We have written frequently about our concerns that there is too much capacity coming on line in the semiconductor industry. We have also noted that MEMC Electronics (WFR) supplies silicon to both the semiconductor and solar power industries.
Solar Power has been on a tear recently due to the high prices of oil. It now looks as though they are in a position to negotiate sweet deals for themselves.
Under the terms outlined in the LOI, MEMC will supply solar wafers to Suntech over a 10-year period, with pre-determined pricing, on a take or pay basis beginning in the first quarter of 2007. Sales of the wafers over the 10-year period would generate between $5 billion and $6 billion in revenue for MEMC. As part of the arrangement and in order for MEMC to meet Suntech’s supply requirements, Suntech will advance funds to MEMC in the form of an interest-free loan or security deposit which will be used by MEMC for expansion of MEMC’s manufacturing capacity. In addition, MEMC will receive a warrant to purchase up to a 4.99% equity stake in Suntech.
It is not often that one can demand from its customers a long-term take or pay contract, with an interest free loan up front and options to purchase a sizable stake in the customer. It could indicate that 1. silicon is in short supply, 2. that MEMC is offering attractive terms for the supply it will provide, or 3. both. However, investors should note that MEMC has had a similar arrangement fall through.
This agreement shouldn’t be the basis for an investment in MEMC, but it does indicate some degree of bargaining power for the silicon supplier.
WFR 1-yr chart:
Related article: MEMC Electronics Rides the Wave of Growth in Solar Power.