Q2 2012 earnings call transcript

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Tronox Ltd.

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Q2 2012 Earnings Call 01-Aug-2012

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Brennen Arndt Daniel Greenwell

Vice President, Investor Relations, Tronox Ltd. Senior Vice President and Chief Financial Officer, Tronox Ltd.

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Tronox Limited Q2 2012 Earnings Conference

Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Brennen Arndt. You may begin, sir.

Brennen Arndt

Vice President, Investor Relations, Tronox Ltd.

Thank you, Kevin, and welcome to Tronox's second quarter 2012 conference call and webcast. Tom Casey,

Chairman and CEO will begin our call with a review of second quarter performance. Following Tom, Dan

Greenwell, Senior Vice President and Chief Financial Officer will report on our financial position. Tom will then provide our outlook for the full-year 2012 and we'll complete the call by taking your questions.

I'll remind you that our discussion today will include certain statements that are forward-looking and subject to various risks and uncertainties concerning specific factors summarized in Tronox's 2011 Form 10-K, our most recent Form 10-Q and other SEC filings. This information represents our best judgment based on today's information. Actual results may vary based on these risks and uncertainties.

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Q2 2012 Earnings Call 01-Aug-2012

During the conference call, we will refer to certain non-GAAP financial terms including adjusted EBITDA and

EBITDA, which we use in the management of our business. EBITDA represents net income before net interest expense, income tax, and depreciation and amortization expense. Adjusted EBITDA represents EBITDA as further adjusted for unusual or non-recurring items including restructuring charges related to our Chapter 11 proceedings and emergence and other non-recurring costs and expenses.

It's now my pleasure to turn the call over to Tom Casey. Tom?

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Thank you very much, Brennen. And for those on the call, I apologize in advance if there are some technical issues. I am calling in from South Africa, Brennen and Dan are both in the U.S. So, hopefully, this will work well.

And I thank all of you for joining us this morning.

Since our last earnings call, Tronox has successfully completed our acquisition of the mineral sands asset from

Exxaro Resources and created the world's largest fully integrated mineral sands to pigments company. We believe

Tronox now has the unique ability to optimize the upstream and downstream sides of our business, maximizing returns for the entire enterprise, no matter where we stand within the business cycles.

While the transaction with Exxaro was completed at the middle of June and our second quarter results only reflect a couple weeks of earnings from the combined business, we are seeing the advantages of the vertically integrated structure each and every day. For example, while demand for the higher grade chloride feedstock, such as natural rutile and synthetic rutile, is down due to the TiO2 industry reducing operating rates, demand for slag has remained relatively strong.

Tronox, therefore, has the unique ability to capture margins wherever it occurs on the supply chain, while utilizing all of our natural and synthetic rutile internally and at the same time continuing to sell chloride and sulfate slag to pigment manufacturers, where margins remain relatively stronger. This is just one example of the powerful synergies this transaction provides Tronox.

Turning now to our second quarter results, we reported revenue of $428.9 million and adjusted EBITDA of $146.2 million. Our EBITDA performance largely reflected our last quarter as a non-integrated producer, as purchased ore costs increased by approximately $600 per metric ton above those in the first quarter. These added costs outweighed stable selling prices and slightly lower sales volumes we experienced during the second quarter.

While demand for titanium dioxide continued to be impacted by the continued weakness in the Eurozone, China, and to a lesser extent North America, demand for our mineral sands products other than zircon are meeting our expectations. Despite the combination of these tepid global economic conditions, customer destocking and some thrifting, adjusted EBITDA was up 24% from the same quarter last year. We delivered this performance at a time when pigment volumes for the quarter were down 24% year-over-year and pigment pricing for the quarter was up

27% year-over-year. For the first half, pigment pricing was up 29% from the last year's levels.

On a pro forma consolidated basis, we have reaffirmed our forecast for 2012 revenue to be between $2.5 billion and $2.6 billion and an adjusted EBITDA margin of between 35% and 34%, therefore, leading to a forecast of adjusted EBITDA of between $875 million and $962 million.

We also believe that we'll generate approximately $550 million of unlevered free cash flow before taxes off of this performance. We expect to deliver this substantial EBITDA and free cash flow generation even in a market whose

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Q2 2012 Earnings Call 01-Aug-2012 volumes have already declined approximately 24%, as I said, and in which we assume level volumes and modestly lower prices for the balance of the year.

This level of EBITDA and free cash flow performance validates the financial strength of our new company even in challenging markets and illustrates, clearly, the strategic merit in our combination of the mineral sands and pigment businesses.

We believe we are in a differentiated position in this market and we'll retain relatively stronger performance in both the current soft conditions and, even more so, as the market strengthens again. And we continue to be positive about the mid and long-term growth rates of the TiO2 market.

The fundamental material demand drivers in our business have established themselves over many years as being highly correlated with GDP, and these have not changed, nor has supply changed. The industry continues to face significant constraints in expanding production over the medium to long-term and the present softness in demand will only reaffirm our conviction.

We won't speculate precisely on whether the current economic uncertainty will give way to a normal demand environment, whether in the latter part of this year or next year, but we do know that even when demand recovers, there is simply not enough pigment production or ore supply to support an influx of demand beyond what we saw only a few quarters ago.

In addition, running TiO2 plants is a capital intensive undertaking that requires mastery of complex proprietary technology, and this remains a major hurdle particularly for the chloride process production plants. Therefore, we continue to believe that the industry's strong structural fundamentals will support an extended period of strength for the TiO2 industry.

In the second quarter, between headwinds of higher ore prices and continued soft TiO2 demand, reduced our earnings, as I've said, but they also served as an affirmation of the importance of our vertical integration strategy, which will be in full force from now through the end of the year. Moving forward, we'll be able to harness strength in the oil industry rather than being susceptible to it.

New Tronox is a stronger and more balanced operation that can capture strength and better manage risks wherever it exists in our supply chain. We are now the only titanium products company with more ore supply than our pigment production requires. And we also have a broad range of feedstocks giving us the flexibility to optimize our ore supply to maximize Tronox, at the enterprise level, financial strength.

I'll turn now the call over to Dan Greenwell for a report on our financial position and we'll come back to speak a little after Dan is completed. Dan?

