UK equity research

14 September 2009 Mining, FTSE AIM

Buy Titanium Resources Group*

from Neutral A capital idea

Current price 7.62p The year 2008 was tough for many mining companies, but few more so than Titanium
Target price 20p Resources Group (TRG). The company closed ranks to stabilise the operation and cut
costs to recover from the capsizing of Dredge 2. As the group prepares to increase
production, the stock is trading at a very attractive 40-80% discount to the market on a
Market cap: £17.9m range of valuation metrics. In our view, TRG is one of the best recovery plays in the
Shares in issue: 234.8m sector and we again upgrade to a Buy recommendation, setting a 20p target price.
Gearing (FY1): 12.9%
Interest cover (FY1): 1.1x
Year to Sales PBT EPS EPS DPS Yield P/E EV/EBITDA VORR
Full valuation data on back page Dec $m $m c growth % c % x x x
2008A 49.4 -32.7 -48.6 701.3 0.0 0.0 na -3.0 -0.3
Performance
Stock All-Share 2009E 43.9 -10.2 -3.6 -92.5 0.0 0.0 na 16.5 -1.0
1 month: 79.4% 6.1% 2010E 54.9 2.6 0.6 -117.7 0.0 0.0 19.3 4.4 1.2
3 month: 64.9% 13.2% 2011E 76.0 14.0 3.1 382.0 0.0 0.0 4.0 0.6 0.1
12 month: -49.2% -6.1% Source: Arbuthnot estimates, company data
High/low:
12 months: 15.0p / 3.3p
• Heavily discounted by the market. On a 2010E basis, the market is currently applying a
40-70% discount to peers on several valuation multiples including EV/sales, EV/EBITDA and P/E.
Last results: Interims, 14 Sep 09
Next results: Prelims, 6 Mar 10
The market value represents 30% of net assets, which is an 80% discount to peers. On a DCF-
Next event: Prelims, 6 Mar 10 based valuation, TRG is trading at 20% of our generated NPV, which is a 70% discount to peers.
TRG’s in-situ reserve value also trades at a c.80% discount, although its basket value of products
Reuters/BBG: TXR.L / TXR LN
per tonne of ore is c.50% higher than closest peer, Kenmare Resources. We think this heavy
discounting is unwarranted given the high quality and world-class nature of TRG’s rutile deposit.
• Positive progress on costs in H1, with production to increase in H2. TRG cut costs by 42%
in H1 as the company scaled down the operation following last year’s D2 incident. Cost
reductions were greatly assisted by a $9.9m cut in fuel costs as the operations benefited from the
newly-commissioned HFO power plant. H1 sales were $19.8m, narrowing the operating loss over
H1 2008 by c.90% to -$0.9m, and generating positive cash flow from operations of $2.3m. The
company expects to improve the performance in H2, as production will increase as Dredge 1
enters a higher-grade zone. With full-year production of 75kt expected, generating sales of
c.$40-45m, we think the scale of the operation has been missed by the market.
• Strategy to increase capacity selected. After assessing the options to increase the mine’s
production capacity to improve economies of scale, TRG’s preferred strategy is to complete the
Analyst:
construction of Dredge 3 (D3). With a 12-month lead time and a cost of c.$25m, we expect D3
Tim Dudley
could deliver additional production capacity of 30ktpa, providing a c.30% capacity increase.
020 7012 2097
timdudley@arbuthnot.co.uk However, as we stated in a bulletin on 25 June following a site visit, TRG would require an
injection of capital to pursue this option.
John McGloin
020 7012 2090
• Valuation and recommendation. Given the 40-80% trading discount in TRG’s current share
johnmcgloin@arbuthnot.co.uk price relative to its closest peers on a number of physical and financial metrics, we see significant
upside in the stock. We generate our target price using an NPV valuation of £110m, setting a
Priced at close, 11 September 2009
target price (assuming likely dilution) of 20p, which could be achieved if the company can re-
capitalise to increase production. We therefore upgrade our recommendation from Neutral to Buy.

*Arbuthnot acts as broker and/or advisor to this Arbuthnot is authorised and regulated by The Financial Services Authority and is a member of The London Stock Exchange.
company and has agreed to publish research on it Registered Office: Arbuthnot House, 20 Ropemaker Street, London EC2Y 9AR. Registered in England Number: 762818
at least annually.
 Titanium Resources Group* 14 September 2009

Overview

Company activities
Titanium Resources Group (TRG) operates the rutile-rich Sierra Rutile Mine in Sierra Leone, which
the company restarted in 2006. The mine produces rutile and ilmenite, primarily for the titanium
dioxide pigment market for use in paints, paper and plastics. TRG is operating one dredge to
produce rutile at a rate of c.75-100ktpa, generating sales of between c.$40-50m pa, since the
second dredge capsized in July 2008. With one dredge operating, TRG is evaluating
development and funding options to expand production to realise some economies of scale to
overcome the high fixed cost base of operating a large mine in Sierra Leone.

Key issues on which investors must take a view

Although TRG’s operations are large scale and contain significant net assets relative to the
market value, for the company to move into robust profitability it will require capital to expand
production. The operation needs more than one dredge working to adequately cover fixed
overheads and be profitable. Likely expansion scenarios require between c.$20-40m to be
invested, with the company preferring the option to complete construction of D3, at a cost of
$25m. Therefore, investors must be comfortable that the company can first access the capital
and second, execute the expansion plans.

Likely direction of consensus revisions

While not widely followed, consensus is likely to be most sensitive to the success of any
recapitalisation of the company. The markets for the company’s rutile product have remained
fairly robust during the recent downturn. Therefore, with improving global market conditions, we
would expect that a number of industry players might be interested in the quality and scale of the
deposit, particularly once profitability can be demonstrated. Consequently, a clear development
plan, improved market communication and effective delivery are likely to attract a higher market
rating for the company.

Valuation and reason behind target price

Given TRG’s 40-80% trading discount relative to its closest peers on a number of physical and
financial metrics, the potential upside in the stock is apparent. We generate our target price using
our NPV valuation (post securing finance) of £110m. Assuming that there is a likely dilution in the
shares in the future, we establish a price range (dependent on the amount of dilution) of 20-28p
per share. We have settled on 20p for our target price, which could be achieved if the company
can re-capitalise to increase production. We therefore place a Buy recommendation on the stock
and expect that the company will continue to be rediscovered by the market.

