MEMC Makes Another Deal (WFR)
It has been a very busy year for MEMC Electronic Materials (WFR) -- though the shares have come down pretty dramatically from their highs in the late winter of $48 or so, every indication is that their sales and earnings are continuing their torrid growth.
The concern has been, from me as well as many others, that there is the potential for a near-future glut in silicon wafers as WFR and all of the major manufacturers prepare to ramp up (or in a couple cases, have ramped up) capacity to meet high demand from both the semiconductor and solar industries.
I still have that concern, but every time WFR makes a deal like the one announced today, I feel a little more secure. In preparation for making big investments in increasing their production capacity for solar-ready silicon wafers (to go along with what has been the core of their business, the production of wafers for the semiconductor industry), they've been pre-selling that capacity -- today it was announced that they have a new deal with Gintech, a Taiwanese solar cell manufacturer, to supply silicon at "pre-determined" prices for 10 years beginning in about a year.
This deal, expected to be worth between $2.5 and 3 billion, comes on the heels of two other similar deals -- one with Motech for about $1.6 billion (that fell apart), and one with Suntech Power that could be worth up to $6 billion.
I'll guess that a midpoint number for each of these deals is a fair assumption to start with, which means a total deal value of $8 billion over ten years. That averages out to $800 million a year, which compares to about $1.2 billion in sales for MEMC last year, so these deals are very significant in giving MEMC a chance to dramatically ramp up their sales volume.
And of course, they're not dropping their core business, which has been the supply of silicon wafers to the semiconductor industry -- though with some recent softness in semis, I think investors are probably pretty happy to see them further diversifying into another potentially large market.
I'm also happy to see that, as with the other deals they've signed, this one includes a "kicker" that allows WFR to make some real money if solar power takes off in the dramatic way that some people expect. With each of these deals, WFR has received in exchange not only a prepayment or a sweetheart loan to help pay for their capacity expansion, but also a warrant of some kind to purchase a significant amount of the solar company in question -- ranging from 5 to 10%.
That allows them to ride along with any solar power boom, and protects them to some degree from preselling their silicon too cheap, since if silicon prices for solar are much higher in five or ten years than expected it's likely to be because demand has grown much faster than expected ... which would mean that Suntech and Gintech might be worth a heck of a lot of money.
I wrote a couple weeks ago that I was nervous about the huge increase in silicon wafer supply that's coming on the market -- and I still am. But as the deal volume has climbed -- to the point that they now have contracted for ten years of sales that equal upwards of 60% of their TTM sales -- I've grown less nervous. A glut is certainly still possible, and if I see enough evidence of it impacting WFR in the near future I still may sell, but a solid floor of future sales like this is nothing to sneeze at.
The concern has been, from me as well as many others, that there is the potential for a near-future glut in silicon wafers as WFR and all of the major manufacturers prepare to ramp up (or in a couple cases, have ramped up) capacity to meet high demand from both the semiconductor and solar industries.
I still have that concern, but every time WFR makes a deal like the one announced today, I feel a little more secure. In preparation for making big investments in increasing their production capacity for solar-ready silicon wafers (to go along with what has been the core of their business, the production of wafers for the semiconductor industry), they've been pre-selling that capacity -- today it was announced that they have a new deal with Gintech, a Taiwanese solar cell manufacturer, to supply silicon at "pre-determined" prices for 10 years beginning in about a year.
This deal, expected to be worth between $2.5 and 3 billion, comes on the heels of two other similar deals -- one with Motech for about $1.6 billion (that fell apart), and one with Suntech Power that could be worth up to $6 billion.
I'll guess that a midpoint number for each of these deals is a fair assumption to start with, which means a total deal value of $8 billion over ten years. That averages out to $800 million a year, which compares to about $1.2 billion in sales for MEMC last year, so these deals are very significant in giving MEMC a chance to dramatically ramp up their sales volume.
And of course, they're not dropping their core business, which has been the supply of silicon wafers to the semiconductor industry -- though with some recent softness in semis, I think investors are probably pretty happy to see them further diversifying into another potentially large market.
I'm also happy to see that, as with the other deals they've signed, this one includes a "kicker" that allows WFR to make some real money if solar power takes off in the dramatic way that some people expect. With each of these deals, WFR has received in exchange not only a prepayment or a sweetheart loan to help pay for their capacity expansion, but also a warrant of some kind to purchase a significant amount of the solar company in question -- ranging from 5 to 10%.
That allows them to ride along with any solar power boom, and protects them to some degree from preselling their silicon too cheap, since if silicon prices for solar are much higher in five or ten years than expected it's likely to be because demand has grown much faster than expected ... which would mean that Suntech and Gintech might be worth a heck of a lot of money.
I wrote a couple weeks ago that I was nervous about the huge increase in silicon wafer supply that's coming on the market -- and I still am. But as the deal volume has climbed -- to the point that they now have contracted for ten years of sales that equal upwards of 60% of their TTM sales -- I've grown less nervous. A glut is certainly still possible, and if I see enough evidence of it impacting WFR in the near future I still may sell, but a solid floor of future sales like this is nothing to sneeze at.
Labels: WFR
This article posted by One Guy @ 10/26/2006 01:00:00 PM 2 comments
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