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Thank you, Tom, and good morning to everyone. Tom has highlighted the factors influencing the business during the second quarter and our outlook for the second half of the year. I would like to first mention a couple of unusual items in the quarter in income, which resulted from the acquisition of the mineral sands business, and then I'd round out our discussion of the top line with a few comments about product selling prices and volumes and about the impact of titanium ore cost on our bottom line. Then I'll follow with additional comments about our operating results, tax rates and future capital spending.

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Q2 2012 Earnings Call 01-Aug-2012

Second quarter of 2012 included two unusual items in net income as well as the transaction-related costs in selling, general and administrative expenses. First, included in the period is a one-time gain of $1.061 billion on the purchase of the mineral sands business. This gain is derived because the total consideration transferred was determined for accounting purposes to be less than the fair value of the net assets acquired.

Therefore, the deemed excess of the value of the net assets acquired over the purchase price has been recorded as a bargain purchase gain in the quarter. The bargain purchase gain is not taxable for income tax purposes.

The purchase price allocation is preliminary and based on valuations derived from estimated fair value assessments and assumptions used by management. The final purchase price allocation is pending, the finalization of appraisal valuations of certain tangible and intangible assets acquired, which may result in adjustment to the preliminary purchase price allocation and the gain on the bargain purchase.

Second, the period includes a tax benefit of approximately $88 million, directly associated with the company's newly implemented Australian holding company structure. As part of the company's redomiciling in Australia and the ownership changes of several entities in the organizational structure, the company was able to obtain a tax basis step-up on certain existing international operations. Because this basis change did not pertain to an entity acquired in the transaction with Exxaro, this net tax benefit was recorded through tax expense and did not impact the company's gain on the bargain purchase.

Second quarter net income available to common shareholders was $1.17 billion, or $13.67 per share, compared to last year's $66.2 million, or $0.85 per share. Year-to-date net income available to common shareholders was

$1.26 billion, or $15.50 per share, compared to last year's $76.4 million, or $0.98 per share.

Revenues of $429 million in the second quarter of 2012 were effectively the same as prior year. Included in the current year revenues were third-party sales of $30.5 million associated with the newly acquired business for the two week period. Increased pigment prices of 23.5% generated $66 million of revenue. Volume declines more than offset the price increase for the quarter.

Year-to-date revenues of $863 million increased 6.9% and the newly acquired revenues noted earlier. Increased pigment prices of 29.3% for the six months generated additional revenues of approximately $161 million, while volume decline of 20.5% lowered pigment revenues by $142 million.

Sequential comparison of the second quarter of 2012 compared to the first quarter of 2012 shows similar pigment pricing while volumes decreased by approximately 4%. We have had a strong focus on cost control, production management and inventory levels. We believe our inventory positions are well placed and at the right levels to meet third quarter anticipated demand as we bring our operating rates to levels that allow for efficient management of working capital.

The year-over-year increase to second quarter selling, general and administrative expenses was $64 million and is directly associated with the mineral sands acquisition. The increase was due primarily to the accrual of $38 million of stamp duty and other property transfer taxes, the acceleration of vesting of restricted stock of $21 million and legal and professional fees of $13 million. These costs should be significantly reduced in the remainder of the year.

Tronox's effective tax rate should be in the range of 8% to 12% for 2012 and throughout 2013, and 15% to 20% for several years thereafter. During the acquisition planning, we implemented multiple tax strategies to lower the effective tax rates and the amount of cash taxes paid. A key aspect of this optimization strategy included the

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Q2 2012 Earnings Call 01-Aug-2012 reorganization of Tronox's subsidiary ownership structure for our international operation. This new structure will provide cash saving benefits in the future in the form of lower tax payments.

Our tax planning initiatives should provide benefit in future periods. As a result, we estimate 2014 effective annual tax rate between 15% to 20%. We expect to realize these effective tax rates for the next several years.

You may have noticed that we now have a new component of equity on our balance sheet called non-controlling interest. This caption represents the amount of Exxaro's 26% ownership of the South African entities as required by the BEE legislation.

We estimate our capital spending for the second half of 2012 will be in the range of $60 million to $80 million.

First half capital spending was approximately $49 million. We anticipate that future capital spending for the next three years will range between $90 million to $110 million of maintenance capital, plus $100 million to $110 million each year for both phases of the Fairbreeze mine development in years 2013 through 2015.

As we noted earlier, the purchase accounting step-up values will require depreciation, depletion, and amortization. We estimate that annual depreciation, depletion, and amortization, will be in the range of $190 million to $210 million for the newly acquired mineral sands businesses.

Additionally, inventory values were written up approximately $270 million to fair market values in the purchase accounting and will be amortized as the inventory is sold. We estimate additional non-cash amortization will likely occur within the next nine to 15 months.

Many people ask whether Exxaro's reported equity earnings from Tronox can be reviewed in the same context as our U.S. GAAP statements. The short answer is, no. Exxaro reports their financial statements in accordance with

IFRS and there can be material differences in timing, recognition, accounting principles and valuations.

At this time, I'd like to turn the call back to Tom Casey. Tom?

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Thanks very much, Dan. I'm told, by the way, that I have misspoken when I was reaffirming our forecast guidance for the year by saying that we were forecasting an adjusted EBITDA margin of between 35% and 34%, if I said,

34% I was mistaken. I meant we're reaffirming forecast EBITDA margins of between 35% and 37%, which is what we announced several weeks ago, so no change to that. And I apologize if I misspoken and added any confusion.

As previously announced, the company's Board of Directors on June 29, 2012 approved the 5-for-1 stock split for holders of both classes of our common stock. And that was effective as of the close on the July 20. The split is now reflected in our stock price and will make Tronox, we hope, more accessible to a wider range of investors.

During the second quarter, we reaffirmed our desire to return capital to shareholders as we generate substantial cash. In keeping with this goal, management has received board approval for series of initiatives. We adopted a policy stating the company's intent to issue a quarterly dividend of $1.25 per share on a pre-split basis payable on

August 13 to shareholders of record on July 13. The quarterly dividend will therefore be paid out at $0.25 per post- split share. The Board has also announced its intent to continue to pay a similar regular dividend on a quarterly basis.

