Tronox Holdings plc Q3 FY2025 Earnings Call

Good morning. Welcome to the Tronox Holdings plc Q3 2025 Earnings Conference Call. This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Jennifer Guenther, Chief Sustainability Officer, Head of Investor Relations and External Affairs. Jennifer, please go ahead.

Thank you. Good morning, and welcome to our third quarter 2025 earnings call today. A friendly reminder that comments made on this call and the information provided in our presentation and on our website include certain statements that are forward-looking and subject to various risks and uncertainties, including, but not limited to, the specific factors summarized in our SEC filings. This information represents our best judgment based on what we know today. However, actual results may vary based on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements. During the conference call, we will refer to certain non-U.S. GAAP financial terms that we use in the management of our business and believe are useful to investors in evaluating the company's performance. Reconciliations to their nearest U.S. GAAP terms are provided in our earnings release and in the appendix of the accompanying presentation. Additionally, please note that all financial comparisons made during the call are on a year-over-year basis unless otherwise noted. On the call today are John Romano, Chief Executive Officer; and John Srivisal, Senior Vice President and Chief Financial Officer. You can find the slides we will be using on our website. It is now my pleasure to turn the call over to John Romano. John?

Thanks, Jennifer, and good morning, everyone. We'll begin this morning on Slide 4 with some key messages from the quarter. Our third quarter results were shaped by ongoing challenges associated with the weaker demand than forecasted, downstream destocking above what we expected and heightened competitive dynamics in both TiO2 and zircon markets. While our competitors' insolvency proceedings are expected to benefit Tronox's future sales volumes, we saw a temporary headwind in the third quarter with more aggressive liquidation of inventory at below market pricing. We have made headway in securing tariffs against Chinese dumping though late in the quarter, we encountered an unexpected hurdle in India when a state court temporarily stayed antidumping duties. The zircon market also experienced headwinds beyond our expectations, particularly in China, where both pricing and volumes continue to face pressure. In addition, we had a sizable shipment of zircon that rolled from Q3 to Q4 at the end of September. We recognize the importance of safeguarding our cash flow and our cost improvement program is ahead of schedule. We are now on track to deliver in excess of $60 million in annualized savings by the end of 2025 and expect to reach our $125 million to $175 million annualized savings goal by the end of 2026. Separately, we have targeted operational actions to manage near-term cash flow. These include the temporary idling of our Fuzhou pigment plant and adjustments at our Stallingborough pigment plant, where we lowered operating rates and are accelerating planned maintenance to align inventory with current market conditions. At our Namakwa smelter operation, we temporarily idled one furnace and will soon initiate a temporary shutdown of our West mine. These actions are intended to reduce inventory and enhance cash flow, supported by our new East OFS mine, which will begin commissioning November 17, supplying higher-grade heavy mineral concentrate into our network. We will continue to assess further measures across mining and pigment sites to ensure production remains closely aligned with prevailing market conditions. Combined, these initiatives are anticipated to generate an estimated cash benefit of approximately $25 million to $30 million in the fourth quarter, positioning us for free cash flow in the fourth quarter and 2026. And on the commercial front, we're driving targeted initiatives to monetize inventory throughout our value chain. Additionally, we strengthened our balance sheet by raising $400 million in senior secured notes, boosting our available liquidity. We are continuing to actively evaluate all available levers to generate cash, reinforce our operational foundation and continue supporting our customers strategically as a global supplier. Despite the unforeseen obstacles in the third quarter, there are reasons for optimism. Antidumping measures continue to gradually improve our penetration and growth in protected markets. We're pleased that Brazil finally finalized their duties two weeks ago, increasing them significantly for major importers compared to provisional duties. Likewise, Saudi Arabia has now implemented definitive antidumping duties at rates comparable to the European Union, and we expect India's duties to be reinstated in the near future. Additionally, increased focus by the West on diversifying away from China and rare earths presents a unique opportunity for Tronox. Our mining operations in Australia and South Africa contain substantial amounts of monazite, a rare earth mineral containing heavy and light rare earths, which can be processed for downstream use in permanent magnets. We are continuing to action on what we can control and influence, reinforcing the business through our cost reduction and cash improvement actions and creating long-term shareholder value. I'll speak to these actions in more detail a little bit later in the call. But for now, I'll turn the call over to John for a review of our financials in the quarter in more detail. John?

