May 26, 2015 - 4:01pm EST by
2015 2016
Price: 13.28 EPS 0 0
Shares Out. (in M): 25 P/E 0 0
Market Cap (in $M): 322 P/FCF 0 0
Net Debt (in $M): 70 EBIT 0 0
TEV (in $M): 392 TEV/EBIT 0 0

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  • Specialty Chemicals
  • Refiner
  • Mining
  • Saudi Arabia
  • Gold




Mining asset implies specialty chemical businesses at a 50% discount to peers and over 100% discount to our 2017 price target; several near term catalysts to drive upside


Full writeup with exhibits available here (password is VICTREC):



We recommend Trecora Resources (“the Company”, “Trecora”, “TREC”) as a long.


Trecora owns 100% of South Hampton Resources (“SHR”) and Trecora Chemical (“TC”), two valuable specialty chemical businesses, and also owns 35% of a Saudi Arabian mining company (“AMAK”).  We believe investors currently have a brief window to acquire TREC ahead of several near term catalysts.


We believe SHR is well positioned to achieve a 60% increase in EBITDA over the next three years. SHR’s domestic customers are dramatically expanding capacity due to an abundance of low cost natural gas that has given them a global cost advantage.  SHR is also achieving rapid international growth due to the unrivaled purity and low cost of its products. The Company expects strong growth from Canadian oil sands customers and is expecting continued growth in China.


Acquired in 2014, TC will benefit from planned capacity additions, improved quality and more robust outbound direct sales effort. Capacity expansions are expected to double throughput by 2017.


AMAK is a globally competitive zinc mine and is anticipated to complete an IPO on the Saudi stock market in late 2016.


SHR Overview (88% of 2015E revenue; 86% of 2015E EBITDA)

SHR supplies high purity C5s and C6s to various petrochemical producers globally (e.g. Exxon Mobil, Chevron, Total, Dow, etc.), with the bulk of its sales in North America.  The Company’s pentane and hexane blends represent less than one percent of the cost of production for each end product, but are critical components of the production processes, serving as catalysts, blowing agents, and solvents.


Production process / pricing: SHR’s feedstock is the C5-C8 natural gas liquids that are byproducts of natural gas and crude oil production.  SHR distills this feedstock into high purity C5s and C6s.  SHR earns a constant dollar spread above feedstock prices and does not take commodity price risk.


Competition: The Company controls approximately 75% of the pentane market and 50% of the hexane market in the U.S. and its primary competitor is Phillips 66.  Customers choose SHR’s products due to their industry leading purity levels, which are critical to SHR’s customers achieving desired throughput rates and end-product chemical characteristics.  SHR differentiates itself from Phillips 66 through its sales and marketing function: our research confirms that Phillips 66 is very much an ‘order taker’, while SHR maintains an active outbound sales team


Substitutability: Substitutes to SHR’s products are limited due to the specific chemical properties required by its customers’ production processes.  SHR’s customers’ production processes and plants are generally configured with the boiling points and other chemical properties of diluents, catalyst carriers, blowing agents, and condensing agents (i.e. SHR’s products) in mind; switching is therefore either not practical or would significantly reduce throughput rates.  SHR customers would also face switching costs: for example, customers would have to receive approval from major end users to replace SHR.  Certain customers such as those selling to any food contact application would face a particularly difficult process. Finally, as referenced above, SHR’s products represent less than one percent of its customers’ total production costs, giving customers little reason to explore alternatives.


New market entrants: There is limited threat of new entrants in any of SHR’s markets due to the modest size of the markets relative to the  investment required to produce at scale. A new plant that produces comparable product at market prices would cost approximately $200mm.  Whereas the total annual market opportunity is approximately $500mm.


TC Overview (12% of 2015E revenue; 14% of 2015E EBITDA)

TC produces specialty waxes for specific customer applications and also offers custom processing services.


TC is a leading specialty wax producer with approximately 4% market share in a highly fragmented market.  The specialty wax market faces some attractive fundamentals with domestic demand currently outstripping domestic supply.


On the custom processing side, TC runs short production campaigns for large chemical producers. Customers typically use TC when they are consolidating plants, conducting maintenance, or reducing capacity and are looking to continue producing their highest margin products.


AMAK Overview

Trecora holds 35.3% ownership in Al Masane Al Kobra (“AMAK”), a 44 sq. km. copper, zinc, gold, and silver mine located in the southwest quadrant of Saudi Arabia.  AMAK was formed in 2008 by Trecora and seven Saudi investors; current ownership includes Trecora (35%), Trecora’s Saudi partners (49%), and Arab Mining Company (16%), an entity formed by the Arab Economic Unity Council.


Proven and probable reserves: zinc - 636mm lbs.; copper - 187mm; gold – 260k oz.; silver – 8.4mm oz.


2015E metal production (per the Company’s May 2015 investor deck):  zinc – 27,000 tons; copper – 8,500 tons; gold – 4,000 oz.; silver 171k ounces; generally in-line with AMAK’s ore reserve 2009 study report.