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Q2 2012 Earnings Call 01-Aug-2012

On June 29, the company's Board of Directors also authorized the purchase of up to 2.5 million Class A shares of our stock. To date, we have repurchased $21.2 million worth of shares at a weighted average cost of $116.06.

During the second quarter, we repurchased 17,000 shares. And after the second quarter, we repurchased an additional 164,800 shares. We have a strong and conservative balance sheet and we are committing to optimizing it. The company anticipates a new debt financing as we have said between $750 million and $1 billion in the second half of 2012. The timing of such a debt offering is always under consideration and remains contingent on credit market conditions.

With that, I'll be happy to open up the line for any questions that any of you have.

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Operator

[Operator Instructions] Our first question comes from Hassan Ahmed with Alembic Global.

Q

Hassan I. Ahmed

Co-Founder & Head of Research, Alembic Global Advisors

How are you? Two questions, one on the inventory side of things. Obviously, the volume, as far as TiO2 go, continue to be weak, call it, third quarter running. But if I take a look at the first half volumes on the coatings company side of things, they continue to be quite strong. So, just wanted to get your feel of what inventory levels look like on the coatings company side of things?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Hassan, this is Tom. We obviously don't have complete visibility or even necessarily accurate visibility into coatings inventories. We believe from our experience in looking at their sales increasing in terms of volume of units, gallons of paint sold, and their purchases from us declining, but they are destocking and have continued to destock through this period. I think there have been some statements by management of at least some of the large paint companies that their inventory levels are declining as they have gone through this process. So while we don't

– I can't give you a more definitive answer to that. That's our view.

Q

Hassan I. Ahmed

Co-Founder & Head of Research, Alembic Global Advisors

Fair enough. Now, the second one on pro forma EBITDA, I know obviously you guys have given 2012 pro forma

EBITDA guidance of, call it, $875 million to $960 million. Just wanted to get a sense of what that pro forma

EBITDA look like in the first half of this year? Is it fair to assume – I mean, as I run my numbers I see it as being roughly around $540 million or so. Is that fair?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

I'll defer to Dan on the accounting. But as Dan said in his statement, because the Exxaro numbers are calculated under IFRS and ours are calculated under GAAP, presented under IFRS and GAAP, that there will be some adjustments to convert their first-half EBITDA to what it would be in our pro forma first-half EBITDA.

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Q2 2012 Earnings Call 01-Aug-2012

Q

Hassan I. Ahmed

Co-Founder & Head of Research, Alembic Global Advisors

Sure, but just wanted to get a ballpark sense frankly.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Well, I think that's the ballpark. It's going to be around there in the ballpark.

Q

Hassan I. Ahmed

Co-Founder & Head of Research, Alembic Global Advisors

In the ballpark. Okay, fair enough. So obviously, inherent in the second half guidance, in line with your statements about sort of continued – well, at least, in the forecast that you're seeing to come up with your guidance some volume weakness, some pricing declines, so obviously the EBITDA will sort of come down first half to second half.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Yes. That would be a fair assumption to make.

Q

Hassan I. Ahmed

Co-Founder & Head of Research, Alembic Global Advisors

Thanks so much.

Operator

Our next question comes from Hamed Khorsand with BWS Financial.

Q

Hamed Khorsand

Analyst, BWS Financial, Inc.

Good morning. Just touching base on the inventory question here, what is a reasonable level for you going forward?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

I'm sorry what the pigment level – is that what you're asking, for total pigment...?

Q

Hamed Khorsand

Analyst, BWS Financial, Inc.

At the whole – at the entire company level.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Dan, this involves the enterprise reported inventory, so do you want to take that – do you want to take and answer for that?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

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Q2 2012 Earnings Call 01-Aug-2012

Sure, sure. Well, what you see is on our balance sheet, you see a very substantial amount of inventory, approximately $1.1 billion. Keep in mind that a fairly sizable portion of that was acquired inventory, roughly $622 million at the time of acquisition. So just a little bit over half of those was acquired inventory from the mineral sands acquisition.

As the ore prices went up during the quarter, that ore cost is now inventoried in our inventory. So while volumes are not inconsistent with what they've been in prior quarter and even at year-end, the average cost of the inventory has gone up. So I think from a volume perspective, we're managing our quantities fairly effectively and we indicated that we would bring production volumes down in the second half. We do have a lot of expensive ore in that inventory. So I would expect to see the inventory values come down as we move through the third quarter and, of course, into the fourth quarter.

But keep in mind that we're amortizing a large portion of that fair value adjustment, we'll be amortizing that on a relatively quick basis. And also, do keep in mind that inventory balance consists of all of the ilmenite, the two stockpiles – two primary stockpiles that we have in Australia and in South Africa, I think 500,000 tons of ilmenite, which is more than a year's worth in Australia and same with the piles of ilmenite that we have sitting in

South Africa. So a lot of it's long-term ilmenite that were used to feed those furnaces at the end of mine life. So there is some value – quite a bit of value in that.

Q

Hamed Khorsand

Analyst, BWS Financial, Inc.

Okay. And Tom, I have one other question there. Given the current state of demand right now for pigments, you were talking about a flattish or even down Q3 and then seasonally Q4 is down as well. So are we talking about Q1 as potentially being the turning point as far as this situation goes in the TiO2 industry?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

I wish I could tell. As I said, we didn't forecast. For purposes of the guidance, we assumed that there would be no improvement in performance in calendar 2012 just because we felt that was the conservative approach to take to it. Clearly, there are signs that U.S. housing is recovering and that the level of activity appears to be picking up with U.S. housing. The GDP in the United States is obviously not doing well. It's not clear where it's heading. I think the last report was 1.5% growth. That's not very exciting.

Europe is in recession and the Eurozone macroeconomic risks are affecting business there. China, as you know, they clearly saw to put the brakes on their economy, particularly in the housing and construction sectors at the end of 2011 in order to prevent a housing bubble and inflation from getting out of hand. They have now appeared

– at least, from our perspective, they appeared to have reoriented their policies and are now more simulative.

So the question is when U.S. housing and China simulation begins to flow through the economies and then flow through our sectors. Obviously, your judgment can be as good as mine on that. But for purposes of what we are planning, we're not planning that it happens in 2012, although there's, at least, some possibility that we might see it towards the end of the year.

Q

Hamed Khorsand

Analyst, BWS Financial, Inc.

