The Titomic question

The Titomic question

There is a Peter Lynch anecdote from the 80s (?) that goes something like “it’s better to buy shares in companies that benefit from the widget, instead of shares in the widget developer.” He gives the example of barcode scanning for supermarkets – while the barcode scanners themselves were a total revolution, the biggest beneficiaries of the tech were actually supermarkets, who saw vastly higher productivity and the barcodes themselves led to new innovations (e.g. computer inventory tracking).

There are other examples that are all some variant of “the biggest beneficiary of technological revolution is the consumer, not the developer.” ASX listed “kinetic fusion” company Titomic (ASX:TTT) potentially fits into this category. Titomic claims to have a better method for creating titanium widgets.

My interest in the stock came tangentially – if there is going to be growing demand for titanium products, induced by a new technology (such as Titomic’s), that could be important for industry supply and demand of titanium, which is important to Base Resources (ASX: BSE), an ilmenite miner I own shares in. As such, I’m not all that interested in Titomic itself, but it is clearly an interesting situation with an industry (potentially) in flux.

It is possible that a new technology makes titanium products easier or cheaper to manufacture, and thus increases overall demand by making them more viable, in addition to making existing demand cheaper to fulfill.

Titomic’s process is described as “cold-gas dynamic spraying of titanium or titanium alloy particles onto a scaffold to produce a load-bearing structure”. The company website claims that the advantages of its process are:

• Fuse dissimilar metals for large seamless structures with enhanced engineered properties
• Stronger structures without welding, folding or bending weak points
• Production volumes without extensive production tooling
• Industry-leading build rates = faster manufacturing time & speed to market
• More efficient use of energy and resources, saving production costs

Other methods of “3D printing” smaller titanium products involves using lasers to fuse titanium powder. Titomic claims here that its method is substantially better, and I think that is at least a plausible claim. I have not yet read any scientific papers on Titomic’s method.

For the purposes of this post, let’s assume that Titomic’s process is viable and does exactly what it says on the tin – lower costs, faster, less energy. My question is twofold:

1. What does the new-age titanium manufacturer (whether that be Titomic/3D printing firm or the buyers of the printing machines) look like?
2. What does the industry itself look like after the proliferation of these technologies?

What does the new-age titanium manufacturing business look like? 

Although it offers titanium powder and engineering & titanium prototyping services on its website, Titomic appears to be primarily targeting the business of selling titanium manufacturing machines. I.e., Titomic manufactures the machine that other companies will use to manufacture their titanium widgets.

I would think that any proliferation of advanced “3d printing” techniques would lower the barriers to creating titanium widgets. The ability to buy a machine that can produce titanium widgets faster and with less cost compared to traditional methods, surely makes it easier to get a hold of specialty titanium products.

That said, it is important to distinguish between two aspects of titanium manufacture. First is the production of the titanium metal (or powder) itself. This is expensive because of the complexity of the Kroll process:

In the Kroll process, one of the ores, such as ilmenite (FeTiO₃) or rutile (TiO₂), is treated at red heat with carbon and chlorine to yield titanium tetrachloride, TiCl₄, which is fractionally distilled to eliminate impurities such as ferric chloride, FeCl₃. The TiCl₄ is then reduced with molten magnesium at about 800 °C (1,500 °F) in an atmosphere of argon, and metallic titanium is produced as a spongy mass from which the excess of magnesium and magnesium chloride can be removed by volatilization at about 1,000 °C (1,800 °F). The sponge may then be fused in an atmosphere of argon or helium in an electric arc and be cast into ingots.

That’s why, according to Wikipedia, Titanium metal production costs around six times as much as stainless steel. 3D printing does not change this part of the process. It is likely that the overall cost & availability of titanium products remains constrained by the cost of actually getting titanium metal.

There is unlikely to be a step change in this part of the process, and I would expect that 3D printing will not immediately lead to a major step change in demand for titanium. Correspondingly, I see minimal near term benefit for Base Resources, bearing in mind that ~90% of titanium globally is made into titanium dioxide (TiO2; white pigment), not metal. Global demand for titanium for specialty purposes has grown at around a ~8% CAGR for the past 10 years. Future growth is expected to be between 4%-6% per annum.

The second aspect of titanium manufacture is making the metal widget. Current methods of creating higher quality titanium products from powder involve, broadly speaking, either rolling it (“direct powder rolling“) for plate and foil type products, or sintering it (fusing it together with a laser) for other shapes. Sintering is the process used in titanium 3D printers. Titomic’s cold gas spraying could reflect an innovation here.

