August 17, 2011

a Shining FuTure aheaD

TiTanium DioxiDe

Titanium dioxide (TiO2) is an inorganic substance that is derived primarily from heavy mineral sands containing Rutile or Ilmenite ores. TiO2 has one of the highest refractive indices (2.61 for Rutile crystals), making it the primary pigment for producing white colour in paints, plastics and paper.

Tony Hayes, Metals & Mining Analyst tony.hayes@europac.ca

Research Associate: Yang Liu yang.liu@europac.ca www.europac.ca sPECIALtY / INDustRIAL MEtALs

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August 2011 tItANIuM DIoxIDE ovERvIEw

titanium Dioxide - A shining Future Ahead

Titanium dioxide (TiO2) is an inorganic substance that is derived primarily from heavy mineral sands containing Rutile or Ilmenite ores. TiO2 has one of the highest refractive indices (2.61 for Rutile crystals), making it the primary pigment for producing white colour in paints, plastics and paper.
SOURCE

Titanium dioxide is mined from Ilmenite and Rutile ores. Ilmenite is more widely used because of its availability but Rutile is more desirable because it has a higher concentration of TiO2.
Ilmenite Rutile

Percentage composition of TiO2 Global Reserves Global 2010 Production Reserve Locations

45-65% 650 million tonnes Australia, China, India, South Africa, Canada

95% 42 million tonnes 580,000 tonnes Australia, 18 million tonnes

In 2010, 6.3 million tonnes of titanium minerals were produced, of which Australia accounted for 25%1. The global titanium dioxide pigment industry is worth $12 billion USD. The mineral is also found in South Africa and Canada, with the three countries together accounting for 60% of global Ilmenite production2.
usAgE

Titanium dioxide pigment is known for its brilliant whiteness, opacity, nontoxicity, inertness and UV protection. It is found in the Rutile or Anatase forms which refers to the crystal structure within the pigments. End users prefer Rutile crystals which are higher grade than Anatase and can be used in smaller quantities while obtaining better results. In the pigment industry, 60% of the paint bought is used for painting houses and 80% of house paint is used for painting existing houses. Paint used for automotive, white goods and other specialty applications need higher quality pigments and is increasingly being imported by Chinese manufacturers3.

Figure 1: Titanium Dioxide usage through the Value Chain4

August 2011 INDustRY PLAYERs FEEDstoCk PRoDuCERs

titanium Dioxide - A shining Future Ahead

The top five producers accounted for nearly 62% of Ilmenite and Rutile supplies in 2010. Rio Tinto is one of the largest suppliers of TiO2 feedstock, followed by Iluka, Exxaro, Kenmare and BHP Billiton.
PRoCEssoRs

There are two ways TiO2 can be processed: the sulphate process and chloride process. The sulphate process is more established, while the chloride process is newer and more cost efficient (however, is it also more tightly controlled). Using the sulphate process is the only way to produce both Rutile crystals and Anatase crystals (Often used in paper, ink and lower quality paint). The chloride process generates only the higher quality Rutile crystals, which is preferred by manufacturers.
Company Description
Largest producer of TiO Estimated capacity: 1.3 million tonnes Second largest producer of TiO Estimated capacity: 795,000 tonnes
2 2

Dupont Cristal Global Huntsman Kronos Tronox

pigments in the world pigments

UK based producer with higher costs of production due to concentrated

sulphate processing

Focused on North American and European markets Filed for bankruptcy protection in 2009 due to low profit margins combined with low demand Estimated capacity: 1.3 million tonnes Accounted for 9% of TiO
2

supply

Dupont pioneered the chloride process in the 1960s and has since incorporated the technology into all of their operations. With this advantage, Dupont has developed the most cost efficient plants in the world. However, the competition is catching up, as all five of the largest TiO2 producers have since acquired the ability to use the chloride process as well. North American plants were the most profitable in 2010, followed by plants in Asia-Pacific and Europe5.
END usERs

End users are predominantly paint and coatings companies and include Akzo Nobel, PPG Industries, Sherwin Williams, BASF, Kansai Paints and Valspar.

