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Author: LeKitKat Big gold star, 5000 posts Top Favorite Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19666  
Subject: Re: Tronox write up in Barron's Date: 7/11/2013 2:40 PM
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You may be right about the dividend if the business doesn't recover as is anticipated. Paying a dividend through debt issuance is not a sustainable payout and they did it fairly soon after coming out of BK exactly to put a floor under the share price and as a sign they were a shareholder friendly business. That was made clear when it was initiated.

The TiO2 business has been in the dumper for several years. It goes through enormous cyclical swings and has been manipulated by the big boyz in the industry namely DuPont. The last few years have been some of the worst on record and sales are depressed with inventory overhangs and excess supplies and capacity as end users stockpiled supplies as the price peaked

The investment thesis was based on a turn of the cycle as end users ran through supplies, the price recovered, utilization moved closer to cyclical highs, and specific to TROX, the acquisition of a mining segment that gives them raw materials and vertically integrates the company. That was expected to improve margins when the cycle turned. None of those things have happened yet --the acquisition is fairly recent & not well-integrated. So a cursory look through Morningstar does not reflect what may happen. Investing in anything that depends on commodity cycles is never a sure thing but chances looked good for pigment producers to begin an upward move in 2014. I expected the dividend to be subsidized with debt and cash until and if the company began a recovery. Obviously the Barron's article is anticipating the increased demand for pigment will result in vastly improved earnings. It may never happen--recession could take hold again and slow demand.

You are always taking a chance on this kind of story while waiting for the company to regain momentum. If one had bought at the low of $15 when I first wrote about them, it would have proved a good entry point. In the current range, it will take good news and higher earnings to get them to Barron's targets and the investment is higher risk if you are depending on the dividend to justify it. If the dividend gets cut, then the price will quickly revisit the lows. It may still be too early to bet on a recovery, but by the time the recovery is well under way, it will be too late. The dividend made the chance more palatable.
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