Hoku Scientific Gains Big On Polysilicon Deal - Will Remain Volatile

Includes: HOKUQ, STP
by: Himanshu Pandya

Hoku Scientific (HOKU) announced the signing of a definitive contract for sale and delivery of polysilicon to Suntech Power (NYSE:STP) over a ten-year period beginning in mid-2009. As I wrote this, HOKU was up 63% in pre-market trading Thursday (at publishing time (2:00 p.m. EST), it is still up more than 50%). It was up around 75% in after-hours yesterday. The contract also provides for an initial deposit of $2 million to Hoku upon signing and requires that Suntech make additional prepayments for products in the amount of $45 million.

HOKU also signed a similar deal back in January with Sanyo Electric Co. worth $370 million over seven years. The contract with Sanyo also included an initial deposit of $2 million. During the Sanyo deal in January the stock doubled overnight similar to what happened yesterday in after-hours.

The Polysilicon plant is still in the process of being constructed in Pocatello, Idaho. The plant when completed will be capable of producing 2,000 metric tons of polysilicon per year. Hoku also intends to seek debt capital of approximately $150 million for the financing and construction of the plant. With the market cap of only 75.91M (before the Suntech deal was announced) the stock has lots of room to grow long term. However, this is only possible if they are successful in building the Polysilicion plant in Idaho. The fact that we have two big names in the solar industry (Sanyo and Suntech) backing them up is a positive sign for such a small company.

The stock price will experience huge swings both up and down until at least the company becomes profitable and finishes the polysilicon plant in 2009. Also according to a lot sources the Polysilicon shortage will end at the latest by 2009 so the margins won’t be as fat as they are now. I would wait for the stock to settle back down before going in long term. If you are momentum trader then you can probably give it a shot at these levels.

Disclosure: no positions in HOKU or STP.

HOKU 1-yr chart:

HOKU 1-yr chart