An LDK Solar investor group gave the company a vote of confidence with a report concluding there's a "high likelihood" the company will be able to get the polysilicon it needs this year.
"I'm reassured they are on track," said Hakan Telenius, author of Thursday's report and organizer of the LDK Investor Group. The report was released only to members of the investor group, but Telenius also sent it to Greentech Media.
The group, which interviewed Chief Financial Officer Jack Lai on Monday, isn't exactly objective -- all members are investors -- but Telenius insisted the group was out to get the facts, not to hype the company.
"We are all investors in LDK who want to see the thing do well and make money, but mostly we want an honest investigation," he said. "We told the company we wanted firsthand information on various issues and that they could look at us as friendly analysts, so to speak, because we wanted them to succeed, but don't want anyone pulling the wool over our eyes, either."
Still, the reports are inclined to be favorable. The first was essentially reassuring and concluded that the market had overreacted to the allegations that LDK had misstated its silicon inventories, Telenius said.
In Thursday's report, the group said that while the polysilicon supply still will be tight this year, there is a "high likelihood" that LDK will be able to get enough for its needs.
The company had previously said it had fixed contracts for 75 percent of the polysilicon it needs for 2008 (see LDK Profits Jump 40%), and the report said contracts for the missing 25 percent are "signed or pending."
Lai said Friday that the 75 percent has been signed, while contracts for the 25 percent are pending.
The group also said it sees "no reason to doubt" the management's expected average polysilicon cost of about $160 per kilogram and added that -- while LDK is expecting margins to drop in 2008, compared to 2007 -- "we suspect they have set the guidance to levels that they will likely meet or exceed."
Telenius also wrote that "there's every indication" that the company's first silicon plant, which is expected to have the capacity to produce 1,000 tons of polysilicon per year, is on track to be up and running this summer.
Perhaps more importantly, he said there's "a reasonable chance" the company will complete its second plant -- a 15,000-ton-per-year plant scheduled to be completed in 2009 -- on time and "a very low probability" that it will be severely delayed.
Telenius said a representative at Fluor, the contractor building the 15,000-ton plant, told him the project is more than two weeks ahead of schedule and consists of a "cut-and-dry approach" using "standard Siemens technology."
The progress of the second plant has been an important point for investors, because LDK's guidance for gross margins in 2009 of between 42 and 50 percent depends on the expectation that the plant will be up and running (see LDK Shores Itself with New Silicon Supply).
"The implications of a lengthy delay would be serious," Telenius wrote.
The company, which Thursday announced it signed a deal to buy trichlorosilane (TCS) -- the silicon, hydrogen and chlorine compound from which high-grade silicon is often made -- from Jiangxi Ganzhong Chlorine & Caustic Co., plans to also buy TCS for its 15,000-ton plant if its own system to produce TCS isn't ready on time, he said.
In a conference call in December, Nick Sarno, senior vice president of manufacturing, said the company was aware making polysilicon "is not going to be as easy as making wafers," but added that it didn't foresee the production of TCS to be a major risk.
LDK also has a backup plan -- what amounts to a "cushion" of 6,800 tons of silicon secured for 2009 out of an expected need of 9,000 tons -- in case the second plant is delayed, Telenius wrote.
Another question on analysts' and investors' minds has been how the two Xinyu City plants, expected to cost a total of $1.2 billion, will be financed -- particularly as share prices remain low.
According to the report, the plan includes an expectation of at least $500 million in customer prepayments, an already-secured $600 million line of credit and operating profits. Lai clarified Friday that the plan calls for about one-third ($400 million) from each of the three sources and said LDK expects to receive between $300 million and $500 million in prepayments in the next six months.
In the report, Telenius wrote that "the rapid growth and the capital expenses make for a tight equation," and said Lai" is therefore studying all alternatives, but stressed that there is at present no plans for another equity issuance, not least because of the market conditions."
The report added that company has contracts for more than $10 billion in sales, including the 6-gigawatt contract with Q-Cells (see LDK Shares Jump 30% on Q-Cells Deal).
Outside analysts couldn't be reached or declined to comment. But Lai confirmed that the facts in the report were correct.
While the report was supportive of LDK overall, Telenius did say he wishes the company had more investor-relations staff to help provide information to investors and the public.
"I think it's a sign of the company's immaturity that they are growing so fast and they are focused on other things [aside from investor relations]," he said. "They might not think ups and down of share prices matter that much, but it does matter that if they need financing, they don't have the option of going out to the market."
A Background of Scrutiny
LDK Solar had been under scrutiny after allegations that it misstated its silicon inventories (see LDK Says Inventory Discrepancy Allegations Have 'No Merit', New Details Surface As LDK Shares Continue to Plunge and LDK Says SEC is Inquiring into Inventory Discrepancy Allegations).
The company in December announced that an independent audit found "No Material Errors" in its accounting and posted a third-quarter profit that jumped 40 percent from the second quarter and eightfold from the year-ago quarter (see Independent LDK Audit Finds 'No Material Errors' and LDK Profits Jump 40%).
But in spite of its guidance that profits would continue to grow, projections that LDK's gross margin would shrink brought share prices down (see LDK 2008 Guidance: Higher Revenues, Lower Margins.
Those prices turned back up 14.2 percent this week when the company announced the TCS agreement, along with another agreement to supply wafers to Neo Solar Power (see LDK Rises as Solar Shares Fall). The investor report, which came out Thursday, also might have contributed to that upturn.
Shares sank slightly again Friday -- closing down 1 percent at $35.44 per share - in spite of a Reuters story saying the company expects its net profit to grow a third to exceed $200 million this year and plans to overtake Norway's Renewable Energy Corp. to become the world's largest solar-wafer maker in three years.