August 2011 INDustRY tRENDs

titanium Dioxide - A shining Future Ahead

Analysts agree that the industry will experience a supply shortage in the upcoming years resulting in increasing titanium dioxide prices in the short term. What is less clear is the long term pricing of this mineral. Global demand for TiO2 pigment in 2010 was estimated to be 5.3 million tonnes6 and is expected to grow 3-4% annually until 2015. However, due to years of underinvestment in the industry, production capacity is not expected to follow suit. To start increasing the supply, large capital investments will have to be made, and rising ore prices will be sure to follow. By 2016, it is predicted there will be an overall shortfall of 1.7 mt TiO2 units and an Ilmenite deficit of 1.1 mt TiO2 units. The tight TiO2 feedstock markets, especially for Ilmentie will drive up prices and encourage short term contracts7. As much as 80% of the increase in demand will come from developing countries as the TiO2 market is strongly correlated to GDP growth8. The recent growth in demand is largely attributed to China, which with consistent GDP growth of 9-10%, compensates for declining or stable demand in developed countries. The demand in China has risen over the past 10 years from 200,000 metric tons annually to nearly 1 million metric tons annually, with no signs of slowing down over the next 6 12 months. The UK consulting company Artikol has a more conservative estimate for global TiO2 demand growth placing it at 2.7% from 2010-2019. However, they also believe in faster growth for China at 5% a year, and see demand potential in India in the next 10 years as well9. The rise in the worldwide middle class population is also expected to increase TiO2 consumption in the next 5 years10. On the supply side, several international and regional companies have started to enter the growing Chinese market. However, much of these planned additions are based on the sulphate process, which causes production costs to be high. While Chinese producers have stated their desire to move towards the chloride based process, a lack of technology, scale, and access to high quality feedstock diminishes their likelihood of success and limits their production capacities11. According to ICIS Chemical Business, a minimum of 100,000 t/year of additional pigment will be needed even if the demand only grows by 2% a year. DuPont currently has plans to expand capacity by 350,000 t/year, which will add 9% to global TiO2 capacity. Producers in the Asia-Pacific region have also been working on capacity expansions but at a much smaller scale12. Outside of China, there are no TiO2 pigment plants expected to be built before 2013-2014, and TZ Minerals International (TZMI), expects prices to rise on tight supplies. Manufacturing costs are already expected to increase by 30% from 2010-2015.
Figure 2: Globalisation of TiO2 Demand

Figure 3: Correlation between TiO2 demand & real GDP

Figure 4: Titanium feedstock supply/demand outlook

August 2011 NEw PRojECts FRoM tItANIuM DIoxIDE PRoDuCERs10

Country

titanium Dioxide - A shining Future Ahead

south Africa Mozambique South Africa Senegal Kenya Australia (WA) Australia (WA) Australia PRICINg FoRECAst AND ExPLANAtIoN

Production (TI02 units ktpa)

Earliest Start

190 250 25 330 246 66 59 122

2012 2012 2011 2013 2013 2013 2013 2013

In 2009, a lack of pricing discipline combined with a decrease in global demand and competition from Asia resulted in very low industry margins and Tronox (5th largest TiO2 processor) to file for bankruptcy protection. Since 2009, pricing discipline has returned with an expected 20% price increase in raw materials representing a 5% cost inflation for end users. The price increases should improve industry profitability, especially the profit margins of producers and processors, though Credit Suisse does not see this trend continuing beyond 2012. In 2010, the average industry profitability expanded by more than $140 US/t relative to 2009, and the revenue to cash cost ratio also increased by 6% for the top 5 producers13 (Tronox has continued production through bankruptcy, and after a 2 year restructuring program, emerged from bankruptcy protection in February, 2011) . Increasing ore prices, which represent a significant cost to processors, discourages the development of new processing capacities. As a result, companies with both mining and processing capabilities will have an advantage in the marketplace. Titanium dioxide prices differ depending on the concentration of TiO2 found in the product. While Rutile has a high concentration of TiO2, because of its limited occurrence, Ilmenite is often used instead. There are several grades of Ilmenite based on its TiO2 content: Chloride grade (>58% TiO content) used as Chloride process feedstock 2 Sulphate grade (<58% TiO content) used as Sulphate process feedstock 2 Feedstock for slag (<50% TiO ) 2 Ilmenite can also be upgraded by decreasing the impurity content to yield higher value. There are also several types of upgraded feedstock available: Synthetic Rutile: 88-95% TiO content 2 Chloride Slag: 85-95% TiO content 2 Sulphate Slag: 80% TiO content 2 The following sections explain pricing forecasts for the different types of feedstock.
5

