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PV Crystalox (LSE:PVCS) is a curious company. Everything started out fine twenty-odd years ago. A bunch of physics/chemistry PhDs initiated an MBO of a division focused on taking the raw material of polysilicon and then growing 2ft-long crystals. The crystals were then cut into wafers, and sold to makers of photo-voltaic solar cells around the world.
They rode the booming solar market with the share price reaching £1.70 in 2008. In that year they took some fateful decisions, which at first seemed logical risk-reducing actions.
They signed up a number of large customers to fixed price contacts over many years; thus a large proportion of PVC’s output could be sold at predictable prices.
But what if the price of the bought-in raw material, polysilicon, rose in the next seven or eight years? It could rise so much that the fixed price wafers were sold at a loss.
The answer was to get the suppliers to sign contracts at fixed prices. This they did.
The problem with hedging like this is that you rely on your counterparty to honour the agreement – and to still be in existence!
(See my earlier Newsletters for more detail on PV Crystalox: 15th – 21st ; 26th – 27th March 2015; 2nd June 2015)
The crisis
Many companies and countries became interested in the manufacture of wafers and solar cells, in particular China. Now, around half of world output of cells is from China – and they are (a) daft about charging economic prices, (b) massively over-produce, and (c) ban the purchase of wafers and cells made outside of China. The result has been a precipitous fall in prices (of course, this has been pushed along by gains in economies of scale and better technology/production methods).
The price fell so much that many of PVC customers went bust or stopped taking the wafers they had signed up to.
PVC had to find new customers in a world swamped with wafers. Through gritted teeth it also gave price concessions to the reneging old customers.
Volume fell so low that PVC could not use all the polysilicon it was obliged to take. It had to sell the surplus on the market. The problem was that the market price fell to one-third of what they had to pay.
This is not good. Losses were inevitable. And so it has been.
The share price fell to 7p.
So why buy into this situation?
I bought PVC’s shares because of the incredible strength of its balance sheet. With a MCap………..To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