Risks to our view

The key risks are 1) securing necessary funding, which we think has a good chance of being
overcome. 2) The execution risk of operation and expansion plans, combined with increased cost
control. Recent management changes improve the outlook in this regard. 3) Commodity markets
- while the price has increased for TRG over the past 12 months, a prolonged US recession
could affect consumption and demand for the company's products. Finally, 4) Sovereign risk is
an important consideration, although this is reduced by the positive relationship the company
has with the Sierra Leone government and the relative stability currently achieved in the country.

2 Arbuthnot Securities

Mine is in production, with
sales of c.$40-45m
Trading at a 40-80% discount to
peers on a range of physical
and financial metrics
TRG has opted to complete
construction of D3, rather than
resurrect D2, requiring $25m
We generate a valuation of 20p,
on a post-financing basis
Titanium Resources Group* 14 September 2009
Investment case
We view Titanium Resources Group as one of the best recovery plays in the junior
mining sector. The company is heavily discounted vs. its peers and asset backing,
resulting from a disastrous 2008 in which a dredge capsized and a major shareholder
liquidated its fund. A recapitalisation of the currently break-even operation would allow
the company to increase production and benefit from improved economies of scale.
• Significant inherent value: Our site visit in June this year refocused our attention on the
inherent value in the group.
• 2009 production is c.75kt of rutile per annum, generating c.$40-45m turnover, which
means the current operations are cash flow breakeven. Net assets represent c.30% of
the current share price, which is a c.80% discount to peers, and include power plants,
port & barging facilities as well as other saleable plant and equipment.
• TRG’s deposit is the world’s largest natural rutile deposit. This is an advantage as
most deposits in production are ilmenite rich, whereas TRG’s resource contains over
65% rutile. Rutile contains twice the titanium concentration of ilmenite and requires
less processing, which means rutile can command a six-fold price premium.
• Heavily discounted by the market: A review of TRG’s closest peers, many of whom have
also had their problems, demonstrates that TRG has been heavily penalised for its troubles.
• The basket value of minerals per tonne of ore is 55% higher than TRG’s closest peer,
Kenmare Resources. Furthermore, based on the in-situ value of the reserves of
c.$2bn, relative to the group’s EV, TRG trades at a c.80% discount to its peers.
• Compared to its peers, TRG trades on a 40-80% discount on several metrics
including EV/sales, EV/EBITDA, P/E and P/Net Assets. On a DCF-based valuation, it
is trading at 20% of our NPV, which represents a c.70% average discount to its peers.
Figure 1: Trading discounts on valuation metrics
100%
80%
60%
Discount to Peers
40%
20%
0%
EV/Reserves P/NPV P/Net 2010E 2010E 2010E P/E
Assets EV/sales EV/EBITDA
Source: Arbuthnot estimates
• Capital is required to increase production capacity: To improve economies of scale,
funds are necessary to increase production. TRG intends to complete the construction of D3,
which will increase the mine’s production capacity by c.30%. We estimate that to complete
construction of D3 and undertake other smaller projects to improve processing efficiencies
will cost c.$25m. The lead time is likely to be 12 months and is dependent on TRG raising
the necessary funding.
Our target price is based on our NPV valuation of £110m. Assuming that there is dilution in the
shares in the future, we establish a price range (dependent on the amount of dilution) of 20-28p
per share. We have settled on the low end of the range ie, 20p, for our target price, which could
be achieved if the company can re-capitalise to increase production.
Arbuthnot Securities 3

Sierra Rutile mines titanium-
bearing mineral sands from the
world’s largest natural rutile
deposit
The operation is located in
Sierra Leone, 135km south-east
of Freetown and 30km inland
from the coast
Rutile is a premium-quality
titanium mineral as it contains a
higher concentration of titanium
than ilmenite
4 Arbuthnot Securities
Titanium Resources Group* 14 September 2009
Sierra Rutile mine
Sierra Rutile mines titanium-bearing mineral sands and holds the tenements covering an area
considered to be the world’s largest natural rutile deposit. The operation currently produces the
titanium minerals Rutile (TiO2) and Ilmenite (FeTiO3) concentrates for export.
Figure 3: Location of operations in Sierra Leone
Africa Sierra Leone
Freetown
Nitti Port Sierra Rutile
mining area
Sherbro
Island
Source: Company data
At the end of 2008, Sierra Rutile was 97.5% held by Titanium Resources Group, with the
government earning-in a 30% interest over a c.15-year period by relinquishing PAYE tax. The
operation is located 135km south-east of Freetown and 30km inland from the coast. The leases
were granted by an act of parliament, with 33-year terms from 2002, making them among the
most secure in Sierra Leone. Mining is currently performed using one bucket line dredge, which
was re-commissioned in 2006. The mineral sands are dredged from constructed ponds before
being concentrated and processed. The product concentrates are then transported to Sierra
Rutile’s port on the Sherbro River for export.
Figure 2: products and equipment
Rutile Dredge 1
Source: Company data, Australian Mineral Atlas
Sierra Rutile holds mining leases over a land area of 580km2, containing proven and probable
reserves of 259Mt at 1.48% recoverable rutile, which gives 3.8Mt of rutile and an expected mine
life of c.20+ years. The mine is unique due to its high concentration of rutile. Rutile is a premium-
quality titanium mineral as it contains a higher concentration of titanium than ilmenite. The
deposit consists of 65-70% rutile, 15-20% ilmenite and 3-5% zircon. Mineral sand deposits with
high concentrations of rutile are rare, as it is more usual to find high concentrations of the lower-

