Company

Argex Titanium Inc (TSXV: RGX) (FSE: ASV) (OTCBB: ARGEF) is commercializing a patent protected process to take high-grade ilmenite (ore) and convert it to pigment-grade high purity titanium dioxide using a patent-protected novel process. Its proprietary CTL process can leach ilmenite ore containing substantial amounts of contaminants and successfully make titanium dioxide pigment for use by the paint and plastics industries. When the CTL process is used with ores suited to its CTL process, Argex has the potential to produce titanium dioxide pigment at much lower cost than current production processes.

Feedstock

Argex’s current primary objective is to develop its proprietary CTL process and scale it to a large scale production unit. Ilmenite, the feedstock can be acquired readily from third party sources. For example, phosphate mining tailings from two mining projects could account for 2 million tons annually of ilmenite – considered waste rock by the phosphate miners. 

Outlook for TiO2

Titanium dioxide (TiO2) is an inorganic substance characterized by brightness and very high refractive index, making it an ideal pigment in paints, plastics and paper. TiO2 is primarily mined from Rutile and Ilmenite ores. Ilmenite is widely available while Rutile is known for higher concentrations of TiO2. Global production of TiO2 totaled 6.4 million tonnes in 2010. DuPont introduced the chloride process and currently produces 20% of the global output. The paints and coatings industry consumes the bulk (62%) of TiO2, followed by the plastics industry (26%) and the paper industry (7%). Growth in the demand for TiO2 directly correlates with the economic activity, and the recovery in the global economy is likely to drive demand over the coming years. As demand is highly correlated to GDP growth, future growth of TiO2 would be primarily driven by  rapidly growing emerging markets such as China and India. Average North American uses 8lb of TiO2 per year. Average Chinese/Indian uses 2lbs of TiO2 per year. As the emerging market countries’ standard of living increases, TiO2 consumption will increase. 

Canadian Titanium Limited (CTL):

Incorporated in 2005, CTL is the work of the principals of Process Research ORTECH Inc. (PRO) with the specific goal of commercializing the proprietary technology developed to produce high purity TiO2 for pigment production. PRO has a history of 83 years in providing innovation and technology development to support Ontario’s industries.

Majority acquisition in CTL: In October 2011, Argex acquired a majority interest (50.1%) in privately owned CTL for a cash consideration of $1 million and the issuance of two million Argex common shares to the selling shareholders of CTL. As part of the deal, CTL granted Argex an exclusive license to use the technology for the recovery of TiO2 in Quebec and a non-exclusive license for the rest of the world. CTL will provide Argex know-how and information applicable to the licensed technology and products. Argex will pay CTL a 2% royalty on its production of TiO2.

The CTL Process

The closed-loop solvent extraction chemical process involves the leaching of titanium-bearing ore material in hydrochloric acid. Both the iron and the titanium in the ore are leached into the solution. Operating at atmospheric pressure with no pre-treatment of ore required the process is highly energy efficient. Additionally, the process operates with low concentrations of hydrochloric acid and avoids the need to handle chlorine, carbon or carbon containing chemicals at very high temperatures. The end products produced are of high-purity (99.8%) TiO2, Fe2O3 and V2O3 with minimal inert tailings.

What makes CTL Compelling?

• Environmentally friendly closed loop process with byproducts that are saleable
• Requires low temperature and only 10% of the input remains as inert tailings
• The CTL process operates at a significantly lesser cost than the industry norm – sulphate and chloride processes
• Can be easily adapted to lower grade ores and produces high purity TiO2
• The CTL process is a patented metallurgical process that allows for the production of high-purity (99.8% pure) pigment-grade TiO2 product. Argex has patents in 14 countries, including the U.S., and in Canada, Europe, India, etc. It has applied for patents in China as well.
• The uniqueness of the process is its ability to produce high purity TiO2, iron oxide and V2O5 through a single process directly from the ore material.
• CTL is the only TiO2 process that can effectively extract TiO2 from ores containing many contaminates such as MgO, V, Cr, etc.
• Inexpensive & available TiO2 feedstock, from phosphate mining tailings

