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According the recent business plan, REC’s management is putting all eggs in one basket. Stuck between a rock and a hard place, management is planning the divestment of the Butte site and becoming a global polysilicon company serving the photovoltaic market from Mainland China (Yulin JV) and the US (re-opened Moses Lake). Reported figures were below our expectations, especially at the profitability level, as EBITDA moved back into the red qoq.
REC SILICON
REC’s future looks to be less fragile – at first sight. But REC’s general problem is still there: the limited access to the largest photovoltaic market of the world, China, as the issues with the US are still unsolved and another potential trade war (Japan and South Korea) could emerge. This had led to management’s cash king philosophy. The Q2 figures were broadly in line with our expectations.
Like a start-up, REC continued to burn cash (Q1: USD-6.4m; cash on hands: USD25.4m), but we assume the amount will come down in the next quarters as management has plans to stop production temporarily of photovoltaic polysilicon at one site and the semiconductor business is profitable. But, as long as the US – Chinese trade war is not solved and global polysilicon prices pick up, REC needs a solution or a new business model. Our estimates were not met.
REC Silicon’s Q4 report is more a confession of wasting away than a recovery. However, reported figures look reconciliable with our estimates due to lower D/A and impairments. In order to cope with the high inventory levels, management plans to shutdown polysilicon production temporarily for two months as the business is so dependent on negotiations in the US-Chinese trade war. Maintaining the company’s liquidity (USD32m after USD105m at year-end) will be the challenge for the year.
Especially in times of a trade war and when the largest market is being negatively impacted by a change in governmental regulation. The Q3 figures clearly reflected the negative impacts thereof and fell short of our expectations.
*Revenues declined 4% to US$58.9m, yoy (qoq: -15%); polysilicon production volume was 6% lower at 2,491mt and sales volume was down 32% to 1,742mt qoq. *EBITDA swung from US$1.3m (Q2 17) to US$-9.6m and the EBITDA margin ended up in red after 2.1% in the previous year’s quarter. *EBIT loss moved from US$-19.0m to US$-370.1m. *Net result came in at US$-374.4m after US$-62.0m. *EBIT absorbed impairment charges of US$340.4m due to e.g. the curtailment of solar incentives in China.
Revenues increased 21% to US$69.9m; polysilicon production volume increased 12.7% to 3,523MT and sales volume 15.7% to 13,851MT. EBITDA improved from US$4.7 to US$14.6; the EBITDA margin increased from 9.2% to 20.9%. EBIT losses declined from US$15.8m to US$5.7m. Net income jumped to US$60.4m from a loss of US$27m, driven by an extraordinary gain of US$72.2m. Excluding extraordinaries net losses improved from US$27m to US$11.9m. Debt obligation met by the successful placement of a US$110m bond.
REC Silicon successfully completed the refinancing. The company offered a 5-year senior secured US-bond with a total volume of US$110m.
Revenues declined only 3% to US$78m in Q4 17 EBITDA margin increased from 6.1% to 13.2% but EBIT losses continued Higher Silicon gas sales and higher prices for solar grade polysilicon mainly contributed to the margin increase Net losses of US$153.1m, driven by the write-down on deferred tax assets of US$147.2m Going concern at risk due to debt maturities in the current year Additional capital of US$100m required
No longer in the driving seat REC Silicon and Shaanxi Non-Ferrous Tian Hong New Energy Co. (SNF) have agreed on the outstanding capital contribution from REC Silicon for the Yulin joint venture. In the past, REC Silicon owned a stake of 49% in this Chinese joint venture. The total production capacity reached 20,000MT polysilicon with state-of-the-art production facilities (next generation FBR-B technology). The first production tests have already been successfully executed. The idea was to deliver polysilicon mainly to the Chinese market. Yulin would have been an ideal strategic set-up to reduce the risks arising from the trade war between the USA and China. Polysilicon production in the USA has suffered from the trade restrictions. SNF is taking the lead SNF will make the outstanding capital of US$169.02m contribution according to the agreement signed with REC Silicon. In return, SNF will increase its stake in the joint venture from 51% by 33.94% to 84.94%. REC Silicon will then own a stake of 15.06% in the joint venture. In addition, the company has to pay US$0.65m interest to the Yulin joint venture and a US$10.4m late penalty payment in three instalments. Due to the new structure of the group, the board of directors of Yulin will be adjusted to five directors, of whom four will be appointed by SNF and one by REC Silicon.
