Tronox: Accelerating Shareholder Value December 2011 Page 1 - - PowerPoint PPT Presentation

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Tronox: Accelerating Shareholder Value

December 2011

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THIS PRESENTATION WITH RESPECT TO TRONOX INCORPORATED ( TRONOX , TROX OR THE COMPANY ) IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. IT DOES NOT HAVE REGARD TO THE SPECIFIC INVESTMENT OBJECTIVE, FINANCIAL SITUATION, SUITABILITY OR PARTICULAR NEED OF ANY SPECIFIC PERSON WHO MAY RECEIVE THIS PRESENTATION, AND SHOULD NOT BE TAKEN AS ADVICE ON THE MERITS OF ANY INVESTMENT

• DECISION. THE VIEWS EXPRESSED HEREIN REPRESENT THE OPINIONS OF SANDELL ASSET MANAGEMENT CORP. (

SAMC ), AND ARE BASED ON PUBLICLY AVAILABLE INFORMATION AND SAMC ANALYSES. CERTAIN FINANCIAL INFORMATION AND DATA USED HEREIN HAVE BEEN DERIVED OR OBTAINED FROM FILINGS MADE WITH THE SEC BY THE COMPANY OR OTHER COMPANIES CONSIDERED COMPARABLE, AND FROM OTHER THIRD PARTY REPORTS. SAMC HAS NOT SOUGHT OR OBTAINED CONSENT FROM ANY THIRD PARTY TO USE ANY STATEMENTS OR INFORMATION INDICATED HEREIN AS HAVING BEEN OBTAINED OR DERIVED FROM A THIRD PARTY. ANY SUCH STATEMENTS OR INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. NO REPRESENTATION OR WARRANTY IS MADE THAT DATA OR INFORMATION, WHETHER DERIVED OR OBTAINED FROM FILINGS MADE WITH THE SEC OR FROM ANY THIRD PARTY, ARE ACCURATE. SAMC SHALL NOT BE RESPONSIBLE OR HAVE ANY LIABILITY FOR ANY MISINFORMATION CONTAINED IN ANY SEC FILING OR THIRD PARTY REPORT. THERE IS NO ASSURANCE OR GUARANTEE WITH RESPECT TO THE PRICES AT WHICH ANY SECURITIES OF THE COMPANY WILL TRADE, AND SUCH SECURITIES MAY NOT TRADE AT PRICES THAT MAY BE IMPLIED HEREIN. THE ESTIMATES, PROJECTIONS, PRO FORMA INFORMATION AND POTENTIAL IMPACT OF SAMC S ACTION PLAN SET FORTH HEREIN ARE BASED ON ASSUMPTIONS THAT SAMC BELIEVES TO BE REASONABLE, BUT THERE CAN BE NO ASSURANCE OR GUARANTEE THAT ACTUAL RESULTS OR PERFORMANCE OF THE COMPANY WILL NOT DIFFER, AND SUCH DIFFERENCES MAY BE

• MATERIAL. THIS PRESENTATION DOES NOT RECOMMEND THE PURCHASE OR SALE OF ANY SECURITY. SAMC RESERVES THE RIGHT TO CHANGE ANY

OF ITS OPINIONS EXPRESSED HEREIN AT ANY TIME AS IT DEEMS APPROPRIATE. SAMC DISCLAIMS ANY OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN. UNDER NO CIRCUMSTANCES IS THIS PRESENTATION TO BE USED OR CONSIDERED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY. PRIVATE INVESTMENT FUNDS ADVISED BY SAMC CURRENTLY HOLD SHARES OF COMMON STOCK REPRESENTING AGGREGATE OWNERSHIP OF APPROXIMATELY 1.8% OF THE OUTSTANDING COMMON STOCK OF THE COMPANY. SAMC MANAGES INVESTMENT FUNDS THAT ARE IN THE BUSINESS OF TRADING BUYING AND SELLING PUBLIC SECURITIES. IT IS POSSIBLE THAT THERE WILL BE DEVELOPMENTS IN THE FUTURE THAT CAUSE SAMC AND/OR ONE OR MORE OF THE INVESTMENT FUNDS IT MANAGES, FROM TIME TO TIME (IN OPEN MARKET OR PRIVATELY NEGOTIATED TRANSACTIONS OR OTHERWISE), TO SELL ALL OR A PORTION OF THEIR SHARES (INCLUDING VIA SHORT SALES), BUY ADDITIONAL SHARES OR TRADE IN OPTIONS, PUTS, CALLS OR OTHER DERIVATIVE INSTRUMENTS RELATING TO SUCH SHARES. SAMC AND SUCH INVESTMENT FUNDS ALSO RESERVE THE RIGHT TO TAKE ANY ACTIONS WITH RESPECT TO THEIR INVESTMENTS IN THE COMPANY AS THEY MAY DEEM APPROPRIATE, INCLUDING, BUT NOT LIMITED TO, COMMUNICATING WITH MANAGEMENT OF THE COMPANY, THE BOARD OF DIRECTORS OF THE COMPANY AND OTHER INVESTORS AND THIRD PARTIES, AND CONDUCTING A PROXY SOLICITATION WITH RESPECT TO THE ELECTION OF PERSONS TO THE BOARD OF DIRECTORS OF THE COMPANY.