Okay. Thank you.

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Q2 2012 Earnings Call 01-Aug-2012

Operator

Our next question comes from Gregg Goodnight with UBS.

Q

Gregg A. Goodnight

Analyst, UBS Securities LLC

Good morning and good afternoon to you.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Hi, Gregg.

Q

Gregg A. Goodnight

Analyst, UBS Securities LLC

Hey, Dan, a question on EBITDA. Are you going to provide EBITDA by segment in the future and do you have a breakdown of EBITDA in the second quarter by segment?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

We do Gregg. What we'll do is we'll provide it by the individual segments. We will provide it. And I think, the piece that we did for the second quarter, we indicated that the newly acquired business made a contribution in the second quarter in our press release. You can see that in the press release, a majority of that came from the mineral sands.

Q

Gregg A. Goodnight

Analyst, UBS Securities LLC

Okay, great. A question for Tom. In your second quarter pre-release, you guided to year-over-year pigment pricing as up 15% and that seems like a long time ago now there's been sort of news flow that suggests that the pigment prices remain under pressure. Do you believe that that 15% year-over-year guidance is still a good benchmark, or if you're a betting man, do you think that's going to be a little lower or a little higher than what you'd previously said?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

That assumption of 15% year-over-year, it included an assumption that prices would decline somewhat in the second half of 2012 and we think that that's the case. We don't expect dramatic declines and there will be different levels of price performance in the different regions of the world. But, in general, on average – sort of the weighted average basis, we expected them to decline kind of mid single digits and we still expect that.

Q

Gregg A. Goodnight

Analyst, UBS Securities LLC

Okay.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

We're not changing that.

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Q2 2012 Earnings Call 01-Aug-2012

Q

Gregg A. Goodnight

Analyst, UBS Securities LLC

Okay, that's great. Just one last question if I could for Dan. You've mentioned your guidance on effective tax rate,

8% to 12% in 2012 and then going up to 15% to 20%. So that – when you say effective cash tax rate, I assume you mean the cash tax rate rather than the book tax rate.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

The cash and the books tax rate will approximate each other. We said in the comments said that 2012 and 2013 should be in the range between 8% to 12%, so that would be effectively cash and book both. And then, in 2014 and beyond, we indicated it would be between the 15% and it will move up a little bit. It will be between 15% and 20% on 2014 and beyond.

Q

Gregg A. Goodnight

Analyst, UBS Securities LLC

Okay, that makes it very clear. Thank you very much.

Operator

Our next question comes from [ph] Omar Sheikh (29:35) with Credit Suisse.

Q

Tom, how would you characterize the industry's supply response to the current environment? And then also, secondly, how quickly do you think that you can move forward with the debt financing? And maybe associated with that, why not simply just tender for the stock given the constraints of volume back in the open market?

Thanks a lot.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Those are multiple questions. What's the industry response to demand? Well, I can tell you what our response has been, which is coming out of the third quarter of 2011, we were operating in – with very low inventory levels. And so on the fourth quarter, we replenished them and then began to slow production. And we continue to slow production on the pigment level because we see no particular value of building inventories over the levels that they had achieved.

The economics of that decision are a little bit more favorable now than they have historically been, because as a largely fixed cost industry, when you slow production, there was much less fixed cost absorption and therefore your EBITDA suffered. With ore feedstock being prices rising very, very dramatically, the balance between fixed and variable costs has changed significantly. And therefore, being able to slow production has a different and a more relatively positive financial impact. So that's what we have done. We think that others have done the same. I can't speak for them. I don't know what precisely they have done with all their plants, but our sense is that that others have responded to their market in the same way we have generally.

With respect to the bond offering, we have some accounting that we have to deal with. With the mineral sands, the bond offering memorandum would require some pro forma numbers that in turn require Exxaro Mineral Sands numbers to be kind of presented on a GAAP basis so we can be pro forma consolidated. That is just – that takes some time.

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Q2 2012 Earnings Call 01-Aug-2012

There's no issues there, simply the mechanics of having that carve out done and the consolidation, eliminations and adjustments performed and reviewed. The question is whether or not that will all be done in time, given where the market is in mid-August. And I simply don't know. But, obviously, we're working hard on it. We're looking at it. And our intention is, so long as the capital markets stay strong, which they appear to be relatively speaking right now, we want to pursue that. We've said that from the beginning and we continue to have that view.

We are not committed just to try to wait around to seek the bottom possible interest rate. We think that as a BB- rated company we'll have access to the markets. We'll get a favorable interest rate, but normalizing the balance sheet will improve the overall cost of capital and increase the return on equity. And so we'll move when we think that the capital markets are favorable, but we won't try to parse it to the absolute optimal [ph] 80 (32:56).

And the question of a tender, we are constrained by two factors with respect to how we buy back – or multiple factors. But two of them are under Australian law, we are precluded from buying back more than 10% of our shares on any rolling 12-month period, which would be – that would limit us to approximately $2.6 million.

In addition, Exxaro and Tronox have signed an agreement in connection with the transaction, in which Exxaro is limited to a 45% ownership limit. I think they have said it's their intention to creep up to that limit. And then we'll see what, if anything, happens after that. So we would not want a tender or have a buy back program that either exceeded Australia law or exceeded the standstill limitations.

Under Australian law, we are allowed to make – sorry, one of the other features of Australian law, as it applies to us now, is that we are limited to making open market purchases. Under that law, however, we are allowed to go to the shareholders and ask for a vote to increase the amount of shares that we buy back and to alter the form of the buyback. That is to enable us to buy in forms other than open market purchases, which might include a tender offer.

So that option is available to us and we are aware of that and we are considering – assuming, particularly if the bond deal were to happen and, obviously, that would give us the financial ability to be more flexible on how we buy back. And then if we decided to pursue that, then we would probably convene a shareholder meeting and seek authority to do so. And if we decide any of those questions, obviously, we'll make that public when we decide it.

Q

Thank you.

Operator

Next question comes from Caroline Learmonth with [ph] ABMA Capital (sic) [Absa Capital] (35:05).

Q

Caroline Learmonth

Analyst, Absa Capital Securities (Pty) Ltd.

