Tronox Holdings Plc annual report, FY2020

Business context and reporting period

Tronox Holdings plc filed its Form 10-K for the year ended December 31, 2020. The company is a vertically integrated producer of titanium dioxide (TiO₂) pigment, with mineral-sands mining, feedstock and smelting operations, and nine pigment plants. It also sells zircon and other products. The filing includes fourth-quarter results, but reports primarily on a full-year basis. Comparisons with 2019 are affected by the Cristal acquisition, completed April 10, 2019.

Key financial metrics

Amounts are in U.S. dollars; figures are rounded.

Fourth-quarter 2020 sales were $783 million, up 13% year over year and 16% sequentially. Fourth-quarter net income from continuing operations was $57 million; net income attributable to Tronox was $45 million.

Material changes versus prior periods

• Reported 2020 sales rose 4% from 2019, partly because 2020 included Cristal results for a period not included in 2019. On a pro forma combined-company basis, sales fell 8%, mainly from lower TiO₂ and pig-iron volumes and lower zircon prices.
• On a pro forma basis, TiO₂ revenue declined 8%; sales volume was down 7% and lower average selling prices reduced revenue. Zircon revenue fell 9%, primarily due to lower prices.
• Reported gross margin expanded to 23%, reflecting Cristal synergies, foreign-exchange effects and the prior-year inventory fair-value step-up and contract-loss charges. Lower TiO₂ and zircon prices, inflation and lower-volume plant costs partly offset these benefits.
• Operating cash flow declined $57 million, primarily because working-capital and other asset/liability changes used more cash.
• Cash increased during the year, supported in part by $500 million of 6.5% secured notes issued in 2020. The company made a $200 million voluntary term-loan prepayment in December.

Outlook, management commentary, risks and unusual items

• Management expected the TiO₂ business to benefit from an anticipated global industry recovery in 2021. It did not provide specific 2021 financial guidance in the supplied filing text.
• Management said operations continued globally without material disruption from COVID-19, while the pandemic reduced second- and third-quarter sales volumes. The company delayed some capital spending and took other cost and working-capital measures to preserve liquidity.
• 2020 net income included an $881 million income-tax benefit, principally reflecting a $909 million noncash deferred-tax benefit from releasing part of the U.S. deferred-tax valuation allowance, with other tax items partly offsetting it. The unusually high reported earnings therefore do not represent operating cash generation.
• Synergies from the Cristal transaction totaled $243 million in 2020: $193 million reflected in EBITDA and $50 million in cash and other synergies. The original target was approximately $220 million by 2022.
• Tronox terminated its proposed Tizir Titanium and Iron acquisition in January 2021 after a UK competition review and paid an $18 million termination fee. It planned a further $300 million term-loan prepayment in first-quarter 2021 and announced a possible refinancing in February 2021.
• The company had lent AMIC the full $125 million agreed to support the Jazan slag smelter. A potential 90% acquisition of the project is conditional on production criteria or related contractual rights; the arrangement could also involve $322 million of AMIC debt. Verify the project’s status and the consequences of either exercising or not exercising the rights.
• Principal risks include volatile TiO₂ and zircon demand and pricing, COVID-19 effects, competition including Chinese chloride-process production, energy and raw-material costs, foreign exchange, operational and cybersecurity disruptions, South African power and regulatory risks, environmental obligations, and the EU’s TiO₂ powder carcinogen labeling rules effective October 2021.
• Recorded environmental liabilities were $67 million, including a $60 million provision for the former Hawkins Point site. Tronox also described ongoing Venator litigation: Venator claims a $75 million break fee, while Tronox counterclaimed for $400 million; the outcome was uncertain.
• At year-end, CEO Jeffry Quinn was on leave after being referenced as an unnamed individual in separate SEC and criminal complaints concerning Ferro shares. Tronox and its shares were not referenced; interim co-CEOs and an interim board chair were appointed.

Important facts for investors to verify

1. How much of reported earnings reflects recurring operations versus the noncash deferred-tax benefit, and whether U.S. tax assets will be usable under applicable limitations.
2. Whether demand, volumes, selling prices and pro forma Adjusted EBITDA recover, and how synergies translate into sustainable cash flow.
3. The execution and funding implications of planned debt repayments, refinancing, debt maturities and the 4.1x net leverage level.
4. The status, performance and potential financial exposure of the AMIC/Jazan project and its conditional debt and ownership provisions.
5. Developments in the Venator dispute, Hawkins Point remediation, South African mining and power risks, and EU TiO₂ regulation.