Euro Pacific Canada Titanium Dioxide August2011[1]

8/3/2019 Euro Pacific Canada Titanium Dioxide August2011[1]

1/13

Tony Hayes, Metals & Mining Analyst

[email protected]

Research Associate: Yang Liu

[email protected]

August 17, 201

www.europac.ca sPECIALtY / INDustRIAL MEtALs

TiTanium DioxiDea Shining FuTure aheaD

Titanium dioxide (TiO2) is an inorganic substance that

is derived primarily from heavy mineral sands contain-

ing Rutile or Ilmenite ores. TiO2

has one of the high-

est refractive indices (2.61 for Rutile crystals), making

it the primary pigment for producing white colour in

paints, plastics and paper.


2/13

euro PaCiFiC aDVanTageThe Euro Pacific Advantage: Despite the growing relative size and importance of non-

North American capital markets, most domestic brokerage firms continue to offer clients

scant exposure to foreign securities. Worse yet, access is typically limited to trading

through ADR stocks or via over the counter with US based market makers

Informed by the hard money ideals so clearly and consistently articulated by Peter Schiff,

Euro Pacific Canada looks to prepare investors for a future in which North American finan-

cial leadership is likely to wane. As the developed world continues to be mired in debt, we

see promising opportunities in developing markets. We have a particular focus on value

based and commodity-focused investments and concentrate on those countries that show

greater respect for economic fundamentals such as savings, production, and monetary

discipline. It is precisely these differences in outlook that make Euro Pacific so unique.

As a full-service broker/dealer, we are constantly expanding our offerings to allow clients

access to global markets that adhere to their personal investment goals. In addition to

foreign stocks, we also offer foreign bonds, mutual funds, and precious metal investment

strategies. For accredited investors, we offer private placements.Unfortunately, foreign stocks still cause anxiety among many investors. Our Investment

Consultants can provide crucial assistance for those investors navigating international wa-

ters for the first time. Our combination of strategy, access, advice, and service is unique in

the industry. If you are concerned about the future of the North American economy, Euro

Pacific Canada may be the only domestic brokerage firm that speaks your language.

W off Svcs :

F Stcks & Bds

Cdty Bsd Stcks

Pcs mtls Stts

Bk acctsPvt Plcts

nw isss & iPos

F Ccs

mtl Fds

Lf, Dsblty & Ctcl

illss isc*

* Offered through Euro Pacific Wealth Preservation Inc.

Cll (888) 216-9779

vst www.pc.c

e Pcfc Cd s fll svc iiroC std

bk dqtd Tt, ot d spclz

f kts d scts. o vstt stty

fllws dvc ld t by e Pcfc Cptls Cf glbl

Sttst, Pt Scff, ttlly czd

cst d fcl lyst.


3/13

A 2011 tianim Diide - A sinin Fre Aead

Titanium dioxide (TiO2 ) is an inorganic substance that is derived primarily

from heavy mineral sands containing Rutile or Ilmenite ores. TiO2

has one of

the highest refractive indices (2.61 for Rutile crystals), making it the primary

pigment for producing white colour in paints, plastics and paper.

SOURCE

Titanium dioxide is mined from Ilmenite and Rutile ores. Ilmenite is more widely

used because of its availability but Rutile is more desirable because it has a

higher concentration of TiO2.

In 2010, 6.3 million tonnes of titanium minerals were produced, of which Australia

accounted for 25%1. The global titanium dioxide pigment industry is worth $12

billion USD. The mineral is also found in South Africa and Canada, with the

three countries together accounting for 60% of global Ilmenite production2.

usAgE

Titanium dioxide pigment is known for its brilliant whiteness, opacity, non-

toxicity, inertness and UV protection. It is found in the Rutile or Anatase forms

which refers to the crystal structure within the pigments. End users prefer

Rutile crystals which are higher grade than Anatase and can be used in smaller

quantities while obtaining better results. In the pigment industry, 60% of the

paint bought is used for painting houses and 80% of house paint is used for

painting existing houses. Paint used for automotive, white goods and other

specialty applications need higher quality pigments and is increasingly being

imported by Chinese manufacturers3.

tItANIuM DIoxIDE ovERvIEw

Percentage composition of TiO2 45-65% 95%

Global Reserves 650 million tonnes 42 million tonnes

Global 2010 Production 580,000 tonnes

Reserve LocationsAustralia, China, India,South Africa, Canada

Australia, 18 million tonnes

RutileIlmenite

Figure 1: Titanium Dioxide usage through the Value Chain4


4/13


INDustRY PLAYERs

FEEDstoCk PRoDuCERs

The top five producers accounted for nearly 62% of Ilmenite and Rutile supplies

in 2010. Rio Tinto is one of the largest suppliers of TiO2

feedstock, followed by

Iluka, Exxaro, Kenmare and BHP Billiton.

