Upstart Argex Titanium And DuPont Headline World TiO2 Summit

(Editor's Note: Investors should be mindful of the risks of transacting in illiquid securities such as ARGEF. Argex Titanium's listing in Toronto, RGX.TO, offers stronger liquidity.)

Summary

Argex Titanium (OTCPK:ARGEF) (RGX.to) is introducing a proprietary manufacturing process which may "disrupt" the entire $18 billion Titanium Dioxide (TiO₂) industry. TiO₂ is the world's most commonly used whitener: from paint, plastics, cosmetics, even sunscreen; it's non-toxic and environmentally friendly (more than 90% of all titanium is used as a chemical powder, not airplane parts).

Argex's solvent extraction process reduces operating costs up to 50% and is the first significant innovation since DuPont (NYSE:DD) invented the Chloride process 65 years ago. The new Argex process is designed to use the cheapest input cost, waste ilmenite tailings, which nobody else wants. Without trying to appear hyperbolic, in a razor-thin margin commodity business, cutting costs by 50% is truly a "blow-out".

Pressure's off Monday September 29th

Starting from an original 19 million warrants (issued before present senior management arrived) we estimate 4.5 million warrants remain at a strike price of C$.52; these expire at 4 pm Monday September 29th. The warrants have been a major headwind for months.

Argex shares sold off to (and held) near the $C.52 strike as holders took guaranteed profits, thus - like a beach ball held under water - the expiration should release a near-term 25% -50% technical rebound.

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19 million overhanging warrants pressured the shares for months; a technical rebound is due. Source: Stockcharts

Fundamentals are strong: Production is already sold out.

TiO2 costs are 20% of a can of paint; PPG (the old Pittsburgh Paint and world's largest mfgr) has partnered with Argex since 2012 in both a research and supply agreement. Along with the recently announced Helm AG exclusive marketing partnership, which covers 50% of production (founded in 1900, family-owned Helm AG has global revenues of $13 billion) we believe Argex's production is already sold out. After all, 50,000 TiO2 tons is miniscule in a 6 million ton industry.

Argex is both cheaper and cleaner

Argex's solvent extraction process is "closed loop" (cleantech). This is important since existing production is extremely toxic and waste treatment costly. Sulfide TiO2 production is destroying rivers in China (where pollution is finally becoming a political matter) and DuPont gets away with dumping TiO2 waste in old wells. The industry is ripe for a cleaner, cheaper newcomer.

Fortunes are made in "disruptive" technology

From railroads to oil, steel to the internet, getting in early on "the next big thing" makes money and changes lives ….. but which one? Boneyards are littered with bodies of investors seeking easy money. Regarding Argex, one clue we noticed recently may be a "tell": the TiO2 industry is taking Argex seriously.

In fact, both DuPont and Argex have been selected as THE keynote presenters at the upcoming TiO2 World Summit:

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Investors can review the forum here.

From the official website:

"Peter O'Sullivan, Global Sales Leader, DuPont Titanium Technologies, and Enrico di Cesare, Chief Operating Officer, and Philippe Guillemaille, Head Of Sales and Marketing of Argex Titanium Inc. will provide keynote addresses."

We like seeing DuPont, the "800 pound gorilla", along with the "new kid" on the same stage. Clearly Argex is in good company; we are impressed this upstart has been given such attention in an otherwise staid "old boy" business. We believe this indicates the Argex process possesses validity among those very people who produce/consume TiO2 for a living.

Clint Eastwood is in specialty chemicals?

Actually it was Eli Wallach who uttered the line "sometimes a man's life depends upon a mere scrap of information" in the immortal classic movie The Good, The Bad and The Ugly. We want to see more than just headlines, pilot plants, good management and excellent partners -we want to see "peer" respect.

It is worth a peek at exactly what the industry is saying. (selected cuts below)

"A message from Reg Adams, TiO2 2014 Conference Chairman"

27 August 2014

"Blessed with the virtues of a high refractive index, uniform particle size, biological inertness and chemical stability, titanium dioxide (TiO2) remains by far the most widely used of all the pigments. "

"Prompted by a 40% upsurge in the price of TiO2 pigments three years ago, customers in the paint, plastic, laminate and other end-use sectors, accelerated research efforts to curtail their consumption, adopting innovations aimed at thrifting or partial substitution."

"Both the chloride and sulfate processes for making TiO2 are now more than 50 years old. A new type of process, entailing hydrochloric acid leaching and a series of organic solvent extraction steps, is poised for commercial-scale employment by Argex at a plant in Quebec. This holds out the promise of a lower carbon footprint, with high-quality TiO2 being produced at a lower overall unit operating cost. How will this potentially disruptive technology affect the dynamics of the TiO2 value-chain?" (our emphasis)

"The structure of the TiO2 pigments industry is undergoing a major shake-up anyway. DuPont plans to float off its TiO2 business as a separate entity. Will one of its leading competitors try to buy a controlling stake?"