Thank you, John. On Slide 5, we reported revenue of $699 million, which is a 13% decrease compared to the same quarter last year, mainly due to lower sales volumes and unfavorable pricing for both TiO2 and zircon. Additionally, we saw a decline in sales of other products compared to the previous year. Our loss from operations for the quarter was $43 million, and we experienced a net loss attributable to Tronox of $99 million, which included $27 million in restructuring and other charges primarily related to the closure of Botlek. While our loss before tax was $92 million, we incurred a tax expense of $8 million during this quarter, as we do not receive tax benefits in locations where we are reporting losses. Our adjusted diluted earnings per share indicated a loss of $0.46. The adjusted EBITDA for the quarter was $74 million, resulting in an adjusted EBITDA margin of 10.6%. Free cash flow was a use of $137 million, which included $80 million in capital expenditures. Now, let’s move on to the next slide to examine our commercial performance. As John mentioned earlier, during the third quarter, we encountered further demand weakness and increased competition, which pressured TiO2 and zircon sales. TiO2 revenues fell 11% compared to the corresponding quarter last year, driven by an 8% decrease in volumes and a 5% drop in average selling prices, although this was partially mitigated by a 2% favorable impact from exchange rates. Compared to the previous quarter, TiO2 sales dropped 6%, influenced by a 4% decrease in volumes and a 3% decline in price, which was somewhat balanced by a favorable 1% exchange rate effect from the Euro. In Europe, the Middle East, and North America, we observed more significant seasonal declines due to market weaknesses, destocking, and competitive pressures. Latin America saw typical seasonal growth but was weaker than anticipated, while competition and a temporary halt on antidumping duties in India limited growth in the Asia Pacific region. Zircon revenues fell 20% relative to the previous year, affected by a 16% price drop, including mix effects, and a 4% reduction in volumes, mainly due to ongoing demand weakness, particularly in China. On a sequential basis, zircon revenues dropped 13%, as a result of a 7% volume decrease and a 6% price decline, including mix. Revenue from other products decreased by 21% compared to the previous year due to higher sales volumes in that prior year. Sequentially, revenue from other products increased by 18%, reflecting higher sales of pig iron and heavy mineral concentrate tailings during the third quarter. Moving to the next slide, I will now discuss our operating performance for the quarter. Our adjusted EBITDA of $74 million marked a 48% year-on-year decline, driven by unfavorable commercial impacts, rising freight and production costs, which were partially countered by favorable exchange rate effects and SG&A savings. Sequentially, adjusted EBITDA fell by 20%. The negative impact from average selling prices, decreased sales volumes of TiO2 and zircon, increased production costs, and adverse exchange rate effects were partially mitigated by sales of heavy mineral concentrate tailings and SG&A savings. Production costs were $4 million unfavorable compared to last year and $7 million unfavorable compared to the second quarter, primarily due to unfavorable LCM and idle facility adjustments stemming from lower pricing and higher costs arising from reduced operating rates. These were somewhat countered by lower cost tons sold in the quarter due to proactive measures taken under our sustainable cost improvement program. Without these initiatives, the headwinds would have been more pronounced. Moving on to the next slide, as John noted earlier, we raised $400 million in secured notes during the third quarter to boost our available liquidity and repay borrowings under our revolving credit lines. Consequently, we finished the quarter with total debt amounting to $3.2 billion and net debt at $3.0 billion. Our net leverage ratio at the end of September was 7.5x on a trailing 12-month basis. In Q3, our weighted average interest rate was about 6%, and we have maintained interest rate swaps to ensure that approximately 77% of our interest rates are fixed until 2028. Importantly, our next substantial debt maturity does not occur until 2029. Additionally, there are no financial covenants on our term loans or bonds. We do have one conditional financial covenant on our U.S. revolver, which we do not anticipate will be triggered. Our liquidity as of September 30 stood at $664 million, including $185 million in cash and cash equivalents, which are well-distributed globally and can be moved with minimal frictional costs. Working capital utilized about $55 million, excluding $30 million in restructuring payments associated with the Botlek site closure. This was driven by a decrease in accounts payable due to reduced purchases and cash flow improvement initiatives, alongside an increase in accounts receivable. Changes in inventories generated significantly less cash than expected, owing to lower sales volumes. Our capital expenditures for the quarter were $80 million, with approximately 59% allocated to maintenance and safety and nearly 41% focused solely on mining extensions in South Africa to maintain our integrated cost advantage. We returned $20 million to shareholders in dividends during the third quarter, and the Q4 dividend will reflect the revised $0.05 per share level. I want to reaffirm our commitment to enhancing cash flow and optimizing working capital. We are executing targeted measures to lower inventory by reducing production rates across all our operations and are maintaining discipline around capital expenditures, as demonstrated in our actions with the West Mine. I remain optimistic about our ability to navigate through this prolonged downturn. With that, I will pass the discussion back to John to elaborate on these actions. John?