Thank you. It's Caroline, Absa Capital. Three questions. First of all, on zircon, obviously, we're seeing a lot lower volumes than might have been anticipated. Can you just comment not necessarily about the rest of the year, but especially where do you see zircon in the medium term, in the longer term? Should we be rethinking a longer-term view or do you still see over a medium-term the volumes recovering to a sustainable – a reasonable, sustainable level?

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(TROX) Corrected Transcript

Q2 2012 Earnings Call 01-Aug-2012

And secondly, tied in with that, you talked a bit about your segmental disclosure. Can you give us any indication, either the revenue line or EBITDA line, zircon versus other products, how important is it for you on a sustainable basis as a percentage of the whole?

And then, just finally, can you remind us on where you are on special dividends? Thank you.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Okay. With respect to zircon, I think we issued a statement a couple of weeks ago in which we basically agreed with Iluka's characterization that zircon sales were down between 25% and 50% from their original 2012 expectations. And my view is that we're at the higher end of that range in terms of zircon sales against the expectations through the first half of the year. Longer-term, I think that the prospects for zircon remain very heavily dependent on China, in particular, and Asia-Pacific, generally, housing and construction – building construction. Zircon's largest application in the world is as an element of tiles. Tiles are largely used in the Asia-

Pacific architecture and housing construction. And so, when the Chinese government seeks to stop the growth of new housing construction, then obviously it's going to have an impact on not only the paint that goes on the walls in those new buildings, but on the zircon that goes in the tiles in those new buildings. As we remain confident in the long-term prospects for titanium dioxide pigment, because we think that it generally tracks GDP growth, we also remain confident in the long-term prospects for zircon.

With respect to the share – zircon, I think we have disclosed zircon as contributing approximately 16% of the pro forma combined EBITDA of the company. I'll ask Dan at the end what we intend to do with respect to any more specific disclosure, but I can tell you that I would call that we have disclosed that, 16% of EBITDA.

With respect to special dividends, what we have said was that when we first introduced this subject publicly, the stock was at a much different price than it is now. We said that we intended to normalize the balance sheet, because we think that has corporate finance advantages. And the use of proceeds would be largely returned to the shareholders. And at that point, predominant use of those proceeds in the form of special dividend made more sense to us. As the share price has become more volatile and has declined, we have said that we intend to go out first and buyback shares, that would still – even if we buy back the 3 million shares, let's say, just to pick a number, that's still leaves a substantial amount of proceeds from the bond offering available, and at that point, we would then think about special dividend.

Q

Caroline Learmonth

Analyst, Absa Capital Securities (Pty) Ltd.

Okay. Thank you. Sorry, can I just check, it was 16% of EBITDA, one-six, for zircon?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

That was 16%.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Yeah, that was pro forma 2011.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

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Q2 2012 Earnings Call 01-Aug-2012

On a pro forma consolidated – on a pro forma consolidated basis, right, for last year.

Q

Caroline Learmonth

Analyst, Absa Capital Securities (Pty) Ltd.

Thank you.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Thanks.

Operator

Our next question comes from Charlie Rose with Cruiser Capital.

Q

Charlie Rose

Principal, Cruiser Capital LLC

Hey, Tom, good morning or wherever you are. There seems to be, last night, there was a call from Asia, from a marketing consultant in the pigment and mining industry, and they went through three issues that are negatively affecting the business that are temporary, but they talked about them. Obviously, the destocking process, the issues of some substitutability of chloride-based pigment, which you've talked about both, and then the more interesting discussion was the Chinese and their selling excess material in outside their home market. They talked about, about 550,000 metric tons being sold outside their Chinese economy and I wanted to get your thoughts on where the Chinese are?

He actually brought up the issues that the Chinese government has a law on their books that they have to have a certain amount of chloride capacity in place over the next few years and that the Chinese would essentially have to restructure their business. So, I'd like get some temperature from you as to what you think about the Chinese currently? Where you think the Chinese are going and what effects it would have on pricing and on utilization rates on the industry effects? Thanks, please.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Okay. We obviously have sought to answer the relative percentages of these various causes, and I have spoken about destocking and thrifting or substitution as well as aggregate demand. And I think the current situation is the result of the product of sum of all of those factors. I think there is a macroeconomic decline in the demand for coatings and also for plastics. And I think actually the data that we have indicates that the decline in demand, so that the macro level for plastics is greater than the decline for paint and coatings. And I think also that the decline within those industries is disproportionately felt by some of the smaller companies or the smaller and medium companies in the world.

We also have looked at these factors that Charlie mentioned. So, in addition to coatings sub-aggregate demand being down, there has been some Chinese capture, particularly on the – in the sulfate market and that happens for the reasons that the consultant mentioned – I think mentioned, that is China over – in recent times, China produced about 1.5 million tons of pigment, almost all of which was sulfate, 98% of which or 99% of which is sulfate and the domestic consumption was about 1.5 million tons. And during those years, about 250,000 tons of

Chinese produced pigment came out of the market and about 250,000 tons went into the market. So, it was relatively self-sufficient market in that sense.

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Q2 2012 Earnings Call 01-Aug-2012

As Chinese consumption declined, because of these governmental policies to brake – put a brake on the economy generally, housing specifically, we don't think the Chinese production would decline commensurately with the

Chinese consumption. So, that supply then went out into the market and caused an excess of supply; first, in Asia-

Pac, which is largely a sulfate-consuming market; secondarily, in Europe, which is not quite as much of the consumer of sulfate product as Asia, but much more so than the United States, and less so in the United States.

So that's – the numbers there are not huge, we don't think. Thrifting and destocking are the major portions. In the thrifting category, we think that there has been some blending of sulfate-processed pigment into the formulations of the paint companies. And we think also that they have reduced the amount of TiO2 in some of their quality brands. The public statements by those – by executives of those companies is that they have done so, but that there is a limit of the amount – sort of the aggregate amount of TiO2 that they can reduce in their formulations without unacceptably affecting quality of the products that they sell, which they're not prepared to do. And that aggregate level just from listening to what they're saying appears to be somewhere in the mid-single digits, so 5% or 6%. So --

Q

Charlie Rose

Principal, Cruiser Capital LLC

Tom, just a follow-up on a different subject. If there was an ability for your agreement with Exxaro to be altered with respect to either the 45% threshold or the issues relating to Exxaro participating in some type of tender offer for shares by the company, how much stock would you have an appetite to buy if that nirvana situation evolved?

