Chemours Company: Bulls Need a Reality Check

Two catalysts have led to 129% gains for specialty chemical manufacturer Chemours Co. (CC 0.01%) in the past year. The long-awaited recovery in selling prices of titanium dioxide, for which the company is the leading global manufacturer, has provided one continuous boost throughout 2017.

But the catalyst that started the stock rally occurred in February 2017, when the company settled a drawn-out legal fight concerning the dumping of a toxic chemical into public waterways. The $670 million settlement removed a cloud of uncertainty that had been hanging over the stock -- and on terms that were more favorable than the worst-case scenario Wall Street envisioned. Better yet, since Chemours had stopped using the toxic chemical in its American manufacturing processes, many assumed related liabilities were a thing of the past.

An unfolding environmental and public health issue in Fayetteville, North Carolina, could prove otherwise. It may be the reality check Chemours bulls need to consider that profits aren't the only bottom line to consider for an investment.

Image source: Getty Images.

Business is booming, but uncertainty looms

Chemours reports financial performance in three business segments, which have performed as follows in the first nine months of 2016 and 2017: 

Business has been booming in 2017 thanks to price increases in the two largest segments: titanium technologies and fluoroproducts. The former is comprised of sales of titanium dioxide, a nanoparticle with myriad uses as a pigment in paints, sunscreens, and foods. The latter consists of sales of products that include fuel cell membranes, refrigerants, and nonstick coatings (with Teflon being the most famous). While useful to modern life, fluoroproducts have one crucial drawback: the manufacturing process.

That's because the chemical reaction used to produce fluoroproducts requires a class of processing aids that are incredibly toxic to human health. The settlement announced in February 2017 concerned the environmental release of the processing aid PFOA, which was phased out years ago. Chemours replaced it with a processing aid known as GenX, which, unfortunately, appears to be similarly toxic.

This wasn't exactly a surprise. The U.S. Environmental Protection Agency raised issues with GenX prior to its industrial use, but a lax regulatory system for chemical safety meant the concerns were nothing more than words on a piece of paper. Chemours proceeded unimpeded, although the state of North Carolina may soon erect the first serious roadblock.

North Carolina is getting serious

Chemours owns a manufacturing facility in Fayetteville, North Carolina that used to manufacture PFOA and now manufactures GenX. It's at the center of unfolding public health concerns. Why? The state of North Carolina has legal limits for the concentration of the processing aids allowed in drinking water. However, tests conducted throughout the year have detected worrisome levels of PFOA and GenX in Cape Fear River and related waterways, where the discharged industrial water ends up.

A few notes and developments of relevance to investors:  

• Chemours no longer uses PFOA in the United States. It doesn't break down in the environment, which means recently detected amounts are likely legacy pollution from years past.
• In June 2017, the company committed to stop discharging GenX into local waterways around its Fayetteville facility. However, as recently as October, state officials detected levels of GenX coming out of the chemical complex's discharged water that were up to 26 times higher than the legal threshold for drinking water. The discharge doesn't actually become drinking water, but the company is supposed to alert regulators of discharge events of that magnitude, and it didn't. 
• After the October tests, environmental regulators moved to revoke the company's ability to discharge wastewater from the site and referred the incidents to the North Carolina Bureau of Investigation for potential criminal charges. 
• In the company's latest 10-Q, it noted five separate lawsuits filed against it for its actions in Fayetteville including from residents, the Cape Fear Public Utility Authority, and nearby Brunswick County. 
• The state continues to expand its sampling of residential wells near the facility. At last count, 85 households were being supplied with bottled water due to GenX levels in their wells being above the provisional state health goal. 

It's still possible that the company will avoid potential fines or costly legal battles, but recent events certainly aren't favorable to the company. Consider that the households being supplied with bottled water (courtesy of Chemours, as ordered by the state) will need to dig deeper wells or be connected to the local water system with new and costly water lines. That could take months or years.

Or consider that the company's former parent, Dow Chemical, now part of DowDuPont, may disagree with its liability in any potential lawsuits. A similar dispute elevated Wall Street's concern over the settlement involving PFOA that was announced earlier this year. Each company paid half of the $670 million settlement, easing concerns, but that may not be the case for lawsuits over GenX.

No matter how this plays out, one thing is sure: Uncertainty is about to return for Chemours. And uncertainty is never good for a stock.