Thanks, John. So turning to Slide 9. As outlined at the start of the call, we have seen positive developments on antidumping this year. This slide summarizes the monthly Chinese exports to the four key regions that finalized duties in 2025. While India's duties are currently stayed, we have a high level of confidence that they will be reinstated in the near future. As the data shows, the implementation of antidumping duties has had a measurable and meaningful impact on Chinese imports in the EU, Brazil and India, and we would expect to see this trend carry into Saudi Arabia as the governments reinforce their commitment to local investment and sustainability. At the peak, these markets imported a total of approximately 800,000 tons of TiO2 from China. While we do not anticipate this figure to go to zero, we have and expect to continue to see a meaningful reduction in exports to these markets and share growth for Tronox. As a reference, the U.S. has had tariffs in place on TiO2 since 2018 when the Section 301 tariffs were put in place under President Trump's first administration. Chinese exports to the region have remained consistently below 20,000 metric tons per year in a market that consumes approximately 900,000 metric tons. These developments are extremely positive for Tronox, especially as the sole domestic producer in Brazil and Saudi Arabia and a significant participant in the EU and Indian markets as well as the U.S. market. Combining this with the industry's idled mining capacity and over 1.1 million tons of global TiO2 supply that has been taken offline since 2023, the majority of which we believe is permanent, the industry is undergoing a structural shift that supports a supply-demand rebalance. As the most vertically integrated TiO2 producer, Tronox is well positioned to capitalize on this opportunity created by the rebalancing of the market. Turning to Slide 10. We remain actively engaged in advancing our rare earth strategy. With high concentrations of rare earth in our mineral deposits and decades of expertise in mining and mineral processing, we're uniquely positioned to play a significant role across the value chain from mining to upgrading. We are already mining monazite in Australia and South Africa, but our capabilities extend beyond mining. We operate both hydro and pyrometallurgical processes and employ over 400 engineers, geologists and metallurgists among our 6,500 employees. Combined with our global footprint, we have the flexibility to optimize where we participate along the rare earths value chain. As a part of this strategy, in October, we took a 5% equity interest in Lion Rock Minerals, a mineral exploration company whose Minta and Minta East deposits have the potential to be a major source of high-quality monazite and rutile. This investment represents an attractive opportunity with minimal overburden and has substantial potential for resource development in support of our rare earth strategy. Now turning to Slide 11, I'll review our updated outlook. We are now expecting Q4 2025 revenue and adjusted EBITDA to be relatively flat to Q3 of '25. This is primarily driven by weaker-than-anticipated pricing on TiO2 and zircon as a result of more aggressive competitive activity in the market, partially offset by improving volumes across both TiO2 and zircon. Although our outlook has been revised lower from our previous guidance, we expect fourth quarter TiO2 volumes to increase 3% to 5%, net of a 2% volume headwind from idling our Fuzhou facility and zircon volumes to increase 15% to 20% sequentially in part due to the rolled bulk order from Q3 to Q4. These are strong leading indicators for the fourth quarter, which is normally lower due to seasonality and directionally in line with what we would historically see on the front end of a recovery. On the cost side, we continue to execute on our cost-reducing measures as previously outlined. Our sustainable cost improvement program is expected to exceed over $60 million in run rate savings by the end of the year. And as I mentioned earlier, we have temporarily idled our Fuzhou pigment plant and one of our furnaces at our Namakwa site, lowered operating rates at Stallingborough pigment plant and will soon initiate a temporary shutdown of our West mine. We will continue to assess further measures across mining and pigment sites to ensure production remains closely aligned with prevailing market conditions. These actions position us for positive free cash flow in the fourth quarter and 2026. With regard to our cash use items for the year, we expect the following: net cash interest of approximately $150 million, net taxes of less than $5 million and capital expenditures of approximately $330 million. And we expect working capital to be a slight source of cash for the fourth quarter. Turning to the next slide, I'll review our capital allocation strategy before we move the call to Q&A. Our capital allocation priorities remain unchanged and focused on cash generation. We continue investing to maintain our assets, our vertical integration and projects critical to furthering our strategy, including rare earths. We have taken decisive action to reduce our capital expenditures over the course of the year. For 2026, while we have some catch-up capital from delayed projects in 2025, we expect capital to be less than $275 million in the year. We continue to focus on bolstering liquidity. With the actions taken in the third quarter, we have ample liquidity to manage the business and endure market fluctuations. Last quarter, we lowered the dividend by 60% to align with the current macro environment. And as the market recovers, we will resume debt paydown, targeting mid- to long-term net leverage range of less than 3x. We will continue to focus on what we can control and influence and reinforce the business through cost reduction and cash improvement actions. As the most vertically integrated TiO2 producer, Tronox is well positioned to capitalize on the opportunity created by the rebalancing of the market, evidenced by the effect of antidumping duties and supply rationalization in the industry. I remain confident in our ability to navigate this environment and deliver meaningful value for shareholders. And with that, we'll turn the question back over to the operator for the Q&A session.