And directing the cash flow – I'm sorry, directing the bond offering towards the stock more than directing it in a more two-way manner at partially the stock and partially towards special dividend distributions, what type of appetite could the company have to buy back its own stock? Would it be 5 million shares, 6 million shares, 7 million shares or would it still be only at the 2 million share level?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

I think, Charlie, that depends entirely on the price of the shares and our view of value of the shares at any given time. But I can't – I wouldn't tell you a specific number now that would be applicable to all funds. But I would say that we believe in – but let me – actually let me add in one additional factor. Exxaro has said that they intend to be buyers themselves, and we have had a very preliminary conversation with them some months ago about them tendering proportionally into a tender offer that to get the aggregate shares over the standstill limit of 45%. I think they are open to that. There's nothing definitive. But they are open to that. But I also recognize that a sale by them would involve a taxable realization event, and therefore there's some costs you end up participating in that transaction. So, that would have to be addressed. But the more broad question of how much shares we have an appetite of – to buy back is a function of where the share price is, where value is, how much capacity we have on the balance sheet, what we think we need to use the balance sheet for given our foresight into the foreseeable future. So, I can't give you specific amount. But generally speaking, if it's a good use of shareholder resources and corporate resources, we'd be inclined to at least look at.

Q

Charlie Rose

Principal, Cruiser Capital LLC

Thank you.

Operator

Our next question comes from Michael Goldberg with Corvex.

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Q2 2012 Earnings Call 01-Aug-2012

Q

Michael Goldberg

Analyst, Corvex Management

Hey, guys. Great quarter. I guess, the question – I have two questions. One, probably a quick one around the

Fairbreeze extension, it look like in the Exxaro filings they're talking about commissioning starting in 2015 now, in

March of 15, and how does that change your view over your stockpiles in inventory? And are you prepared, I guess, to start using the unattritioned material? I think you needed to build a new plant for that, where is that in

CapEx and so forth? And then, just around big picture, supply/demand, it seems like your guidance implies an operating rate in the 80% level. Is there any historical precedent for that, especially for that going on for what will look like five quarters, I guess, by the time we get out at the end of the year or is this really an unprecedented time period? Hello.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Yes. This is Dan Greenwell, can you hear me?

Q

Michael Goldberg

Analyst, Corvex Management

Yeah.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

We must have lost Tom.

Operator

Yes. This is the operator. His line did disconnect.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Okay. Go back through your question, you talked about operating rates, I think you indicated it might be around

80% or so and has the industry, in general, operated at those rates. From our view of things, over time there has been a short periods where they've operated at those rates, but not for extensive periods. Can they operate at those rates? Sure, they can. And this is something that I think, when you look at demand side of things, we're going to have to operate at whatever rates this demand require. So, that's not an uncomfortable position for us. Obviously, we'd like to be operating it in the high 90%s, but we've reconfigured some of our activities and think we can do it profitability without a lot of fixed costs overhang associated with it.

Q

Michael Goldberg

Analyst, Corvex Management

And I guess, to the point, has the – I guess, five quarters of, I'd say, low-80%s, I don't know exactly what it is, I know you guys don't report that way, but the math sort of gets you there. And has that ever happened? It seems like this is a very long destocking, if this is really what's going on.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Yeah. Sure, it's happened. Yeah, sure, it's happened. You look at some – back in 2008 and 2009 when we had the financial crisis, we operated at lows and the industry in general did as well. And then earlier – in earlier periods, they did as well. So I think...

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Q2 2012 Earnings Call 01-Aug-2012

Q

Michael Goldberg

Analyst, Corvex Management

For five quarters.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Pardon me.

Q

Michael Goldberg

Analyst, Corvex Management

For five quarters at those levels?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Well, I don't know that you can say we're operating five quarters at that level. We've had various levels of operations. We brought it down, as Tom indicated, in the – towards the end of the fourth quarter of last year, we brought rates down. I don't want to say that we're in the 80s or give – we don't disclose our operating rates. But we pulled them back – we pulled them back a bit and we're pulling them back a bit more right now.

Q

Michael Goldberg

Analyst, Corvex Management

And then, on Fairbreeze, is that the new target, is March 15 to have that up and running?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Well, there will be certain pieces of it that we're undertaking right now. I think we've got a long lead time. We've got one more permit we have to get. We can start some activities on it. The exact month and day, I don't think we're particularly worried about. It could be the end of 2014, it could be early 2015. Your question with respect to, do we have ilmenite to run that facility? Absolutely, we do. We have a fairly large stockpile of ilmenite at KZN itself to operate that for, I guess, almost over a year, about 15 months' worth. And then, obviously, we've got material over at Namakwa as well, a part of it fully attritioned, part of it unattritioned. The unattritioned piece, we're putting the plant together right now. That should be operational in the fourth quarter of this year to the first quarter of next year, somewhere around that timeframe. And to the extent that we need to supplement KZN's material for that Namakwa material, we'll bring it over from Namakwa should we need to.

Q

Michael Goldberg

Analyst, Corvex Management

And that plan is in your $90 million to $110 million of CapEx – maintenance CapEx?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Yeah. That's actually a little special project. I don't know that I would call that normal maintenance CapEx. That I would put in the other bucket, that's more of a project – a specific project.

Q

Michael Goldberg

Analyst, Corvex Management

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Got you.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Probably about $40 million for that.

Q

Michael Goldberg

Analyst, Corvex Management

$40 million?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Yeah.

Q

Michael Goldberg

Analyst, Corvex Management

Okay. So that's $40 million that we'll see in 2012?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

You should see most of it in 2012, yes.

Q

Michael Goldberg

Analyst, Corvex Management

Great. Thank you.

Operator

Our next question comes from Malone Ma with Simplon Partners.

Q

Tom A. McKay

Founder & President, T. A. McKay & Co., Inc.

This is Tom McKay standing in for Malone from Simplon Partners. In the meetings you held last week with shareholders, you said that you had excess inventory stockpile that was worth, I think, $750 million to $1 billion.

