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Hanwha offers to acquire all shares at NOK 2.20/share (all-cash offer)Offer implies a 28% premium to yesterday’s close and 54% to 3-month VWAPBoard (excluding conflicted members) unanimously recommends accepting the offerOur take: In light of the debt burden, very challenging to see any remaining equity value
REC Silicon ASA
REC's Moses Lake product failed the third-party qualification test, marking a critical setbackWith near-term liquidity needs, excessive debt, and no clear estimate visibility at this stage......a full refinancing appears inevitableHowever, several uncertainties must be resolved before such a refinancing can occur
REC’s Q3 update left many unanswered questions. The company’s near-term capital need is obvious, and we are uncertain as to whether a short-term bridge loan from Hanwha will solve “everything”. In a best case scenario, 2025 now looks be a transition year characterized by streamlining of operations and costs (i.e., we don’t necessarily rule out one or two quarters with negative FCF once plateau production has been reached). Although further Hanwha-supported bank financing would be welcome, REC’s future leverage ratio is looking increasingly unsustainable, hence it is probably unwise to disregard the risk of a meaningful equity raise (~100 USDm) either early next year or in the following quarters. This, combined with the risk of not meeting product quality specifications, creates a situation where there is no firm floor to the share price. At the same time, in a scenario where product quality specifications are met shortly, production stabilizes within guided cost levels and the company becomes FCF positive without any dilution, our DCF still justifies a share price of 8-10 NOK/sh. Given the wide set of outcomes however, we find a Hold-recommendation most prudent and lower our TP to NOK 4 (9).
Q3 EBITDA USD -42.7m (~20-30% below cons./ ARCe)Qualification time for product approval still uncertainMoses Lake put on "minimum operation rate" to preserve cash
We downgrade REC to Hold, as the upside to our base case is looking less exciting in light of the risks. Provided that REC meets the product qualification criteria, executes according to plan through next year and is given access to debt financing on similar terms, REC should be worth ~10-15 NOK/sh. What would significantly shift the “fair value”- range to the upside, is a meaningful recovery for polysilicon prices, but little evidence points to such a development in the near term. As 2025 is likely to be a “transition year” (where some streamlining/ fine-tuning will be needed to achieve internal cash cost targets), the funding situation needs clarification and the US election brings some risk with it, risk/reward is looking more neutral, and we consequently downgrade.
Prior to the first Moses Lake delay announcement in March, it seemed like RECSI had done most things right (signed an offtake contract with Hanwha with a floor price mechanism, secured attractive debt-financing, divested its Yulin stake well above market expectations and communicated through several consecutive quarters that the reopening of Moses Lake was progressing on schedule/ within budget). Since then, several delays have been announced to the first product shipment, often last minute, which have contributed to put mgmt.’s credibility under pressure. The company faces several important tests over the next six months: i) First product shipment (September), ii) Ramp-up to full capacity (before year-end), iii) The need for additional funding (preferably debt financing secured by Hanwha), iv) Hopefully landing one or more contracts with silicon anode companies for silane offtake. Although it is challenging for us to have strong conviction as to whether the last delay is behind us or not, mgmt. expresses confidence in reaching this milestone, which should i) unlock the USD 50m prepayment, ii) make it easier to secure additional financing and iii) restore trust. We lower our TP on the back of negative estimate revisions and an increased cost of equity, but continue to see valuation upside in most price scenarios, assuming successful ramp-up of Moses Lake volumes.
EBITDA USD -38m as a result of Moses Lake start-up costs. 19% higher losses q/qButte EBITDA USD 7.0m (vs. USD 2.8m last quarter) due to higher prices and lower costsMoses Lake first delivery and 100% capacity still guided for September and year-end, respectivelyVast majority of Moses Lake- capex behind us, but additional financing to bridge liquidity gap likely neededDiscussions with certain silicon anode producers likely to reach conclusion later this year
First product delivery now expected in mid-September 2024 (previously: by end Q2)Apart from the clean-up issue, all other construction activities are on schedule"In advanced processes of exploring funding options to bridge any temporary financial gap" (mainly debt)Unfortunate for many reasons (increases risk and negatively impacts trust)
EBITDA USD -31.5m as a result of continued start-up costs at Moses Lake. Flat q/qButte EBITDA USD 2.8m (vs. USD 1.1m last quarter) due to marginal volume increaseMoses Lake has met five out six quality parameters. First delivery slightly delayedVast majority of Moses Lake- capex should be behind us, but the bridging towards positive FCF looks more vulnerableDiscussions with certain silicon anode producers expected concluded later this year
From a company-specific viewpoint, RECSI has done most things right over the past year: i) The company has become fully financed for the Moses Lake restart, ii) it has signed a 10-year Moses Lake offtake agreement, with a price floor that should ensure a minimum level of profitability, iii) the 15% Yulin equity stake was sold for an impressive USD 136m consideration, iv) the Moses Lake capacity ramp-up has so far progressed in line with schedule/budget. Despite this, the share price development has been disappointing. We think the market underestimates the degree of de-risking that has taken place, but due to the adverse polysilicon market development since our previous update, we trim our TP to NOK 17 (27).