US-tax legislation influenced share price performance On 31 October 2017, Tore Torvund, President and CEO of REC Silicon ASA, bought 200,000 shares in the Company at NOK 1.05 per share after the release of the Q3`17 results . He now owns 1,331,486 shares or a stake of 0.5% in REC Silicon ASA. The CEO’s timing was excellent although the share price subsequently declined to NOK 1.03 on 7 December 2017. The share price low of NOK 0.94 was reached in October. The company will report Q4`17 results on 9 February 2018. The share price increase was mainly driven by the final tax legislation which remained unchanged for the solar industry. In addition the pending decision on the trade dispute might also provide some clarity for manufacturing companies. On 15 December the US-Congress reached an agreement on comprehensive tax reform legislation. The final tax legislation maintained the solar Investment Tax Credits (ITC) for commercial developers and homeowners in its current form. Trade conflict still unresolved SEIA, the US-solar industry association sent a letter to President Trump to protect thousands of solar workers. At present around 260,000 workers are employed in the solar industry. The decision to impose high tariffs will lead to worker layoffs. The US-solar companies are combating new tariffs on imported panels. The case pits American solar-cell makers against solar-panel installers. Sales of solar panels from China and Chinese companies have already been hit by US import duties. The deadline for the decision in the solar trade case is 26 January. If trade tariffs are imposed on modules downstream pricing could change substantially. Module prices could increase from US$1.08/W to US$1.5/W to their 2012 price levels. Demand from utility-scale projects would collapse.
The company reported Q3 17 results. Revenues jumped 48.3% to US$75.5m. Silicon Gas sales volume increased 17.1% to 904MT. Demand for silicon gases remained strong. Polysilicon sales in MT jumped 130.5% to 4,091MT. The company experienced an average solar grade price increase of 0.2% compared to Q2 17 and a prime solar grade price increase of 4.7%. According to management, price increases were mainly attributable to lower polysilicon supply due to maintenance and industrial accidents at competitors’ manufacturing facilities. The access to the polysilicon market in China is still restricted due to the ongoing trade war. EBITDA turned into positive territory to US$3.6m. EBIT losses declined from US$106.5m to US$82.1m.
The company reported Q2 17 results. Revenues declined 13.6% to US$61.4m but increased 6.8% from US$57.5m. Higher polysilicon revenues were responsible for the quarterly increase. However average solar grade prices declined by 6.9% due to the restricted access to the Chinese market. The ongoing trade war and the overcapacity in polysilicon production were mainly responsible for the restricted access. FBR polysilicon production more than doubled from 1,026mt to 2,380mt and total polysilicon production increased from 1,671mt to 3,057mt. Sales of silicon gases increased from 610mt to 808mt and remained nearly unchanged compared to the first quarter. Silane prices increased by 1.6%. The gross margin, however, improved from 54.7% to 76.4%. EBITDA of US$1.4m reached positive territory again compared to an EBITDA loss of US$14.2m in Q2 16. EBIT losses improved from US$-38m to US$-19m. Net losss increased from US$18.9m to US$64.7m because the company received a tax refund of US$20.1m in Q2 16 but paid taxes of US$16.4m in Q2 17.
REC Silicon has received a provisional decision from the Norwegian Tax Office (CTO). The CTO disallows tax losses of US$36m to be deducted from tax expenses. In 2015, the CTO received a notice from the CTO and affirmed the tax position of the company. In 2016, however, the CTO reassessed the tax returns from 2009 and 2011. REC’s management will oppose the provisional decision. In Q2 17, however, around US$30m including US$4m interest expenses will be booked as short-term liabilities. Cash balances reached US$81m in Q1 17 with no maturities in 2017.
In Q1 17. revenues declined 16.4% to US$57.5m and EBITDA reached US$4.6m compared to an EBITDA loss of US$13.5m in Q1 16. Net losses declined from US$64.4m to US$27m. FBR cash costs reached US$10.7/kg at a 50% capacity utilisation rate. Cash flow from operations reached US$15.7m. Cash increased from US$66m in Q4 16 to US$81m in Q1 16 mainly driven by declining account receivables. Nominal debt remained unchanged at US$186m and nominal net debt reached US$106m. In Q2 17, management is expecting FBR costs to reach US$11/kg and FBR production of 2,350MT. Total polysilicon production should reach around 3,040MT and 12,320MT in 2017. Capital spending in 2017 will be limited to US$10m.
The company reported Q4 16 results. Revenues increase 7.2% to US$80m and the gross margin improved from 47.5% to 73.6%. EBIT losses declined from US$59.9m to US$30.5m because polysilicon volume increased by 38.7% to 3,801mt. The company experienced a recovery in the solar market after the significant deterioration in Q3 16 caused by the expiration of the feed-in tariffs in China. Average spot prices increased by 12.7% in Q4 16 compared to Q3 16. Taking total costs of US$0.35 per watt into consideration, polysilicon only contributed US$0.08 per watt to total costs.
In Q3`16 revenues dropped 41.8% to US$50.9m. EBIT losses increased from US$46.3m to US$109.8m. This also includes an impairment of US$78.5m taken against property, plant and equipment. Excluding the impairment, EBIT losses would have reached US$31.3m. Polysilicon production increased by 9% to 3,903 MT but total sales volume plummeted from 4,512 MT to 1,775 MT. Sales of silicon gas however increased by 20.2% to 772MT in the third quarter. The cash balance reached US$86.8m and will meet the working capital requirements in Q4`16.
