Tronox Incorporated (NYSE:TROX)

CAPS Rating: 3 out of 5


Player Avatar TMFDeej (99.26) Submitted: 11/1/2012 8:58:54 AM : Outperform Start Price: $18.81 TROX Score: -20.07

I've been watching this one since the company emerged from bankruptcy in 2011. Emergence from bankruptcy is a type of special situation that can often result in absolutely amazing returns for investors. That's why so many smart investors have been sucked into buying shares of General Motors even though it is one of the worst run companies that I have personally ever come in contact with. See Six Flags or WR Grace, which almost single handedly made Ted Weschler's stellar career, for excellent examples of success stories.TROX's stock has been completely hammered lately. It has fallen from a high of $160 to its current $20 per share. Ouch. So does this mean that it's a good buy at this point? As David Einhorn's joke goes "What do you call a stock that's down 90%? A stock that was down 80% and then got cut in half." A lot of great investors have been cut trying to catch a falling knife.Well, there was an excellent article on the situation over on Seeking Alpha last month.Tronox: This 4.4% Dividend Yield Equity Trades At A Bargain 5x Earnings are a few key quotes:Overall Tronox operates 465,000 metric tons of annual TiO2 production capacity. According to competitor Kronos's management, it would cost roughly $1.0BB to build a new 150,000 metric ton facility. That implies a replacement cost for Tronox's pigment capacity alone of $3.1BB. Add in the price tag for the Exxaro acquisition of $1.6BB (the Mineral Sands Segment now), and total replacement cost for Tronox works out to approximately $4.6BB.Given that Tronox's stock trades at a TEV of $3.5BB, that means investors at today's prices are able to invest in Tronox's titanium ore and TiO2 pigment capacity at only 75% of cost! No wonder management recently issued debt to repurchase stock.I strongly believe that the housing market in the United States is improving and will continue to do so. Since 40% of the demand for TROX's pigments comes from North America, and a great deal of that from white paint, this will definitely help the company. Heck even the recent horrible and tragic (my heart goes out to all of those impacted by them) storm in the Northeastern U.S. should lead to an uptick in demand for white paint. These things should help to offset some of the recent weakness in the Titanium Dioxide market.One scary aspect of investing in TROX is that a global economic slowdown will definitely hurt the company, and I don't think that one is very possible. However it seems as though much of that is priced into the stock at this point.Deej

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Member Avatar AygHead (< 20) Submitted: 11/27/2012 2:37:14 PM
Recs: 1

Hi TMFDeej, I'm a follower of yours but looking at this pick, and digging into the financials it looks as if TROX is cash flow negative at this point owing to input costs - hence the continued decline. I like the thesis noted above, but until raw material cost come down, or TROX can pass along higher prices, I think this will cap any near or even term gains in the stock. I will watch this one closely though. Thanks for your continued commentary.

Member Avatar Fuels (< 20) Submitted: 11/30/2012 12:26:31 AM
Recs: 0

Are you aware that Tronox mines a type of ore that is the main input for titanium dioxide? Once legacy contracts expire they'll be the only fully vertically integrated player in the market. Not only will they supply their own feedstock, but they could sell excess feedstock too.

Member Avatar AygHead (< 20) Submitted: 12/3/2012 9:12:50 AM
Recs: 1

Yes - input costs meaning the cost to mine titanium dioxide - primarily being energy, coke chlorine, coke, and caustic soda

Member Avatar Fuels (< 20) Submitted: 12/18/2012 12:58:29 AM
Recs: 0

Got it. Thanks.

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