The company will receive USD 130m (~3.3 NOK/sh) before certain transaction costsThe Yulin JV is valued at zero in our SotPWe think the market also has been reluctant to price in this optionUse of proceeds not yet determined
REC Silicon (REC) has started the Moses Lake site and hopes to get the first polysilicon out by the end of November. This would allow for the first shipments to Hanwha Q-Cells in Q1 2024 as planned. The odd finding was that semi companies bought less silane gases despite a pick up in semi grade polysilicon volumes. The management gave a relatively moderate outlook in which it sees a recovery. Profitability was below our expectations (-15%). There was no consensus available.
New supply agreement replaces the binding term sheet from JanuaryLimited new information, but contributes to reduced uncertainty
REC has upped the likelihood of a better future based on more of a step-by-step approach than cutting the Gordian knot. However, the short-term outlook is not that positive especially when it comes to energy as some triggers are still in the making. All in all, the recovery story is still intact, but the potential risks remain unchanged.
Butte EBITDA USD 10m (vs. ARCe USD 4.5m) on higher volumes and pricesNecessary financing securedMoses Lake progressing according to plan, first production targeted Nov 1st
REC Silicon is planning to divest its remaining stake in the so-called Yulin joint venture. This is getting off cheaply on our view as the company had lost any kind of control in the JV and had therefore written down the assets.
REC Silicon’s Q1 report was characterized by the high cash outflow and the successful refinancing measures. The former was related to the strong restart ambitions of the Moses Lake production site, whereas the latter was crucial to give the company a certain leeway and freedom to follow its recovery path. The reported figures missed our expectations (sales: -5.3%; EBITDA: -30.4%), but this not meaningful as the overall story remains intact. However, the higher EBITDA loss was partly explained by cost inflation.
Revenue of USD 29m (-13% vs. ARCe) on lower semiconductor volumesButte EBITDA of USD -3.4m (vs. ARCe USD -0.9m) for the same reasonOn schedule to restart Moses Lake in Q4 2023
USD 110m loan from KEB Hana Bank in Korea, guaranteed by Hanwha Will be used to retire the outstanding bond with maturity 13 April Addresses near-term capital need; further financing required in 2023
RECSI’s Q4 figures came in short of our expectations, mostly due to the negative impact of continued high power prices. The most important new information was the EBITDA guidance of USD 100-300m at full capacity, which we have used to backsolve the likely floor/ceiling price levels of the offtake contract. Considering this, the set of outcomes/fair valuation range is now much more defined, and we argue the current entry level represents attractive risk/reward.
REC Silicon did not have a nice year-ending. The company experienced a destocking along its semiconductor value chain, which ended up with lower yoy and qoq silane gas deliveries as well as polysilicon ones. Continued yoy higher electricity and raw material prices made it difficult for Semiconductor Materials to remain in positive territory. We understand that business secrets are not shared, but management remained pretty vague when analysts asked for more clarity on other business topics.
Q4 revenue USD 32m (-5% vs. ARCe) on lower utilization Butte EBITDA USD -6.5m (vs. ARCe USD 2.4m) on utilization/energy costs Company level EBITDA guidance of USD 100-300m at full capacity… ..supporting our investment case. RECSI should outperform today
10-year offtake agreement with floor price and prepayment Reiterates ambition of restarting in Q4’23, full utilization towards YE’24 Floor price and prepayment mechanisms provide significant de-risking We find today’s news major positive and expect RECSI to outperform
Potential IPO by YE’23 Indicated pre-money set to USD ~1.2bn (USD ~180m net to RECSI) If successful, will add 4.3 NOK/sh to our SotP
RECSI delivered disappointing Q3 figures, as Butte had one of its weakest quarters this decade. The bright spot was the fact that Moses Lake remains on track to reopen by Q4’23. We lower our near-term estimates due to the soft silane gas outlook, and also trim our long-term price assumptions to build in wider contingency vs. current spot levels. Still, we argue that too much pessimism now is priced in (a level of ~$14/kg polysilicon vs. spot $37/kg) and thus reiterate Buy.