Our first question comes from James Cannon at UBS.

I think the first thing I wanted to poke on was just around some of the antidumping measures you're seeing. Just given the movement with India kind of pausing their tariffs for a while, it seems like if I square that against the new measures in Brazil and Saudi Arabia, that would be a net negative in terms of like market size. Can you talk about how those dynamics are playing into your volume guidance?

Yes, you are correct that the markets in Brazil and Saudi Arabia combined are actually experiencing lower demand than in India. However, we are confident that the duties will be reinstated soon, likely before the year concludes. While we are not directly involved in negotiations there, we are well-informed and believe the DGTR will make a decision before the end of the year. Currently, duties in India are still being collected, and if they are reinstated, the overall situation will not change significantly. As we analyze our export expectations, we are facing some challenges in realizing the volume we had anticipated for the fourth quarter. Previously, we expected a higher figure, but we are still projecting a 3% to 5% increase compared to the third quarter. We are seeing some improvement in our numbers, but it is not as substantial as we had hoped. Regarding Brazil and Saudi Arabia, we view this as a unique opportunity. The duties implemented in Brazil have been considerably higher than the provisional duties, with some larger importers facing doubled rates. You can expect an average of around $1,200 per ton for all importers, which is quite significant given that we are the sole producer there. In Saudi Arabia, although we anticipated developments there, the timing was earlier than expected, and we see a unique opportunity as the only producer in that market as well. As we consider the volumes and shifts mentioned earlier, we are not merely speculating. October is now complete, and our sales for that month were the second highest this year, comparable to our strongest month in March. Even as we saw declines in volume due to destocking earlier, November’s sales are also trending positively. We have a clear outlook for both November and December orders. While there may be some uncertainty about our confidence in the numbers, the 3% to 5% growth from Q3 to Q4 is very much within our reach.

Got it. And then I just had one follow-up on the rare earths opportunity. You talked about having some capabilities with chemical conversion. But if you could give a little more detail and just unpack for us what you can do in the rare earth space in kind of the refining type downstream piece of that market and whether or not you can do that with your current footprint or that would need additional capital or a partner?

Okay. Yes. So look, on the rare earth side of the business, obviously, we've been mining forever, and I made reference that mining is not the only capability that we have. So we're already in the concentration business. So that's just producing rare earth mineral concentrate and have historically been selling that. The next step in that value chain would be cracking and leaching. We've already completed a pre-feasibility study and have started a definitive feasibility study on that production. We've located a site where that would be in Australia. Look, moving down into refining and separation, that is work that's going to require us to do some work with a partner. We're engaged with a lot of different participants across multiple jurisdictions. We have nondisclosure agreements in place, so we aren't at liberty to elaborate on who that is. But we're well positioned with our current capacity as well as some of the things that we referenced. So we made a small investment in a company called Lion Rock. That company has a very interesting deposit. We've looked at it. We've actually sent our people there. We made the investment so that we could now validate the work that they've done. There's still a lot of work to do there, but it's not only our current mining; we're looking longer-term at how we can continue to support that growth. There will be capital involved. And as we have more information, we'll articulate that. But at this particular stage, that's about where we'll have to close off the discussion with regards to development there.

Our next question comes from Peter Osterland at Truist Securities.

Sorry, Peter, we're getting a little bit of a tough connection from you. Can you start at the beginning of your question again, please?

Sure. Can you hear me now?

Better.

I just wanted to ask about operating rates. Do you have a specific time frame in mind at this point for how long this could continue on?