PRoCEssoRs

There are two ways TiO2

can be processed: the sulphate process and chloride

process. The sulphate process is more established, while the chloride process

is newer and more cost efficient (however, is it also more tightly controlled).

Using the sulphate process is the only way to produce both Rutile crystals and

Anatase crystals (Often used in paper, ink and lower quality paint). The chloride

process generates only the higher quality Rutile crystals, which is preferred by

manufacturers.

Dupont pioneered the chloride process in the 1960s and has since incorporated

the technology into all of their operations. With this advantage, Dupont has

developed the most cost efficient plants in the world. However, the competition

is catching up, as all five of the largest TiO2

producers have since acquired the

ability to use the chloride process as well. North American plants were the most

profitable in 2010, followed by plants in Asia-Pacific and Europe5.

END usERs

End users are predominantly paint and coatings companies and include Akzo

Nobel, PPG Industries, Sherwin Williams, BASF, Kansai Paints and Valspar.

DupontLargest producer of TiO

2pigments in the world

Estimated capacity: 1.3 million tonnes

Cristal GlobalSecond largest producer of TiO

2pigments

Estimated capacity: 795,000 tonnes

HuntsmanUK based producer with higher costs of production due to concentrated

sulphate processing

Kronos

Focused on North American and European markets

Tronox

Filed for bankruptcy protection in 2009 due to low profit margins com-

bined with low demandEstimated capacity: 1.3 million tonnes

Accounted for 9% of TiO2

supply

DescriptionCompany


5/13


Analysts agree that the industry will experience a supply shortage in the

upcoming years resulting in increasing titanium dioxide prices in the short term.

What is less clear is the long term pricing of this mineral.

Global demand for TiO2pigment in 2010 was estimated to be 5.3 million tonnes6

and is expected to grow 3-4% annually until 2015. However, due to years of

underinvestment in the industry, production capacity is not expected to follow

suit. To start increasing the supply, large capital investments will have to be

made, and rising ore prices will be sure to follow. By 2016, it is predicted there

will be an overall shortfall of 1.7 mt TiO2

units and an Ilmenite deficit of 1.1 mt

TiO2 units. The tight TiO2 feedstock markets, especially for Ilmentie will drive upprices and encourage short term contracts7.

As much as 80% of the increase in demand will come from developing countries

as the TiO2

market is strongly correlated to GDP growth8. The recent growth

in demand is largely attributed to China, which with consistent GDP growth of

9-10%, compensates for declining or stable demand in developed countries.

The demand in China has risen over the past 10 years from 200,000 metric

tons annually to nearly 1 million metric tons annually, with no signs of slowing

down over the next 6 12 months. The UK consulting company Artikol has a

more conservative estimate for global TiO2

demand growth placing it at 2.7%

from 2010-2019. However, they also believe in faster growth for China at 5%a year, and see demand potential in India in the next 10 years as well9. The

rise in the worldwide middle class population is also expected to increase TiO2

consumption in the next 5 years10.

On the supply side, several international and regional companies have started to

enter the growing Chinese market. However, much of these planned additions

are based on the sulphate process, which causes production costs to be high.

While Chinese producers have stated their desire to move towards the chloride

based process, a lack of technology, scale, and access to high quality feedstock

diminishes their likelihood of success and limits their production capacities11.

According to ICIS Chemical Business, a minimum of 100,000 t/year of additional

pigment will be needed even if the demand only grows by 2% a year. DuPont

currently has plans to expand capacity by 350,000 t/year, which will add 9%

to global TiO2

capacity. Producers in the Asia-Pacific region have also been

working on capacity expansions but at a much smaller scale12. Outside of

China, there are no TiO2

pigment plants expected to be built before 2013-2014,

and TZ Minerals International (TZMI), expects prices to rise on tight supplies.

Manufacturing costs are already expected to increase by 30% from 2010-2015.

INDustRY tRENDs

Figure 2: Globalisation of TiO2

Demand

Figure 3: Correlation between TiO2

demand & real GDP

Figure 4: Titanium feedstock supply/demand outlook


6/13


PRICINg FoRECAst AND ExPLANAtIoN

In 2009, a lack of pricing discipline combined with a decrease in global demand

and competition from Asia resulted in very low industry margins and Tronox (5th

largest TiO2

processor) to file for bankruptcy protection.