REC Silicon continued to suffer from high energy prices, the management having attempted some mitigation in the form of a large maintenance shutdown. The hedging policy, if any, remained unclear. Aside from the dwindling cash, REC’s financial situation remains difficult as the bond repayment and additional financing requirements remain unsolved. REC’s Q3 figures were below our cautious expectations.
Butte Q3 EBITDA of USD -5.3m vs. ARCe USD 4.4m Reopening of Moses Lake progressing according to plan Nothing new related to offtake discussions with Hanwha Bond still covered by cash
Butte Q3 EBITDA of USD -5.3m vs. ARCe USD 4.4m Reopening of Moses Lake progressing according to plan Nothing new related to offtake discussions with Hanwha
We increase our TP to NOK 32 (30) after implementing minor positive changes following last week’s report. The main uncertainty is the exact price/volume structure of the offtake contract to be signed with Hanwha, which is likely to be concluded and disclosed in the market in Q4’22. Our TP of NOK 32 is based on a DCF- analysis risked by 20%, where we have assumed the company will realize a long-term polysilicon price of $22/kg.
The REC management flagged many moving parts in terms of the final Go for the re-start, but the US government is preparing the industry and others for a fairly clear sky scenario. This should support the management’s case for a positive decision on the re-opening of the Moses Lake site. After the call, we have concluded that it would be wrong to be too enthusiastic about Q3. The reported figures were a mixed bag as profitability came in below our expectations.
Moses Lake restart capex USD 150m vs. our USD 210m estimate Weak Q2 cash flow but still very comfortable liquidity position Less uncertainty on Moses Lake is a positive for the bonds
On track to restart Moses Lake in line with prior communication (Q4’23) Moses Lake restart capex of USD 150m vs. ARCe USD 210m MOU with Hanwha signed, price negotiations ongoing Lower capex = lower capital need and less uncertainty - should be a relief
The bill is expected to pass the House later this week Should trigger necessary investments to establish a US-solar supply chain Given approval, this scenario represents upside vs. our current base case due to firm tax credits
We increase our TP to NOK 30 (26) on the back of RECSI’s announced ambition of restarting Moses Lake in Q4’23. The fact that Hanwha expressed an interest in securing all capacity already at this point was earlier than we had anticipated, and massively decreases utilization risk in addition to increasing RECSI’s bargaining position in other discussions. Our TP of NOK 30 is based on what we find to be a conservative DCF-analysis risked by 20%.
Management has passed by an opportunity to bring the company back into investors’ minds, but some vague plans and unspecified financial needs do not push the needle. Management had not prepared well to answer investors’ questions. It’s a pity. Reported figures were solid but still impacted by higher energy prices coming in 3.5% and 4.8% above our expectations. Management remained also quite vague when it came to the Q2 outlook and remained hesitant in giving a FY one.
Q1 revenue of USD 34.6m (-13% vs. ARCe) Butte EBITDA of USD 10.7m (+21% vs. ARCe), up from USD 9.3m in Q4 Announcing plans to restart Moses Lake in Q4’23, with offtake to Hanwha Incremental capex requirement unlikely to add material risk to Credit case
Q1 revenue of USD 34.6m (-13% vs. ARCe) Butte EBITDA of USD 10.7m (+21% vs. ARCe), up from USD 9.3m in Q4 Announcing plans to restart Moses Lake in Q4’23, with offtake to Hanwha The share should immediately reprice closer to 30 NOK/sh in our view
Yday, Sila Nano announced purchase of factory building in Moses Lake Today, Group14 announced to have completed a $400m capital raise… …aimed at establishing a large-scale battery materials factory in the US …reliant on a silane gas from Moses Lake to reach necessary scale
Q4 was characterized by higher prices and volumes than we anticipated, and we consequently revise our ’22 estimates somewhat higher. With Build Back Better seeming stranded in its current form, we have delayed our base case reopening point by six months and lowered the reopening probability by 10pp. That said, by increasing the ML margin assumption and moving the valuation point out to YE’22, we revise our TP only slightly down to NOK 26 (27).
REC’s management still anticipates that it will re-start its PV polysilicon production in 2023, despite some anticipated oversupply from new capacities coming on stream. However, the political landscape in the US seems to be generating some uncertainties. As we see the re-opening of Moses Lake as a key component for future success, a go decision would trigger a different valuation as well as a different perception of the company. The recent capital increase (~NOK964m) will give the company additional leeway. Our expectations were not met.
