” A closer look at Renewable Energy (REC.OL) silicon divison.”
Renewable Energy (Norwegian stock exchange REC-OL.PK) currently trades at a value of somewhere around 9 billion NOK (27 june) and has 12.85% of shares shorted.”historical big bet on REC” (source: http://e24.no/boers-og-finans/historisk-stort-veddemaal-paa-rec-fall/20072957 ) The price to book value is around 0.4 and even if they have to close down the wafer segment and write down all as expenses price to book value would still be at 0.5. As I like contrary ideas I will in this first article take a closer look at the silicon segment of REC. If it proves popular I could do the same for the wafer and cell&module segment. When it comes to the silicon part first it should be noted that even when the prices have been falling for polysilicon spot prices the lowest contracted price have been stable now for the last month (at 52.50$ per kg): (source www.pvinsight.com)
While I wont go into detail about the wafer production at REC I will note in this article that the wafer is severly pressured on price and currently more than half of the revenue (in NOK million: 633 internal 841 external but some of the external is silane and electronic grade silicon. Source: q1 2011 report http://www.recgroup.com/en/ir/Reports/2011/First-quarter-2011/) goes to rec wafer. That means that REC have a potential for more sales in silicon in the future if they expand or the wafer section is closed.
Finally this is not a buy recommendation for rec in the short term as there is a legal despute with China sunergy over a wafer contract that is expected a result on in the short term and could influence RECs share prices negative or positive depending on the outcome. (www.pv-tech.org/new/china_sunergy_rec_w...;) Finally its not sure if REC has bottom out or if its still falling more. What this article on the other hand tries to do is investigate closly the silicon part of REC and look if there is a value case there. In the oppinion of the author there is.
In this article we will look at the patented protected technological advantage Rec have in its Silicon segment, how diversified the product range is and finally the fair value of the assets in RECsilicon. All suggest that REC currently is traded at very low levels and potential is undervalued.
This article will assume you know basics on how solar cells are made. If you feel unsure of this process you could for example read my amature description of this in my instablog: seekingalpha.com/instablog/901705-eystei...
Note also I will not discuss the supply & demand discussion in the current article but just purely focus on REC and its silicon division. I believe there is a demand for solar pv and especially now as the prices are falling drastically, but this is another discussion for another article. With those two notes out of the way lets now start the discussion of REC's silicon division:
Rec have two production facilities located in USA: Moses Lake in Washington and Butte in Montana. REC acquired these factories from Advanced Silicon Materials Inc owned by the Komatsu. Komatsu before this purchased the factory in Moses Lake from Union Carbide Corporation. This is important to know because REC acquired some patents from these purchases and made strategic choice in what silicon technology to persue.
Patents from Union Carbide:
4292344 Fluidized bed heating process and apparatus
4684513 Zone heating for fluidized bed silane pyrolysis
4818495 Reactor for fluidized bed silane decomposition
5139762 Fluidized bed for production of polycrystalline silicon
5798137 Method for silicon deposition
5810934 Silicon deposition reactor apparatus
Rec also have Komatsus japanese technology of Siemens-like bell jar reactor with silane gass.
(Sources:
http://www.wikipatents.com/US-Patent-4292344/fluidized-bed-heating-process-and-apparatus
http://www.wikipatents.com/US-Patent-4684513/zone-heating-for-fluidized-bed-silane-pyrolysis
http://www.wikipatents.com/US-Patent-4818495/reactor-for-fluidized-bed-silane-decomposition
http://www.wikipatents.com/US-Patent-5139762/fluidized-bed-for-production-of-polycrystalline-silicon
http://www.wikipatents.com/US-Patent-5798137/method-for-silicon-deposition
http://www.wikipatents.com/US-Patent-5810934/silicon-deposition-reactor-apparatus )
The article ” History of Si Manufacturing” gives a good insight into silicon production http://www.peaksunsilicon.com/storage/technology/History%20of%20Si%20Manufacturing.pdf (this is where i found the patents REC have.)