Peter, I'll try to answer your question. It was a bit broken up. It was regarding, I think, the idling of the Fuzhou plant and our actions that we took in Stallingborough. So the Fuzhou plant, we idled that plant to preserve cash. The market, as we've talked about, all of these issues with antidumping are creating a lot of competitive activity inside of China. That is one of our lowest-cost plants, but it's obviously operating in one of the lowest-priced markets. So we've idled that facility. Our plan would be to probably have that offline. We'll make decisions on what we're going to do with that asset as the market unfolds. With regards to Stallingborough, we brought forward some maintenance and have slowed the facility down just to be in line with what the market is doing. So I would expect in the fourth quarter, we'll probably bring that plant back up to full rate. When you start thinking about all the things that we referenced around these structural changes, we want to make sure that we're positioned to be able to support that inside of Europe. We have a significant position in Europe. The market in Europe has been a bit weaker in the third quarter. When we start thinking about all of the activity that's going on around the supply-demand dynamics, right now with the pickup in Q4, I do believe, and I've said this before, but I do believe we're on the front end of a recovery. And at the front end of the recovery, you start to see demand patterns that are a bit different than what you would historically see. Q4 volumes being up 3% to 4% when they're seasonally normally down is a good sign for us. And the next step beyond that, if we see this continuing to transition in a positive direction, we'll start looking at pricing initiatives. So I'm very encouraged by what we're seeing in the market. Stallingborough, to be specific, is a short-term action where we brought forward some maintenance, slowed the plant down to manage inventory, but we'll be ready to action that plant at full rates to meet the demand as it returns.

Very helpful color. And just as a follow-up, thinking about 2026 earnings potential, targeting the $125 million to $175 million of cost savings by the end of 2026. Do you have an estimate of what the year-over-year EBITDA impact will be in '26 versus '25? And what are the swing factors that would drive the low versus the high end of cost savings within that range?

Yes. So as we've mentioned previously, we have taken action this year, but on the sustainable cost improvement program, but it will take some time for us to flow through our balance sheet and to see it in our results. So in 2025, there's been tons of activity across all of our sites, all of our functions, all of operations. But in 2025, it's primarily been the lower-hanging fruit that we see in our numbers. So about $10 million we've seen primarily in SG&A, although as we move into 2026, as John mentioned, we're already on a run rate to end the year at over $60 million. So we should see at least that amount in 2026. It will be more operational focused at that level, and we see it coming through in fixed costs.

So maybe just adding on to that a little bit because we've had a lot of questions about this sustainable cost improvement program. And this is a bottoms-up process across our entire organization. And at this point, we've identified and acted on almost 2,000 ideas across our network. And out of those, we've got more than 1,100 that have been planned, executed and fully realized, and we currently have 413 of those ideas that are already delivering value. And when you think about how those savings kind of break out, a significant portion of those savings are coming from fixed cost reductions, and we're making good progress on the variable side as well. And we've made some great progress on ore yield improvements at our pigment plants, thanks to some of the investments in our digital infrastructure like TOIS, which is Tronox's operational information system, APC and other actionable metrics, all working together now, and we're lifting and shifting those projects across our network. Now I'll just add a few more bullets because I think it's important. In addition, some of our other capital investments are now starting to pay off. For example, some of the work that we did in Bunbury to upgrade our cooling and waste infrastructure are now translating into our capability to use lower head grade more efficiently. And we're also realizing benefits from our energy efficiencies and investments in KZN and Namakwa with larger electrodes at our furnaces, making differences in our costs and EMV optimization across all of our mining side of our business. Our contractor usage has been optimized, and we've significantly reduced our outside services, helping us become more efficient. And we've improved our logistics and optimizations of our MSPs to produce higher-value product mixes that match current market demand and have found new opportunities to improve yield in several areas. And one of the things that we're utilizing now is an app called Power BI. So every one of our people that are engaged in this process across the organization, including myself, have the ability to track these projects on a daily basis. So this isn't something that we're just talking about. It's something that's become ingrained in what we do every day, and we're making great progress on that front.

Our next question comes from Vincent Andrews at Morgan Stanley.

This is Justin Pellegrino on for Vincent. I just wanted to see if you could help us bridge to the positive free cash flow that you stated for 2026 and what assumptions are included within that, specifically if there's any expectation for earnings growth and changes in working capital amongst the other cash items that have been discussed on today's call.

Yes, thank you, Justin. I will address that. Currently, we are not providing guidance for 2026, aside from our expectation to be free cash flow positive. Some key factors contributing to the improvement from 2025 to 2026 include our sustainable cost improvement program, which is projected to increase from $10 million to over $60 million year-over-year. We are also transitioning from inventory accumulation in 2025 to inventory reduction. This change is partly due to our targeted operational actions, which are projected to achieve savings of $25 million to $30 million in Q4, potentially growing to nearly $50 million to $80 million depending on the duration of our facility shutdowns. Additionally, we anticipate a reduction in capital expenditures, with guidance of $330 million this year decreasing to under $275 million next year. It's also important to note that we have closed our bottling facility, and the cash restructuring charges impacting our free cash flow should largely be behind us by 2026. We expect around $80 million in cash charges for 2025, tapering to a much lower amount in the low teens expected for 2026. However, this will be heavily influenced by the commercial market conditions.