We visited the Sierra Rutile
operation in Sierra Leone on 18-
19 June 2009
Management is considering
options to increase production
Completing the construction of
Dredge 3 appears to be the
most attractive option
The new power plant is almost
cutting power costs in half
Production is currently break-
even, but TRG needs to
increase production to realise
economies of scale
Titanium Resources Group* 14 September 2009
quality and lower-value ilmenite, which require additional processing to remove the iron content
required to meet the specifications for titanium product feedstocks.
Recent site visit
We visited the Sierra Rutile operation in Sierra Leone on 18-19 June 2009. D1 was operating in
the Lanti pond, mining a zone of c.1.5% grade material and heading toward a higher-grade
section (over 2% rutile). The company expects D1 to reach this higher-grade section in Q4 and
we estimate that this will boost production from c.6ktpm to c.9ktpm towards the end of the year.
We anticipate that these higher grades will continue out to 2012, resulting in a 20% YoY increase
in production in 2010 (adding c.$8m in revenue).
Development options
At the time of our visit, management was in the process of evaluating the options for increasing
the mine’s output. In the interims (14 September 2009), the company announced that its
preferred strategy to increase production is to complete the construction of Dredge 3. Previously,
D2 was intended to provide scale by doubling production to 200kt; however, the company is now
investigating non-D2 opportunities such as starting D3 and utilising a dry mining fleet to increase
production. If the company were to proceed with this option, we believe the mine would be
capable of providing a sustainable and profitable c.130ktpa production rate (c.$70m sales),
offset by reduced capex needs and deferred (unproductive) pond relocations.
D3’s pontoon has been completed and all the parts for the dredge’s construction are on site,
although work was halted following the D2 incident. To finish the job, the company only needs to
acquire the processing components for the dredge and auxiliary equipment (tenders, loaders).
Including capital to also undertake projects to improve processing efficiencies (which may add a
further c.5ktpa in capacity), these works are expected by the company to cost $25m and take 12
months to complete construction and commission.
Power plant reducing fuel costs
We saw the new HFO power plant in operation. It is already providing significant cost benefits
(reducing power costs by over 50% from 34c/kWh to 13-14c/kWh) as fuel represents c.25% of the
operating costs. However, without D2, the reduced demand is diluting the benefits as when the
load is lower, the plant switches to run on diesel. While diesel is 20% more efficient than the old
plant, the periods of low load have lasted up to four hours per day. The company is investigating
lowering the tolerance limits imposed by the OEM, which requires the switch from diesel to HFO.
Even with these issues, the new plant helped reduce fuel costs by $9.9m in H1.
Operation now stabilised
Currently, we estimate the mine (with lower grade) is barely washing its face on a cash basis.
Given the first half production, we anticipate production of 75kt rutile in 2009, providing
c.$40-45m in sales, totally offset by mine cash costs (c.$3.2m per month), capex, WC and SGA
costs. Overall, we had our reservations given the company’s history, but the site visit reminded
us of the mine's potential as the main asset - a world class rutile resource - is still there.
Production needs to increase to realise economies of scale, with the key inputs being time and
capital.
Arbuthnot Securities 5
 Titanium Resources Group* 14 September 2009

Figure 2: Operational gearing

50%

30%

Operating Margin
10%

-10%

-30%

-50%

-70%
60 80 100 120 140 160 180 200 220 240 260
Rutile Production, kt
Source: Company data, Arbuthnot estimates

Dredge D2 insurance claims

One insurance claim on the
dredge 2 incident has been
settled, with the potential for
further cash to be paid
In April, TRG reached a Settlement Agreement with one insurer in relation to the company's
insurance claims, following the capsizing of Dredge D2. The settlement was with the second
largest of the reinsurers of TRG’s insurance policy for property damage and business interruption.
The amount paid out so-far was $3.5m.

With outstanding claims with the remaining insurers, there is the potential, though it might take
some time, to realise further cash. The company is at this stage pursuing its claims through the
courts against the balance of the reinsures, and will incur legal costs in the process.

6 Arbuthnot Securities
 Titanium Resources Group* 14 September 2009

Comparative valuation

Closest peers are Kenmare
Resources and Iluka Resources
We selected two of the company’s closest peers for a market comparison: ASX-listed Iluka
Resources and AIM-listed Kenmare Resources, with both companies having had their share of
troubles over the last 12 months. The major diversified miners such as Rio Tinto and Anglo
American’s BEE spin out, Exxaro, are key players in the industry, but we chose to focus on the
two other companies that are primarily mineral sand producers.

Value of reserves
TRG’s basket value per ore Given that the mineral sand peers have different quantities of each mineral sand, instead of
tonne is better than Kenmare, comparing the grade of the contained minerals, we calculated an in-situ value per tonne of ore
while the relative value of the
based on the current market prices for rutile, ilmenite and zircon.
reserves is discounted 80% by
the market

Figure 3: Comparative reserves valuations

Iluka Resources Iluka Resources

Kenmare Kenmare
Resources Resources

Titanium Titanium
Resources Resources
Group Group

0 5 10 15 20 25 0% 5% 10% 15% 20% 25%

In-Situ Value per Reserve Ore tonne ($/t) Enterprise Value (EV) / In-Situ Value of Reserves

Source: Company data, Bloomberg, Arbuthnot estimates (excludes bauxite reserves)

This provides a relative measure of the value of the reserve base and the potential margin
available for each producer. The higher the in-situ values per tonne are, the higher the potential
margins if extraction costs are similar.

We also calculated the enterprise value (EV) as a proportion of the in-situ value for the
companies, as shown in the right hand graph in Figure 2 above. The two peers traded at 22% of
the value of the in-situ reserves. Given the value per tonne of TRG’s reserves, particularly when
compared to Kenmare, it is surprising to again see TRG trade at a discount of over 80% discount
to the peers.

