September 29, 2013 - 12:27am EST by
2013 2014
Price: 11.07 EPS $0.00 $0.00
Shares Out. (in M): 49 P/E 0.0x 0.0x
Market Cap (in $M): 539 P/FCF 0.0x 0.0x
Net Debt (in $M): -25 EBIT 0 0
TEV ($): 514 TEV/EBIT 0.0x 0.0x

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  • Holding Company
  • Illiquid
  • Discount to NAV
  • Sum Of The Parts (SOTP)
  • Potential Buybacks
  • Insider Ownership


I am recommending a long position in NL industries common stock.  NL is primarily a holding company controlled by Texas billionaire and former corporate raider Harold C. Simmons.  It is quite illiquid and also lacks sell side coverage.


NL’s primary assets are its

  • 30% stake (35.2 million shares) in TiO2 producer Kronos Worldwide (ticker KRO) worth $547.7 million at KRO’s closing price, which is controlled by Simmons
  • 4% stake (14.4 million shares) in Valhi, Inc (ticker VHI) worth $273.8 million at VHI’s closing price, another holding company controlled by Simmons
  • 87% stake (10.8 million shares) in CompX International (ticker CIX) worth $142.0 million at CIX’s closing price, a small manufacturer controlled by Simmons
  • $25.1  million of cash at the NL parent company level and wholly owned subsidiaries (i.e. excluding $52.7 million of cash held at CompX)
  • Insurance coverage (amounts not disclosed) relating to litigation discussed below


NL’s primary liabilities are

  •                 Accrued environmental remediation of $59.8 million relating to 50 sites
  •                 Potential contingent liabilities relating to 5 sites for which NL is not currently able to reasonably estimate a range of costs, or relating to cost overruns at the 50 sites which have been accrued
  •                 Potential contingent liabilities relating to lead pigment litigation, including the current public nuisance case in Santa Clara, in which the other defendants include Sherwin-Williams, DuPont, Atlantic-Richfield (now BP), and ConAgra Grocery Products
  •                 Potential contingent liabilities relating to asbestos, including 1,125 of these cases pending


NL appears to be trading at a ~42% discount to its NAV, defined as the market value of its listed stakes plus parent cash less parent debt and accrued environmental remediation.  To close that 42% discount without changing the value of the listed stakes would imply NL shares would need to trade up 72% to $19.08 per share.


VHI Stake @ Market   273.8
KRO Stake @ Market   547.7
CIX Stake @ Market   142.0
  Trading Value of Stakes   963.5
Plus: NL Parent Cash   25.1
Less: NL Parent Debt   0.0
Less: Accrued environmental remediation (59.8)
  Implied NAV     928.8
NL Shares     48.7
  Per NL Share     $19.08
Current NL Share Price   $11.07
  Implied Premium (Discount) (42%)
  Implied Gain (Loss) to Remove 72%

In the meantime, NL offers a 4.5% cash dividend while you wait.  I would also expect that NL’s single largest asset, its stake in KRO, should trade up significantly in value as  the next TiO2 cyclical upturn unfolds.  While much has been written about TiO2 in the various KRO and TROX threads, suffice it to say that TiO2 has historically been a violently cyclical commodity chemical, and one in which pricing power (or lack thereof) has generally been driven in large part by inventory levels.  After suffering from significant excess inventories beginning in Q4’2011, the industry (and KRO specifically) have significantly reduced inventory levels. 


Here is the disclosure from KRO of their finished TiO2 days of inventory on hand going back several years:



