Tronox Inc. (TROX)

[newtechinvestor]

The heart of the debate is at the time of Tronox IPO in 2005, whether the company was solvent or not.

The article contend if at the time of IPO, Tronox had more liabilities than the assets, hence the company was insolvent (bankrupt), then Tronox has a case against its former parent, Kerr-McGee, now part of Anadarko Petroleum.

"....reserve for environmental contingent liabilities, which is an off-balance-sheet entry, was $224 million at the time of the IPO. "

"In the study, parts of which are featured in this month's issue of CFO magazine, Greg Rogers, president of consultancy Advanced Environmental Dimensions, estimates that the fair value of Tronox's environmental contingent liabilities was $1.2 billion — far beyond the $224 million reserve that Tronox reported — on the date it went public. That is more than twice the company's equity of $556 million, as valued by investors in the IPO."

Rogers used a proprietary set of financial analytics, and what he characterizes as a conservative 6.5 multiple applied to the $224 million reported reserve to calculate the fair value of the company's liabilities. His study, which is based on public financial data for 24 oil, gas, and chemical companies, illustrates that despite spending millions each year on environmental cleanup, most of the companies take charges every year to replenish their environmental reserves.

"If the study's calculation for Tronox is a reasonable estimate of fair value, that would put Tronox's contingent environmental liabilities for 2005 at just over $1.4 billion, while total liabilities would add up to about $2.69 billion, far above its total book assets ($1.27 billion), and probably much higher than any reasonable fair-value estimate of the company's assets."

At the time of IPO, Tronox had reported $490mil in equity and $1.27bil in liabilities. Greg Rogers's fair market value of contingent environmental liabilities shows the company would have had negative equity of $-934mil ($1.76bil assett-$2.69bil liabilities).

At the time of Tronox IPO, contingent enviromental liability reserve was severe inadequate, company was undercapitalized and fair market value of its liabilities exceeded assets. Therefore, the company was basically insolvent or bankrupt. Tronox, creditors and shareholders were not adequately informed of the true nature of its transfered liabilities.

In any shape or form, this is very positive take on Tronox's lawsuit against KM-APC.