Disclaimer

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Executive Summary

SAMC has been a large shareholder of TROX since prior to Chapter 11 emergence We believe that TROX is significantly undervalued and management should be more aggressive in accelerating the realization of several catalysts that will improve valuation These catalysts include:

• Optimize pro forma balance sheet
• Relist on the NYSE
• Significantly increase research analyst coverage
• Improve liquidity via stock split
• Complete the Exxaro deal

We believe the realization of these catalysts will yield a valuation of $183 $194/share, representing 56% 66% upside from current levels

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Optimize Pro Forma Balance Sheet

TROX explicitly made comments regarding its conservative pro forma capital structure with significant financial flexibility

• that would indicate to us the company

s pro forma balance sheet is not being optimized

• No incremental debt incurred in acquisition

(TROX presentation slide 15, 10/6/11)

• Future cash flow from operations expected to be sufficient to pay cash portion of merger consideration ($12.50 per

share or ~$190 million in aggregate) (TROX presentation slide 15, 10/6/11) TROX cites that significant free cash flow will be generated with a potential dividend policy consistent with its peers, but only an

• pportunity

to return additional cash to shareholders or to make potential high-return investments

• We

ve announced that we intend to issue dividends that are consistent with the industry peers. But with this level of free cash flow generation, there will also be opportunities for return of additional cash above and beyond the dividend to shareholders, and we will be exploring those alternatives. (TROX conference call 10/10/11) We believe management must now be more aggressive in closing the significant gap between the current stock price and fundamental value If the Exxaro deal is as attractive as TROX claims and as we believe, the conservative pro forma capital structure could be better utilized by levering the balance sheet to reward shareholders with a substantial amount of cash in the form of a large special cash dividend

• We believe TROX can easily pay between $24

$43/share in cash and remain conservatively capitalized

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$1,827 $2,214 $2,495 $2,820 $3,078 $3,605 51% 40% 33% 24% 17% 3% $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 Fully-integrated Chloride Ore-integrated Chloride Fully-integrated Sulfate Ore-integrated Sulfate Non-integrated Chloride Non-integrated Sulfate 0% 10% 20% 30% 40% 50% 60%

Optimize Pro Forma Balance Sheet

We believe that TROX post-Exxaro deal ( New TROX) will be the strongest player in its industry with 100% vertical integration and unparalleled free cash flow generation

• Net debt/11EBITDA will only be 0.5x post-Exxaro deal and after paying the $12.50/share cash consideration, levered

free cash flow is expected to be approximately $700 million. This implies a greater than 20% FCF yield based on a pro forma New TROX market capitalization

• New TROX should earn sustainably higher operating margins relative to its industry peers given vertical integration as

well as the fact that 100% of the company s capacity will consist of the more cost-efficient chloride process

TiO2 Production Cash cost (USD) / ton EBITDA Margin

Source: Alembic Global Advisors.

New TROX Comparable Peers Chinese Producers

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Optimize Pro Forma Balance Sheet

We believe New TROX could easily lever up to 1.0x 1.5x on a mid-cycle EBITDA basis and subsequently dividend the cash proceeds to shareholders while still maintaining strong credit metrics Post-special cash dividend and Exxaro deal, we believe New TROX is fundamentally valued at $183 $194/share including a $24 $43/share cash dividend

Note: Mid-cycle/midpoint EBITDA, net debt data as per TROX 10/6/11 presentation, slide 14. Capex data as per slide 15 and TROX 10/10/11 conference call. Implied equity and enterprise values assume Exxaro Mineral Sands contribution on a 100% basis and 26.9mm diluted shares outstanding. Pro forma EPS EPS assumes 74% Exxaro Mineral Sands contribution, 8.0% cost of incremental debt, 35% cash tax rate and 25.9mm diluted shares outstanding.

Target Leverage Low High

• Adj. Net Debt / Mid-Cycle EBITDA

1.00x 1.50x Net Debt / Mid-Cycle EBITDA 0.38x 0.38x Incremental Debt $617 $1,117 Total Net Debt $1,000 $1,500 Implied New TROX Equity Value $4,284 $4,068 Implied Enterprise Value $5,284 $5,568 EV / 12E Midpoint EBITDA 3.6x 3.8x Credit Metrics Net Debt / 12E Midpoint EBITDA 0.7x 1.0x Mid-Cycle EBITDA / Int. Exp. 12.3x 8.2x Mid-Cycle EBITDA - Capex / Int. Exp. 9.0x 6.0x Pro Forma EPS $19.91 $18.90 P/E Multiple 8.0x 8.0x New TROX Share Price $159.25 $151.21 Dividend / Share $23.85 $43.17 Total New TROX Value / Share $183.10 $194.38 % Change to Current Price 56% 66%