Since 2009, pricing discipline has returned with an expected 20% price increase in

raw materials representing a 5% cost inflation for end users. The price increases

should improve industry profitability, especially the profit margins of producers

and processors, though Credit Suisse does not see this trend continuing beyond

2012. In 2010, the average industry profitability expanded by more than $140 US/t

relative to 2009, and the revenue to cash cost ratio also increased by 6% for the top

5 producers13 (Tronox has continued production through bankruptcy, and after a 2

year restructuring program, emerged from bankruptcy protection in February, 2011)

. Increasing ore prices, which represent a significant cost to processors, discourages

the development of new processing capacities. As a result, companies with both

mining and processing capabilities will have an advantage in the marketplace.

Titanium dioxide prices differ depending on the concentration of TiO2

found in

the product. While Rutile has a high concentration of TiO2, because of its limited

occurrence, Ilmenite is often used instead. There are several grades of Ilmenite

based on its TiO2

content:

Chloride grade (>58% TiO2

content) used as Chloride process feedstock

Sulphate grade (


7/13


RutILE

Rutile demand is mostly affected by the titanium sponge markets and welding

rod manufacturers. Although they comprise only 8% of the TiO2

market, this

equates to around 30% of the Rutile market. Credit Suisse does not see its

demand increasing but prices in the medium term should increase due to plant

closures after the global financial crisis that put the bargaining power in the

producers hands. Eventually, expansions by several large TiO2

feedstock

producers in the Synthetic Rutile market combined with stagnant demand will

drive prices down starting 2013.

According to TZMI, bulk Rutile in H1 2011 is priced at $700/750

US/t, an increase from $550 US/t in 2010

Prices will peak in 2012 with Credit Suisse estimated it to reach$925 US/t and decline starting 2013

The long term expected price is $850 US/t

ILMENItE

The Ilmenite market is more opaque and difficult to forecast than the Rutile market.

While short term prices are expected to rise, new mineral sand deposits that should

be operational in 2013 will drive prices down closer to the long term forecast.

The long term expected price sits at $160 US/t

March estimates by TZMI placed current new contracts at $130-

150 US/t with spot sales at $160 US/t and could reach $200 US/t

in the near future

Existing contracts are priced at $100 US/t

Figure 5: Zircon, Rutile and Ilmenite, quarterly price 1987-2014F in real (2011) terms


8/13


sLAgs AND sYNthEtIC RutILE

Prices for these markets are not specifically forecasted but prices are increasing

because sulphate slag supply is very tight due to the general trend of large

processors moving towards producing higher profitability choride products.

Chloride slag contracts are currently priced in the mid $400 US/t range while spot

prices reach low to mid $500 US/ton FOB.

TZMI reports new Synthetic Rutile contracts varying from $600

US/t-$700 US/t, twice the existing contract prices

Chloride slag contracts are currently priced in the mid $400 US/t

range while spot prices reach low to mid $500 US/ton FOB

tItANIuM DIoxIDEAccording to Ti Insight LLC and Credit Suisse, TiO

2prices have generally declined

on a real basis over the past 20 years despite the strong 11% increase in 2010.

Tight TiO2

supply and demand conditions, however, mean that this trend should

reverse for the period of 2010-2015 if not longer, giving producers the pricing

advantage. The margins gained for top end titanium products should outpace

those at the bottom.

Ti Insight LLP had also stated that average world prices for high quality TiO2

pigment was $2400 US/t but prices could double to $4800 US/t by 2015. Currently,

strong demand combined with low inventory levels have resulted in a series of

significant price increases from producers with buyers having no option but to

accept. Further increases may come for Q3 2011 starting September or October.

In Asia, prices are also expected to increase because of power rationing in some

provinces that will cause producers to cut back operations 14. In Europe multiple

Figure 6: Global Average TiO2

Prices


9/13


plant closures during the recession combined with aged facilities that mostly

rely on the sulphate process have caused prices to soar. With no new prospects

for increased capacity soon, Europe is increasingly importing from Asia. Some

companies, such as Dow Chemical, are now trying to develop new technologies to

decrease the amount of TiO2

needed in paints to combat rising prices15.

TiO2

producers have already announced pricing increases of $200

US/t in Q4 2010 with another increase of $300 US/t in Q1 2011 and

a further $350 US/t increase in Q2 2011

In North America, titanium dioxide prices have already reached as

high as $3080 US/t as of Q2 2011

In Europe, analysts estimate prices to climb to $4200 US/t by the

end of 2011

1Singh, Digvijay. National Industrialization Co. Rep. no. 2060.SE. Credit Suisse, 17 May 2011. Web.