For the economics of these different products the following article gives a good research base ”A Review of the Silicon Material Task ” (http://ntrs.nasa.gov/archive/nasa/casi.ntrs.nasa.gov/19840020141_1984020141.pdf )
For the reader I have prepared a short summary: Rec uses a simens like process in Butte and Moses lake that's based on the Komatsus technology. They use Silane gass (SiH4) for this and this has advantages and disadvantages. Further more REC choose to continue the work of Union Carbide corporation on a Fluidized bed reactor process and this is both patent protected and have a very competitive production cost. But also this process has advantages and disadvantages. There are also some competing FBR processes that are also patented, Hemlock and MEMC are two companies that hold different type of FBR processes using other gasses than silicon silane (SiH4) and have the potential to compete with REC on its FBR process. But REC is the only firm in the world doing a silane gass FBR process and they have this patent protected. They also have patent on silicon powder dust collection for silane fbr reaction making them even able to sell this as a product. (See later)
The main disadvantage to any fbr process is that its quite complex and can be dangerous if not run correctly. For example it can cause explosions: ” It is a well established fact that SiCl2 fragments are generated in deposition of silicon from chlorosilanes in poly or Epi reactors, which polymerize into explosive mixtures and deposit in the exhaust ductwork downstream of such reactors. The problem is simply overcome as first shown in US Patent 3594215, by injection of HCl or Cl2 into the exhaust stream to "quench" the polymerization.”
(http://www.peaksunsilicon.com/storage/technology/History%20of%20Si%20Manufacturing.pdf )
Silane gass is more expensive than chloride hydride, a quick search on the internet on a chinese seller revealed silane sells for 80$ / per kg or 8000$ per tonn. (search was done 26 june 2011)
For Silicon Chloride Hydride the price from one seller quoting a price ranged from 1200-2000$ per tonn. (From online seller at alibaba.com) Obviously these prices are very rough but attleast gives an idea of what the gass prices could be at.
On the other hand silane gass makes more pure silicon.
”The Komatsu process operated by REC, is the second most prevalent electronic grade polycrystalline silicon technology in 2007. This approach melds as mentioned previously, the Siemens-like batch, bell jar SiH4 deposition reactor developed in Japan by Komatsu, in the early stages of that country's entry into the semiconductor device fabrication field, with the low cost ion-exchange technique for separation of silane from the mixture of chlorosilanes produced in hydrochlorination of metallurgical silicon, developed by Union Carbide. The highest purity EG poly available is in fact produced in this way.”(http://www.peaksunsilicon.com/storage/technology/History%20of%20Si%20Manufacturing.pdf)
Also the FBR silane production still has a lot of potential for reduction of prices. A 1980 economical viability report on this at a 1000 mt plant projected cost around 9.66$ per kg.( at the time union Carbide fbr technology http://ntrs.nasa.gov/archive/nasa/casi.ntrs.nasa.gov/19840020141_1984020141.pdf page 21)
The two main technologies in use are FBR and SIMENS reactor types. I found 4 producers using FBR type reactors: Wacker Chemie (germany), MEMC Electronic Materials (US), REC (norwegian based but reactors in US) and AE (US). In China as far as I know none use another technology than the Simens process. In Europe as far as I know only Wacker Chemie uses the FBR process. So FBR is very consentrated in USA.
Top 8 silicon producers and what technology they use:
Hemlock Semiconductor (2010: 36 kt) USA. (SIMENS)
Wacker Chemie (2011: 32 kt, Jan 2014: 67 kt) Germany. (SIMENS & FBR)
GCL-Poly (2010: 21 kt, Jan 2012: 46 kt ) Hong Kong. (SIMENS)
OCI (June 2010: 17 kt, Dec 2010: 27 kt, Jan 2012: 42 kt, Oct 2012: 62 kt) South Korea. (SIMENS)
Renewable Energy Corporation ASA (REC) (2010: 17kt)[22] Norway. (Komatsus Reactor – A simens like reactor & FBR and also Floating zone based )
LDK Solar (2010: 15kt)[23] China. (SIMENS)
Tokuyama (2009: 8 kt, Jan 2013: 14 kt) Japan. (SIMENS & & VLD –Vapor-to-Liquid Deposition)
MEMC Electronic Materials (2010: 8 kt, Jan 2013: 18 kt) USA. (SIMENS & FBR)
(Source: http://en.wikipedia.org/wiki/Polycrystalline_silicon )
Interestingly out of the top 8 a total of 3 use the FBR method. Could this be because this is a superior production method? One company persues another type called vapor to liquid deposition (read more about it here: http://www.solarnenergy.com/research_file/428751.pdf page 11) It also uses either silane SiH4 or Silicon Chloride Hydride SiH3Cl. It promises 10 times faster production than simens and is 5 times more energy efficient. On the other Hand the FBR process is even more energy efficient at around 1/10 of the energy used for a simens reactor. FBR is also a continous process while the other have a start period and end period between cycles.
An indication of the energy consume from a simens reactor process could be: ”The Siemens methods consumes about 60~150kWh in manufacturing 1 kg of SoG-Si.” (http://www.solarnenergy.com/research_file/428751.pdf page 10)
REC’s FBR process uses around ”10KWh/kg—an order of magnitude difference.” (http://www.pvtech.org/chip_shots_blog/the_view_from_moses_lake_part_ii_rec_silicon_learns_to_go_with_the_granular .) This means that REC have quite an advantage over the simens process in electricty costs.
Then there’s the handling, something that’s simplified when the end-product is basically pelletized material. “Granular polysilicon is a very useful form factor. It’s easy to handle, it flows well, we’re able to take it out and essentially just classify it, by its visible size, and then load it into bulk containers. So the labor usage and further processing of poly has gone down tremendously. (http://www.pvtech.org/chip_shots_blog/the_view_from_moses_lake_part_ii_rec_silicon_learns_to_go_with_the_granular)
“At the customer receiving end, as they learn to use this form factor, they’re now able to get their costs down, because in a lot of cases it’s manual loading of crucibles which isn’t needed when you have a flowable product.”
GCL poly the leader in china has reported under 60 Kwh/kg in its latest report:
(source: http://www.gcl-poly.com.hk/attachment/2011051217305817_en.pdf)
So somewhere around 60 kwh/kg seems to be the correct amount.
Another aspect is the fact its quite expensive and time consuming to put up a simens reactor factory: ”Investment requirements, for a traditional facility, built by Siemens, producing2.000mt. of finished product per year is between euro 300-400mio,and will take min 4 years (including obtaining governmental approvals) to set up in a facility of 90.000m2.”(http://www.scribd.com/doc/55988586/Presentation-Teaser-Silicon-2011-SE )
In REC’s factory in butte they produce electrical grade silicon by a production method called floating zone method , this produces very pure silicon but it is more expensive and time consuming. (Floating zone information http://www.solarnenergy.com/research_file/428751.pdf page 14)
Next we look at the actual products of Rec Silicon:
Butte produces three products: Simens reactor flat zone silicon, electronic grade silicon and silane gas. Butte primary makes electronic grade silicon with its simens reactor process. This is of higher purity and sold at higher prices than solar grade silicon. Finally the flux in solar grade silicon prices does not to as high degree affect electronic grade silicon.
Moses Lake produce four products: Silane gass, simens chunk solar grade polysilicon and Fludized Bed Reactor (FBR) granular silicon. Also sales of silicon powder as a byproduct from FBR Silicon( source http://www.accessmylibrary.com/coms2/summary_0286-35594039_ITM )
Polysilicon:Simens chunks solar grade from moses lake is the industry standard type of solar grade silicon, given that rec uses silane gass it should have a slightly higher purity than simens based reactors, and since rec have patent on this from Komatsus japanese technology process this small advantage should be protected. As we dont know the exact price of the simens chunks solar grade silicon we cannot know if they have a good market position in this. One should note an ideal blend in crucibles to make wafers is by having big simens chunks blended together with granular small balls of silicon from the fbr silicon process that fills all the small pockets of air in the crucible. This gives a lower filling time of 41.2% less at 50/50 granular and simens chunks and 29,4% increase in weight managed to put into a 60kg crucible (82.5 kg into a 60kg crucible) (http://www.recgroup.com/Documents/REC%20Investor%20Presentation%20MAY%202011.pdf investor presentation may page 35)
The Float zone silicon produced at Butte is ”typically used for power devices and detector applications.” (source http://en.wikipedia.org/wiki/Float-zone_silicon)
The Electronic grade silicon produced with the Komatsu process is very competitive in that its one of the purest electronic grade silicon available. ”highest possible electronic grade available.” (source: http://www.peaksunsilicon.com/storage/technology/History%20of%20Si%20Manufacturing.pdf )
FBR granular silicon: Have some major advantages and allmost same quality as electronical grade silicon ”this is not electronic-grade poly, but it’s not that far off.” (http://www.pv-tech.org/chip_shots_blog/the_view_from_moses_lake_part_ii_rec_silicon_learns_to_go_with_the_granular)
Silane:The main uses of silane are in the deposition of various silicon-containing films that are essential to the fabrication of integrated circuits, LCD displays and increasingly the enhancement of efficiency of crystalline silicon solar cells and production of silicon-based thin film solar cells.
Now lets look at some historical data of REC in its silicon division:
Year | Revenue (NOK MIL) | EBITDA | EBITDA MARGIN |
2005 | 1018 | 413 | 41 % |
2006 | 2 127 | 1 063 | 50 % |
2007 | 2496 | 1347 | 54 % |
2008 | 3 033 | 1 540 | 51 % |
2009 | 3 943 | 1 920 | 49 % |
2010 | 5 245 | 2 735 | 52 % |
Over the last 6 years the average EBITDA margin have been around 49,5%.
How about labor costs? How many people do the silicon segment include: Butte have around 300 (source: http://recgroup.com/recgroup/operations/Butte/ ) and Moses Lake around 550 (source: http://recgroup.com/recgroup/operations/Moses-Lake/ ) so a total of 850 people are going to produce in 2011 around 17000 (20 tonn per person) Tonn of solar & electric grade silicon and some 2150 MT of silane gas. (2.5 tonn per person.)
Hemlock Semiconductor have around 1000 people for 36000 tonn of production (36t per person) Since both are based in USA I would conclude that REC can get a higher productivity per worker just by increasing production volumes.
Compare this with chinese leader GCL-poly having 8000 workers for 21000 mt (2010) and 3500 MW wafers.
(http://www.gcl-poly.com.hk/eng/about/glance_key.php ) It is possible that wages from worker carry an heavier burden on US silicon firms than Chinese. The positive is that GCL-poly reported a first quater 2010 cost of around 35$ per kg.
(http://simuch.com/File/20100824060800.pdf not disclosed if this was cash cost of production) and ldk having a q12011 cost of 39$ per kg with 3% labor cost , 13% electricity cost and 25% deprecation cost based on 10 year straight line deprecation. (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODkxOTd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 page54)
What about production costs for REC? We only know of this for FBR and it is at 23 cash cost and total cost of 42$ per kg at q3 2010 and target reduction to 17 $ cash cost and 31 $ total cost in q4 2011. Allready in q1 they have a demonstrated cash cost of 18$ per kg FBR silicon. 60% of current silicon at rec is FBR silicon. Some of it is higher graded electronic silicon produced at butte. We know from the 2006 annual report (http://www.recgroup.com/en/ir/Reports/Annual-Reports/2006/ page 44) that butte produced around 2855 tonn electric grade silicon and this was expanded with another 1000 tonn because of debottleneck expansion (http://www.recgroup.com/en/ir/Reports/Annual-Reports/2006/ annual report 2006 page 22) so attleast 3855 tonns of the remaining 7000 (capacity total 17000 for 2011: http://www.recgroup.com/en/recgroup/operations/REC-Silicon/) is electronic grade leaving only 3145 solar grade based on the komatsus simens like reactor process. We can conclude that REC have very competitive solar grade silicon prices when 76% of all solar grade silicon is fbr silicon 22,6% is electronic grade silicon leaving a more weak 24% of all solar grade silicon (only 18.5% of total silicon produced) to higher cost structures.
