I’m always watching what Seth Klarman is buying. He is currently one of the world’s greatest value investors. He recently on Feb. 10th via the Edgar S.E.C. Archive purchased a small position in Tronox Inc.
Tronox Incorporated is engaged in the production and retailing of titanium dioxide pigment which is used in paint, coatings, plastics, paper and many other everyday products. The company also offers electrolytic manganese dioxide, which is used as active cathode material for alkaline batteries; lithium manganese dioxide that is used as rechargeable battery material; sodium chlorate for the pulp and paper industry; boron trichloride, a specialty chemical gas, which is used in various products, including pharmaceuticals, semiconductors, high-performance fibers, specialty ceramics, and epoxies; and elemental boron that is used in igniter formulations for defense, pyrotechnic, and air bag industries. Tronox Incorporated and is based in Oklahoma City, Oklahoma.
Witmer: We like companies that have a strong management team that understands how to allocate capital. Little is more upsetting than when they overpay for an acquisition or squander cash by repurchasing shares at too high a price. We also like companies that generate free cash flow and will pay some of it out in the near future in dividends or share buybacks if the stock is undervalued. And we want companies whose balance sheets give them staying power in a crisis.
Last year I recommended Tronox [TROX] at $94 a share. Now it is $125. Tronox manufactures titanium dioxide and is one of five companies with the technology to produce it via the chloride method, which is cost-efficient and environmentally friendly. Tronox recently announced a merger with a division of Exxaro Resources [EXX.South Africa], a South African company that mines titanium dioxide feedstock. This will make Tronox vertically integrated. The acquired business has a 1.5-million-ton stockpile of ilmenite, the feedstock, which is in tight supply.
Tronox hit a high of $165 last year. Shares have backed off due to market turmoil, mixed feelings about the acquisition and uncertainty regarding the economy. Most important, sales of titanium dioxide were slow in the fourth quarter. Investors didn’t understand this was a seasonally weak period. Insiders have been buying shares at Kronos Worldwide[KRO], a Tronox competitor, which adds credence to our theory.
Schafer: Tronox came out of bankruptcy court last year. Why did the company go broke?
Witmer: It was spun out of Kerr-McGee with a lot of environmental liabilities and debt. Then the financial crisis hit. But there have been positive surprises since I recommended it last year. Tronox has tax-loss carryforwards that are worth about $30 a share. And the company has incredible earnings power, in the range of $20 to $30 a share. I had guessed it was around $12 a share. Some think it is overearning because of the tight supply situation, but even using an 11 multiple of my prior estimate and adding the tax assets and the next 12 months’ free cash flow gets you a target price of more than $190 a share. If earnings continue to grow at the current rate, they might be sustainably closer to $20, which gives you a $250 stock.
Here is the link to the S.E.C. reporting document known as a SC13G: http://www.sec.gov/Archives/edgar/data/1061768/000106176812000022/0001061768-12-000022-index.htm