NEAR TERM PRODUCER - TiO2

Titanium dioxide – prices are expected to double by 2015

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George et al

Message: ROBUST ECONOMICS AGAINST A CONSERVATIVE BACKDROP
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According to Pope and Company:

http://personal.crocodoc.com/HU4eBoK (12 Page document)

April 28, 2015

Argex Titanium Inc.

Rating: BUY

Target Price: $1.85 (down from $2.10)

ROBUST ECONOMICS AGAINST A CONSERVATIVE BACKDROP

“A good scientist is a person with original ideas. A good engineer is a person who makes a design that works with as few original ideas as possible. There are no prima donnas in engineering.”
-Freeman Dyson

EVENT: In lieu of Argex Titanium Inc.’s (“Argex”, “RGX”, and the “Company”) announced 2014 year end results and operational outlook for its first TiO2 plant, we have revised our assumptions and financial model.

Scrutinizing The Model: Management assumptions for the first plant, in our opinion, are conservative; yet demonstrate the robust economics of the CTL process. Critically, are those pertaining to TiO2 pigment prices, FeCl3 by-product credits and processing costs. We provide three arguments to support our position for higher TiO2 prices, realizing higher by-product credits and moderating the processing costs.

Macro Trends and Anecdotes: Central to our discussion on pigment prices is supply-side tightening with capacity reductions in Asia, and higher demand expectations from peer producers. Exiting a market trough, we expect the price movement to be upwards.

Opportunity for Higher By-Product Credits: We see an opportunity to negotiate more favorable terms for ferric chloride distribution and transportation costs than stipulated by management.

Process Costs For A Low Case Scenario: Management has chosen the most readily available feedstock which favors high iron production, as ferric chloride, and consumes incremental amounts of chlorine. We contend management has alternatives to source ore feedstock for the purpose of reducing process costs.

VALUATION: We revise our model with updated assumptions and value the company based on a five year DCF and terminal value using a 9.5x exit EBITDA multiple, which we deem reasonable vis-à-vis industry peers, project’s higher margins and potential for future production growth from additional plants.

Catalysts: Securing project financing remains a top priority followed by project EPC contract award, long lead item order and project construction.

RECOMMENDATION: We reiterate our BUY rating of Argex
and moderate our target price down to $1.85 to account for a conservative backdrop.
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