|Shares Out. (in M):||120||P/E||0.0x||0.0x|
|Market Cap (in M):||120||P/FCF||0.0x||0.0x|
|Net Debt (in M):||0||EBIT||0||0|
An innovative industrial process technology company with a patented process to produce high purity and high value titanium dioxide (TiO2) pigment (used in paint and plastic industries) using a patent-protected novel process that has the ability to harvest high-quality pigment from low-value ilmenite feedstock, specifically from feedstocks that contain contaminants like magnesium (Mg), vanadium (V) or chromium (Cr).The company has a collaboration agreement with PPG Industries,2nd largest paint company in the world and a major consumer of TiO2 and is working towards an offtake agreement with PPG.TiO2 prices average over $4000/tonne currently and the ilmenite ore used as input sells for $300/tonne. Even after accounting for processing costs, margins are projected to be very healthy at $2500/tonne, even if one were to give no credits for byproducts. Currently operating 10kg/day pilot plant in Mississauga, Ontario, Canada.
Argex Titanium Inc (TSXV: RGX) (FSE: ASV) (OTCBB: ARGEF) is commercializing a patent protected process to take high-grade ilmenite (ore) and convert it to pigment-grade high purity titanium dioxide using a patent-protected novel process. Its proprietary CTL process can leach ilmenite ore containing substantial amounts of contaminants and successfully make titanium dioxide pigment for use by the paint and plastics industries. When the CTL process is used with ores suited to its CTL process, Argex has the potential to produce titanium dioxide pigment at much lower cost than current production processes.
Argex’s current primary objective is to develop its proprietary CTL process and scale it to a large scale production unit. Ilmenite, the feedstock can be acquired readily from third party sources. For example, phosphate mining tailings from two mining projects could account for 2 million tons annually of ilmenite – considered waste rock by the phosphate miners.
Outlook for TiO2
Titanium dioxide (TiO2) is an inorganic substance characterized by brightness and very high refractive index, making it an ideal pigment in paints, plastics and paper. TiO2 is primarily mined from Rutile and Ilmenite ores. Ilmenite is widely available while Rutile is known for higher concentrations of TiO2. Global production of TiO2 totaled 6.4 million tonnes in 2010. DuPont introduced the chloride process and currently produces 20% of the global output. The paints and coatings industry consumes the bulk (62%) of TiO2, followed by the plastics industry (26%) and the paper industry (7%). Growth in the demand for TiO2 directly correlates with the economic activity, and the recovery in the global economy is likely to drive demand over the coming years. As demand is highly correlated to GDP growth, future growth of TiO2 would be primarily driven by rapidly growing emerging markets such as China and India. Average North American uses 8lb of TiO2 per year. Average Chinese/Indian uses 2lbs of TiO2 per year. As the emerging market countries’ standard of living increases, TiO2 consumption will increase.
Canadian Titanium Limited (CTL):
Incorporated in 2005, CTL is the work of the principals of Process Research ORTECH Inc. (PRO) with the specific goal of commercializing the proprietary technology developed to produce high purity TiO2 for pigment production. PRO has a history of 83 years in providing innovation and technology development to support Ontario’s industries.
Majority acquisition in CTL: In October 2011, Argex acquired a majority interest (50.1%) in privately owned CTL for a cash consideration of $1 million and the issuance of two million Argex common shares to the selling shareholders of CTL. As part of the deal, CTL granted Argex an exclusive license to use the technology for the recovery of TiO2 in Quebec and a non-exclusive license for the rest of the world. CTL will provide Argex know-how and information applicable to the licensed technology and products. Argex will pay CTL a 2% royalty on its production of TiO2.
The CTL Process
The closed-loop solvent extraction chemical process involves the leaching of titanium-bearing ore material in hydrochloric acid. Both the iron and the titanium in the ore are leached into the solution. Operating at atmospheric pressure with no pre-treatment of ore required the process is highly energy efficient. Additionally, the process operates with low concentrations of hydrochloric acid and avoids the need to handle chlorine, carbon or carbon containing chemicals at very high temperatures. The end products produced are of high-purity (99.8%) TiO2, Fe2O3 and V2O3 with minimal inert tailings.
What makes CTL Compelling?
Competitive Advantage of Argex
Capital Structure and Shareholding
As of September 30, 2012, RGX had approximately 118.9 million ordinary shares issued and outstanding. The company also had 8.6 million options outstanding at an average exercise price of $0.41 and warrants of approximately 14.2 million at an average price of $0.52.
Insiders and Institutional shareholders hold over 25 million shares. Significant institutional shareholders include Luxor Capital with 14% and Sprott holding around 2% shares outstanding of the company.
$6.8 M in cash and short-term investments as of Sept 30, 2012.
While a higher production of TiO2 can generate much higher valuation for its shares we are using a conservative one module production facility of 50,000 tonnes/year. If we use $3500 per tonne as the selling price, zero value for by product credits and a cost of production of $1200 per tonne, RGX can generate $2300 per tonne. For 50,000 tonnes this means $115 Million of operating cash flow per year. If it raises $200 million in debt at 7.5% per year this will leave $100 million per year of free operating cash flow for a 50,000 tonnes/year plant, the smallest module the company is contemplating. As of April 5, 2013 the company had a $117 million in market value. While all these assumptions can be adjusted, without making any aggressive assumptions the company should trade north of $3 if it announces further steps to get to production and a favorable sentiment to junior markets.
Why the recent decline in share price?
While we have no crystal ball on all the reasons, one point we heard was there is a general concern on the lack of news on the offtake agreement with PPG. Our understanding is that PPG staff working on the deal with RGX is also working on closing the Akzo Nobel acquisition for the last two years and that deal seems close to getting done. In the financial markets, there is always the pressure for news every quarter, whereas in the real world timelines are longer and dependent on many other industry events. Plus RGX had a good run and given the lack of news, there is likely some profit taking going on as well.
Junior pre-revenue companies like RGX is exposed to commodity price, environmental, capital raising, regulatory and personnel risks. RGX is also exposed to scalability risks- which is Argex’s ability to scale up the current CTL mini-plant into a commercial industrial plant in a timely and profitable manner within the expected capital costs and delivering a product that meets the specifications of its customers.
Possible offtake agreement and feasibility study results are the near term catalysts.