My Chemical Romance Part IV: Already Doubled, Still Room to Double Again: Tronox $TROX

From the blackest black with Orion Engineered Carbon (OEC) to the whitest white with Tronox (TROX), the valuation on niche chemicals is commanding some attention. Tronox is a great example of having to bite the bullet and buy something that has already doubled, because it has another potential double in front of it. The stock has had an aggressive rally these last few days, and it might pull back, but if you zoom out a little, it probably isn’t worthwhile to wait for a dip.

There are a lot of opportunities that I miss, nobody can catch them all, but not finding this one at the lows stings particularly hard because last fall it had one of my favorite signals, a $125,000 inside purchase from the CFO. You can see management buying TROX at $7 and below, but selling closer to $15.

There is an author on Substack who did catch this one with perfect timing, Athelas Research. You can find his original writeup on TROX here:

Tronox Holdings: In the Cyclical Trough

Tronox makes titanium dioxide, the primary ingredient in white pigment for paint, plastic, paper, some cosmetics, and some food additives. Paint and plastic are important for construction booms, and we have a president who is hell bent on unfreezing the housing market. TROX is similar to Cleveland Cliffs (CLF) in that they are vertically integrated all the way down to the mines that extract titanium. This gives them a cost advantage over peers, putting them in the first quartile of the cost curve and capable of competing effectively with China who is trying to subsidize their way into dominating every critical commodity.

Tronox is the second largest titanium company after Chemours (CC), but Chemours has a diversified product line while Tronox is focused entirely on titanium. Chemours also owns titanium sand mines, but only enough to cover 10% of their pigment production, while Tronox is just about self sufficient. TROX has six mines, four in Australia and two in South Africa, as well as eight pigment processing plants around the world.

Titanium mines also produce zircon and monazite as byproducts. If you have followed my writeup on Energy Fuels (UUUU), you will know that monazite is a high density source of heavy magnetic rare earth elements. That makes TROX the fourth company in my “Free REE” category along with IDR, UUUU, and METC. The idea behind Free REE is to look for companies that have a primary business with reasonable cash flows, but also have exposure to rare earths as lottery ticket. Buying TROX puts four chits on the period table bingo card, Titanium, Zirconium, and the heavy magnetic rare earths elements Neodymium and Praseodymium.

Titanium is an interesting metal, because currently the vast majority of ore goes into manufacturing white paint. But the demand for stronger alloys for humanoid robots and drone warfare has some estimates putting titanium metal demand growing by 15x in the next five years. It is possible that demand for titanium metal could pressure input prices of Tronox’s competitors and / or Tronox might some day find it more valuable to sell titanium to metal refiners than to paint manufacturers.

Management has also initiated a feasibility study to build out a facility in Western Australia to refine the monazite further themselves in order to capture more of the value instead of selling the unrefined sands. TROX has even acquired a 5% stake in Lion Rock Minerals (LRM.ASX) and secured access to their monazite tailings, as well as contractually locking down other monazite tailing streams as well. Costs for the expansion would be estimated to be around $600 million, and it would position TROX to be a major supplier of Western rare earth elements, although completion of such a project would be several years away.

You can see why I am so mad at myself for missing TROX at the lows when the CFO bought in. It has free upside to rare earth elements, it’s a mining stock in the first quartile of the cost curve, it is positioned well to benefit from the economic boom and rate cutting cycle, and it still has room to double from here. What’s not to like? I don’t have any special insight into the titanium dioxide market, aside from knowing that paints are used in construction booms, and the world is cutting interest rates. Size positions accordingly, but TROX makes a great complement to OEC in the portfolio. Fill the bingo card with niche materials, and when they double, rotate some gains around to the next dominoes in the global commodity supercycle.

The biggest drawback for TROX is their debt burden, with about $3.2 billion of long term debt, and $1 billion of it fixed at 4.625% and due in 2029 where they almost certainly won’t be able to refinance at the same rate. With the last three years of net income losses, management even took out a $400 million loan recently at 9.125% for working capital. Trailing twelve month interest expense was $166 million, which is currently burdensome, but in a boom year like 2020, TROX generated $995 million of net income. In 2021 that number was only $300 million, and in 2022 that number was $500 million. ISM Manufacturing just broke out above 50 for the first time in three years, so it looks like TROX will be back in boom times again soon enough.

ISM PMI:

TROX’s price to sales ratio is currently 0.42x. At the 2017 peak, that number was over 1.1x, but it has sustained a price to sales a ratio of around 0.80x for years at a time. It’s not easy to buy something that has already doubled, and it’s also not easy to buy something that has rallied so much in the last three days. I would not be surprised by a near term pullback. But it bolsters confidence if you zoom out a little.

I would put a medium term price target of $15, where management was happy to sell recently. But if you are nimble, have good timing, and want to hold out for a peak, $20, $25 or even $30 are entirely possible. A lot will depend on capital allocation plans, will management retire debt, or will they build out that Western Australian rare earth processing hub?

Tronox Holdings (TROX) $7.45: $15 by mid 2028

Here are links to parts 1-3 of My Chemical Romance: