MEMC Electronics Makes Hay While The Sun Shines (WFR)

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MEMC Electronic Materials (WFR) released some big preliminary news yesterday that has given the stock quite a nice jolt, up close to 10% as I type this. WFR has had a great year, thanks to booming wafer sales to semiconductor companies and the growing demand from the solar power industry -- for background, this St. Louis Business Journal article does a nice concise job of explaining the current polysilicon supply crunch and its impact on MEMC for those who don't want to read semiconductor trade journals.

But the news for now is that MEMC will be partnering with Motech, a large solar cell manufacturer, to supply silicon wafers at set prices over eight years in exchange for a significant amount of up-front cash and a piece of the action.

With this deal, Motech is essentially selling WFR their existing wafer manufacturing business, and paying up front for future wafer supply in the form of a loan that will help WFR invest in its ambitious plans to dramatically increase their polysilicon output over the next few years. As a kicker for WFR, they will also get the right to purchase 5% of Motech in the future at a set price (a warrant), allowing them some nice upside gain if Motech performs well in the ongoing bull market in solar power.

I like the skeleton of the deal, though it's only a letter of intent right now and could change or disappear in the coming months as they hammer out the details. It's great for Motech because it assures them of a steady stream of raw materials in a very competitive marketplace (to see what happens if you don't have this assurance, just look at what happened to Evergreen Solar when MEMC notified them that it would opt out of its contract to supply ESLR with polysilicon... perhaps in order to free up supply for Motech?)

For the solar cell markers right now, the key above all else is competing for polysilicon and /or wafers -- as solar and semiconductor markets are both in a rapid growth phase, the competition for this material is fierce and the supply very limited. Customers abound, thanks to generous government subsidies that seem to be cropping up everywhere, but raw materials are very tight.

And it's great for MEMC, too, because it allows them to go ahead with their big plans for doubling from 4,000 to 8,000 metric tons of annual polysilicon production over the next three years with less financial risk (I wrote about this after their last earnings release). This increase will enable them to better handle the increased demand from both the semi and solar industries, especially solar, and this deal with Motech gives them in effect an advance sale of that production so they don't have to produce it speculatively in hopes that solar power will be hot and they'll still have customers waiting.

Add that to the fact that they're also acquiring a little more wafer manufacturing capacity from Motech, and the fact that they don't have to pay interest on this up front payment (WFR shareholders can be pretty sensitive to debt after their problems of a few years ago), and MEMC comes up smelling like roses, too ... even if the warrant for 5% of Motech doesn't end up being worth much.

So it looks like one of those rare deals that's good for both sides ... we'll see if that's how it plays out in the end, but I like it so far, and the market does, too.

I'm glad I didn't let my fear of the cyclicality in semiconductors scare me away from holding WFR after I saw it near a 100% return for me at the end of last year (average cost of $16.25, so it's now closer to 150% gain in my portfolio) ... looking backward makes you nervous about holding gains like this, but as I see WFR looking forward themselves, and aggressively building their business like this, I like what I see for the future and no longer want to do any selling. Semiconductors brought MEMC to this point, but it may well be solar that takes them to the next level.