KRO Finished TiO2 Inventory Days % Chg YoY % Chg QoQ
    12/31/2006     68    
    3/31/2007     68   0%
    6/30/2007     55   (19%)
    9/30/2007     50   (9%)
    12/31/2007     59 (13%) 18%
    3/31/2008     64 (6%) 8%
    6/30/2008     49 (11%) (23%)
    9/30/2008     55 10% 12%
    12/31/2008     113 92% 105%
    3/31/2009     64 0% (43%)
    6/30/2009     42 (14%) (34%)
    9/30/2009     48 (13%) 14%
    12/31/2009     58 (49%) 21%
    3/31/2010     56 (13%) (3%)
    6/30/2010     39 (7%) (30%)
    9/30/2010     42 (13%) 8%
    12/31/2010     52 (10%) 24%
    3/31/2011     63 13% 21%
    6/30/2011     49 26% (22%)
    9/30/2011     48 14% (2%)
    12/31/2011     104 100% 117%
    3/31/2012     110 75% 6%
    6/30/2012     84 71% (24%)
    9/30/2012     79 65% (6%)
    12/31/2012     102 (2%) 29%
    3/31/2013     68 (38%) (33%)
    6/30/2013     51 (39%) (25%)


It stands to reason that as demand increases and inventory levels fall further, the price of TiO2 should start to increase again after falling precipitously for the past year and a half.  Huntsman is clearly of that belief, as their definitive agreement to buy Rockwood’s TiO2 assets this month, thus  nearly doubling down on TiO2, is generally consistent with that family’s history of trying to buy deeply cyclical commodity chemical companies near cyclical troughs.


I think the biggest risk to NL in the short term comes from the potential for an adverse verdict in the current Santa Clara lead pigment litigation at the initial trial court level.  While such an adverse verdict is quite possible, particularly in a state like California and at the trial court level, page 19 of the NL 10-Q notes that NL has never settled nor lost any such case after all appeals have been exhausted and final adjudication.  Here is an excerpt:

                 “We do not believe it is probable that we have incurred any liability with respect to all of the lead pigment litigation cases to which we are a party …

                                • we have never settled any of the market share, risk contribution, intentional tort, fraud, nuisance, supplier negligence, breach of warranty, conspiracy, misrepresentation, aiding and abetting, enterprise liability, or statutory cases,

                                • no final, non-appealable adverse verdicts have ever been entered against us and

                                • we have never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a twenty-year period for which we were previously a party and for which we have been dismissed without any finding of liability.”


I think the likelihood of any adverse trial court verdict ultimately sticking is exceedingly remote, given the industry’s undefeated litigation history across decades, and across so many different types of cases and “novel” legal doctrines, not to mention the sheer quantity of cases.  I would note that SHW uses nearly identical language to NL’s 10-Q in its communications with investors.


I think the greatest “real” risk is that the discount to NAV persists or even widens.  With that said, I would note that one of Simmons’ longest held controlled portfolio companies, Titanium Metals (ticker TIE), was purchased by Precision Castparts in December 2012 for cash.  If that transaction was any indication, Simmons might not be opposed to further monetization and simplification of his empire, especially as he continues to age (he is 82 years old).  He has also spun off various subsidiaries (or portions thereof) over the years.


I suspect that many Chinese TiO2 or other Chinese chemical companies could have an interest in KRO, given China’s long time desire for modern chloride TiO2 technology and the associated human capital and operational know-how.  China has not only been alleged to have stolen parts of such technology and bribed American engineers of rival companies, but the Chinese government has also been shutting down dozens of smaller and highly polluting sulfate TiO2 plants in China.


Given that TROX raised a war chest of cash to participate in TiO2 industry consolidation and given that HUN is now buying the Rockwood assets, it is also possible that TROX could look to acquire KRO.  KRO’s TiO2 footprint is largely in Europe, while TROX’s footprint is largely in Mississippi and Australia.  Moreover, TROX has massive NOLs in the US while KRO has huge NOLs in Germany.


Simmons has also continued to buy modest amounts of NL stock on the open market in recent years, and at prices above the current quote.




Headline risk from potential adverse ruling at initial trial court level in Santa Clara case


Discount to NAV persists or expands




No imminent catalysts.


Potential for sale, monetization, or spinoff of stakes (or even entire companies) in the cases of KRO, CIX, or VHI. 


Continued purchases of the remaining minority public float of NL by Simmons as time goes by.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


No imminent catalysts.


Potential for sale, monetization, or spinoff of stakes (or even entire companies) in the cases of KRO, CIX, or VHI. 


Continued purchases of the remaining minority public float of NL by Simmons as time goes by.

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