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Argex Titanium Inc.
Spec Buy Rating
$1.60 Target Price
Long-Term Supply Agreement De-Risks Project Financing
Event: Argex announces exclusive long-term marketing and supply agreement with Helm US Corp.
- Exclusive Agreement Terms: Back in October 2013 Argex announced that it had signed a letter of intent for the distribution of up to 25,000tpa of titanium dioxide (TiO2) with a major distributer. After months of negotiations, today Argex disclosed that it has signed a definitive agreement with Helm US Corp. for the marketing and distribution of TiO2 in Canada and the US. Helm US Corp. is a wholly owned subsidiary of HELM AG (Private). Under the agreement Helm will exclusively market and distribute 50%, or up to 25,000tpa of TiO2 produced from Argex’s first industrialized plant to be located in Salaberry-de-Valleyfield, Quebec, for a period of seven years commencing once the plant reaches a sustainable capacity, potentially by Q117.
- Off-Takes Account for Significant Percentage of Future Production: Off-take agreements now account for a majority of the Company’s future production of TiO2. Argex previously announced a long-term supply agreement with PPG Industries Inc. (PPG:NYSE, NR), one of the world’s largest paint companies. We believe this agreement comprises 15,000-20,000tpa TiO2. Thus, the two agreements combined comprise up to 80-90% of Argex’s intended capacity.
- Helm is a Multi-Functional Marketing Organization in the Chemical Sector and a Major Distributer of TiO2: Helm is headquartered in Hamburg, Germany, and is one the of the world’s major independent chemical marketing firms with operations in 30 different countries through five business units including Chemicals, Crop Protection, Pharma, Fertilizer and Nutrition. Revenues of ~€10B in 2013 were largely generated in Europe (61%) followed by America (24%), Asia (14%), and Africa (1%). The new agreement is expected to increase Helm’s exposure to the US. Its TiO2 distribution ability likely exceeds 25,000tpa.
- Financing in Advanced Stages: Argex is currently pursuing financing for its first plant, and expects to be in production within 24 months of construction start-up. The Company has indicated that it is in advanced discussions with a small number of financing partners, thus we forecast construction to begin in Q414 with initial production of TiO2 pigment to begin in late 2016. Argex advised that it is seeking to finance the plant with minimum dilution, possibly two-thirds debt. The main catalyst for the stock in 2014 is the completion of plant financing and the start of construction and procurement of major equipment.
Valuation: Argex has developed a novel, chemical process for the manufacturing of a high purity (99.8%) TiO2 pigment product for use in architectural and other applications using ilmenite feedstock material. The Company’s CTL Process is a low cost, environmentally friendly alternative over conventional TiO2 production methods. Feasibility Study cash costs of ~$1,500/t, compare favourably to major pure play pigment manufacturers with current average costs greater than US$2,000/t TiO2. Argex has the potential to become one of the lowest cost TiO2 pigment manufacturing operations in the world. The securing of an additional supply agreement is a validation of the potential scalability of Argex’s technology and product quality; and we believe will provide further reassurance to financiers contributing to project financing for the Company’s first plant. We maintain our Speculative Buy rating and 12-month target price of $1.60/shr. The current EV/EBITDA multiple for 2017, the first year of full production is 8.6x.
