the upswing.

What’s makes Tronox an interesting company is that it’s involved in all the facets of the TiO2 cycle, from the mining to the production of TiO2. This provides TROX with a competitive advantage on the cost side since it has greater control over the supply chain.

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