Arbuthnot Securities 7

TRG is discounted by 45-90% on
its 2009/10 EV/sales forecast
TRG is trading at a 40-70%
discount on 2010 financial
metrics
8 Arbuthnot Securities
Titanium Resources Group* 14 September 2009
Financial metrics
We also reviewed the financial metrics of the mineral sands producers. As each company (for a
variety of reasons) is expected by the market to be loss making in 2009, we first compared
EV/sales over the three-year window and then compared the companies’ EV/sales, EV/EBITDA
and P/E multiples for 2010E. We also provide our standard P/NPV measure based on our DCF
models for the companies.
EV/sales
While on a tonnage basis, consensus estimates for 2010 suggest Kenmare will produce eight
times more product tonnes (c.800kt) than TRG (c.90kt), the actual value is much more
comparable. TRG has forecasted sales in 2010 of c.$50m, which is only c.40% less than
Kenmare’s forecasted sales of c.$90m (being mostly ilmenite). In 2009, the difference in sales
between the two companies is only c.15%, as Kenmare is ramping up commercial production.
Therefore, we have reviewed the relative values of the three companies on an EV/sales basis,
which demonstrates that TRG is trading at a 40-90% discount to Iluka and Kenmare in 2009 and
2010.
Figure 4: Comparison of EV/sales
14
12
10
EV/SALES
0
2008A 2009E 2010E
Iluka Resources Kenmare Resources Titanium Resources Group
Source: Company data, Bloomberg, Arbuthnot estimates
EV/EBITDA & P/E
Looking at our and consensus estimates for 2010 including EV/EBITDA and P/E, we continue to
see a discount for TRG of between 40-70%. Note that TRG’s 2010 estimates are not dependent
on the company increasing capacity (which benefits 2011), only on increasing production from
higher grades at D1.
 Titanium Resources Group* 14 September 2009

Figure 5: Comparison of 2010E financial metrics

EV/SALES

EV/EBITDA

P/E

0 5 10 15 20
2010 Multiples

Iluka Resources Kenmare Resources Titanium Resources Group

Source: Company data, Bloomberg, Arbuthnot estimates

On our 2010 estimates, TRG trades on multiples of 1x sales, 5x EBITDA and 12x P/E, potentially
dropping to 4x P/E in 2011 if the D3 expansion goes ahead (including our assumed share
dilution).

Net asset backing

We believe the market valuation for TRG’s net assets is far too low given the substantial amount
of plant and equipment the company owns, including the recently-constructed c.$30m power
plant. Compared to the peers, who trade above their net asset value, TRG is trading at a discount
of c.80%. TRG has debt of c.£30m, owed to the government of Sierra Leone, which has been and
should continue to be very cooperative in its rates and repayments.

Our recent site visit highlighted Figure 6: Price/net assets on balance sheet
the assets held by the group,
1.8
which are heavily discounted by
the market 1.6

1.4
P/Net Assets

1.2

1.0

0.8

0.6

0.4

0.2

0.0
Iluka Resources Kenmare Resources Titanium Resources
Group
Source: Company data, Bloomberg, Arbuthnot estimates

Price per NPV

We have also compared the current trading discount to the NPV of the company’s operations
and projects. This shows that the peer group on average trades at c.50% of the NPV, while TRG
is trading at 20% of the NPV, which equates to a discount to the peers of c.70%.

Arbuthnot Securities 9
 Titanium Resources Group* 14 September 2009

Based on our NPV valuation, Figure 7: P/NPV comparison

TRG trades at 20% of NPV - a
1.0
70% discount relative to peers
0.9
0.8
0.7

P/NPV
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Iluka Resources Kenmare Resources Titanium Resources
Group
Source: Company data, Bloomberg, Arbuthnot estimates

10 Arbuthnot Securities

We value TRG on a DCF basis
over a 20-year mine life
We generate a post financing
valuation of c.£110m, setting a
TP of 20p
Titanium Resources Group* 14 September 2009
DCF valuation & target price
We use our DCF model for TRG’s operations to generate our valuation and target price. We have
run the model over the 20-year mine life, and assumed that D3 is constructed and no further
expansions are performed. Our numbers also assume that a full equity re-capitalisation takes
place, and therefore include the potential share dilution.
Table 1: Valuation
As at 11 September 2009 (£m)
Sierra Rutile Mine – DCF based NPV at a 10% discount rate 120
-
Cash/(debt) (End H1 2009) -25
Total 95
Current value per share
Current shares (m) 246
Current NPV per share (p) (rounded) 40
Value per share post possible fundraising
Sierra Rutile Mine – DCF based NPV at a 10% discount rate 120
Cash/(debt) – post fundraise (£m) -10
Total valuation post fundraise (£m) 110
Possible range in the number of new shares issued (m) 150 - 300
Possible valuation per share post fundraise (p) 20 - 28
Target price (p) 20
Source: Arbuthnot estimates
Based on the above assumptions, we calculate a valuation for the mine of £120m. Given our
assumption that TRG will go to the market to raise funds, we include a possible share dilution
range, which generates a post fundraising valuation of £110m and a value per share ranging
from 20p to 28p. We have taken 20p as our revised target price, which represents c.2.6x upside
to the current share price. On this basis we upgrade to a Buy recommendation.
Arbuthnot Securities 11
 Titanium Resources Group* 14 September 2009

Titanium market

Rutile has a higher titanium and
titanium pigment content vs.
ilmenite, providing the rutile-
rich TRG with a unique market
advantage
TRG’s main business, Sierra Rutile, sells titanium-bearing heavy mineral sands into the titanium
feedstock for processing into titanium dioxide pigment (for paints, paper and plastics) and
titanium metal. In this market, TRG has a key advantage as its mineral sand resource is rutile rich,
which attracts premium prices due to its significantly higher titanium and titanium pigment
content compared to ilmenite. The higher grade makes rutile significantly easier and cheaper to
process into the titanium mineral products, making it a desirable, high-quality blend feedstock.

Figure 8: Titanium and titanium dioxide content of rutile vs. ilmenite

Rutile
% Titanium
(Ti)
Ilmenite

% Titanium Rutile
Dioxide
(TiO2) Ilmenite

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: Arbuthnot estimates (in pure state)

Rutile commands a 6x price TRG holds a competitive advantage due to the high grade and scarce nature of natural rutile as
premium to ilmenite most mineral sand deposits around the world are ilmenite rich. In monetary terms, TRG can
command a price premium of up to 6x vs. the ilmenite sands producers.

Titanium demand
Demand for titanium minerals is driven by global demand for titanium dioxide (TiO2) pigment. The
titanium dioxide pigment industry consumes 93% of the feedstock, which is used to make a high-
quality, white opaque pigment used in paint, paper and plastics. It is usually sold under term
contracts.