Silane:
When it comes to the silane gass sales as mentioned earlier a quick search online on a chinese retailer revealed 80$ / per kg or 8000$ per tonn (not a very reliable measuring method I know but the best I have) most likly this is less for mass volumes of silane but even at half price 4000$ per tonn this could generate a bit of revenue for rec with target sales of excess silane gass of 2,150 MT for 2011. (http://www.recgroup.com/en/products/silane-gases/)
Ldk in a recent quarterly report estimates global market to be around 3500 MT. And they estimate a growth of 25-30% per year. (meaning REC have a big chunk of the world market at 61,4%) (source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODkxOTd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
What do we know of the contracts REC have on its sales of polysilicon?
” REC Silicon sells most of the production volumes under long term contracts, and delivered silane gas and polysilicon to approximately 40 external customers in 2010. The top five external customers accounted for approximately 33 percent of the total sales revenue in 2010, compared to approximately 39 percent in 2009. Polysilicon sales to REC companies represented 40 percent of the total sales revenue in 2010.”
(source annual 2010 rec report http://www.recgroup.com/en/ir/Reports/Annual-Reports/Annual-Report-2010/)
We also know of one major contacts that ties up silicon:
”Oslo, March 21, 2007: Renewable Energy Corporation (REC) has entered into a long-term agreement for the supply of polysilicon to SUMCO TECHXIV Corporation (STC), a subsidiary of the world's second largest electronic wafer producer. Under the agreement, REC will deliver polysilicon to STC worth approximately NOK 4.8 billion over the next 7 years.” http://www.recgroup.com/view?feed=R/136555/PR/200703/1113405.xml
The silane gass is tied up in contracts ”The agreements, most of which run through 2014, are structured as take-or-pay contracts with pre-determined prices and volumes for the entire contract period. The contracts have an approximate value of USD 1 billion (~NOK 5 billion). Additional volumes are contemplated under the agreements and may be accessed by the customers within the contracts framework.” (source: http://www.solarfeeds.com/solar-stocks/2410-rec-asa-secures-nok-5-billion-in-silane-sales-contracts ) This should give REC an exellent revenue stream from the silane gass part of the buisness.
We know in the past REC have supplied silicon to Sun Power and could possible be doing it now as an undisclosed partner: ” For the year 2007, the contract calls for SunPower to purchase approximately $20 million of silicon ingots from REC SiTech. This contract builds on previous ingot supply agreements and purchase orders between the two companies. SunPower's silicon supply for 2007 remains sufficient to produce 110 megawatts of cell production. ” http://us.sunpowercorp.com/about/newsroom/press-releases/?relID=215060 )
And as mention previously REC can sell the silicon powder it have as a byproduct. ” The contract has a value in excess of $500 million...and runs for seven years from 2009 through 2015, REC said. ” (This is a byproduct also in the simens process) http://www.youroilandgasnews.com/news_item.php?newsID=13457
When it comes to managment they have ties with hydro. The current manager of the silicon department Tore Torvund used to work for statoilhydro then later hydro leading its energy & oil department. The president Ole Enger had several leadership positions in Hydro during 1986 til 1991. Øyvind Hasaas lead of HR also have a hydro background: Prior to joining REC Øyvind held several executive management positions in Hydro, last as Head of Hydro Industrial and Business Parks. The Cheif Legal officer Kristine Ryssdal also have a hydro past. Interestingly hydro produces the aluminum that is used for the backend of solar modules. The president Ole Enger also have a silicon background in his position as president of ELKEM that was bought by chinese bluestars. (http://www.elkem.com/eway/default.aspx?pid=242&trg=MainLeft_6886&MainLeft_6886=6271:34459::0:6892:6:::0:0 ) Another interesting connection can be found in the owner of REC ORKLA, where the managment ceo Bjørn M. Wiggen who used to work under Ludvik Sandnes (then ceo of Orkla) sold Elkem to chinese bluestar because of a phone call from Ludvik now working as a senior advicor for Royal Bank of Scotland. Wiggen have been task to see if there is a possible buyer of REC and have not ruled out a sell of Renewable Energy. (Source: http://www.dn.no/forsiden/naringsliv/article2058423.ece in norwegian)Finally when it comes to technological advantage in 2010 rec has around 35 patents granted and 200 patents pending. ”REC has introduced a series of innovations to the solar industry, and continues to build on an IPR portfolio counting around 35 patents granted and more than 200 patents pending. Key patents and patent applications cover REC’s production technologies for silane gas, Siemens reactors, fluidized bed reactors and polysilicon deposition, ingot crystallization, wafer sawing, washing, singulation, inline doping of solar cells and REC’s future cell and module processes and designs.” (source annual 2010 rec report http://www.recgroup.com/en/ir/Reports/Annual-Reports/Annual-Report-2010/)
It seems clear the four FBR producers have created a high barrier for other entries into FBR production. Finally a perfect match for rec is its patent on using silane gass for FBR process and at the same time beeing a dominating force in selling excess silane having a 61,4% of the world market in this growing segment.
