By Chris Berry (@cberry1)

For a PDF version of this note, please click here

Regular readers will know of my affinity for Argex Titanium (RGX:TSX, ARGEF:OTCBB). I have written on the company in the past (here and here) and continue to believe in the technology that the company maintains as an extremely disruptive force in the titanium dioxide (TiO2) business. I am long the stock at a higher price.

The rationale for considering the company was simple: this isn’t a traditional mining story, but has de-risked a proprietary process for producing TiO2 from low cost ilmenite. In a global environment awash with excess capacity of commodities (TiO2 included), those companies that survive and thrive will need to prove they can produce a given product at the lowest all in sustaining cost. RGX is one such example.

RGX has demonstrated its production process at pilot scale and has larger companies (PPG Industries (PPG:NYSE) and HELM AG) to vouch for it but the stock performed poorly last year likely owing to the fact it was “lumped in” with junior mining plays even though RGX itself is in no way a mining company.

The recent news of RGX now having received technical due diligence reports associated with the financing of its first TiO2 plant has lit a fire underneath the share price.

I would argue that market forces have confused share price and value in the case of RGX and the news of the completed due diligence reports have served to “wake up” the market to the fact that RGX is a story that can survive and thrive in a very challenging market.

There are, of course, reasons for caution. Huntsman’s (HUN:NYSE) plan to reduce its TiO2 capacity by 13% (about 100,000 tonnes) as a cost saving measure is one. Additionally, DuPont’s (DD:NYSE) comments during its Q4 2014 earnings call aren’t terribly encouraging:

“We delivered volume growth across the portfolio but competitive pressures in TiO2 remain high as soft industry fundamentals especially in Europe contributed to lower prices during the year. We believe industry utilization rates remain essentially unchanged with inventory levels near normal.”

However, as I mentioned previously, these statements mask the fact that RGX has a process that can exist in this dour environment and could actually be complimentary to a TiO2 producer looking to lower costs. With prices falling and margins shrinking, technology which lowers production cost should be at a premium and this is exactly what RGX offers.

The hurdle of financing RGX’s TiO2 plant still remains, but with the due diligence documents in hand, this can now be squarely faced. As I said above, I own shares in RGX and while I absolutely hate “talking my own book”, price and value may not be confused here much longer.

http://www.discoveryinvesting.com/blog/2015/2/18/argex-titanium-an-example-of-markets-confusing-price-and-value