Tag Archives: norway

Tough Times Ahead For REC Silicon ASA

REC Silicon posted yet another abysmal quarter with no respite in sight. As predicted, the company’s inventory build plan backfired, and the company raised capital through debt and equity offerings in the last 24 hours. We believe the management is too optimistic, and as such do not see much joy for shareholders for quite some time to come. REC Silicon ( OTCPK:RNWEF ), as we forecasted , reported horrendous second quarter results on Tuesday. While revenues of $93M is an improvement over $74.4M from Q1, they come at a steep cost to the company in terms of plummeting ASPs. As a result of the plummeting ASPs, EBITDA declined again from $24.8M in Q1 to $5.8 million in Q2. The process-in-trade loophole, through which the company has been shipping polysilicon to China in the recent past is no longer available to the company, and effectively a big part of the company’s customers disappeared overnight. Against this backdrop, the company built another 1248 MT of inventory as it was unable to sell its poly production in the market. This inventory build in a downward pricing environment sapped the company’s cash flow, and the company has now come to the realization that its current business vector is not sustainable. However, as we wrote earlier, this handwriting was on the wall when the company decided to build inventories instead of selling product due to low ASPs in Q1. In the face of further declining prices and balance sheet stress, the company opted to sell product at distressed prices. While the FBR poly produced by REC Silicon has typically commanded lower ASPs than Siemens poly that most of the industry produces, the gap between the prices has increased dramatically in the recent quarters. This gap opened up further at the end of Q2 (see chart below). We believe there are two reasons for this widening gap. The first is that instead of withholding selling at the low prices as the company did in Q1, the company sold product at artificially low price to raise some much-needed cash. Secondly, customers sensing the upcoming changes to Process-in-Trade, and the company’s financial position, appear to have negotiated hard and gotten steeper discounts than usual. While the company sold a significant amount of polysilicon at low prices in the quarter, the production continued to be ahead of sales. The resulting 1248 MT inventory build in the quarter has now increased the company’s inventory to approximately 6000 MT – approximately 4 months of sales. Finally, the company decided that it cannot keep building inventory and has decided to cut its production at its Moses Lake facility. This reduced the company’s manufacturing capacity by about 2000 MT. The company also decided to put on hold its expansion plans. REC Silicon had previously planned 3000 MT of new capacity using its updated FBR-B process. This new process could have helped the company further improve cost structure but is now being halted with an eye towards a future restart. The company is conducting an orderly shutdown process and expects to be able to bring the facility to production within a year once it decides to restart the work. With these production moves, the company is dramatically reducing its capacity and expects that it will deplete its current inventory by 1500 MT in Q3. This would help generate some much needed cash flow for the company. The company also made an equity offering last night and sold about 10% of the company shares. REC Silicon allocated 230,000,000 new ordinary shares at a price of NOK 1.55 per share in the Private Placement to existing shareholders and new investors, with gross proceeds of NOK 356.5 million (approx. $43M). The company also announced Thursday morning that it also has sold or agreed to sell a nominal value of NOK 155,000,000 (approx. $19M) of bonds held in treasury to investors to raise additional money. These moves dramatically strengthen the company’s balance sheet and reduce the fears of possible default of debt payments coming up in 2016. In the earnings call this morning , management commented that the adversity is temporary and caused by the tariff war between US and China, and that the company expected the trade situation to be resolved by early 2016. Over the short term, the company sees Korean manufacturers supplying 60% of China import needs, German manufacturers supplying 30% of the needs, and the US poly manufacturers essentially shut out of the market. With the tariffs, the company expects that Korea production will mostly go to China leaving the US producers to chase Malaysia, Taiwan and other countries. REC management contends that the current low polysilicon prices are due to tariffs and Chinese government subsidies will not prevail in the long term. The company’s worst case plan involves shipping product to countries outside of China and continuing with interim measures such as tolling until the Company’s Yulin JV enters production, at which time, the company expects to be able to serve the China market. REC sees polysilicon becoming the choke point in PV production and expects poly prices to recover. The company, with over a billion dollars in assets, is not taking any impairment charges in spite of these developments because it expects the trade situation to be resolved by the beginning of 2016. We see the management’s view, even the most pessimistic version, as likely too optimistic. We do not see any indication that the tariffs are likely to go away quickly and we do not see an end to production from China’s SOEs and other heavily subsidized Chinese manufacturers. We also do not buy the commentary that a long-term shortage of poly will develop and that the poly prices will move up meaningfully. Even a more moderate set of assumptions would suggest that the company’s thesis that the current market economics will not work and the prices will go up over time is highly speculative. Unfortunately for the company, the reduction of production means the fixed cost absorption will be a problem and the company will have an inferior cost structure going forward. The company’s manufacturing roadmap, which relied on the lower cost FBR-B production, is now problematic. Because of these factors, we believe it is highly likely that the company’s assets are severely impaired. The company’s silicon gas sales, which do not depend on the polysilicon business, provide a respite to the company. However, this product line offers no significant long-term growth benefit to the company’s story. While the management presents itself as planning for worst case, we believe the company is far too optimistic. Given the tariff uncertainty, likely low polysilicon prices, impending new capacity, and commodity nature of the industry, investors in the company may not have much to celebrate for a long time to come. Our view on RNWEF: Avoid. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Sapa JV Achieves 9% Growth In North America For Norsk Hydro

Summary Today’s earnings from Orkla act as a partial pre-announcement for Hydro’s earnings next week, due to the 50/50 joint venture. The Norwegian government invests NOK 1.5 billion in Norsk Hydro’s new plant, with the European Trade Commission’s blessing. Hydro reports on February 10th – are there more surprises? In my most recent article about Norsk Hydro ( OTCQX:NHYDY ), I focused on some key drivers for EPS that I felt made the company a better value play than Alcoa, Inc. (NYSE: AA ). Today’s earnings announcement by Orkla ASA ( OTCPK:ORKLY ) gives us a sneak peek into Hydro’s earnings next week. Sapa is an extruded aluminum company, and is run as a 50/50 joint venture between, Orkla ASA ADR and Hydro: September 12, 2013 press release . Sapa is the global leader in extruded aluminum, and has a market share of 30% in North America and 26% in Europe. It offers a variety of solutions to its customers through five business segments, and is a leader in energy-efficient buildings. Sapa also has a strong presence in Asia and South America. “Orkla’s share of Sapa’s result was NOK -360 million in the quarter. Sapa’s results were negatively impacted by extraordinary costs related to the accounting write-down of fixed assets in China. Demand for extruded aluminium products in North America rose by 9%, primarily driven by growth in the automotive and building industry. In Europe, demand was on a par with 2013.” – Earnings release Sapa makes up only a part of Hydro’s earnings, but level demand in Europe is encouraging, as it has been recognized that the European economy may be contracting. Growth in North America appears robust at 9%, and bodes well given the current high aluminum price. It will be necessary to wait for Hydro’s results to get a full picture of the accounting write-down, but I anticipate that it will be similar to write-downs made by Alcoa this quarter, which had a negligible effect on share price. The write-down should not be taken out of context from the rest of Hydro’s earnings. The strong demand is evident, and should translate across all of Hydro’s primary aluminum business. A further NOK 1 billion in synergy savings is anticipated over the next 2 years. This fact will only enhance the value of Sapa for both of its parent companies. It is all cash that falls straight to their bottom lines at each earnings announcement. Norwegian Government Invests in Eco-Friendly Norsk Hydro Central to my thesis about Hydro is the idea that the company can continue to make more money by being as environmentally friendly as possible. In other news yesterday: “The EFTA (European Free Trade Association) Surveillance Authority has approved funding of NOK 1.5 billion from Enova for Hydro to test the world’s most energy- and climate-efficient aluminum production in a full-scale pilot plant at Karmøy, Norway.” – Hydro press release. Enova is a Norwegian state-supported agency for promoting efficient-energy consumption and renewable energy. The same day, and sticking with the eco-friendly theme, Hydro announced a new research partnership with SGL Group ( OTCPK:SGLFF ). The project will take place over the next three years, and is being funded by the Research Council of Norway. The goal is to develop new, energy-saving, carbon cathode technology for use in the primary aluminum production process. Any reduction in energy costs is a big saving for Hydro, but it also provides extra income, because Hydro sells any excess energy it produces into the national grid. Exactly how well Hydro performed over all in the fourth quarter is still somewhat of a mystery. If results from Alcoa are anything to go by, the company should surprise to the upside next week. The two press releases yesterday continue to confirm that the future looks bright for Hydro. I look forward to seeing the increased earnings created by the synergies at Sapa over the rest of the year. The stock has performed well over the last year or so since my first article about it . It would appear there is more to come. NHYDY data by YCharts Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks. Disclosure: The author is long NHYDY. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: This article is not intended as investment advice. It is for informational purposes only and expresses the authors opinion. The reader should conduct their own research and form their own opinion prior to initiating any position. Actual outcomes may vary from those discussed in the article.This article may contain certain forward-looking statements. I have tried, whenever possible, to identify these forward-looking statements using words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “potential” and similar expressions. These statements reflect my current beliefs and are based on information currently available. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual results, performance or achievements to differ materially from those expressed in or implied by such statements. I undertake no obligation to update or provide advice in the event of any change, addition or alteration to the information contained in this article including such forward-looking statements.

