15 March 2013 09:17 [Source: ICB]
Wall Street analysts believe Tronox may choose to pursue Huntsman's titanium dioxide assets
Analysts paint Huntsman as Tronox's likely target for a TiO2 swoop
Copyright: Emily Hildebrand
What could be motivating Tronox to pursue a deal include its stockpile of 3.5m tonnes of ilmenite ore and 211,000 tonnes of surplus rutile ore, along with wanting to utilise $1.6bn in US net operating loss carryforwards (NOLs), noted the analyst.
The NOLs sitting on Tronox's books would offset any future earnings in the US. And ilmenite ore is primarily used in the sulphate TiO2 production process rather than the more modern chloride processs. All of Tronox's TiO2 production is chloride-based.
SULPHATE PROCESS BIAS
"In our view, Tronox is looking for sulphate process biased assets with some presence in the US. Via process of elimination, these parameters screen Huntsman's pigment assets as the ideal candidate," said Ahmed.
Huntsman's TiO2 business consists of 565,000 tonnes/year of TiO2 production, of which 60% is sulphate-based. It has one 75,000 tonne/year plant in Lake Charles, Lousiana, according to Alembic Global Advisors.
Ahmed estimates a price of $1.1bn-1.15bn for Hunstman's TiO2 assets - in line with the $1.3bn debt financing planned by Tronox.
While US-based TiO2 producer Kronos also has some sulphate process plants representing 23% of total capacity of 637,000 tonnes/year, and a chloride process plant in Lake Charles, the analyst said a deal would be unlikely given antitrust issues stemming from Kronos' heavy chloride process exposure.
Ahmed also rules out DuPont's business (100% chloride-based), as well as that of Cristal (8% sulphate exposure).
Rockwood Holdings is also exploring strategic options for its TiO2 business Sachtleben, in Germany.
One source said Tronox could be considering Huntsman's or Rockwood's assets, but analysts are leaning more towards Huntsman.
"Given Rockwood's longstanding vociferousness on wanting to dispose of its TiO2 business, as well as Tronox's intimate knowledge of part of Rockwood's operations, one might surmise a combination could be in the offing," said Wells Fargo analyst Frank Mitsch.
"However, we would not be surprised if Tronox went in another direction in TiO2, choosing instead to pursue Huntsman's pigments business," he added. "As Huntsman's chairman indicated at its last investor day, 'all options are open' with anything and everything (save family members) up for sale."
Ahmed said: "Rockwood can also be ruled out from the deal wish list as it has no US assets, thereby disallowing optimal monetisation of Tronox's US NOLs".
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