Great. And then just one more. I was hoping you could kind of talk about the higher-than-expected destocking that you saw downstream. Can you frame that just relative to historical averages? And then what are you hearing throughout the supply chain regarding expectations for rebuilding any sort of inventory in the channel?

Yes. The destocking occurred a bit earlier than we typically expect in the year. We didn't foresee much of this happening in the third quarter, and a notable amount took place in September, right at the end of the quarter, which was unexpected. However, we believe that much of the destocking has already occurred. As we enter the fourth quarter, we expect our customers to return to normal buying patterns. Recovery will be different this time around, largely influenced by the restructuring driven by recent antidumping initiatives. The duty-affected markets, including the U.S., which started under the first Trump administration with Section 301 tariffs, have faced duty impacts in markets consuming 2.7 million tons of TiO2, which is starting to reflect positively for us since we participate in many of those markets. We've discussed this trend for a while, but it's beginning to show up in our results. Additionally, the competitive activity resulting from a competitor's insolvency will likely lead to inventory liquidation soon, and we're noticing changes in buying trends in Europe that support this. India remains a key market for us. The duties there have been paused, but we are confident they will be reinstated before the year ends. Although our growth expectations have moderated, we still see positive growth in that region. Overall, there are many reasons to feel optimistic about our current position in the cycle. We are 3.5 years into a downturn, and I'm certain it will turn around. I believe we are at the beginning of that change.

Our next question comes from John McNulty at BMO Capital Markets.

This is John Roberts. I heard you call John McNulty, but I'm just checking whether you can hear me. Will LB be able to use their new position in the U.K. to bring Chinese ore in and serve the rest of the European market without a tariff?

John, look, there's a lot left to be done with the announcement that LB is going to be acquiring that asset in the U.K. There's a lot of regulatory work to go through. So I would say by no means is that a slam dunk. I can't speak to what they may do. That asset is down. The longer that asset is down, the harder it's going to be to be brought back up. And having done a lot of work trying to buy assets in Europe historically, I would just say there's a lot of wood to chop there.

Okay. And do you have any rare earth activity going on in South Africa as well?

We mine in South Africa and Australia, and monazite is present in both deposits. What we're doing right now is actioning the majority of what we have in Australia. But yes, we have monazite in South Africa and some of the things that we've done historically, although this last sale of mineral concentrate didn't have much rare earth in it. Historically, we have and continued to mine. And as long as we're mining in both those regions, we're getting monazite, which has both light and heavy rare earths in it. And we're developing a process forward to monetize that in a way which we can move down the value chain. Furthest we're going to move down that chain would probably be the refining side. The metalization and magnet production is not something that we feel we're uniquely positioned to do. But being a mining company that's regularly involved in mineral upgrading, it's a natural fit for us to look at concentration, acid leaching and cracking and refining and separation.

Our next question comes from Roger Spitz at Bank of America Securities.

I would like to get clarity on the updated guidance for the working capital outflow and free cash flow for 2025, or discuss the Q4 numbers. You mentioned that working capital is only showing a slight inflow despite idling various assets. Could you provide an update on either Q4 or the full year 2025 regarding both working capital and free cash flow?

I'll start and then let John add to it. To clarify on the idling of the assets, it will provide a working capital gain for the Fuzhou facility, slowing down Stallingborough, and bringing forward maintenance will be advantageous. The furnace was idled on September 15, and we’re reporting that now. The West mine, which is a crucial process, will be affected as we introduce East OFS, which starts commissioning on November 17. After that commissioning is complete, we will begin to shut down the West mine. To explain further, we had both an East and a West mine. East OFS is taking the place of the East mine, while the West mine will continue to operate. However, to save cash, we will idle it as soon as we bring East OFS online, which will feature a higher grade heavy mineral concentrate that will integrate into our operations. John, would you like to add anything?