Figure 9: Titanium mineral feedstock consumption

Titanium metals, 7%

Titanium Dioxide Pigment (TiO2), 93%

Source: US Geological Survey

Titanium dioxide pigment demand

The titanium dioxide pigment market is $10bn in size and demand has increased at an average
rate of 3% pa over the last 30 years, in line with the long-term growth in the world economy.

12 Arbuthnot Securities
 Titanium Resources Group* 14 September 2009

Titanium dioxide pigment is predominately used in paints and coatings, as it is the highest-
quality, opaque and bright white pigment.

Figure 10: Titanium dioxide demand by end use

Paints &
coatings,
60%

Other, 7% Plastics,
Paper, 9% 24%
Source: Tronox Inc,

Figure 11: Titanium dioxide pigment demand growth

8.0

3% pa growth forecast
world TiO2 pigment demand,

6.0
million tonnes

4.0

+3% pa actual growth

2.0

0.0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: TZMI, IBMA, Lyondell

Historically, consumption of titanium dioxide pigment was concentrated in North America and
China is now the main driver of
Western Europe; combined these regions accounted for more than half the world’s demand.
titanium dioxide pigment
demand
However, as Chinese production and demand increases, the country’s consumption is expected
to grow at least at a rate of 7% pa over the next ten years, representing a 43% total increase in
demand. This increase should offset lower growth in traditional markets.

Figure 12: Forecast 10-year titanium dioxide pigment demand growth by region
Nth
America,
Asia -
18% China, 43%
Pacific,
16%

Middle East
& Africa,
7% Central &
Western Sth
Central
Europe, 6% America,
Europe, 6%
4%
Source: TZMI, IBMA

Arbuthnot Securities 13
 Titanium Resources Group* 14 September 2009

Titanium metal demand

While pigment demand takes the largest share of the market, the titanium metal industry is also
expanding driven by the growing use of titanium. Titanium’s use has risen due to its low density
relative to its strength and corrosion resistance. Demand for the metal has come from industrial
applications and the aerospace industry, where titanium can account for up to 10% of the weight
of a commercial aircraft.

Figure 13: Titanium metal demand by end use Figure 14: Titanium metal production inputs

industrial,
49% Alloys &
Scrap, 25%

consumer /
aerospace, Titanium
other
38% Sponge,
applications,
13% 75%

Source: Roskill - Economics of Titanium Metal Report, Arbuthnot estimates

Producers are installing new titanium sponge melting and milling capacity to meet growing
demand for high-quality material from the aerospace industry. With the number of passenger
aircraft expected to more than double by 2025 and each aeroplane using increasing quantities of
titanium, demand is rapidly rising.

Titanium sponge makes up 75% of the input for titanium metal products and is produced from
processing natural or synthetic rutile. We also expect this increase in demand to flow down
through to high-grade rutile ores.

Supply
Currently, c.6Mt of titanium-bearing mineral sands are produced each year, of which 9.5% are
rutile. This production comes from an estimated worldwide resource base of 1.3bn tonnes of
deposits, of which 8% is rutile. Recent increases in the share of rutile production have been
driven largely by the re-start of operations at the Sierra Rutile mine in 2006.

Figure 15: World production of rutile and ilmenite

7000 12%

6000 10%
Mine Production, tonnes

Rutile % of production

5000
8%
4000
6%
3000
4%
2000

1000 2%

0 0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Ilmenite Rutile Rutile % of production

Source: US Geological Survey

14 Arbuthnot Securities

Rutile attracts a 6-8x premium
to ilmenite…
Titanium Resources Group* 14 September 2009
Figure 16: World resources of rutile vs. ilmenite
Rutile 8%
Ilmenite
92%
Source: US Geological Survey
Prices
The price history and comparative prices for titanium-bearing minerals and titanium consumables
are displayed Figure 17 below.
Figure 17: Titanium feedstock prices
800
700
600
Titanium Ore Price ($/t)
500
400
300
200
100
0
Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sep
97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09
Titanium Ore Rutile Conc min 95% TiO2 Bagged US$/t FOB/Aus
Titanium Ore Rutile bulk conc min 95% TiO2 Europe $/tonne fob/Aus
Titanium Ore Ilmenite bulk conc min 54% TiO2 Europe $/tonne fob
Source: Bloomberg, Metal Bulletin
Rutile prices can attract a premium of between 6x (for bulk rutile concentrate) and 10x (for
bagged rutile concentrate) the price of ilmenite concentrate, because of its superior titanium
concentration, quality and lower processing requirements. With the increasing demand for
titanium-based products, premium quality producers are well-placed to obtain high prices and
should continue to attract robust demand for its products from customers looking to up-blend
lower-quality and plentiful ilmenite. This will become all the more pertinent as rising power costs
make the economics of processing lower-quality ilmenite increasingly unattractive.
Arbuthnot Securities 15
 Titanium Resources Group* 14 September 2009

Titanium Resources Group - Summary

TXR LN / 7.62p / £18m / Buy 20 p* *Priced as at 11 Sep 09
Year end December ($m) 2007A 2008A 2009E 2010E 2011E Year end December ($m) 2007A 2008A 2009E 2010E 2011E

Production Summary Ratios

Rutile (kt) 83 79 75 90 121 EBITDA Margin 0% -46% 6% 25% 34%
Ilmenite (kt) 16 18 17 18 24 Operating Margin -12% -61% -12% 10% 22%
Total Rutile Production Nominal [$/t] 83 79 75 90 121 PAT margin -21% -242% -24% 5% 18%
Cash cost [$/t] 557 641 549 457 413 ROCE -6% -21% -7% 2% 10%
Rutile Price [$/t] 475 500 525 551 600 ROE -6% -104% -8% 2% 9%
Ilmenite Price [$/t] 80 100 130 130 130 Net Debt to Equity 8% 33% 13% 23% 0%
Average Sale Price [$/t] 420 430 460 490 530 Interest cover 0.0 9.7 - - -

Valuation Metrics (CY)