The potential for further reduction in FBR prices seems clear. As the capacity expands tonn per worker will increase and wages total cost will be reduced. Further expansion also costs less than simens expansion and requires less energy to be used. An advantage that can grow larger as energy potential becomes more expensive. Finally another aspect is that the FBR have actually been in ramp up even in 2010 and now in 2011 we finally are starting to see a high percentage of high grade fbr silicon. The yield for higher grade silicon has been on an increasing trend with one exemption of the power failure in q3 2010 that caused yield of high grade silicon to drop. From q1 2010 yield rate of 64% high grade silicon its currently in q1 2010 at 88%. A patent on dust collection for the FBR process means even this byproduct can be sold and is yet another advantage to the REC FBR silicon process.
When it comes to the price of this asset it was an 1.7 billion $ investment or 9,35 billion NOK for the 10500 MT fbr silane and silane gass facilites. A total of 24 reactors each producing an average of 437.5MT per year. (source http://www.pv-tech.org/chip_shots_blog/the_view_from_moses_lake_part_i_rec_silicon_makes_a_big_solar-poly_bet_on_a) Compare this patented technology taking some 2-3 years to ramp up with the current share price implying a value of 8,944 billion NOK the silicon plant alone justifies looking closer into rec as an investment. (share price of 8.970 on june 24 closing) And also note this does not even include silicon I plant at Moses Lake or the whole of the Butte plant. The share value currently represent just the FBR plant alone.
Also one may note that REC has recently announced plans to expand capacity with another 10000 MT and this time the cost will be around 600-800 million $. (60 to 80$ million per 1000t) It will be cheaper because they allready have the support buildings needed. (source: http://basinfarmer.com/?p=1668 )
This should be compared with around 428-570 million $ per 2000 mt for a simens reactor expansion and the fact that deprication of plant value carry a significant part of the cost of silicon production. (source: http://www.scribd.com/doc/55988586/Presentation-Teaser-Silicon-2011-SE )
They are currently waiting for a decicion on supply of power to the FBR plant. ”the company is waiting for news on its request from the PUD for a power sales contract. A decision is expected in October. ” ( source: http://www.columbiabasinherald.com/news/articleec88182c-8309-11e0-8d42-001cc4c03286.html )
Just visualy looking at page 37 of the may investor presentation for rec ( source:http://www.recgroup.com/Documents/REC%20Investor%20Presentation%20MAY%202011.pdf) one can see deprication alone accounts for around 40% of q32010 costs and around 30% of Q42011 fbr silicon cost. This is a major advantage for REC to be able to reduce the cost on just expanding cheaper than simens reactor based technology
Disclosure: I am long REC-OL.PK, HSOL, SOL, PWER, JASO.
Additional disclosure: I have never been employed at REC. I am a student of law and at the same time working part time. I have a master degree in psychology. My hobby for stocks started around 2 years ago and some 20 stock books ago. I would be interested in doing analytical work. All information found in this article was found just searching the internet for information and articles.