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Tronox Overview

TROX is the 5th largest titanium dioxide (TiO2) producer globally with operations in the U.S. (Mississippi), the Netherlands and a 50% JV in Western Australia, which it will now consolidate with the closing of the Exxaro deal Wholly-owned by Kerr-McGee at the time, the company was publicly listed via partial IPO in 2005 and the remaining stock was spun off to Kerr-McGee shareholders in 2006 (Kerr-McGee was acquired by Anadarko in 2006) TROX filed for bankruptcy in January 2009 as operations suffered due to a weak macroeconomic environment and as a result of large legacy liabilities inherited from Kerr-McGee The company emerged from bankruptcy on February 14, 2011 with a clean balance sheet, free of any environmental or other liabilities that originally led to its bankruptcy filing TROX has been of significant strategic interest to third parties as demonstrated by Huntsman Corp s failed stalking horse bid in 2009 and Kronos previous public commentary during 2011 Since emergence, we believe the company has been too slow to realize fair valuation

• Shareholders had initially been awaiting the filing of the company

s 2008/2009 audited financials, which would have subsequently led to a registration statement filing and SEC clearance to relist

• The Exxaro deal has now significantly delayed this catalyst. With nearly 3 months since the deal announcement and no

preliminary proxy statement, we are disappointed and concerned timing will continue to drag, which continues to preclude additional research analysts from initiating coverage

• We believe an NYSE relisting will immediately lead to research coverage by bulge-bracket firms as TROX will be the
• nly pure-play way to invest across the TiO2 value chain
• Effecting a stock split will also improve liquidity in the security and further narrow the gap between current trading and

fundamental value

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Exxaro Deal Overview New Tronox

On 9/26, TROX announced the acquisition of Exxaro s mineral sands business in exchange for a 38.5% equity stake in New

• TROX. TROX shareholders are set to receive one share in New Tronox (effectively, the remaining 61.5% of the combined

company) and $12.50/share in cash, which is to be funded by near-term cash flow generation. Transaction is expected to close in H1-2012

• Exxaro will retain a 26% direct interest in the South African assets in order to satisfy South African Black Economic

Empowerment (BEE) ownership requirements. 1.4 million shares have been allocated to future issuance in exchange for the 26% interest in the case that BEE compliance structure is no longer required The Exxaro deal includes its mineral sands assets, which consist of KZN Sands and Namakawa in South Africa that produce slag, zircon, pig iron and rutile, as well as Exxaro s 50% interest in the TiWest JV The transaction is enormously strategic for TROX and Exxaro. TROX will now be able to secure ore supply resulting in 100% vertically integration (previously, the company was only one-third integrated). Through its significant equity interest, Exxaro will participate in the benefit of a fully-integrated TiO2 producer with the ability to increase its stake in the new entity over the next several years Exxaro s shares will be subject to a 3-year lockup period; standstill agreement limits Exxaro s ownership to less than 45% until the 3rd anniversary of the deal. Beyond that, board approval and/or majority support from unaffiliated TROX shareholders would be required in order for Exxaro to increase its stake above 50%

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Structurally, New TROX will be the most unique player in the Ti02 industry

New Tronox Overview

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TiO2 Overview

Pigment demand driven by Asia (40% of global demand); pigment predominantly used in paints and coatings (63% of end demand) and construction materials (27%) Supply/demand balance will be tight as capacity utilization will remain >90% over at least the next several years with only limited new capacity coming on line (new high-quality capacity will be added by 2014 at earliest)

• Greenfield facility expansions are costly (up to $5,000/ton, or approx. $1bn based on 200K tons of Ti02 capacity)
• Moreover, new capacity growth will be meaningfully constrained by TiO2 feedstock accessibility

Producers have consistently and successfully pushed through TiO2 price increases over the past 18 months in a modest global growth environment (TiO2 is highly correlated with global GDP growth)

• TROX, Kronos and Dupont have already announced price increases effective January/February 2012

High-quality TiO2 market very concentrated top 5 TiO2 producers contribute to 60% of global capacity, but represent nearly all chloride-based TiO2 capacity

Source: Alembic Global Advisors, 11/28/11 In 000 tons

1,000 2,000 3,000 4,000 5,000 6,000 7,000

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e

70% 75% 80% 85% 90% 95% 100% Capacity Demand Capacity utilization

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TiO2 Feedstock Overview

TiO2 feedstock consists of various minerals, ranging from ilmenite (50% TiO2) to chloride slag (80%-85% TiO2) and rutile (95% TiO2). Ilmenite and chloride slag represents approx. 45% and 20% of feedstock supply, respectively. Feedstock typically represents one-third of a TiO2 producer s operating costs Supply/demand balance will remain very tight given 5 to 7-year lead time needed to bring on new ore mines. Furthermore, up to 40% of announced mine development projects are at risk of being substantially delayed Relatively concentrated industry top 3 producers represent nearly half of the global market. TROX will become the #3 player via the Exxaro deal

• Specifically, chloride feedstock is highly concentrated with the top 3 producers representing 70%-80% of the market,

depending on grade level. Through Exxaro, TROX will be the #3 player in chloride feedstock, behind only Rio Tinto and Iluka Significant feedstock price increases have only materialized recently. On 12/6, the #2 player, Iluka Resources, negotiated rutile price hikes of 80%-85% for next year

Source: Tronox presentation, 10/6/11