Small Cap Strategist is published by Crystal Equity Research an independent research resource on small capitalization stocks. Follow along as we discuss the most recent trends in the small-cap sector, investigate interesting companies and pan a few not-so-promising stocks.
(ARGEF:OTC/PK or RGX:TO) is
a small company with a big idea:to
penetrate the old-school titanium pigment industry with some new technology.The company’s CEO, Roy Bonnell has been on
the road recently pitching the merits of his team’s innovations.Argex plans to produce high purity titanium
dioxide pigment or TiO2 from ilmenite ore using a proprietary process the
company has been developing with the help of a major user of titanium pigment,
paint producer PPG
Industries (PPG:NYSE).Apparently PPG has been sufficiently
impressed with Argex to enter into a technology sharing and supply agreement
Tronox White Pigment Paint
Titanium pigment is used mostly in paint and the interdependent
industries form a fairly small club.That a giant like PPG, with its deep knowledge of paint pigments, was
offering the ‘secret handshake’ to this small Canadian company made a big
impression on me as well.In articles
published on June 24th and June 25th, “Changes
Afoot in the Titanium Pigment Industry” I set out arguments for investing
in Argex’s TiO2 innovation.
Argex is a developmental stage company, and has not yet started
production.Indeed, management has been
walking Wall Street, hat in hand because the company needs capital to build and
equip its first production facility.Argex needs as much as $300 million to set up shop in Valleyfield, Quebec.
Trepidation over the imminent capital raise is probably why RGX
shares have traded off by 25% since I first wrote about Argex in late June
2014.Dilution through the issuance of
new shares should be a concern for equity investors.The company already has 113.2 million shares
outstanding and another 19.9 million in options and 1.1 million warrants have
been issued.With all derivatives
exercised and debentures converted, the company would have 140.8 million shares
outstanding-an increase of 24%.
Dilution aside, the Argex titanium business model could be a
strong earnings generator that could easily support interest and principle
payments.A feasibility study completed
a year ago provides some insight into the potential profitability of the
production facility Argex is planning in Quebec.Ernst & Young conducted the economic
portion of the study, concluding the plant could generate $4.4 billion in
pigment sales and $567 million in sales of by-products over its expected useful
life, providing $1.9 billion in operating income.The cooperative pact with PPG and a new
marketing and supply agreement with the U.S. subsidiary of Germany’s HELM, AG, a worldwide supplier of
chemicals, fertilizers and pharmaceutical products, should provide added
confidence in E&Y’s revenue estimates.
To fully appreciate E&Y’s expectation of 38% in operating
profits requires an understanding of the genius of the solution Argex is
bringing to the TiO2 pigment business.Argex’s
patented production process relies on solvent extraction technologies that have
been used successfully by uranium and rare earth producers.However, Argex has taken the process a number of
steps further, potentially changing both the economics and environmental profile
of TiO2 production.
The Argex process is most accommodating of lower grade feedstock,
making it possible for the company to turn out even high-purity TiO2 using low-cost
ilmenite feedstock that others cannot use.What is more, the Argex process requires low pressures and low
temperatures, both of which yield cost savings in the front end of Argex’s TiO2
production process.The closed loop
process emits no pollutants.There are
by-products, but those are expected to be secondary sources of revenue rather
than environmental headaches.
Customers like PPG might expect some of the savings to get
passed along to them in the form of lower TiO2 pigment sales prices.Argex management is all too happy to offer
its products at a competitive price point and win new customers who are anxious
to replace their expensive sources with the Argex TiO2 pigment.
Argex’s CEO Roy Bonnell would also be happy to get a term sheet
or two from investors anxious to get involved with their potentially disruptive
TiO2 pigment solution.In their
feasibility study, Ernst & Young estimated the current value of Argex’s
first production facility could be as much as $678.3 million after taxes.Now this estimate was based on an 8% discount
rate, which to me seems a bit low.That
said, E&Y also calculated that the internal rate of return on the plant
investment could be near 33% after taxes.That provides a fairly generous return environment for both potential
creditors and as well as equity investors.
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Cap Strategist web log, Crystal Equity
Research nor its affiliates have a beneficial interest in the companies