Argex Titanium readies for massive leap with industrial-sized plant in the works

Argex Titanium (TSE:RGX) is ready to pounce, with the company looking to make a big splash as it nears the start of industrial-sized titanium dioxide production from its plant in Quebec, using an environmentally-friendly process that has become the envy of its peers.

The Quebec-based company, which recently wrapped up a $10 million financing split between Ressources Québec, a subsidiary of Investissement Québec (IQ), and a U.S. based fund manager, has a proprietary mineral extraction process that allows it to produce high purity, or 99.8 per cent pure, pigment-grade titanium dioxide directly from run-of-mine material at its deposits.

It announced the site of its first industrial-sized plant last fall, in Valleyfield, Quebec, which will also be the site of the company’s new research and development centre. The progression from a junior explorer -- as well as the securing of financing from not only the largest project finance provider in Quebec, but also an arm of the Quebec government -- is more than one could hope for in these challenging markets, and has even led to an agreement with the biggest customer of titanium dioxide worldwide.

That customer is PPG Industries (NYSE:PPG), the second largest paint company in the world, with 2012 sales of $15.2 billion. The agreement has two parts, with the first securing the purchase of titanium dioxide from Argex for use in the architectural paint markets, while the second ensures the continuation of a collaboration between the two parties to optimize PPG’s coating technology.

With a feasibility study for its first industrial plant around the corner, and the company recently graduating to a TSX main board listing, Argex is well on its way to supplying PPG’s needs.

“With a lead order from PPG, IQ at the table, a large U.S. investment fund that has indicated their willingness to participate in project financing, and the expectation of a successful feasibility study very shortly, these four things collectively are the cornerstone of what we need to be successful to raise the money required for our industrial-sized plant,” says president and CEO Roy Bonnell in a recent interview with Proactive Investors.

The company is currently moving its pilot titanium dioxide facility in Mississauga to its new home in Quebec, with “a lot of construction going on right now”, says the CEO. “Once we’re all done, the pilot plant will be up and running again as we expect to always run it alongside the industrial-sized plant.

“It’s an important training tool for our staff and can also be used for testing different ore bodies and testing on a smaller scale different changes and improvements we want to make moving forward.”

The feasibility study, with results expected imminently, is an important part of what the company needs to complete before it can finance the industrial plant. If all events go as planned, Argex is expecting to commission the plant in 2015, producing titanium dioxide at industrial scale.

Titanium dioxide is an inorganic substance characterized by brightness and very high refractive index, making it an ideal pigment in paints, plastics and paper. Each one of the company’s modules at the industrial plant is expected to have a maximum capacity of 50,000 tonnes per year of titanium dioxide pigment production, with the world market right now supplying in excess of 6.5 million tonnes annually.

The price of titanium dioxide is currently sitting at about $3,650 a tonne in North America, having peaked above $4,800 in April 2012, and falling shortly thereafter due largely to economic factors.

But Bonnell says that things are looking up. “In January this year, there were 120 days of inventory on average, and today there are between 50 to 60 days. The inventory build-up has been reduced considerably.

“Other factors that determine price and quantities in the market are housing sales, construction and GDP growth, all of which, in the U.S. in particular, were the best since 2007 and are all indicative of prices moving upward for titanium dioxide.”

This is good news for any titanium dioxide company, but even more so for a company that has a proprietary production process that changes and improves the current standard. The innovation in Argex’s process lies in how the equipment is used and how the solvents and temperatures are properly balanced, with its method for mineral extraction operating at atmospheric pressure, thus eliminating the need to handle chemicals at very high temperatures.

Bonnell explains that there are now two standard technologies for producing titanium dioxide: the sulphate process, which dates back to 1911 and uses sulphuric acid under high temperature and pressure, and the chloride mix process, which was invented in 1946 and uses a chloride mix under the same high temperature/pressure conditions.

“These have been the standard ever since, and the challenge on both of these methods is the limitation on being able to treat both of these ore bodies with contaminates in them.”

“Under both processes, you’re left with environmental issues in terms of toxic waste. Our process doesn’t use high pressure or high temperature and uses ore bodies that others cannot because of those contaminates.”

He says that rather than producing toxic waste, Argex’s low emissions, closed-loop process, which yields minimal inert tailings and uses relatively low levels of hydro chloric acid that are regenerated after use, produces pure saleable products that can be sold to other industries.

“The benefit is that we can access much cheaper feed stock because we’re not competing with the same ore bodies as everybody else, and our costs net of by-products are much lower because rather than having to pay additional costs to deal with waste, we’re actually receiving credits because of the by-products.”

Economically, he adds, the process becomes “much more interesting” than the existing processes that have been around for more than a century, in the oldest case.

The capital costs projected for Argex’s industrial-sized plant are around $200 million, with Bonnell saying the only caveat is that he stands to be contradicted by the engineers in the upcoming feasibility study, though he is quite confident in the accuracy of the preliminary figure. Operating costs are estimated at $1,000 to $1,500 per tonne, which Bonnell says would be “one of if not the lowest” operating costs in the industry.

The chief executive’s least preferable route to raise the necessary funds is through an equity financing, as Argex has “very strong margins and can support a significant amount of debt on the project.” “We don’t want to do what other people have done and announce a massive equity financing where shareholders look at this as a massive dilutionary event.

“We want to be in a position where the shareholders – first and foremost – look at a financing as a de-risking event,” assures Bonnell, adding that the company is looking for funds from Quebec’s IQ to equipment vendors.

With $13 million in the till currently, as well as between $6 to $7 million in warrants due to come in between now and next September, the company is in no danger in terms of its management burn rate, even if markets “were to drop off the side of the earth next week”. “But we still have to focus on our project financing and build an industrial-sized plant. That is a different exercise,” admits the chief.

Still, with its off-take partner being the number one customer of titanium dioxide globally -- ahead of both Dutch AkzoNobel and U.S.-based Sherwin Williams -- as well as the Quebec government on its side, Argex is on path for success. It sees even more supply agreements on the horizon, or other similar collaboration deals.

“Probably the easiest part of this whole exercise is to sell our titanium dioxide. Our sales department is small, so our strategy is to focus on large volume purchasers because we don’t have the staff or infrastructure to service all the little guys,” says Bonnell.

Shares of Argex, which were late last month upgraded to the main board of the Toronto Stock Exchange, are sitting at about 98 Canadian cents, giving the company a market cap of some $130 million.

http://www.proactiveinvestors.co.uk/companies/news/61961/argex-titanium-readies-for-massive-leap-with-industrial-sized-plant-in-the-works-61961.html