To answer your question, I'll provide some additional details. Year-to-date through Q3, we experienced a significant utilization of working capital and free cash flow, totaling approximately $190 million in working capital and over $300 million in free cash flow. We have indicated that we expect to achieve a positive outcome for both free cash flow and working capital in Q4, aiming for maintenance and slight improvements in both areas. It's essential to consider the events of Q3 to understand the factors influencing Q4. As John mentioned, we faced numerous commercial challenges in Q3, including antidumping delays in India, competitor insolvencies in Europe, and competitive dynamics in China, along with the postponement of zircon shipments from Q3 to Q4. The zircon shipments will contribute positively in Q4. Additionally, we had a tailings sale in Q3, but since it occurred late in the quarter, the cash collection for that will reflect in Q4. Therefore, we anticipate improvement quarter-over-quarter, but these issues resulted in a smaller reduction in inventory than anticipated, meaning it didn’t serve as a significant source of cash. We foresee a recovery with higher volumes in Q4 for both TiO2 and zircon, although, as John noted, the increase is less pronounced than expected but still positive, leading to some benefits from reduced inventory. From an accounts payable perspective, we experienced notable use, along with about $30 million in restructuring charges in Q3, which will decrease in Q4. Consequently, the reduction in purchases and capital expenditures led to higher accounts payable, but we expect this to revert in Q4. Overall, we anticipate Q4 free cash flow and working capital will be more substantial than in Q3, though relatively flat.

And when we think about all the actions that we're taking to preserve cash and you couple that with some of the positive things we're talking about on the market, again, I made reference that the market will recover. We think we're on the front end of that, but we're taking actions that we feel are prudent at this particular stage to make sure that we have cash and that all those things that John just referenced around a covenant are not triggered ever. So this is a process that we're in place. It's been a tough downturn, but we're taking actions that we need to take to manage the business through the long term.

Our next question comes from Frank Mitsch at Fermium Research.

I want to return to the unexpected challenges regarding prices for the fourth quarter for both TiO2 and zircon. For TiO2, it appears that the competition from Venator's liquidation of inventory is significantly impacting the situation. I'm interested in your thoughts on when we might transition from these unexpected pricing challenges to potential positive price movements for TiO2, assuming a typical coating season. Additionally, you mentioned more intense competitive dynamics in the zircon market. Could you elaborate on that?

Thank you, Frank. Regarding TiO2, we did not react to all the liquidation events from competitors, as their prices were not very appealing. However, this liquidation created a competitive environment. In the second and third quarters, there was significant competitive activity, and we mentioned that we planned to regain some market share. The inventory liquidation has sparked even more competition, but I believe much of that inventory will be cleared out by the year's end. We are already engaging with customers about future needs as they prefer suppliers who will be around beyond 2026. Demand patterns are fluctuating, and while we saw increases in early 2024 that dwindled in the subsequent quarters, the fourth quarter appears to be different. We haven't noticed notable fluctuations despite industry changes and duties. We expect this recovery to be distinct, and if demand continues at the current rate, our sales in October were the highest for the year, comparable to March. We also have good visibility for November and December, suggesting much of the destocking is completed and we are returning to normal demand patterns. As a result, we may see prices start to rise, although not before the first quarter, but we are keeping an eye on it. Regarding zircon, competitive activity has intensified, particularly with a significant amount of heavy mineral concentrate being mined from China and various African regions. Indonesia has begun reducing their output, which has impacted prices. While the Indonesian market isn't massive, with around 60,000 to 70,000 tonnes of zircon produced annually, we are noticing a downward trend in their production. Additionally, other mining projects have also scaled back. The zircon market's shifts from Q3 to Q4 involved global shipments, but we are beginning to observe an increase in demand. Previously, I noted that while global demand was rising, China was lagging. However, we are now starting to see early signs of increased demand in China. It may still be premature to make definitive predictions about pricing, but the demand trends in the fourth quarter for zircon are promising.

Our next question comes from Edward Brucker at Barclays.

I think you sort of mentioned it as you're going through the cash flow implications of the idling of the facilities. But are you able to provide the actual cash cost of the idling of the facilities and furnaces and then the closure of the mine that you expect?

First, I want to clarify that we are not closing a mine; we are idling the West mine. We are reducing operations similarly to how we shut down one furnace at Namakwa, which produces a significant amount of the slag we use. Since we aren't producing as much TiO2, we have also idled the furnace. The mine will be brought back online once the market improves. The cash generation benefits from this idling in 2026 will largely depend on the duration of the shutdown, but there will be a positive cash impact. In the fourth quarter of 2025, the total effect on EBITDA from reducing those assets is projected to be $11 million, which is significant. Currently, excluding Fuzhou, we are operating at just over 80% capacity utilization. In the previous downturn, when we operated our assets at lower rates, the fixed cost absorption was costing us between $25 million and $30 million per quarter, not accounting for idling a mine. I want to connect this back to our ongoing cost improvement program. While it may be challenging to see its impact in the numbers, the fixed cost absorption for the quarter being only $11 million indicates the effectiveness of our cost improvement efforts, given that we are running at similar operational levels. We've idled a mine, but our costs have not dropped significantly. John, do you want to add anything?

