NEAR TERM PRODUCER - TiO2
Titanium dioxide prices are expected to double by 2015
Message: Pope and Company: Buy Rating and $2.10 target for Argex
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Pope and Company: Buy rating and $2.10 target for Argex
According to Pope and Company:
http://personal.crocodoc.com/nzjmwWG
Argex Titanium Inc.
Rating: BUY
Target Price: $2.10
ARGEX PAINTS THE WAY FORWARD
Initiating Coverage of Argex Titanium Inc. (“Argex”, “RGX”, “Company”) with a BUY rating and 12 month target price of $2.10
Industry has Attractive Growth Potential: Titanium dioxide pigment (TiO2) is an essential raw material in making coatings and architectural paints. TiO2 demand has grown at 3.3% annually driven by GDP growth and per capita usage in developing countries. Supply is constrained with limited capacity expansion.
Hydrometallurgical Process Using Low Cost Ore: The Company is licensed to use the Canadian Titanium Limited (CTL) propriety technology to process low grade Ilmenite ore and operate at the low end of the cost curve. We estimate at least a 40% cost reduction at $1,500 per tonne versus existing processes. Saleable iron chloride by-product for water treatment applications is also produced.
Progress and De-Risking: A positive feasibility study with after tax IRR of 33.8% and after tax NPV of $678 million. Secured purchase and supply agreements for 100% of production to PPG and US Helm. Operating pilot plant demonstrates scalability. Project financing for first commercial plant at the due diligence stage.
Share Price Does Not Reflect Cash Flows or Relative Valuations: Our 12 month target price is based on a DCF of cash flows to firm using a 12% discount rate and $3,200/tonne TiO2 price. Relative valuation using 1-year forward P/E and EV/EBITDA multiples based on producing comparables support our DCF valuation.
Catalyst:
1. The completion of the due diligence process 4Q 2014-1Q 2015
2. Successful completion of project financing 1Q 2015
3. Start of detailed engineering and construction work in 1Q-2Q 2015
Recommendation: We rate Argex a BUY with a 12 month target price of $2.10 based on our DCF and multiple valuations. Investors who have been patient with Argex stand to see their patience rewarded in the next 12 to 24 months. Investors seeking a disruptive company in a high margin and growing industry should consider Argex as near term catalysts present an opportunity for share price appreciation.
Investment Thesis
Argex is set to be the lowest cost producer of pigment grade TiO2, and is poised to capture market share, and generate shareholder value.
We consider the TiO2 pigment industry structure and have determined the current tight supply condition to continue, and with industry projected demand growth, and strong prices to persist. Current producers have only two high cost production alternatives to make TiO2, namely the Sulphate process or the Chloride process. Argex is licensed to use The Canadian Titanium Limited (CTL) process – a hydrometallurgical process based on acid leaching and solvent extraction of low grade titanium bearing ores. This is not feasible by the two other existing methods. In addition, the CTL process has lower raw material and energy costs and produces significantly less waste. Presently, Argex is seeking to finance its first commercial scale plant in Valleyfield, Quebec. The company is undergoing the technical stage of the due diligence process and has completed a positive feasibility study. Argex, we argue, will lead a disruptive change in the TiO2 pigment space, pending the outcome of the project financing. Supporting our view is the recent collaboration and supply purchase agreement signed with PPG Industries Inc. (“PPG”) to develop coating technology and finished product for coating applications. In return, Argex will supply PPG with 50% of its production capacity. The remainder is contracted through US Helm Corp. (“Helm”).
Our model is based on a single commercial plant with target operating capacity of 50,000 tonnes per year. The model generates a share value of $2.10 with a TiO2 product price of US$3,200/tonne and a conservative discount rate of 12%. Supporting our valuation are a higher current TiO2 product price of US$3,400/tonne, a gross margin of 59%, and a relative valuation method using 1-year forward P/E and EV/EBITDA multiples.
http://personal.crocodoc.com/nzjmwWG
Argex Titanium Inc.
Rating: BUY
Target Price: $2.10
ARGEX PAINTS THE WAY FORWARD
Initiating Coverage of Argex Titanium Inc. (“Argex”, “RGX”, “Company”) with a BUY rating and 12 month target price of $2.10
Industry has Attractive Growth Potential: Titanium dioxide pigment (TiO2) is an essential raw material in making coatings and architectural paints. TiO2 demand has grown at 3.3% annually driven by GDP growth and per capita usage in developing countries. Supply is constrained with limited capacity expansion.
Hydrometallurgical Process Using Low Cost Ore: The Company is licensed to use the Canadian Titanium Limited (CTL) propriety technology to process low grade Ilmenite ore and operate at the low end of the cost curve. We estimate at least a 40% cost reduction at $1,500 per tonne versus existing processes. Saleable iron chloride by-product for water treatment applications is also produced.
Progress and De-Risking: A positive feasibility study with after tax IRR of 33.8% and after tax NPV of $678 million. Secured purchase and supply agreements for 100% of production to PPG and US Helm. Operating pilot plant demonstrates scalability. Project financing for first commercial plant at the due diligence stage.
Share Price Does Not Reflect Cash Flows or Relative Valuations: Our 12 month target price is based on a DCF of cash flows to firm using a 12% discount rate and $3,200/tonne TiO2 price. Relative valuation using 1-year forward P/E and EV/EBITDA multiples based on producing comparables support our DCF valuation.
Catalyst:
1. The completion of the due diligence process 4Q 2014-1Q 2015
2. Successful completion of project financing 1Q 2015
3. Start of detailed engineering and construction work in 1Q-2Q 2015
Recommendation: We rate Argex a BUY with a 12 month target price of $2.10 based on our DCF and multiple valuations. Investors who have been patient with Argex stand to see their patience rewarded in the next 12 to 24 months. Investors seeking a disruptive company in a high margin and growing industry should consider Argex as near term catalysts present an opportunity for share price appreciation.
Investment Thesis
Argex is set to be the lowest cost producer of pigment grade TiO2, and is poised to capture market share, and generate shareholder value.
We consider the TiO2 pigment industry structure and have determined the current tight supply condition to continue, and with industry projected demand growth, and strong prices to persist. Current producers have only two high cost production alternatives to make TiO2, namely the Sulphate process or the Chloride process. Argex is licensed to use The Canadian Titanium Limited (CTL) process – a hydrometallurgical process based on acid leaching and solvent extraction of low grade titanium bearing ores. This is not feasible by the two other existing methods. In addition, the CTL process has lower raw material and energy costs and produces significantly less waste. Presently, Argex is seeking to finance its first commercial scale plant in Valleyfield, Quebec. The company is undergoing the technical stage of the due diligence process and has completed a positive feasibility study. Argex, we argue, will lead a disruptive change in the TiO2 pigment space, pending the outcome of the project financing. Supporting our view is the recent collaboration and supply purchase agreement signed with PPG Industries Inc. (“PPG”) to develop coating technology and finished product for coating applications. In return, Argex will supply PPG with 50% of its production capacity. The remainder is contracted through US Helm Corp. (“Helm”).
Our model is based on a single commercial plant with target operating capacity of 50,000 tonnes per year. The model generates a share value of $2.10 with a TiO2 product price of US$3,200/tonne and a conservative discount rate of 12%. Supporting our valuation are a higher current TiO2 product price of US$3,400/tonne, a gross margin of 59%, and a relative valuation method using 1-year forward P/E and EV/EBITDA multiples.
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