PVCS – “cash conservation” to “cash to shareholders”- Potential Value: Closing up Shop?

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PV Crystalox (LSE:PVCS) have issued their interim management statement stating they are expecting full year wafer sales of 100-105MW at significantly above spot prices. They last paragraph is more exciting and implies management are going to give up the ghost as they rightly should, but it still leaves a huge amount of uncertainty as to the levels of cash shareholders can expect:

The Group has a strong net cash balance and the Board is continuing to reorganise the Group, to enable the return of cash to shareholders.  The Board expects to make a further announcement before the year end.

Trichlorosilane

One comparable relationship can be drawn with MEMC, who are liable to pay Euros 70m to Evonik for the cancellation of their take or pay trichlorosilane contract for their Merano Polysilicon production facility in Italy. The PVCS Bitterfeld production facility is also fed by Evonik and Degussa, but is at a lower capacity of 1,600mt instead of MEMC’s Merano facilities 6,000 mt. Assuming equivalents in timings, contract type and pricings, a possible figure of £17m or Euros 20m can be deduced, but this is a back of the envelope calculation as there are so many uncertainties.

Polysilicon

Other potential liabilities for PV Crystalox will come in the form of their polysilicon contracts and any calculation is semi-irrelevant as they have been renegotiated at various interval (where of course none of the details have been divulged). At the moment the Company is flipping their excess contract poly back into the spot market, which at the moment sits at $15 in China and $20 – ish in Europe.

What we do know –

1. The extra contract poly was originally signed in 2010 for 5 years to coincide with the ramp up to c.700MW of wafer capacity in 2012, and to supplement the Bitterfeld production of 1,600mt. An estimate of 40% Bitterfeld to 60% bought in – and with Bitterfeld not producing, 25% of the external poly being used for the 100-105 MW of wafer production this year.

2. The polysilicon market has suffered in previous years with a massive shift in power from supplier to buyer as oversupply has become the name of the game. In 2010 the spot price reached $70 whilst the contract price was $40-50 and now sits in the teens to low twenties compared to a contract price of $25. So an estimate of a loss of between $5-10 per Kg of excess poly bought in after the contracts were renegotiated from 2010 and the subsequent price falls.

On the back of these numbers you can come up with a range of figures depending on whether volumes have been moderated or not, and the exact pricings – but one thing is for certain, PVCS is taking in excess polysilicon at a contract price above the present spot price, and those quantities will be increasing as the wafer ramp up phase comes into play leading to a higher out flow of cash.

Asset Sales

A lot of hubbub has been made on the bulletin boards about the sale of the facilities particularly Bitterfeld, with some naming the Qataris as their favoured buyers. There is one major problem with this, firstly the size of the facility, which is in no way globally competitive with the Tier 1 and Tier 2 producers such as Wacker, OCI and GCL. Ultimately the Bitterfeld facility is a small fish in a big pond at 1,600mt and costs of $25 plus compared to companies with total capacities of 30,000-60,000mt and costs of $15-$20 plus.

As for the wafer and cutting facilities – although its good old British engineering at Abingdon with bespoke melting crucibles and processes – there is excess capacity in the sector, with estimates ranging at 50-100% for most segments of the value chain, and yet again the economies of scale are dwarfed by the Asian giants.

It is going to be hard to find a buyer for a loss making operation in this environment and especially such small fry – but stranger things have happened.

Conclusion

The announcement today shows a solid shift in mentality and intent from the PVCS management – from “cash conservation” to “cash to shareholders”.  Although it’s not fully spelt out, i.e. “we will be shutting up shop” instead of “reorganise the group to enable the return of cash to shareholders”, it is a step in the right direction and as their fiduciary duty to shareholders would expect.

So changing here from a bearish to a more bullish stance, but highlighting the amount of risk as the devil will be in the details… the level of compensation from wafer contracts, the liabilities from trichlorosilane and polysilicon, the rest of the cash positives and negatives such as asset sales. Ultimately a punt but looking like a better one with a clear potential catalyst expected by year end – and still waiting on the cash bonuses from cancelled wafer contracts.

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