Management published a trading update. Third quarter results and fourth quarter guidance will be given on 2 November. The trading update is a clear profit warning. Due to the ongoing trade war between the USA and China, management indicated lower than anticipated sales volume. In addition, the weak photovoltaic market accelerated the decline in the third quarter. Third quarter polysilicon sales volume will only reach 1,800 tons. Revenues are expected to range between US$45m and US$50m compared to US$71.1m in the second quarter. Third quarter polysilicon production volume will reach around 3,900mt compared to 4,490mt forecasted previously. FBR production will now reach 3,300mt compared to the guidance of 3,830mt. FBR costs will remain unchanged at US$12/kg.
Revenues in Q2 16 declined 23.5% to US$71.1m and EBIT losses widened to US$38.1m, compared to US$29.4m in Q2 16. Compared to Q1 16, revenues increased 3.2%, mainly a result of higher silicon gas sales volume of 14.8%. In Q2 16, polysilicon sales volume in MT declined 4.8% to 3,634MT but average solar grade polysilicon prices increased 9.7% quarter-on-quarter. Production, however, plummeted from 5,071MT to 1,671MT. Silicon gas sales declined around 38.3% to 610MT. According to management, demand remained stable and prices declined only 2.8% compared to the first quarter.
The company reported Q1 16 results. Revenues declined 7.5% to US$68.8m and EBIT losses increased from US$11.5m in Q1 15 to US$37.5m. The losses were mainly driven by the capacity curtailments in Moses Lake. In May, the company restarted the Silane III production and will start Silane IV production in June. The polysilicon sales volumes increased by 61% to 3,857 tons despite limited access to the Chinese market. Compared to Q4 15, volumes increased 41%. Average solar grade prices increased by 6% and solar spot market prices by 4%. According to management, spot prices increased due to inventory depletion and higher wafer production.
The company reported final 2015 results. As already mentioned when REC Silicon reported preliminary results, the company is fighting for survival. The key solution to overcome the difficulties is a resolution of the US/China trade war. China requires a balanced and reciprocal deal and the US needs reasonable access for its polysilicon producers.
The company reported preliminary 2015 results. In Q4 15, revenues declined 14.4% to US$74.9m. The EBITDA loss increased from US$14.1m to US$29.6m, mainly attributable to lower revenues, a bad debt expense of US$7m and a write-down on inventories of around US$6.1m. Total polysilicon production reached 3,022MT, or 2% higher than the guidance of 2,980MT. Production of silicon gases reached 709MT and exceeded guidance of 700MT. Silicon gas prices, however, declined 2% in the fourth quarter.
In Q3 15, revenues declined 30.8% to US$87.5m and EBITDA turned from US$44.9m to a loss of US$14.1m. The EBITDA margin dropped from 35% to -16%. Polysilicon production dropped nearly 30% to 3,580MT. Cash costs per kg however increased 31.4% to US$13.8 per kg. The weak operating performance was mainly influenced by the curtailment of production capacity at the Moses Lake production plant. Total polysilicon sales volume increased 15.6% to 4,512MT. Average solar grade prices declined 13% compared to Q2 15 and continued its downward trend. The business development of silicon gas also faced declining revenues. Total silicon gas volume dropped 32.6% from 952MT to 642MT (78MT below target). The decline was impacted by strong forward sales in Q2 15. The average price compared to Q2 15 declined 17%. According to management, the overall gas demand is on track not only in Q4 but also for 2016. However, in some end-user markets demand is weaker than previously expected.
Management is planning to close the remaining production capacity in Moses Lake due to the US/China Solar Trade War. If the trade war continues and the 57% duty on solar grade polysilicon imports into China remain, management will close its production capacities in Moses Lake in Washington USA. The shutdown would also imply laying off around 400 employees out of a total of 720 employees. Management is complaining that little progress has been made in the trade dispute. To its understanding, there will be no resolution on Chinese solar panels imported into the US without a deal providing market access for US polysilicon into China. There is still some hope that China will make a deal on US polysilicon.
The company reported Q2 15 results. Revenues declined 26.7% to US$93m. EBITDA plummeted from US$31.6m to US$5.8m. The EBITDA margin reached 6.2% compared to 25% in Q2 14. Net losses from continuing operations reached US$42.8m compared to a profit of US19.7m. Silicon production increased only 2.7% to 5,071mt. The trends in the second quarter compared to the first quarter are breath-taking. Polysilicon sales volume went up 60% and prices declined 20%. Silane gas sales volume jumped 34% and prices declined 21%. These negative trends were mainly driven by weak end-user demand, excess inventory and the ongoing trade dispute between the US and China. Solar grade polysilicon prices were down from the previous quarter ranging between US$14 and US$16 per kg.