Eco Friendly: Making Money As Oil Falls

Summary Introduction: auto makers and the aluminum industry. Symmetry between oil costs and lower aluminum. Overview of last year’s pick: Norsk Hydro. Looking to the Future and Growth. Conclusions. Making more of our vehicles out of aluminum equates to continually lower demand for oil. Existing regulations in Europe and America require that each new generation of automobiles be more fuel efficient than the last. Car manufacturers around the globe are switching to aluminum in an effort to reduce gross vehicle weight and by doing so reduce fuel consumption. Yesterday Clark Schultz , SA News Editor released a note about Ford (NYSE: F ) and the closed loop recycling program that has been put in place at the company’s facilities. The system allows Ford to recycle every piece of scrap aluminum that is created during the production of the new F-150. This is helping to reduce the higher production cost of the new more fuel efficient truck . The trend is here to stay and in large part has been responsible for the increase in the price of aluminum over the last few years. Currently, orders by automobile manufacturers show more growth than any other sector of the aluminum market, but we will come back to that later. Although price appreciation may appear slight, it was achieved while working through an excess in warehouse inventories. Inventories are now near historical lows and supply can only be described as tight. Neat Synergy Savings Aluminum production is particularly energy intensive. This makes large producers like Alcoa (NYSE: AA ) particularly sensitive to oil price. There is a nice symmetry to the reduction in fuel consumption and demand for aluminum. As oil prices decline, the cost of aluminum could also decline. It would seem more likely, given the tightness in supply that margins will increase for producers like Alcoa before the price of aluminum declines substantially. In addition, increased recycling of aluminum is also reducing energy demand. It takes about 10% lees energy to produce recycled aluminum than it does by normal production. I covered this topic last year in the first eco friendly article that covered Norsk Hydro (OTCQX: NHYDY ). Like Alcoa, Norsk Hydro is a large aluminum producer and will certainly benefit from these savings and increased demand. I would like to take a look at what separates Hydro from the rest of the crowd. What gives them that extra competitive edge? Norsk Hydro It is almost exactly 1 year since I released my first article about Norsk Hydro. At that time I had a price target of $10.50 for December 2014 and $15.25 for December 2015. I guess we should have a look at performance then and see if we are on track. NHYDY data by YCharts 34% increase for the year is not bad especially given recent market action. The stock did trade 3% higher yesterday on a down day for the markets but at $5.32 we are still a long way from the $10 price target. Even the highs in July and November were just over $6, so what happened? All Values NOK Q1 2014 Q2 2014 Q3 2014 Q4 2014 Revenue 18.28B 18.27B 19.7B EPS (Diluted) 0.19 0.09 0.29 EBITDA 1.72B 1.45B 2.63B EBITDA Growth -3.43% -15.73% 81.48% Gross Income 2.85B 2.62B 3.67B Some of the highlights:- Revenues were stable throughout the year. ESP grew 222% from Q2 to Q3 based of higher aluminum prices Gross Margins expanded to 18.6% in Q3 before the largest decline in oil price. The company did have some real currency headwinds this year which muted performance. The strong US dollar and Euro both had an effect against the NOK. I do not anticipate a repeat of this in 2015. There is much talk in the Eurozone about another round of stimulus next year. In the US, the FOMC appears to be more dovish and many say we will not see a rate hike soon. Either of these two outcomes will positively impact Norsk Hydro. If both happen then it is even better. Trust in Management to deliver So far, these have all been external factors that the company has little control over. Good management does not just sit around and wait for things to improve; so what has the company been doing over the last year. In my first article, I covered some of the improvement efforts that the company had planned. 