Revenue of USD 43.2m (+16% vs. ARCe) Butte EBITDA of USD 9.3m (+72% vs. ARCe), up from USD 1.8m in Q3 Strong market outlook for semiconductor polysilicon and silane Will maintain flexibly to restart in 2023, i.e. potential FID in 2022
We increase our TP in RECSI to NOK 27 (25) on the back of Hanwha’s move to become a shareholder, creating a more vertically integrated solar manufacturing platform, and the encouraging political development in the US. Hanwha has 1.7GW of cell manufacturing capacity in the US that could serve as an end customer for ~30% of Moses Lake’s capacity. Our TP is based on an 80% chance of a reopening (up from 70%).
Due to lower utilization/higher costs REC’s Q3 came in a bit soft, but our estimate changes are quite neutral as costs are expected to normalize, while REC gradually should benefit from higher prices. Although the reopening case for Moses Lake remains strong, we would not be surprised if a decision could be pushed to mid-2022. That said, if the multi trillion USD welfare package should receive support and include solar manufacturing subsidies, it could happen sooner.
REC Silicon looks to be a perfect case study in how delayed business decisions could play out. Polysilicon solar prices go through the roof and management is mired in discussions instead of re-starting Moses Lake. The polysilicon price rise was not fully out of the blue, it emerged in the past quarters, but management seems to have fallen asleep. The Q3 figures were below our quite cautious expectations.
Higher prices, but lower volumes (flat revenue QoQ) Butte EBITDA of USD 1.7M (down QoQ on higher electricity costs) Cash position up due to favourable working capital contribution Reopening case remains strong, but too early to make decision
REC’s management had ‘collected’ some money from investors to re-fuel and revamp the Moses Lake site, but it prefers to stand on the side line when it comes to solar polysilicon production. We understand this will be quite an endeavour as long as a non-Sino value chain has not been established or when its establishment starts. We see REC’s management between a rock and a hard place as investors might become somewhat agitated. The reported figures fit into our broad picture.
Strong reported numbers, but underlying largely in line Butte Q2 EBITDA adjusted for grant at USD 7.0 vs. USD 10.8m in Q1 Limited new outlook comments – no new commercial agreements yet Overall a neutral report
Butte EBITDA in-line at 10.1m – REC EBITDA at USD 4m vs est at USD 1.5m Customer indicative forecast suggests a strong increase from Butte in Q2 We view the report as credit positive due to performance on Butte Bonds now callable at 105.75, leaving limited upside from current levels
REC Silicon ASA Record plc
The battery industry is striving for cheaper batteries on a per kWh-basis, and silicon anodes not only represent the most promising route to lower costs, but also compatibility with current Li-ion batteries and their value chains. Based on the effort and capital put into R&D, we believe the chance of commercialization is increasing. Our TP of NOK 28 (19) is based on a 70% chance of a Moses Lake reopening, solely serving the battery industry in 50% of the outcomes.
REC has made such an improvement since October. After the closing of the capital increase, it looks as if what had looked like management’s wishful thinking might have turned into something more realistic. Seeing the signs of the times, the re-vitalisation of a photovoltaic value chain outside China makes a lot of sense against the background of everything becoming greener hype. The reported Q4 figures were not that game-changing, as we had expected in Q4, as REC was still loss making.
Butte EBITDA of USD 11.7m – in line Increasing level of interest from battery materials companies Intends to make a decision regarding Mosel Lake restart by year-end Our positive view on the investment case has been strengthened
REC recently announced two new partnerships, together providing Moses Lake with more than sufficient utilization to justify a restart. The final decision will be made next year, which could trigger first production around year-end 2022. A utilization level of ~90% is clearly within reach by 2025, which could push REC’s annual EBITDA above USD 130m. Through a probability weighted scenario analysis, we arrive at a new TP of NOK 19 (3.5), and hence upgrade to Buy.
Not really, but the non-cash settlement of the property tax dispute could be seen in the light of the vital signs sent by recent activity (Latest of 15/10/2020). This looks like the implementation of previously-announced plans (Latest of 13/10/2020). However the semiconductor business remained the only cash-generating business with declining margins. The reported figures were a bit weaker than expected.
Butte EBITDA of 7.3m – Cash balance of USD 35.9m Moses Lake to be restarted, funding secured Partnerships on Moses Lake for both Solar PV and battery technologies Bond has traded up, still at attractive levels
REC is conducting a private placement backed by the announcements of 13/10/2020. The financing proceeds will be used to make the PV-related plan come true. As we see a certain interdependence between a planned re-start of REC’s site and Violet Energy’s plans, we are slightly struggling with the schedules of both companies as they look disconnected.
