Tronox Will Merge With Ore Supplier

In a $1 billion-plus bid to vertically integrate its business in the white pigment titanium dioxide, Tronox will acquire the mineral sands operations of South African mining conglomerate Exxaro Resources, the world’s third-largest supplier of TiO₂ ores.

Tronox, which calls itself the fifth-largest global producer of TiO₂, will get a 74% interest in two South African operations that mine TiO₂-rich minerals such as ilmenite and rutile as well as a TiO₂-rich smelting coproduct called slag. All the minerals are feedstocks for plants that produce purified TiO₂ pigment.

The deal also includes Exxaro’s 50% interest in the Tiwest joint venture between the two companies in Australia. This partnership operates a TiO₂ plant that is back-integrated into mineral sands.

In exchange, Exxaro will receive a 38.5% stake in Tronox, which is planning to list on a major stock exchange after the transaction is completed in the first half of 2012. Tronox delisted from the New York Stock Exchange in 2008 just before declaring bankruptcy as a result of liabilities inherited from its former parent, Kerr-McGee. Tronox emerged from bankruptcy earlier this year.

On the basis of recent Tronox share prices, the deal is worth about $1.3 billion. The combined firm would have had before-tax profits of $495 million on sales of nearly $2 billion in the 12-month period ending on June 30.

The key to the deal for Tronox is securing raw materials. “Because of the assurance of ore supply, we believe we will be uniquely positioned to take advantage of future expansion and profitable growth opportunities,” said Tronox CEO Dennis L. Wanlass in a Sept. 26 conference call. The company is already considering a new TiO₂ plant in South Africa as well as expansion of the mineral sands operations.

Analysts worry about the timing of the deal given the shakiness of the global economy. And Mark Gulley, a stock analyst with Ticonderoga Securities, says it could limit Tronox’ future options. “While this deal makes some strategic sense,” he wrote to clients, “it also increases capital intensity, making a potential acquisition of Tronox less likely and more expensive.”