August 2011 RutILE

titanium Dioxide - A shining Future Ahead

Rutile demand is mostly affected by the titanium sponge markets and welding rod manufacturers. Although they comprise only 8% of the TiO2 market, this equates to around 30% of the Rutile market. Credit Suisse does not see its demand increasing but prices in the medium term should increase due to plant closures after the global financial crisis that put the bargaining power in the producers hands. Eventually, expansions by several large TiO2 feedstock producers in the Synthetic Rutile market combined with stagnant demand will drive prices down starting 2013.
According

to TZMI, bulk Rutile in H1 2011 is priced at $700/750 US/t, an increase from $550 US/t in 2010 Prices will peak in 2012 with Credit Suisse estimated it to reach $925 US/t and decline starting 2013 The long term expected price is $850 US/t
ILMENItE

The Ilmenite market is more opaque and difficult to forecast than the Rutile market. While short term prices are expected to rise, new mineral sand deposits that should be operational in 2013 will drive prices down closer to the long term forecast.

Figure 5: Zircon, Rutile and Ilmenite, quarterly price 1987-2014F in real (2011) terms
The long term expected price sits at $160 US/t March

estimates by TZMI placed current new contracts at $130150 US/t with spot sales at $160 US/t and could reach $200 US/t in the near future Existing contracts are priced at $100 US/t

August 2011 sLAgs AND sYNthEtIC RutILE

titanium Dioxide - A shining Future Ahead

Prices for these markets are not specifically forecasted but prices are increasing because sulphate slag supply is very tight due to the general trend of large processors moving towards producing higher profitability choride products. Chloride slag contracts are currently priced in the mid $400 US/t range while spot prices reach low to mid $500 US/ton FOB.
TZMI

reports new Synthetic Rutile contracts varying from $600 US/t-$700 US/t, twice the existing contract prices Chloride slag contracts are currently priced in the mid $400 US/t range while spot prices reach low to mid $500 US/ton FOB
tItANIuM DIoxIDE

According to Ti Insight LLC and Credit Suisse, TiO2 prices have generally declined on a real basis over the past 20 years despite the strong 11% increase in 2010. Tight TiO2 supply and demand conditions, however, mean that this trend should reverse for the period of 2010-2015 if not longer, giving producers the pricing advantage. The margins gained for top end titanium products should outpace those at the bottom.

Figure 6: Global Average TiO2 Prices

Ti Insight LLP had also stated that average world prices for high quality TiO2 pigment was $2400 US/t but prices could double to $4800 US/t by 2015. Currently, strong demand combined with low inventory levels have resulted in a series of significant price increases from producers with buyers having no option but to accept. Further increases may come for Q3 2011 starting September or October. In Asia, prices are also expected to increase because of power rationing in some provinces that will cause producers to cut back operations14. In Europe multiple

August 2011

titanium Dioxide - A shining Future Ahead

plant closures during the recession combined with aged facilities that mostly rely on the sulphate process have caused prices to soar. With no new prospects for increased capacity soon, Europe is increasingly importing from Asia. Some companies, such as Dow Chemical, are now trying to develop new technologies to decrease the amount of TiO2 needed in paints to combat rising prices15.
TiO

producers have already announced pricing increases of $200 2 US/t in Q4 2010 with another increase of $300 US/t in Q1 2011 and a further $350 US/t increase in Q2 2011 In North America, titanium dioxide prices have already reached as high as $3080 US/t as of Q2 2011 In Europe, analysts estimate prices to climb to $4200 US/t by the end of 2011