Competitive Advantage of Argex

• Proprietary extraction process producing high-purity TiO2: Argex’s key differentiating factor over competitors is its CTL extraction process that produces high-purity (99.8%) TiO2. The energy efficient closed-loop process is significantly less expensive to operate than currently available Sulphate and Chloride processes and produces high-purity (99.8%) TiO2, Fe2O3 (iron oxide) and V205 with minimal inert tailings.
• Proven Equipment and Low Temperature reduces risk in scale up: The equipment used in the CTL process is industrial-scale equipment that has been used for a number of years for uranium, copper, nickel and rare earths. The metallurgists behind the CTL process were key to perfecting the uranium and nickel processes. Solvent extraction typically scales up 15,000 to 100,000 times from a pilot environment, Argex will only be scaling up 15,000 times as it is currently producing around 3.5 tonnes per year and the first plant is expected to produce 50,000 tonnes/year. Pilot plant is in operation since Feb, 2011 and scale up completed in Sept 2012 and is now producing 10 kg/day of high purity industrial grade TiO2. 
• PPG and other end customer collaboration already underway: End Customer Collaboration with PPG and other consumers of TiO2. Argex’s collaboration with PPG is focused on combining their coatings technology and expertise with Argex’s TiO2 product.
• Favorable supply-demand dynamics indicate higher prices for TiO2: With demand outpacing supply, prices of TiO2 are expected to move higher over the next five years. According to Ti Insight LLC, the price could reach ~$6000 per tonne by 2015 from the current ~$3500 per tonne due to rising demand and fewer capacity additions. This would immensely benefit TiO2 producers and processors alike.
• Modular construction of production facilities with reasonable capex contemplated: Unlike mining projects which costs upwards of $500 million leading to questions of capital raising ability, RGX is contemplating modular plant construction with costs expected within $200 Million (to be confirmed after the full feasibility study is released over the next few months) for a 50,000 tonnes facility. In the fourth Quarter 2012 RGX engaged Genivar Inc. (TSX: GNV), an engineering services firm to conduct a feasibility study and establish economic viability for TiO2 production unit, the first module production facility.  
• Collaboration Agreement that might lead to an off take Agreement: On April 3, 2012 Argex Mining Inc announced that it has entered into a technical collaboration agreement with PPG Industries (NYSE: PPG) to develop and optimize PPG's technology for Titanium Dioxide (TiO2) pigment for paints and coatings applications to be produced by Argex. The intention is to make Argex's TiO2 pigment compatible with various end-use applications for PPG. The PPG deal also provides for the negotiation of an off take agreement if the RGX technology is successful in producing as per PPG’s requirements. The company recently announced a listing of the products it will be producing based on the results of the pilot production for various applications for potential customer acquisition. 
• Experienced management team: Argex has a technically accomplished management team with decades of experience in mineral property exploration and development, mineral processing, metallurgy, mineral exploration, and investment banking. At the helm is Roy Bonnell, CEO and co-founder, with significant capabilities in financial and investment banking. He was the managing director of Atwater Financial Group Inc. from 2004 to 2010 and corporate finance associate for two investment dealers (2000- 2001). We believe Mr. Bonnell will play a key role in raising capital for the construction of TiO2 production plants. Apart from the CEO, there is a strong management team with technical expertise in place to help get to production.

Capital Structure and Shareholding

As of September 30, 2012, RGX had approximately 118.9 million ordinary shares issued and outstanding. The company also had 8.6 million options outstanding at an average exercise price of $0.41 and warrants of approximately 14.2 million at an average price of $0.52.

Insiders and Institutional shareholders hold over 25 million shares. Significant institutional shareholders include Luxor Capital with 14% and Sprott holding around 2% shares outstanding of the company.

Cash

$6.8 M in cash and short-term investments as of Sept 30, 2012.

Valuation

While a higher production of TiO2 can generate much higher valuation for its shares we are using a conservative one module production facility of 50,000 tonnes/year. If we use $3500 per tonne as the selling price, zero value for by product credits and a cost of production of $1200 per tonne, RGX can generate $2300 per tonne. For 50,000 tonnes this means $115 Million of operating cash flow per year. If it raises $200 million in debt at 7.5% per year this will leave $100 million per year of free operating cash flow for a 50,000 tonnes/year plant, the smallest module the company is contemplating. As of April 5, 2013 the company had a $117 million in market value. While all these assumptions can be adjusted, without making any aggressive assumptions the company should trade north of $3 if it announces further steps to get to production and a favorable sentiment to junior markets. 

Why the recent decline in share price?

While we have no crystal ball on all the reasons, one point we heard was there is a general concern on the lack of news on the offtake agreement with PPG. Our understanding is that PPG staff working on the deal with RGX is also working on closing the Akzo Nobel acquisition for the last two years and that deal seems close to getting done. In the financial markets, there is always the pressure for news every quarter, whereas in the real world timelines are longer and dependent on many other industry events. Plus RGX had a good run and given the lack of news, there is likely some profit taking going on as well. 

Risks

Junior pre-revenue companies like RGX is exposed to commodity price, environmental, capital raising, regulatory and personnel risks.   RGX is also exposed to scalability risks- which is Argex’s ability to scale up the current CTL mini-plant into a commercial industrial plant in a timely and profitable manner within the expected capital costs and delivering a product that meets the specifications of its customers.