2Delivering Value Through Expansion of the World Class Moma Mine. Rep. Kenmare Resources, Apr. 2011. Web.

.

3Zircon and Titanium. The Sands Are Shifting. Rep. Mineral Deposits Limited, Mar. 2011. Web.

4Delivering, loc. cit.

5Singh, loc. Cit.

6Global Titanium Dioxide Industry Recovery Firmly Under Way. PRWeb. 25 Mar. 2011. Web.

.7Delivering, loc, cit.

8Argex Receives Titanium Dioxide Pricing Forecasts. Argex Mining Inc. 26 Jan. 2011. Web. .

9Titanium Dioxide Prices and Pricing Information. ICIS Chemical Business. Feb. 2011. Web.

.

10Zircon, loc. cit.

11Singh, loc. cit.

12Terry, Larry, and Joseph Chang. Global TiO

2market in wave of activity. ICIS Chemical Business [Weekly] 30 May

2011. General OneFile. Web.

13Singh, loc. cit.

14Terry, loc. cit.

15Dow Breakthrough Enables Better Paint with Less TiO2- MarketWatch. MarketWatch. 24 Mar. 2011. Web.

.


10/13


NOTES:


11/13

CoMPANY sPECIFIC DIsCLosuREs

Is this an issuer related or industry related publication?

Does the Analyst or any member of the Analysts household have a financial interest in the securities of the subject issuer?If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA

Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?

Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?

Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own commonshares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issuedand outstanding shares of the issuer?

During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicatemember, participated in a public offering, or private placement of securities of this issuer?

During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking orrelated services to this Issuer?

Has the Analyst had an onsite visit with the Issuer within the last 12 months?

Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?

Has the Analyst received any compensation from the subject company in the past 12 months?

Is Euro Pacific Canada Inc. a market maker in the issuers securities at the date of this report?

u.k. DIsCLosuREs

This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund

EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.

The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promo-tion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.

u.s. DIsCLosuREs

This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.

Euro Pacific Canada Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research

reports and the independence of research analysts.

Issuer Industry

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

ANALYst CERtIFICAtIoN

Cmpany: N/A ticer: N/A

I, Tony Hayes, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will

not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.

Note: This is our initiating coverage report on Neo Material Technologies.

stoCk RAtINg CAtEgoRIEs

stRoNg BuY: The security represents extremely compelling value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon.

BuY: The security represents attractive value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon.

hoLD: The security represents fair value and no material appreciation is expected over the next 12-18 month time horizon.

sELL: The security represents poor value and is expected to depreciate over the next 12-18 month time horizon.

Our ratings may be followed by () which denotes that the investment is speculative and has a higher degree of risk associated with it.

RAtINgs DIstRIButIoN

Euro Pacific Canadas initial rating distribution is as follows (rating distribution is updated monthly):

EuRo PACIFIC CANADA INC. REsEARCh DIsCLosuREs


12/13

trn

121 Richmond Street, Suite 200

Toronto, ON, M5H 2K1

416-649-4273

888-216-9779

Mnreal

1501 Mc Gill College Avenue

Suite 1450

Montral, Qubec H3A 3M8

vancer

One Bentall Centre

505 Burrard Street, Box 76

Vancouver BC V7X 1M4

www.europac.ca

INstItutIoNAL sALEs & tRADINg

David Foley, Managing Director, Institutional Sales & Trading 416-933-3350

[email protected]

Christine Young, Institutional Sales 416-479-8690

[email protected]

Liza Oulton, Institutional Sales Trader 416-933-3351

[email protected]

Taylor Christie, Institutional Trader [email protected]

INvEstMENt BANkINg

David Cusson, CEO [email protected]

Rob Furse, President [email protected]

Russell Starr, Head of Equities 416-649-4272

[email protected]

Christina McCarthy, Mining Specialist 416-649-4273 x405

[email protected]

Tom Seniuk, Associate 416-649-4273 x301

[email protected]

REsEARCh

Tony Hayes, CFA Metals & Mining Analyst [email protected]

Nick Agostino, CFA, MBA, P.Eng. 416-933-3352

[email protected]

DEsIgN & LAYout

Ted Thompson [email protected]


13/13

TiTanium DioxiDea Shining FuTure aheaD

Titanium dioxide (TiO2) is an inorganic substance that

is derived primarily from heavy mineral sands contain-

ing Rutile or Ilmenite ores. TiO2

has one of the high-

est refractive indices (2.61 for Rutile crystals), making

it the primary pigment for producing white colour in

paints, plastics and paper.

Euro Pacific Canada Titanium Dioxide August2011[1]

Documents

Transcript of Euro Pacific Canada Titanium Dioxide August2011[1]