Monday, February 27, 2012

Tronox Thoughts

I was doing a little digging on Tronox (TROX) today. This is a company that I bought a couple of weeks ago for the very simple reason that Seth Klarman plopped $199m into them. They are like a case study in Greenblatt's first book, "You Can Be a Stock Market Genius". Here are some basic facts:
  • They came out of bankruptcy in December 2010.
  • They are traded in the pink slips despite a $2.36b market cap.
  • Their major product is titanium dioxide, which is a major part of paint.
  • Titanium dioxide is in short supply and prices have been rising.
  • There are only five companies in the world that produce Titanium dioxide.
  • It would take time to build new Titanium dioxide plants, and even if they were built some of the main components of Titanium dioxide are in short supply.

So at a basic level, it seems there is a clear moat for Tronox. Now I was reading Jim Jubak's blog today and he actually mentioned titanium dioxide in his blog, so of course I perked up. Here is some of what he said as he said to sell Dupont (thankfully I had already sold) due to Titanium Oxide:

"DuPont doesn’t face rising raw materials costs for many of its products. Except for titanium dioxide. And that’s a huge problem.

DuPont is the world’s biggest producer of titanium dioxide, the white pigment crucial to making paint in all colors.

The problem is that the world is experiencing a bit of a titanium dioxide squeeze because the supply of mineral sands with high concentrations of titanium dioxide such as rutile and ilmenite hasn’t kept up with supply. In 2011 the cost of rutile climbed 77% while the price of titanium dioxide climbed just 38%.
"

Now that was interesting and I immediately wondered if the same was true for TROX. I would not want to own a company who was able to increase their prices, but not enough to keep pace with the increasing raw material costs.

So I dug and found this presentation (Exxaro Mineral Sands Acquisition Investor Presentation). It actually lays out a plan of TROX to profit from this issue, which is why I believe Seth Klarman bought their stock. Tronox put into play last summer a plan to buy a company that has the raw materials. The deal is due to close in the 1st half of 2012. So not only have they cornered enough of the raw materials to supply their titanium dioxide (vertical integration), but they actually will have an excess and thus will be able to sell at what are apparently favorable prices.

TROX has a couple of other major catalysts that I am excited about. They did say they will move from the pink sheets to the NYSE after the merger is completed. I think this will increase their visibility and likely share price. Finally, they are going to re-domicle (Exxaro is South African) to Australia post-merger. They kind of skated around the issue, but it seemd clear to me that the primary driver of the re-dom was financial (ie lower tax rates). That could also increase stock price as they should bring more to the bottom line.

I already own a pretty decent stake in TROX, but I will watch the share price and may add on down days. As always, everyone should do their own due diligence.

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