Yes. So as mentioned, there will be a $11 million impact in Q4 from shutting the facilities down from an EBITDA perspective. However, we expect that to be offset by anticipated cash flow benefits in Q4 and in 2026, driven by the actions taken. As we see the positive shifts in the market and cash generation, we will monitor performance closely and adjust as necessary going forward.

Well, to add to that, just to clarify. The work we are doing and idle actions will give us a more considerable cash generation opportunity than the costs we will incur by shutting down our operation short-term. We're actively managing this in accordance with the changing market dynamics.

Got it. And just my next question, can you dive a little further into why you feel so confident that India will reinstate those duties? And then if they don't, are there any contingency plans for the region?

I'll begin with the last question. India is our second-largest market, and we currently benefit from a 10% duty advantage by supplying from Australia due to a free trade agreement. There's still potential for growth here. Even when China was at its peak, supplying 300,000 tons per year in a market of 450,000 tons, we continued to grow. Although growth may slow down, we expect to keep growing. While we do not produce in that region, we are in active discussions with the government and have insights into the situation at the DGTR. We anticipate a decision by the end of the year, which we believe will be favorable. I can't provide more details at this time, but we are optimistic. Even if the duties are not reinstated, we still have a plan for growth.

Our final question comes from Hassan Ahmed at Alembic Global.

In the press release, you mentioned shutting down 1.1 million tons of TiO2 capacity since 2023. My question specifically concerns anti-involution and China. If I'm correct, China has around 50 TiO2 facilities, with about 20 of those being small-scale, producing 50,000 tons or less, and operating at a loss. If I group those 20 facilities together, that totals approximately 700,000 tons of capacity. How are you approaching that capacity? Is it at risk? Are you hearing anything about potential closures? Also, what insights do you have regarding anti-involution?

Yes, thank you for the question. To clarify, the 1.1 million tons of capacity refers to the period from 2023 to now, and we believe most of that is currently offline. Some Chinese plants are included, but we are not counting our own plant idling. We have heard of other plants considering idling, and the key question is whether they will be shut down permanently or just temporarily. I expect there will be some consolidation in that capacity. We will need to continue competing with others in the long run. That's why these duties, which usually last for five years with a subsequent sunset, are important. Our focus needs to be on improving cost efficiency so we can maintain a sustainable competitive plan regardless of where we sell our product. I believe our plant in China is the most cost-effective in our system, but the market there is also the lowest priced and is more competitive now. With the 800,000 tons that used to be exported, there are fewer alternative markets for that material. Other regions not affected by duties are mostly saturated with Chinese products as well. I agree it will take time, and it seems like it should have happened sooner. Many of those plants are state-owned and benefit from subsidies, which we do not have for our facility in China. We have idled that plant for valid reasons and will decide how long it stays down based on market conditions. I acknowledge that what you've described is not entirely reflected in the 1.1 million tons that have already been taken offline. In this downturn, which has lasted 3.5 years, I've never seen such a drastic capacity reduction. Historically, you might see 25% of capacity reduced in a downturn, but typically the market declines, and just before closures begin, there's some recovery. This situation has lasted longer than any previous ones, and every competitor has either idled or closed a plant.

Thank you, John. I would like to follow up on the situation regarding antidumping in India. I understand that the circumstances are still shifting. However, it seems that the main reason for the courts overturning the antidumping duties was not related to the underlying reasons for imposing those duties originally, but rather to procedural issues. Specifically, the Indian Paints Association mentioned that certain information was not provided to them but was disclosed to other parties. This indicates that the decision was more about procedure than the initial reasons for the duties. Does this give you confidence that these duties may be reinstated?

That's exactly right. I couldn't restate it any more clearly than you just did. It was a procedural error. We believe that the data that they didn't get has been submitted. The procedural correction will be done, and the duties will go back into place. So I can't state what you stated any more clearly, the right answer.

Thank you. So there are no further questions today. So I'll now hand the call back over to John Romano for closing remarks. Thank you, John.

Thank you for joining the call. It has been a challenging 3.5 years, but we are optimistic about our self-help initiatives and the hard work we have put into cost improvement programs. I provided details on those efforts, and they are being integrated into our daily operations, just like safety is a priority for us. Maintaining these cost improvements and staying competitive in the long term will remain a focus. Our team has excelled at implementing these programs across different sites, and I am feeling positive about our progress due to their efforts. We look forward to providing you with updates throughout this quarter and the next. Thank you very much.

This concludes today's call. Thank you for joining, and have a great day.