And my question is, how much of that excess inventory did you acquire in the Exxaro transaction and how much did you already own before the transaction?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Okay. I wouldn't call it excess inventory. It's basically ilmenite. You have various sources of ilmenite. Let's talk specifically on the joint venture in Australia. We have roughly 500,000 tons of fully attritioned ilmenite stockpiled in Australia. And typically, what folks do, mining companies do, is they build that up as you get towards end of life

– end of mine life, so that you can utilize that as you move to a new section or you transition. So there is about

500,000 tons in that. As you recall, we owned 50% of the joint venture, so you could say that we acquired 50% of that in the acquisition. With respect to Namakwa and KZN, there are quantities there that tally up to something close to that as well. We acquired all of that.

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The large pile of unattritioned ilmenite we have over at Namakwa, roughly 3.5 million tons, needs to be attritioned and that's what – the last participant asked a question on that. We intend to attrition that – start attritioning that either in the late fourth quarter or early – fourth quarter of 2012 or early first quarter of 2013 and we will run that and continue to attrition it and make that available.

With your question, is – if all of that was attritioned today, at market prices, you would have somewhere probably between $750 million and $1 billion. Clearly, it's going to take us a period of time to attrition that material. So you can't sell it on the open market today nor would that be our intention today to dump it on the ilmenite market. We think that's a strategic asset for us long term. We think a lot of folks would love to have that position and, clearly, it provides us with a good stockpile of ilmenite to feed either the smelters at Namakwa or move it over to KZN as we're transitioning to Fairbreeze.

Q

Tom A. McKay

Founder & President, T. A. McKay & Co., Inc.

I see. Okay. Let me just ask it a different way. The cost of the acquisition, 10 million shares at, say, $120 a share pre-split is $1.2 billion, how much of that was stockpiled inventory?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Well, we haven't...

Q

Tom A. McKay

Founder & President, T. A. McKay & Co., Inc.

...acquired in the acquisition?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Well, we haven't specifically disclosed that – of the purchase price, we allocated – in aggregate inventory, we allocated a fair value to the inventory of roughly $622 million. That piece of the inventory, the unattritioned pile, we did not allocate any value to that in the purchase accounting.

Operator

This is the operator. Mr. Casey's line should be connected and able to speak now.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Hello, Dan.

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Yes, Tom.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Okay. I've been hearing you. You're doing a great job, Dan. No reason to [indiscernible] (56:09).

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A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

Yeah, so to the answer...

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

We only – I don't know how much more time we have. So I'm glad to be back on. Sorry for the interruption.

Q

Tom A. McKay

Founder & President, T. A. McKay & Co., Inc.

So that, I think, comes close to answering my question. The one other thought I had was you've said that you're about 125% backward integrated now. What do you view as the ideal balance of raw material production and TiO2 production? Is it 100% or is 125% backward integrated the ideal balance?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

This is Tom. We like being long mineral sands, feedstock farms, because it gives us the ability to take advantage of shifting strengths in that market, and at the same time, supply ourselves with either the most advantageous in terms of reducing processing costs, or the otherwise weak – relatively weaker or comparatively weaker feedstock, which we have a lot of flexibility. So we like that position. And we intend to move our consumption at Kwinana and Hamilton and Botlek from their historical levels to levels that more precisely do that. That is that we absorb the mineral sands production and we prioritize the mineral sands feedstock types that might not otherwise be as strong in the market and we sell the feedstock type that is strong in the market, but having more of that will be to our benefit.

One of the – I think one of the unique attributes of Tronox is we are one of two major suppliers of synthetic rutile in the world and we are one of two major suppliers of slag in the world. And that – we're the only one who produces both. And so we can move our consumption around between the two entirely at our discretion basically.

And that's – and I think that's a huge advantage when one feedstock – as I mentioned in my comments, if the higher-quality, higher-cost feedstocks get a little softer in demand, but the lower-quality, lower-cost feedstock, therefore, remain strong as pigment users shift their consumption from one to the other, we can handle that very well. In fact, we can leverage it.

So we like being long. We think there is going to be opportunities to make money right where we are. It also provides us the opportunity if we were ever to expand either through acquisitions or brownfield expansions. We can feed the expansion with our own feedstock and even increase the advantage that we have. So it gives us a lot of flexibility. We like that. And when I dropped out -

Q

Tom A. McKay

Founder & President, T. A. McKay & Co., Inc.

[indiscernible] (59:03).

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

You're welcome. When I dropped out, there was a question on Fairbreeze, and I just wanted to say that we seized the approval from the – it's called the NEMA, which I believe stands for The National Environmental

Management Agency, on the water line, which is one of the important approvals we need. There is still an

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Q2 2012 Earnings Call 01-Aug-2012 approval on water use that has to come out and then a modification from the DMR. The DMR has already given us the fundamental approval on the mine itself, and the water use, presumably, will be also influenced by this approval received yesterday. So we're making progress on those governmental approvals and we feel good about the prospects of being able to turn that mine in when we talked about.

I had heard that – we've always talked about sort of late 2014 for that mine going into commercial operation. I was at the Exxaro earnings release today and I know Wim said, I think, March 2015. It's sort of – he was – I think he was being conservative and probably had a different set of full production assumptions. But our view is, as Dan – I heard Dan say that we're not all that concerned in terms of one month, two months, three months. It's going to be around that period of time and we have the stockpiles necessary to feed the KZN smelters for far more than that period of time. And so it's not – it's just not a big issue for us in terms of keeping our production at the rates that we anticipate and we desire.

Operator

Our next question comes from David Lerner with Omega Advisors.

Q

David H. Lerner

Analyst, Omega Advisors, Inc.

Hi, guys. Congratulations on a good quarter.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Hi, David.

Q

David H. Lerner

Analyst, Omega Advisors, Inc.

And thanks for giving some guidance for the rest of the year. I'd appreciate if you guys could elaborate on how you're thinking about 2013 EBITDA and EPS relative to 2012 and what factors are going to drive the differences there in terms of prices, volumes, costs. And then secondly, what were cash flows from operations in the quarter?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

I'll leave the CFO question to the CFO and I'll duck the 2013 question on the grounds that you can't possibly believe that I would give you guys the 2013 on this call, at this time. I will tell you, however, in order to make this point again, that when we look at our future financial performance, we think that the ability to capture margin at both levels of the supply chain, viewed in one perspective, or in the other perspective, by or at – essentially, the cost of extraction and processing is going to be a very powerful leveraging – have a very powerful leveraging impact on our EBITDA and cash flow. And so, we expect great strength out of this transaction and that's, obviously, why we did it.

