Developments in the titanium dioxide market bring the Contran Corporation back into focus

Discounts stacked within special situations within a potential cyclical bottom

Dear Reader,

I’ve got an idea for you hot off the presses. I have just acquired positions in NL 0.00%↑KRO 0.00%↑ and VHI 0.00%↑, all associated via the Contran Corporation’s complicated web of cross-holdings (for which good articles already exist), but primarily exposed to the titanium dioxide market via ownership of KRO 0.00%↑ . They are all illiquid to varying degrees, so be careful if you’re considering buying.

Titanium dioxide — what’s that and what’s going on?

Its largest use case is as a white pigment in coatings and paints (particularly automobiles). The titanium dioxide market has been in the dumps from Chinese oversupply. Meanwhile key players such as Chemours and Tronox are heavily-indebted.

Meanwhile, there have been some counter-dumping duties enacted in the EU. It is not clear how effective they have been or will be, because the China dumping situation is pretty bad. However, there are early signs of optimism as JPM has upgraded TROX 0.00%↑ and called for a likely bottom in prices.

A lot of folks would say that if you’re bullish on titanium dioxide then you should simply go buy the largest, most liquid name — TROX 0.00%↑. There’s a lot of wisdom in that advice, generally, but TROX 0.00%↑ does have around 5x EBITDA in debt, increasing its risk substantially.

If only we could layer in a special situation or two, to tilt the odds more in our favor…

As it turns out, conglomerate value trap all time classic VHI 0.00%↑ (and its associated listings) is at the center of this potential industry inflection. How?

Its largest holding, KRO 0.00%↑, is not only less-levered (< 3x EBITDA) than TROX 0.00%↑, but this is after making a strategic acquisition last year in buying out Venator’s JV share of their North America plant for $185mm. My understanding is that this is the lowest-cost plant in North America. Fascinating.

KRO 0.00%↑ trades at 6x 2025 EBITDA consensus (vs Tronox @ 7.4x) and 10.3x consensus earnings. If market fundamentals improve and those estimates come up, there is substantial upside here.

Furthermore, KRO 0.00%↑ has a huge exposure to Germany, which I view as an upside with all the fiscal news going on in Europe.

I said special situation or two…

Sure, sure. Alright, so here’s why my largest position here is actually NL 0.00%↑: owning KRO 0.00%↑ at a discount.

NL 0.00%↑ trades at a $330mm market cap while holding $232mm of KRO 0.00%↑ and $259mm of CIX 0.00%↑ (a niche lock / boating parts manufacturer), and $50mm+ of net cash. About a 39% discount to the sum of parts. I think CIX 0.00%↑ is an interesting little business and fairly valued here. It pays a consistent dividend. So I’m pretty happy to own it as a discount via NL 0.00%↑ . NL 0.00%↑ pays a dividend with a history of specials.

Basically, I see this as a lower downside (in most scenarios) option versus owning KRO 0.00%↑ . KRO 0.00%↑ is something I would scale more into to take on more risk, like if it puked after a bad quarter.

What’s the catch?
NL 0.00%↑ former legacy business has ongoing legal risk from lead lawsuits, but my understanding is that they’ve never actually had a legal judgment found against them. Still, conceivably, there’s a risk that this company blows up on a bad legal ruling.

So what about VHI 0.00%↑?

At VHI 0.00%↑ you’re getting $383mm of KRO 0.00%↑ and $283mm of NL 0.00%↑

for $438mm, a 34% discount. Some people believe we should “look through” the discounts of NL 0.00%↑ to count a higher discount, which I think is reasonable to some extent. You’re also getting a small land development segment (my understanding is they already did the majority of development + sales), and $50mm+ net cash about unconsolidating KRO 0.00%↑ and NL 0.00%↑ financials. Depending on how you wanna’ bake it all in, maybe you’re getting a 35%-45% discount to sum of the parts, potentially more if you want to “look through”. Unfortunately, Valhi doesn’t really buy back shares and has a low dividend.

Cliffnotes

KRO 0.00%↑ buyout of Venator, low cost structure and strong balance sheet make it an interesting play in its own right. Buying it at a discount via VHI 0.00%↑ or NL 0.00%↑ are interesting risk augmentations.