Tronox Holdings Plc annual report, FY2013

Tronox Limited (NYSE: TROX) — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013; the filing also reports unaudited fourth-quarter results. The registrant in the filing is Tronox Limited. Financial statements are presented in U.S. dollars under U.S. GAAP.

Business context

Tronox produces titanium dioxide pigment (TiO₂), titanium-bearing mineral sands and related products, including zircon and pig iron. Its two reportable segments are Mineral Sands and Pigment; Corporate and Other includes electrolytic and other chemical operations. Tronox’s acquisition of mineral-sands operations closed June 15, 2012, so 2012 results include the acquired business only after closing and are not fully comparable with 2013.

Financial performance

Metric (US$ millions, except percentages and per-share data)20132012
Net sales1,9221,832
Gross profit / gross margin190 / 9.9%264 / 14.4%
Operating income325
Net income (loss)(90)1,133
Net income (loss) attributable to Tronox(126)1,134
Adjusted EBITDA (non-GAAP)362503
Cash from operating activities337118
Capital expenditures172166
  • Sales rose 5%: higher volumes and the full-year contribution of the acquired operations more than offset lower selling prices and mix. Management attributed $480 million of the sales change to lower prices and mix, offset by $294 million from higher volumes and $273 million from acquired businesses.
  • Gross margin fell to about 10% from 14%, primarily because of lower selling prices. Purchase-accounting depreciation, depletion and amortization also weighed on reported gross profit: $159 million in 2013 versus $75 million in 2012.
  • Mineral Sands segment operating income increased to $238 million from $156 million; Pigment shifted to an operating loss of $179 million from income of $57 million. Lower pigment prices were the principal pressure.
  • 2012 net income included a $1.055 billion noncash bargain-purchase gain from the mineral-sands acquisition; this makes headline net income comparisons especially distorted. 2013 other income included a $24 million noncash gain from liquidating two non-operating subsidiaries and $39 million in foreign-exchange gains.

Fourth-quarter results

Metric (US$ millions, except per-share data)Q4 2013Q4 2012
Net sales436482
Gross profit (loss)54(61)
Net income (loss) attributable to Tronox(7)(93)
Basic and diluted earnings (loss) per share(0.06)(0.82)

Quarterly figures are unaudited. Q4 sales were lower year over year, while gross profit and attributable loss improved substantially; the filing does not provide a clear Q4 segment-level reconciliation in the quarterly-results table.

Cash, debt and liquidity

  • At December 31, 2013, cash and cash equivalents were $1.478 billion, long-term debt was $2.413 billion, net debt was $935 million, and working capital was $2.290 billion. Total liquidity was $1.774 billion, including cash and $296 million of available revolver capacity.
  • Operating cash flow was $337 million; investing cash outflow was $171 million and financing cash inflow was $614 million. Cash increased $762 million during the year, substantially reflecting borrowing proceeds.
  • Debt included a $1.5 billion senior secured term loan due 2020 and $900 million of 6.375% senior notes due 2020. Interest and debt expense rose to $130 million from $65 million. The company reported compliance with its debt covenants at year-end; neither revolving facility was drawn.
  • 2013 dividends paid were $115 million. Cash and cash equivalents were held across Europe ($775 million), Australia ($318 million), the United States ($218 million) and South Africa ($167 million); the filing notes restrictions on certain intercompany transfers.

Outlook, material developments and risks

  • Management expected 2014 capital expenditures of approximately $250 million. It said pigment and high-grade feedstock inventories were nearing normal levels, with feedstock inventories expected to normalize through 2014; it expected prices to remain affected by surplus inventories.
  • Hillendale mining ceased in December 2013. Fairbreeze is intended to replace it; management expected possible operations in the second half of 2015 and full operation in 2016, subject to regulatory approval and construction. A conservancy appeal had suspended the water-use license, but the Department of Water Affairs lifted the suspension on February 5, 2014; mediation and the appeal remained unresolved.
  • On March 19, 2013, Tronox refinanced its term facility with a $1.5 billion term loan due 2020 and repaid a $149 million delayed-draw loan. Floating-rate exposure, currency movements, commodity prices and input costs remain relevant sensitivities.
  • A December 2013 bankruptcy-court ruling found Anadarko liable in the Tronox litigation and indicated damages of $5 billion to $14 billion, subject to final calculation, offsets and possible appeal. Tronox said it would receive no immediate or direct proceeds: most funds would go to environmental and tort trusts. Potential tax deductions depend on final recovery and trust spending and were not recognized as an asset.
  • Key disclosed risks include TiO₂ price and demand cyclicality, competition and cost inflation; South African political, labor, power, water and regulatory risks; operational and environmental incidents; reserve-estimate uncertainty; foreign exchange exposure; debt and cash-transfer restrictions; and Exxaro’s significant voting influence (about 44.4% at year-end).

Important facts for investors to verify

  • Whether pigment pricing and margins recovered after the 2013 decline, and whether reported volume gains translated into stronger operating earnings.
  • Whether 2014 capital spending, cash generation and dividend payments were supported by operating cash flow rather than additional borrowing.
  • Term-loan and note terms, floating-rate exposure, covenant headroom, and the practical availability and transferability of cash across jurisdictions.
  • Fairbreeze appeal and permitting status, construction progress, cost, and timing relative to Hillendale’s closure.
  • Final Anadarko damages, appeal outcomes, trust distributions and any resulting tax benefits; these remained contingent in the filing.
  • Mineral reserve assumptions and changes: reported total heavy-mineral reserves were approximately 1.139 billion metric tons of ore containing 69.2 million metric tons of heavy minerals, with reserve estimates subject to geological, operational and economic assumptions.