Description

Tor Minerals is in transition from a low margin commodity chemical manufacturer to a higher margin specialty niche pigment manufacturer. The current stock price at less than 25% of tangible book and slightly above net current assets reflects only the commodity past. If the new products that have inspired consistent insider buying the last two years are successful, there is 10 or more times upside for the stock.

HISTORY

Torm minerals was formed in 1973 by the Benilite Corporation to commercialize a new process to manufacture HITOX (high grade titanium dioxide). This buff colored chemical costs 25% less than white titanium dioxide and can be used to substitute for a portion of the white titanium dioxide or other pigments in paints and plastics. In 1980, Benilite spun off the new company to shareholders and in 1988 it became publicly traded as Hitox Corporation of America through an IPO of 1.38 million shares.

In 2000, the company added to its plant in Corpus Christi Texas by acquiring a plant in Malaysia (TOR Minerals Malaysia). This plant offered a rare source of Ilmenite (FeTiO3) which is processed into Synthetic Rutile and finally HITOX (TiO2) at either the Corpus Christi Plant or at the Malaysia plant. The acquisition also opened markets in Asia for the companies products.

In 2001, Tor Minerals acquired a plant in Hattem Netherlands. This acquisition opened up the European market for HITOX sales and also added a new product, ALUPREM. Aluprem is a speciality alumina manufactured from Aluminum and Bauxite Ore through a process developed by Dr. Olaf Karasch, who was the manager of the Hattem, Netherlands office. Aluprem is used on electrical insulators, cast polymers, as an industrial catalysts, and is sold to the coatings market.

During the housing boom in the early 2000’s, Tor Minerals sales and profits grew nicely. Their HITOX pigments are used in paints and PVC pipe so their HITOX sales are tied to the construction industry. Additionally, sales of Aluprem rose rapidly from $1.9 million in 2002 to over $8 million in 2004. Tor made a private placement of common shares and convertible preferred to finance expansion of capacity at their Corpus Christi and Netherlands plants in 2004. This expansion was ill-timed as the housing bust reduced profitability to zero in 2006 and 2007. Tor was left with significant excess manufacturing capacity.

CHANGE IN STRATEGY

Aluprem is a higher margin specialty chemical that is used in niche applications. Tor has successfully grown this business by tailoring the product to specific applications and finding more of these applications. Sales have run as follows

2002: $1.9 million

2003: $4.7 million

2004: $8.1 million

2005: $10.6 million

2006: $6.2 million

2007: $8.5 million

The sales dip in 2006 was caused by the loss of Englehard Corporation who was a very large customer in 2005. Tor minerals projects further growth in the specialty alumina business going forward with a market potential of $25 million. 

The developer of Aluprem, Dr. Olaf Karasch became CEO of Tor Minerals on July 1, 2006. The company set on a track to develop and market more higher margin specialty products like Aluprem. Using techniques from the Netherlands plants, Tor has developed and introduced in 2008 four new pigments marketed under the name Tioprem. Tioprem Gray, Tioprem Orange, Tioprem Beige, and Tioprem Brown saw their first commercial sales in 2008. According to the company, over 100 companies are currently testing the new pigment.

Tioprem is a new specialty pigment that is superior for some specialty applications. It maintains its true color at temperatures up to 300 F, doesn’t fade with exposure to UV radiation, has excellent color strength, and improved gloss and opacity. For applications that require these characteristics, Tioprem reportedly can reduce the cost of a can of paint by 10% over the currently used commercial pigment. Tor management notes that Tioprem gross margins are expected to run about 40% rather than the 25% gross margins (at full capacity) of their traditional HITOX pigment. Market potential for Tioprem is reported to be $45 million. Dr. Olaf Karash projected these sales levels might be reached in 3 to 5 years at the annual meeting in Corpus Christi last May. For comparison, HITOX sales currently run $15 million a year. This niche market appears to be large enough for significant profitability for Tor Minerals but small enough to not attract competition.

FINANCIAL OPPORTUNITY

Tor minerals broke even in 2006 and 2007 as their plants were operating at just 40% capacity. The excess fixed costs from the excess capacity have reduced their overall gross margin to just 19%. HITOX gross margins were 30% in 1999 and Tor management projects they would run at least 25% if at full capacity today. Tor has moved HITOX production from their Corpus Christi plant to Malaysia. This frees up production assets that can produce $45 million in sales of Tioprem at their Corpus Christi plant without significant capital expenditures. In the meantime, the Netherlands plant also suffers from excess capacity to be filled by rising sales of their Aluprem specialty product. Optimistially, at $45 million in Tioprem sales at a gross margin of 35% and $25 million of Aluprem at 30% gross margin, Tor minerals gross profit could be $23 million dollars in 5 years. This compares to their break even gross margin of $5.2 million in 2007 and a current market cap of less than $6 million.

FINANCIAL RISKS

Paint pigment sales are tied to the health of the construction industry which isn’t too good right now. Tor minerals debt is small but could still be a problem in the current environment. They were in violation of a debt convenant with Bank of America in 2008.  This was in part due to intentional reduction in plant utilization to reduce inventories and produce cash but it also dropped gross margin to 13% resulting in reported losses.  They agreed to raise at least $1 million in new capital to satisfy the bank. On September 15^th, Tor minerals announced a private placement of shares (at $1.20) and warrants (3 years struck at $2.00). Interestingly, they are raising $2.1 million with most of the shares being purchased by company insiders. Sales are likely to fall before they rise and more dilution like this could occur. 

Could this investment go to zero? Two things seem to offer protection. First, officers and directors owned 41% of outstanding shares before the private placement. They are certainly motivated to to the right thing for shareholders. Second, tangible book value is $22.5 million or roughly $2.34 a share after accounting for the dilution from the private placement. Book value is mostly physical plant assets.

The Malaysia plant was acquired on March 1, 2000. The purchase price was 5.9 million with debt assumption of $4.0 million. Total assets at the Malaysia plant are currently $14.9 million.

The Netherlands plant was acquired for $3.8 million in 2001 and then expanded in 2004. Total assets are $11.7 million although $2 million is goodwill.

The Corpus Christi plant has been owned for a long time. Total assets are $12.2 million.

In ordinary times, one might feel protected from total investment loss by the $2.34 in tangible book value. In the worst case the assets could be sold at a discount to book value, the modest debt paid off, and still cover the market cap of the company. In the current environment, Tor minerals perhaps needs to be considered a high return but also potentially risky investment.

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