Clearly the industry is taking Argex seriously. Of course, having giant PPG as your partner certainly helps.

Changes at DuPont

As previously announced, DuPont is spinning off their TiO2 business which is expected to be completed sometime in 2015. As noted above, the TiO2 industry is in shake-up mode and more change is coming.

A recent Seeking Alpha article summed up nicely the DuPont situation. Below we copied a key related paragraph:

"The company's performance chemicals segment primarily deals in titanium dioxide (TiO2) and fluoro chemicals. The segment makes up approximately 15 percent of the total revenues. The segment was severely hit by the lower prices of finished products. During the quarter, the operating income from the segment declined by 6 percent as compared to same quarter of previous year. The decline is primarily due to the lower prices of chemicals which declined by 4% compared to last year's figure. The company continues to suffer from the cyclical volatility in prices."

Our point: a technological advantage beating competitors by up to 30% or even 50% on costs - most of whom are losing money or barely breaking even - at a time when pricing pressures are already tight, is indicative of a true "disruptive technology".

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DuPont's website has a bundle of information on the industry.

For those interested in learning more about Titanium Dioxide, DuPont has a 28 page "coatings brochure" which is a marvelous primer about the wonderful world of TiO2, available here

More information on the Argex process is available on their website: www.argex.ca

It's a small world, but I wouldn't want to paint it" (Steven Wright, humorist)

DuPont's "Ti-Pure" production (below) is truly global in nature (as is demand). We are interested in Argex's world-wide roll-out potential; this is much more than a small plant in Quebec. The Argex process can go anywhere - especially where cheap Natural Gas is abundant (like the US gulf coast, Middle East, or S.E. Asia).

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Source: DuPont

Going forward

While Canada is known mostly for their dinosaurs (that is, fossil fuels, minerals, BlackBerry & opponents of the LA Kings) the chemical business is better understood in places like New York and Germany. We believe a fully-financed Argex will be favorably received. Indeed, we will have several "disruptive" technology examples in our next report, plus a similar type "specialty-chemical" business model whose shares have increased a whopping 80 X over the past 6 years (not a typo).

However, first, and we agree, the initial plant financing has to be completed.

In this regard we are pleased to see Argex management patiently moving forward without hyping the stock; it is only a closed deal that matters and, in fairness, there is not much anyone can 'say' until it closes. Investors may wish to wait until such announcement, which remains our "official" recommendation, although we continue to accumulate.

Our best information, gathered from several sources, is a multi-tiered debt structured financing is progressing, and that multiple parties (including the Quebec government, already an investor) are at the table. Given the massive amount of easy Fed money floating about New York these days there is certainly no better time in history to put forward a high yielding deal. However, investors need to understand that a complex financing with multiple parties and detailed due diligence take time to complete and no deal is ever done until inked. There will also be execution risk on any project, along with fluctuating market conditions.

We look for a Financing completion within the next 2 months. In addition, we believe the Quebec government has put together a "hot team" to fast-track Argex into production.

Our plan is to continue accumulating shares and add after the financing news.

Conclusion

With a pre-tax IRR of 40%, strategic partnerships with PPG (this is non-exclusive; the TiO2 component in paint is $10 billion annually) and Helm AG out marketing, we believe production is fully sold. Now that the warrant overhang is finished, about now should be the last chance to acquire cheap Argex shares, given the fundamentals and opportunity.

How much is it worth? We will build a detailed model once we see the financing terms, yet even if margins are scrunched down to 30%, Argex can make a handsome profit at prices that will bankrupt competitors. With almost no limit on growth.

Tronox (NYSE:TROX) for example sells about $1 billion of TiO2 (along with mineral sands and other vertical products) yet cannot make a profit even at $3400 TiO2 and... Tronox trades at a $3.3 billion valuation; Argex at $78 million. The Argex technology may cannibalize enough of Tronox's sales (and several others), bankrupting them, over time. With DuPont and the 5 main TiO2 producers in flux, we suspect one will acquire/license the technology to augment existing production/distribution - and in a world where Tesla sells for $35 billion; flakey internet start-ups go for multi-billions (most of whom will soon vanish) the value of this technology, which re-arranges an established 100 year chemical industry, could/should move into the billion dollar range, over the next several years.

We have visited the facility and met the entire team. Yes, our vision is a big one - calling for Argex technology in plants world-wide; near low cost Natural Gas and other input costs (ie. the Gulf Coast, Middle East and S.E. Asia). We believe Argex is a rare disruptive opportunity which will upset an "ancient" industry.

Additional disclosure: This report is for informational purposes only and is not a solicitation of any security purchase or sale. Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, Fincom Investment Partners cannot guarantee its accuracy. Any opinions or estimates constitute our best judgment as of the date of publication, and are subject to change without notice. We recommend investors conduct thorough investment research of their own, including detailed review of the related Companies' SEC filings, and consult a qualified investment adviser.

http://seekingalpha.com/article/2528605-upstart-argex-titanium-and-dupont-headline-world-tio2-summit