Profit & Loss (pre-x) Year end December 2007 2008 2009 2010 2011
Revenues 67.8 49.4 43.9 54.9 76.0 P/E -2.5 -0.3 -3.0 19.7 4.1
Expenses -64.5 -64.7 -33.7 -33.7 -42.7 Yield (%) - - - - -
Depreciation -7.8 -7.7 -8.2 -8.2 -9.5 Net Cash Generation (%) -2.1 -1.8 -0.0 -0.3 0.9
Gross profit -4.4 -22.9 2.0 13.0 23.9 P/CF (ops) -5.1 -1.3 5.7 2.9 1.0
SG&A -3.7 -7.4 -7.5 -7.5 -7.5 EV/SALES 1.1 1.5 1.6 1.3 0.9
Operating profit -8.1 -30.3 -5.4 5.5 16.4 EV/EBITDA -223.3 -3.2 25.9 5.3 2.8
non-operating gains - - - - - EV/Production ($/t) 1,794 1,770 1,683 1,444 1,097
share of JVs - - - - -
EBITDA -0.3 -22.7 2.8 13.6 25.9 Valuation summary Equity $m $c/shr £m £/shr
PBIT -8.1 -30.3 -5.4 5.5 16.4 Mineral Sands 100% 196 79 120 49
Net interest -6.5 -2.3 -4.8 -2.9 -2.5 x 100% - - - -
PBT -14.6 -32.7 -10.2 2.6 14.0 x 100% - - - -
Tax 0.3 -86.9 -0.1 -0.0 -0.0 Total NPV (10% discount rate) 196 79 120 50
PAT -14.3 -119.6 -10.4 2.6 13.9 Combined Chk 275 112 165 67
Minority interest - - - - -1.6 Other - - - -
Dividend - - - - - Net Debt (YE) 42 17 25 10
NP (attr.) -14.3 -119.6 -10.4 2.6 12.3 Total 153 62 95 40
Diluted Shares (m) 235 246 284 396 396
EPS (c) -6.1 -48.6 -3.6 0.6 3.1 P/NPV 0.2 x
DPS - - - - -
Sensitivities -20% -10% 0% 10% 20%
Calendarised Adj EPS (p) -3.0 -26.2 -2.6 0.4 1.9 Sale Price -54% -27% 0% 27% 55%
Calendarised Adj EPS (USc) -6.1 -48.6 -4.3 0.6 3.1 Grade/Recovery -46% -23% 0% 23% 47%
Opex 35% 17% 0% -17% -34%
Balance Sheet Capex 4% 2% 0% -2% -4%
Tangible assets 142.3 125.5 122.9 142.7 136.3 Exchange Rate 0% 0% 0% 0% 0%
Intangibles 13.2 13.3 13.3 13.3 13.3
Other assets 87.1 0.1 0.1 0.1 0.1 Valuation by Asset
Investments - - - - -
Non-current assets 242.6 138.9 136.3 156.1 149.6
Stocks 14.9 14.5 13.2 8.2 3.8
Trade and other receivables (debtors) 22.3 24.0 15.4 16.5 3.8
Cash and cash equivalents 25.7 7.4 31.4 18.0 62.2 Mineral Sands
Current assets 62.9 45.9 59.9 42.7 69.8 100%
Total Assets 305.5 184.7 196.2 198.8 219.5
Provisions 2.8 3.3 3.3 3.3 3.3
Other liabilities - - 0.1 0.1 0.1
Long term borrowings 44.1 45.1 48.2 48.2 48.2
Non-current liabilities 47.0 48.3 51.5 51.6 51.6 Production & Cash Costs
Overdraft 0.1 0.0 - - -
Trade and other payables (creditors) 17.2 21.5 13.5 13.5 20.3 140 Production 700.0
Tax liabilities - - - - -
120 600.0
Current liabilities 17.4 21.5 13.5 13.5 20.3 Cash Costs
Production (kt)

100 500.0

Cash Costs (£/t)

Total Liabilities 64.3 69.8 65.0 65.0 71.8
Net Assets 241.2 114.9 131.2 133.7 147.6
80 400.0
Total Equity 241.2 114.9 131.2 133.8 147.7
Net Debt/(Cash) 18.5 37.7 16.9 30.3 -14.0 60 300.0
BV 228.0 101.6 117.9 120.4 134.3 40 200.0
Cash flow 20 100.0
Operating profit -17.0 -40.4 -5.4 5.5 16.4 0 0.0
Depreciation 7.8 7.7 8.2 8.2 9.5 2007A 2008A 2009E 2010E 2011E
Other non-cash 5.2 8.2 1.7 - -
Working capital -1.9 0.5 1.9 3.9 23.9
Net interest (paid) / received 2.1 -0.8 -1.8 -2.9 -2.5 Reserves & Resources Equity Tonnes Grade Rutile
Tax paid -0.5 -0.4 -0.0 -0.0 -0.0 Reserves (P) (Mt) (%) (kt)
Cashflow from operating activities -4.3 -25.1 4.6 14.6 47.2 Rutile 100% 259.1 1.5 3,825.1
Capex -57.5 -33.0 -5.6 -28.0 -3.0 Total Reserves 259.1 1.5 3,825.1
Other asset additions /investments - - - - -
loan granted / repaid - - - - -
Acquisitions and disposals 0.0 28.8 0.0 - - Resources (M,I,Inf) (including reserves)
Cashflow from investing activities -57.5 -4.2 -5.6 -28.0 -3.0 Rutile 100% 426 1.4 5,826
Ordinary shares issued (net) 35.0 - 25.0 - - Total Resources 425.7 1.4 5,826.3
Dividends paid - - - - -
Increase in borrowings - 11.1 - - - EV/Reserves: ($/t) 18.9
Cashflow from financing activities 35.0 11.1 25.0 - - EV/Resources: ($/t) 12.4
Net cash increase/(decrease) -26.8 -18.2 24.0 -13.4 44.2