Singh, Digvijay. National Industrialization Co. Rep. no. 2060.SE. Credit Suisse, 17 May 2011. Web. Delivering Value Through Expansion of the World Class Moma Mine. Rep. Kenmare Resources, Apr. 2011. Web. <http://www.kenmareresources.com/investors/~/media/Files/K/KenmareResources/pdf/presentations/Kenmare%20presentation%20April%202011.pdf>. 3 Zircon and Titanium. The Sands Are Shifting. Rep. Mineral Deposits Limited, Mar. 2011. Web. <http://www.mineraldeposits.com.au/user/files/Investor%20Centre/Presentations/MDL_Presentation_March_2011.pdf> 4 Delivering, loc. cit. 5 Singh, loc. Cit. 6 Global Titanium Dioxide Industry Recovery Firmly Under Way. PRWeb. 25 Mar. 2011. Web. <http://www.prweb.com/releases/pcs2011/03/prweb5192364.htm>. 7 Delivering, loc, cit. 8 Argex Receives Titanium Dioxide Pricing Forecasts. Argex Mining Inc. 26 Jan. 2011. Web. <http://www.argex.ca/ uploads/45.pdf>. 9 Titanium Dioxide Prices and Pricing Information. ICIS Chemical Business. Feb. 2011. Web. <http://www.icis.com/v2/chemicals/9076545/titanium-dioxide/pricing.html>. 10 Zircon, loc. cit. 11 Singh, loc. cit. 12 Terry, Larry, and Joseph Chang. Global TiO2 market in wave of activity. ICIS Chemical Business [Weekly] 30 May 2011. General OneFile. Web. 13 Singh, loc. cit. 14 Terry, loc. cit. 15 Dow Breakthrough Enables Better Paint with Less TiO2 - MarketWatch. MarketWatch. 24 Mar. 2011. Web. <http://www.marketwatch.com/story/dow-breakthrough-enables-better-paint-with-less-tio2-2011-03-24>.
2

August 2011

titanium Dioxide - A shining Future Ahead

NOTES:

EuRo PACIFIC CANADA INC. REsEARCh DIsCLosuREs

ANALYst CERtIFICAtIoN
Company: N/A ticker: N/A I, Tony Hayes, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. Note: This is our initiating coverage report on Neo Material Technologies.

stoCk RAtINg CAtEgoRIEs

stRoNg BuY: The security represents extremely compelling value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon. BuY: The security represents attractive value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon. hoLD: The security represents fair value and no material appreciation is expected over the next 12-18 month time horizon. sELL: The security represents poor value and is expected to depreciate over the next 12-18 month time horizon. Our ratings may be followed by () which denotes that the investment is speculative and has a higher degree of risk associated with it.

RAtINgs DIstRIButIoN
Euro Pacific Canadas initial rating distribution is as follows (rating distribution is updated monthly):

CoMPANY sPECIFIC DIsCLosuREs

Is this an issuer related or industry related publication? Does the Analyst or any member of the Analysts household have a financial interest in the securities of the subject issuer? If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer? Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer? Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer? During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer? During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to this Issuer? Has the Analyst had an onsite visit with the Issuer within the last 12 months? Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months? Has the Analyst received any compensation from the subject company in the past 12 months? Is Euro Pacific Canada Inc. a market maker in the issuers securities at the date of this report? Issuer Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Industry No No No No No No No No No No

u.k. DIsCLosuREs
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.

u.s. DIsCLosuREs
This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts.

INstItutIoNAL sALEs & tRADINg David Foley, Managing Director, Institutional Sales & Trading david.foley@europac.ca Christine Young, Institutional Sales christine.young@europac.ca

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TiTanium DioxiDe

a Shining FuTure aheaD

Titanium dioxide (TiO2) is an inorganic substance that is derived primarily from heavy mineral sands containing Rutile or Ilmenite ores. TiO2 has one of the highest refractive indices (2.61 for Rutile crystals), making it the primary pigment for producing white colour in paints, plastics and paper.

www.europac.ca