Cost of production: AMAK’s cost of production is in-line with median cost global producers due in part to a cost advantage derived from low cost diesel fuel for which AMAK pays only $0.25 per gallon.  Median cost zinc and copper producers report cash costs of production of $0.50 and $1.50 per pound, respectively, compared to current spot prices of $1.04 and $2.76 per pound, respectively (as of 4-29-15)


Life of mine: The September 2009 feasibility study forecasted a mine life of 12 years.  Management has stated that this forecast was solely for feasibility purposes and that actual mine life could be much longer. The Company is actively negotiating additional leases that could measure six times the size of the existing lease.  The additional leases would significantly extend AMAK’s life without much additional cost. During Q1 2015, management indicated that they had received ‘verbal confirmation’ of the additional leases.


Valuation: we have estimated AMAK’s value per Trecora share to be $4.00-$6.25 based on a blend of values indicated by trading comparables, a January 2013 capital raise, and a DCF analysis. See Exhibit 2.


Investment Thesis


SHR expects to increase volumes by 60% over the next three years due to US Gulf Coast petrochemical capacity expansions, Canadian oil sands customer growth, and active development of other international customers.


US Gulf Coast: Domestic natural gas supplies have resulted in the United States’ petrochemical production costs falling to among the lowest in the world, leading to significant near-term capacity additions.  Shale gas has provided the U.S. with a thirty-year natural gas supply that can be profitably produced at $4.00 per million BTUs or less.  NGLs such as ethane and propane are byproducts of the natural gas and crude oil production process and are the primary inputs to petrochemical production.  As of November 2013, 135 new petrochemical projects, representing $90 billion in capital investment have been announced through 2020, with peak spending expected in 2016 and 2017.  Polyethylene capacity itself is expected to increase by 60% by 2018 according to an analysis by ICIS.  There is very little uncertainty around these capacity additions as nearly all of them have been permitted and begun construction.  A handful of significant projects will come online in late 2015 and mid-2016 while the majority will be online in 2017.


Canadian Oil Sands: During 2012 and 2013, the Company cultivated a Canadian oil sands customer that has a very specific need for the Company’s pentane products.  SHR recently signed a new 3-year contract and expects this customer’s volumes to double in 2015.  Despite the drop in crude oil prices, the Company anticipates additional growth from the Canadian oil sands and is actively qualifying a second Canadian oil sands customer.


Other International: The Company currently sells to customers in the Middle East and has recently penetrated China, where it expects material growth.  The Company’s pentane-hexane products are globally competitive due to their high purity levels and advantageous cost position.  International growth is aided by low transportation costs as the cost to ship containers from the Company’s Silsbee, TX plant to China or the Middle East is equivalent to shipping to New Jersey.


Acquired in October 2014, TC will benefit from planned capacity additions and an improved outbound direct sales effort; capacity expansions are expected to double throughput by 2017


Trecora Chemical (fka SSI Chusei) was acquired October 2014 from Schumann/Steier, a trading company focused on base oils.  Trecora management believes SSI Chusei was undermanaged while owned by Schumann/Steier due to the prior owner’s focus on sourcing, trading, and marketing base oils. Management sees near term opportunities to grow wax and custom processing sales by improving quality, increasing outbound marketing efforts, and adding capacity, while debottlenecking the existing plant.


During Q1 2015, TREC completed a debottlenecking project at the wax businesses that is expected to double wax throughput by 2017.  Management believes it can accelerate sales due to customer overlap with SHR and due to SHR’s superior marketing ability. Recent marquee customer wins, including the world’s largest adhesives producer, are encouraging.


By Q2 2016, TREC expects to complete an $18mm expansion of the custom processing business, which is currently running at 95% capacity utilization.  TREC expects a two year to three year payback on the incremental investment.  The Company has already received several customer order indications on the new capacity.


Near term catalysts to unlock value in AMAK


We have estimated AMAK’s value per Trecora share to be $4.00-$6.25 based on a blend of values indicated by current trading comparables, a January 2013 capital raise, and a DCF analysis based on the 2009 feasibility study.  See Exhibit 2 for detail.  By Saudi law, AMAK will have to complete an IPO on the Saudi stock exchange in 2016.  We believe that the current share price of TREC attributes zero value to TREC’s stake in AMAK.



Valuation and price target

We believe that Trecora is significantly undervalued at its current share price.  Based on a range of values for AMAK, TREC is currently trading at a 50% discount to peers and prior transactions. See Exhibit 1 for current valuation and Exhibit 3 for peer trading multiples and prior transaction multiples.


We derive a price target of $27 - $29 based on anticipated growth in SHR & TC through 2018 and our estimate of TREC’s stake in AMAK. See Exhibit 1 for our price target calculation.




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Canadian oil sands capacity additions 2H 2015

AMAK IPO 2H 2016

Completed petchem expansions 2016, 2017


TC capacity expansion 2H 2016

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