Source: Company data, Arbuthnot estimates

16 Arbuthnot Securities
Titanium Resources Group* 14 September 2009

Arbuthnot Securities 17
 14 September
Titanium Resources Group* 2009

Analysis of the strategic environment

Porter's five competitive forces model

Suppliers 18 Buyers

Bargaining power of suppliers Total Bargaining power of buyers

HIGH/MEDIUM AND RISING
• The mining industry has experienced
an upturn over the last two years and
consumables are in short supply,
notably Tyres and parts. TRG is
principally a dredging operation and is
therefore not exposed to the same
factors as most of the industry.
Substitutes
2 MEDIUM FALLING
Industry competitors
Rivalry among existing firms
LOW/MEDIUM AND RISING
• Rutile production is limited to a small
number of companies, for most rutile is
a by-product of ilmenite production.
TRG is unique in being primarily a rutile
producer. Its proximity to the European
market should make it the preferred
supplier into Europe.
• The big players in the sector are Iluka
and Rio Tinto. Both companies have
aspirations to expand operations.
Kumba recently acquired Ticor.
3
• Because of the past history at Sierra
Rutile the company has to demonstrate
that it can maintain supply. Prior to
closure brought about by the civil war
4
the market paid a premium for the
produce from Sierra Rutile.
• Natural Rutile is the cleanest source of
TiO2 and the company has
experienced no problem in getting
sales contracts to date. It is the closest
supplier to the European market. The
market is projected to be in deficit out
to 2012
Potential entrants

Threat of substitute products Threat of new entrants

LOW AND STABLE 5 LOW/MEDIUM AND RISING 4
• Natural Rutile is the preferred source of • While there are a number of new
TiO2 for the chloride pigment process. projects in the pipeline, most of these
It is unlikely that it will be substituted. are for ilmenite which is not a direct
Upgraded Slag (UGS) is the closest competitor.
competitor but requires a higher energy • Rio Tinto's QIT Fer et Titane project in
input to produce. Madagascar is due on line at the end of
LOW 5 Attractive the decade. This is a UGS producer
competitive
LOW/MEDIUM 4 forces and may present competition for TRG.
MEDIUM 3

HIGH/MEDIUM 2 Unattractive
competitive
HIGH 1 forces

Source: Arbuthnot (adapted from Porter 1980 p.4); ‘Total box’ represents sum of five forces: 25 = attractive industry, 5 = competitive industry

SWOT analysis

Strengths Weaknesses

• Proven mining and process methods • Remote Site

• Reserves and Resources have been verified by • Sierra Leone perceived as unstable location
numerous consultants • Marginal with a single dredge
• Off take agreements in place for Rutile • Largest shareholder not represented on the board
• Largest Natural Rutile deposit in the World • Has yet to prove profitability

Threats Opportunities

• Professional personnel and mining equipment in short • High operational gearing driven by production
supply globally. increase
• Downturn in US housing market could reduce pigment • Production can be further increased through
demand reprocessing tailings and satellite deposits
• A pure rutile play without the advantages of Zircon • Developing Asia becoming a growing consumer of
sweetener TiO2
• Increased rutile production could negatively impact • Proximity of premium product to European markets
market • Increase supply to titanium sponge market
Source: Arbuthnot

18 Arbuthnot Securities
 Titanium Resources Group* 14 September 2009

Arbuthnot Securities, Arbuthnot House, 20 Ropemaker Street, London EC2Y 9AR Email: firstnamesurname@arbuthnot.co.uk
Chief executive Sales and trading
Neil Kirton 020 7012 2108 Sales
Research Simon Wickham (Head of sales) 020 7012 2038
Head of research David George 020 7012 2039
Xavier Gunner 020 7012 2083 Melanie Sharp 020 7012 2092
Alternative energy & technology Nicholas Feldman 020 7012 2045
David Cunningham 020 7012 2082 Jonathan Clements 020 7012 2044
Emerging companies Darren Winter 020 7012 2042
Robert Sanders 020 7012 2084 Matt Hasson (Natural resources) 020 7012 2037
Oliver Cummings 020 7012 2078 Sales trading
Engineering; electronics; tech hardware; aerospace & defence Paul Kersey (Head of sales trading) 020 7012 2030
Michael Blogg 020 7012 2091 David Llewellyn 020 7012 2031
Housebuilders & contractors Lisa Letham 020 7012 2029
Kate Moy 020 7012 2074 Mark Barnes 020 7012 2019
Mining Trading
John McGloin 020 7012 2090 Bobby Tipping (Head of trading) 020 7012 2017
Tim Dudley 020 7012 2097 Andy Lewis 020 7012 2028
Oil & Gas Edward Malone 020 7012 2027
Dougie Youngson 020 7012 2098
Real estate Investment funds
Nan Rogers 020 7012 2096 Sales
Support services: recruitment, automotive & related tech Rupert Stevenson (Head of investment funds) 020 7012 2014
Xavier Gunner 020 7012 2083 Matthew Kinkead 020 7012 2013
Support services: consultancy, managed services Adam Gill 020 7012 2025
David Brockton 020 7012 2093 Trading
Transport Calum Summers (Market making) 020 7012 2009
Gerald Khoo 020 7012 2089 Darren Papper 020 7012 2015
Special situations Research
Sneha Shah 020 7012 2081 Chris Young 020 7012 2016

Explanation of recommendations
Our analysts award a Strong Buy rating in those cases where they believe there will be total shareholder return - defined as the absolute rise in share prices plus dividend
payment - in excess of 20% over a 12-month period. We assign a stock a Buy recommendation where our analysts believe there will be a total shareholder return of 10%
or more over a 12-month period. We apply a Neutral recommendation where we anticipate a shareholder return of between plus 10% and minus 10%. We assign a
Reduce recommendation where we anticipate a shareholder return of between minus 10% and minus 20%. Our Sell recommendation implies an expected shareholder
loss over a 12-month period of 20% or more. Analysts have assigned a 'trading view' to stocks that they think might move materially within the following ten trading days;
possibly in response to a move in currency, sentiment, or a specific event. The trading view is a short-term suggestion and does not contradict the 'recommendation'.
Arbuthnot acts as a market maker or liquidity provider for this company.
Arbuthnot has provided investment banking services to this company within the last 12 months.
The company has seen this research but no material changes have been made as a result.
Unless otherwise stated, the author of this research is the first analyst listed on the front cover of this document. Analysts’ remuneration is based on a number of factors,
including the overall results of Arbuthnot Securities, to which a contribution is made by investment banking activities. Analysts’ remuneration is not based on expressing
a specific view or recommendation on an issuer, security or industry.
This research is classified as being a "marketing communication" as defined by the FSA’s Handbook. This is principally because analysts at Arbuthnot Securities are
involved in investment banking activities and pitches for new business and consequently this research has not been prepared in accordance with legal requirements
designed to promote the independence of investment research. Therefore, the research is not subject to any prohibition on dealing ahead of the dissemination of
investment research. Nevertheless, the Firm's Conflict of Interest Management Policy prohibits dealing ahead of research, except in the normal course of market making
and to satisfy unsolicited client orders. Please refer to www.arbuthnotsecurities.co.uk for a summary of our conflict of interest management policy in relation to research.
This includes organisational controls (departmental structure, a Chinese wall between corporate finance and other departments, etc), procedures on the supervision and
remuneration of analysts, a prohibition on analysts receiving inducements for favourable research, editorial controls and review procedures over research
recommendations and a prohibition on analysts undertaking personal account dealings in companies covered by them.