And the specifics of 2013, we'll talk about that closer to the end of the year. Dan, do you have a comment on the cash flow from operations question?

A

Daniel Greenwell

Senior Vice President and Chief Financial Officer, Tronox Ltd.

No, we – David, what we haven't done is included a cash flow in this earnings release. We're in the final stages of making sure we have all the classification between the categories correct. So we haven't disclosed it this week. You should see it in next week's 10-Q that we file. So I would say we're finalizing right now, making sure we get all the

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Q2 2012 Earnings Call 01-Aug-2012 categories proper between the acquired companies and ourselves. And so to give a number right now, I'm just not prepared to do that.

Q

David H. Lerner

Analyst, Omega Advisors, Inc.

Got you. Thanks, guys.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Dan, if I had known that – if I had known you were going to say that, I could have ducked it directly.

Q

David H. Lerner

Analyst, Omega Advisors, Inc.

No, it's...

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Okay. Next question, Kevin.

Operator

Our next question comes from Ed Mally with Imperial Capital.

Q

Ed P. Mally

Analyst, Imperial Capital LLC

Yes. Hi. Thanks for taking the question. Just going back to the guidance on 2012, so you talked about you were assuming mid single-digit price declines for pigments in the second half, what's the underlying volume assumption that is associated with that?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

We said that we expected volumes to be relatively constant flat across the second half of the year, which would imply – I think, we disclosed in our release and in these comments earlier that volumes are down more than 20% in the first half from the peaks in 2011, so volumes down 20%-ish and then the prices down the way we've described.

Q

Ed P. Mally

Analyst, Imperial Capital LLC

And I guess, as we sit here a month into the third quarter, are the trends that you're seeing thus far in 3Q consistent with those assumptions?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

It's very early days. I think, it's too early to even comment on the quarter, so.

Q

Ed P. Mally

Analyst, Imperial Capital LLC

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Okay. And just a final thing related to this, any assumptions on feedstock sales to third parties that are embedded in that guidance?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Very, very little in terms of uncontracted. We have some contracts already and those are taken into account, but there is very little sort of spec feedstock sales, some, but not a majority of it – not a major portion of it.

Q

Ed P. Mally

Analyst, Imperial Capital LLC

Okay. How material is the contracted portion?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Well, a lot of it is to us, right? I mean, we're going to be buying, essentially, the vast majority of the feedstock production in the second half. There are others – there are some other contracts which like many feedstock suppliers are under market and are the remnants of contracts entered into in 2008, 2009 and 2010, that some of which will roll off by the end of this year, the balance of which for the mineral sands business roll off next year.

And so, there's still some of those contracts.

Q

Ed P. Mally

Analyst, Imperial Capital LLC

So, those contracts for sale other than what you're using internally, do you see pursuing that as a continuing line of business from what you inherited or do you see potentially phasing those out?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

If you look at the balance of production and consumption, our – we've reported that aside from zircon and pig iron, the mineral sands business produces, I think the number is 723,000 tons a year of titanium dioxide feedstocks. We consume – we could add our 465,000 tons of pigment production would consume, I think,

512,000 is the number production of feedstock. And so, we'll be long 211,000 tons anyway.

That's where we stand if we entirely self-supplied on the feedstock, our feedstock from our own mineral sands business.

Q

Ed P. Mally

Analyst, Imperial Capital LLC

Okay.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

The general – in terms of our policy going forward, that is – so we will always be selling to third parties for some of our mineral sands production. The feature that will change in these contracts, however, is that regardless of the term duration in terms of our willingness to supply and the customers willing to buy, the pricing structure of the old contracts involved a base price set at the time the contract was entered into, and then caps and collars around

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Q2 2012 Earnings Call 01-Aug-2012 annual price increases for the balance of the term. I don't think there will be caps and collars in any future or contracts.

Q

Ed P. Mally

Analyst, Imperial Capital LLC

Okay. Thanks very much.

Operator

Our last question comes from Kieran Daly with Macquarie.

Q

Kieran Daly

Analyst, Macquarie First South Securities (Pty) Ltd.

Hi, Tom. Kieran Daly here from Macquarie. I'm asking more so from an Exxaro perspective, but we've been quite used to getting some good historical numbers on volumes, feedstock volumes, zircon, et cetera, from Exxaro. I noticed you guys don't talk about volumes very much, don't give out those numbers. Any plans for that to change in the future and give us some idea of volumes in terms of feedstocks, zircon or even pigment?

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Kieran, I was at the Exxaro release this morning and I noticed in their book the data that you talked about. As we get the new company together, we're going to look at the form of our disclosures and the amount of information we give, the form in which we give it, and all of that. So, I'd say I can't commit that we're going to do what Exxaro used to do, but it's a question that we're trying to grapple with right now. We have moved from a single segment reporter in old Tronox to at least the two segments of minerals and pigments now and we're going to be considering how we disclose going forward. So, I'd ask you to keep an open mind on that until you see what we do.

Q

Kieran Daly

Analyst, Macquarie First South Securities (Pty) Ltd.

Okay. That's fair. Thanks, Tom.

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Thank you.

Operator

Ladies and --

A

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

Okay. Kevin?

Operator

I'm not showing any other questions.

Thomas J. Casey

Chairman & Chief Executive Officer, Tronox, Inc.

All right. Thank you very much for all for your interest. I appreciate it. Again, our view is that we had a relatively strong quarter and it affirmed very, very strongly the power of our ability to participate at both levels of the supply

24

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Tronox Ltd.

(TROX) Corrected Transcript

Q2 2012 Earnings Call 01-Aug-2012 chain in both softer conditions and in robust conditions, which is what we expect to come forward. So, we're very optimistic and upbeat about our business. I'm in South Africa, as I mentioned, meeting with our mineral sands leadership team and some of their folks, Trevor Arran, who runs that organization, is here with me, and we're very positive about our path going forward.

So, I thank you for your interest and your support and we look forward to talking to you next quarter. Thank you.

Bye-bye.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wondering day.

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