Tronox Inc. (TROX)

[BEMBEL]

Seems that analysts were needed as catalysts.

Nice read, especially last sentence:


http://online.barrons.com/article/SB50001424052748703496404578171460444417012.html?ru=yahoo&mod=yahoobarrons

A Pigment for the Imagination

By DAVID ENGLANDER | MORE ARTICLES BY AUTHOR
As sales of a key paint ingredient revive, the shares of Tronox could double or even triple, says investor Meryl Witmer.

A weak global economy has quashed demand for titanium dioxide, a white pigment used in paints and coatings.

The decline stems from the economic problems of a hard-hit Europe and a slowing China, where the pace of construction -- red-hot until last year -- has cooled. With demand weak, paint makers have slashed their orders of the pigment.

That has hurt results at Tronox, one of the pigment's largest producers. In the September quarter, its titanium-dioxide sales fell 30% from the level a year earlier. Tronox shares (ticker: TROX) have tumbled, too, by 50% since June. But the selloff seems overdone. At a recent price of $15.65, Tronox looks cheap, trading at a 37% discount to its stated book value of $25, and for 6.6 times next year's estimated earnings.

There's reason to think that demand for titanium dioxide could rebound. As that happens, over the next year, Tronox stock could double.

Tronox was spun off from Kerr-McGee in 2005, not long before the financial crises hit and demand for titanium dioxide plummeted. Tronox, which had been saddled with significant environmental liabilities from Kerr-McGee, filed for bankruptcy.

Two years later, in 2011, it emerged, with a cleaner balance sheet, the liabilities remediated to a trust, and significant tax credits.

Last summer, Tronox bought the mineral-sands operations of Exxaro Resources (EXX.South Africa), a South African miner, in exchange for a 38.5% stake in itself. The mineral-sands operation includes feedstock used to make titanium dioxide. That makes Tronox the world's largest vertically integrated pigment producer. Once the deal closed in June, Tronox was listed on the New York Stock Exchange. At the end of July, the stock split, 5 for 1.

With more than 1,000 customers in 90 countries, Tronox has 8% of the global titanium dioxide market, and is the only producer, aside from DuPont, that uses 100% chloride in its production process. This typically creates a higher-quality product than the rival sulfate process. The company gets 77% of its sales from the paint and coatings industry, and 20% from plastics. Its customers include blue-chip outfits like Benjamin Moore, Sherwin-Williams (SHW) and PPG Industries (PPG).

With the acquisition of Exxaro's mining unit, Tronox produces zircon, a co-product of titanium feedstock mining used to whiten tiles, and pig iron, which is used to produce steel.


In the September quarter, sales were split between pigments and minerals. For the full year, analysts estimate that Tronox could earn $249 million, or $3.25 a share, on $2 billion in revenue. Next year, EPS is expected to dip to $2.36 a share, before reviving in 2014, if pigment demand rises, as seems likely.

The current weakness dates to 2011's fourth quarter. Since then, customers have been primarily living off their pigment stockpiles, and delaying new orders. But now, inventories have fallen, and customers who have been substituting cheaper materials for titanium dioxide have reached a point where adding more of these to their products would threaten quality.

An improving U.S. housing market, and stimulus policies in China, could also stoke demand. In a Nov. 12 earnings release, CEO Tom Casey said: "While demand for our pigment products has been weak, we believe the fundamental conditions underlying demand for these products have begun to recover, and we believe sales will begin to increase next year."

As demand ramps up, Tronox should benefit from its vertically integrated model. It will be consuming its own low-cost feedstock, rather than feedstock bought elsewhere, boosting operating leverage and margins.

As for its balance sheet, Tronox has $774 million in cash to $1.6 billion in debt, or net debt of 19% of total capitalization. The company is expected to generate $252 million in free cash flow this year. A shareholder-friendly management used some of its cash to buy back 10% of Tronox's stock in the September quarter, and to pay a hefty $1.00-a-share annual dividend, producing a 6.4% yield.

Meryl Witmer, general partner of Eagle Capital Partners, who recommended Tronox in the 2012 Barron's Roundtable, still likes it, and thinks the shares are dirt cheap. She notes that the company's replacement cost totals roughly $35 a share.

In addition, Tronox has $3.50 a share in net operating losses, and could reap a large settlement from its pending $14 billion lawsuit against Kerr-McGee, now a unit of Anadarko Petroleum (APC). Tronox claims that the environmental liabilities Kerr-McGee left it with in the spinoff drove it into bankruptcy.

As pigment demand normalizes, Witmer says, Tronox could hit $30 to $50, given how volatile its stock has been.