Arbuthnot recommendation proportions in last quarter

All stocks excluding AIM Corporate stocks excluding AIM
Strong Buy 10.8% Strong Buy 34.5%
Buy 56.5% Buy 55.2%
Neutral 23.3% Neutral 3.4%
Reduce 9.5% Reduce 6.9%
Sell 0.0% Sell 0.0%
Source: Arbuthnot
Arbuthnot Securities Limited is authorised and regulated by The Financial Services Authority (FSA, 25 The North Colonnade, Canary Wharf, London E14 5HS) and is a member of The London Stock
Exchange. Arbuthnot is the trading name of Arbuthnot Securities Limited. Registered Office: Arbuthnot House 20 Ropemaker Street London EC2Y 9AR. Registered in England Number: 762818

This document has been approved by Arbuthnot Securities Limited (‘Arbuthnot’) for communication to professional clients (as defined in the FSA Handbook) and to persons who, if they were
clients of Arbuthnot, would be professional clients. Any recommendations contained in this document are intended solely for such persons. This document is not intended for use by persons who
are retail clients of Arbuthnot or, who would if they were clients of Arbuthnot, be retail clients, who should consult their investment adviser before following any recommendations contained herein.
In any event this document should not be regarded by the person to whom it is communicated as a substitute by the recipient of the recipient’s own judgement and does not constitute investment
advice (as defined in the FSA Handbook). This document is based on information obtained from sources which we believe to be reliable, however it is not guaranteed as to accuracy or
completeness by Arbuthnot, and is not to be construed as a representation by Arbuthnot. Expressions of opinion herein are subject to change without notice. This document is not and should not
be construed as an offer or the solicitation of an offer to buy or sell any securities. Arbuthnot and its associated companies and/or their officers, directors and employees may from time to time
purchase, subscribe for, or add to or dispose of any shares or other securities (or interests) discussed herein. Any US recipients of this document are believed, by Arbuthnot, to be major US
institutional investors only. Any US institution wishing to obtain further information or to effect a transaction in any security discussed herein should do so only through the correspondent US broker-
dealer of Arbuthnot, Auerbach Grayson & Company Incorporated, which accepts responsibility for its contents.

Arbuthnot Securities 19
 Company valuation ratios (x) 2009E 2010E Share price and recommendation tracker graph (two years)
EV/Sales 1.0 1.1 N R 10 d
B 34d
EV/EBITDA 16.5 4.4 10 0
EV/EBITDA REL 2.6 0.7 90
P/E na 19.3
80
P/E rel -0.4 2.2
70
P/CEPS 12.4 -5.0
60
P/NAV 0.2 0.2
EV/IC 0.3 0.3 50

ROIC (%) -2.1 2.1 40

ROIC/WACC -0.3 0.3 30

VORR -1.0 1.2 20
EV/Sales/G 0.1
10
Industry attractiveness /25 18
0
Source: Arbuthnot estimates; growth rates from last actual
S ep D ec M ar J un S ep D ec M ar J un Sep

B SB NR B N

T IT A N IU M R E S O U R C E S G P . P R IC E T A R G E T

Source: Thomson Financial, Arbuthnot

Summary financial data, year to Dec ($m) 2008A 2009E 2010E 2011E
Sales 49.4 43.9 54.9 76.0
EBITDA -22.7 2.8 13.6 25.9
Operating Margin (%) -61.3 -12.4 10.0 21.6
EBIT -30.3 -5.4 5.5 16.4
Interest charge 2.3 4.8 2.9 2.5
PBT -32.7 -10.2 2.6 14.0
Tax rate (%) -1.1 1.1 0.3 0.2
Underlying tax rate 28.0 28.0 28.0 28.0
NOPLAT -21.8 -3.9 3.9 11.8
Profit after tax -119.6 -10.4 2.6 13.9
Reported EPS (c) -2.8 0.6 3.1 5.0
Underlying EPS (c) -48.6 -3.6 0.6 3.1
Underlying EPS YoY growth (%) 701.3 -92.5 -117.7 382.0
DPS (c) 0.0 0.0 0.0 0.0
Basic no. of shares (m) 283.6 396.0 396.0 396.0
Fully diluted no. of shares (m) 246.1 284.0 396.5 396.5

Operating cashflow -15.2 10.3 21.1 33.4

Depreciation -7.7 -8.2 -8.2 -9.5
Provision utilisation
Change in working capital 0.5 1.9 3.9 23.9
Cash tax paid -0.4 0.0 0.0 0.0
Capex -33.0 -5.6 -28.0 -3.0
Asset disposals 28.8 0.0 0.0 0.0
Cash earnings -49.4 2.9 -9.8 27.9
CEPS (c) -20.1 1.0 -2.5 7.0

Fixed tangible assets 125.5 122.9 142.7 136.3

Goodwill 13.3 13.3 13.3 13.3
Other assets 45.9 60.0 42.7 69.9
Total assets 184.7 196.2 198.8 219.5
Current liabilities 21.5 13.5 13.5 20.3
Long-term liabilities 48.3 51.5 51.6 51.6
All liabilities 69.8 65.0 65.0 71.8
Net debt 37.7 16.9 30.3 -14.0
Gearing (%) 32.8 12.9 22.6 -9.5
Source: Company data, Arbuthnot estimates

20 Arbuthnot Securities