What do current widget manufacturing margins look like?  It’s not easy to tell because a lot of titanium products are niche and as diverse as prosthetics and aeroplane wings. Some titanium manufacturers are private businesses, and others (RTI) are consolidated within larger businesses (formerly Alcoa, now Arconic – Alcoa split into two companies).

Arconic appears to report its business segments by product, in a way that largely combines aluminium and titanium, making it hard to discern titanium margins (deliberately, I suspect). However, in 2014 RTI earned $31.2 million in EBITDA on revenue of $211.4 million, for an EBITDA margin of ~15%. Alcoa/Arconic expected to run the company substantially better, and Arconic reported a 20% “Adjusted EBITDA” margin on its engineering solutions in 2017.

This image gives a recent look at technology in the titanium widget industry currently:

Arconic 2017 annual report.

This suggests that the state of the art tech in the industry is laser power bed (i.e., sintering) as used by Arconic and Airbus. If Titomic’s technology is viable then the company may genuinely have something valuable to offer. IP/patent protected manufacturers are potentially capable of generating attractive margins over the long term – like CSL and Cochlear. So, what happens next?

Perhaps Titomic sells its machines to everybody in the industry. Perhaps margins widen for a while and then come down over time – as it gets easier, cheaper, and faster to manufacture widgets, I would guess that the customers reap most of the benefits. Margins likely vary by industry (automotive, aerospace, medical) depending on the concentration & market power of the manufacturers of each type of product.

What happens to Titomic?  How long do the machines last? Does a machine get sold with a follow-up maintenance contract a la Cochlear?  There are only a handful of large titanium widget manufacturers in the world, and I would expect there to be limited demand for Titomic’s technology in terms of the number of units that can be sold. At some point, potentially fairly quickly, the major players will all have this wonderful new tech, and then… does Titomic sell new machines in line with industry upgrade cycles, i.e., lumpy earnings?  Titomic could also sell its tech into China and then watch it get stolen, which sounds like fun.

I have not looked into Titomic at great length, beyond its prospectus, recent presentations and the annual report. However, were I looking at the company (and I will), I would be asking:

• Is the technology viable?
• When will Titomic’s product be commercially available?
• Does Titomic’s product solve the problems that titanium widget manufacturers need to solve?
• What will it cost per unit and what will the likely margins be?
• What is the total addressable market – how many machines, globally? (noting that titanium products are used not just in aerospace, but in cars, medicine, and several other specialty industries)
  • In context of the cost of the machine, who does it make sense for to purchase a Titomic machine, especially if the cost of manufacturing widgets falls? (call this the “likely” or “sensible” addressable market)
  • Every end user of titanium is NOT going to have a Titomic machine, unless the price point is very cheap, so who does it make sense for to manufacture widgets? (cheap machines & wide proliferation would itself add significant complexity in context of supplying titanium powder, which is not easy to come by).
• How will Titomic protect itself from IP theft especially in the context of China? (anything that makes aerospace widgets easier to manufacture will be a hot target, I imagine)
  • Related, as an IP/patent protected manufacturer, is this company actually going to enjoy Cochlear-like margins over the long term?  Can the process be reinvented or improved in order to sell new generations of machines over time, which will be necessary in order for that to be the case?
• How do you handicap all of the above in the context of a $100m market cap currently, and potential commercialisation being conceivably several years and a few cap raises away?

Titomic’s an interesting company. Its technology, if viable, appears to have potential. Whether the stock at $1.50 has potential, I am not sure – conceivably yes if the tech is viable, but that is a hard question to answer. As one former shareholder said to me recently – is Titomic the VHS or the Betamax?

I do not think Titomic is a buy, primarily because it is a pre-revenue company, but also because I think that some or most of the questions above will be unanswerable for most prospective investors. If you can afford the legwork to answer them however, and especially if you can understand the technology and the problems that titanium manufacturers are trying to solve, I think you could generate a meaningful edge here. Should it start commercialising its product, I think Titomic could be worth keeping an eye on.

A caveat, given that I have discussed this technology on the premise that it is commercially successful (which it is not). This company is presently selling a “dream” – uncommercialised technology – which might be worth something someday. Investors should always be highly cautious in these situations. I  have no intention of taking any position in Titomic.

I have no financial position in any company mentioned. I am not an engineer and do not have any kind of minerals or materials expertise. This is a disclosure and not a recommendation.

10footinvestor

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