2009 was the last time that aluminum prices were at these levels and at that time Hydro was still losing money. The company set forth the $300 plan which aimed to reduce the cost of production of aluminum by $300 USD per metric ton. They successfully completed that program last year, a 35% reduction in CapEx. The program was so successful that they expanded it to cover smelters also looking to reduce costs by a further $100 USD per metric ton. That program has been successfully achieved this year. They then decided to expand this operating principal to the B to A division of the company. At the last earnings call, the CEO Svein Richard Brandtzaeg said: “I’m very pleased to announce that the effects From B to A improvement program in Bauxite & Alumina are coming true. The bottom line as maintenance costs following the power outages are coming down. And we can observe a reduction in cost in our reported third quarter a continuation of the B to A program was a high priority and you should continue to expect positive developments even in this business setting.” So it would seem that the margin improvements in the 3rd quarter are here to stay. The company is the most efficient producer of aluminum in the world. They have been so aggressive in conserving energy costs that the goal is now to be carbon-neutral by 2020. Continued expansion of recycling will be important in achieving this, and as we said earlier recycling adds to the bottom line. The zero footprint target over the next 5 years may initially appear unachievable but the company has consistently delivered on all of their promises so far. CO2 emissions have been reduced by 70% since 1990 and the company views this as a competitive advantage. As the world looks to industry for the answers to climate change, Norsk Hydro is very well positioned to answer. So, here is a list of other developments for the last year, all of which will add to Hydro’s bottom line in the future: February 25th EUR 130 million automotive investment in Germany to lift BiW capacity to 200,000 t/year from current 50,000 t/year April 30th EUR 45 million recycling investment in Germany to reach 100,000 t/year UBC capacity May 8th Permanent closure of 180,000 t/year Kurri Kurri smelter in Australia. Old and inefficient June 13th Enova supports planned technology pilot at Karmøy with NOK 1.5 billion June 23rd New long-term power contracts of a total 2.7 TWh for Norwegian smelters July 3rd Announcement to take control of Søral aluminium plant in Norway September 9th Sunndal production optimized by replacing remelt volumes with SU3 production September 12th Included on Dow Jones Sustainability Indices for 15th time October Alumina production at Alunorte increased to 6.0 million t/year All of which have positive implications for the company going forward. So what does this mean for earnings? Realized improvement efforts from 2011 to 2014 amounts to 3.7 billion NOK ($0.5B USD approx.). Anticipated further improvements would add another 1.5 billion NOK ($0.2B USD) over 2015-16. This does not include the synergy saving expected from the Sapa joint venture. I guess it is time to take a look at that. Is the extruded aluminum division of the company and is run as a joint venture with Orkla ASA (OTCPK: ORKLY ) ADR. There is a nice press release about the formation of the company if you would like to read it. Sept. 12, 2013 press release. For now I will just tell you what they do. They are the global leader in this area. They make building systems and aluminum tubing primarily. In terms of what the goal is, I am going to borrow directly from Hydro’s Capital Markets Day Presentation. •Continue improvement efforts and realization of annual synergies through rightsizing portfolio •Maintain No. 1 position in North America and Europe through unique network, R&D expertise, process capacity and strong customer focus •Develop attractive positions in high-growth markets •Capitalize on expectations of a continued strong US market, and respond to more challenging outlook for Europe and South America A further 1 billion NOK in synergy savings is anticipated over the next 2 years. Once you combine that with the previously-mentioned 1.5 billion for 2015-16, you get 2.5 billion NOK permanent savings over the next 2 years. It is another large reduction in expenditures. In October Hydro was spending about $550 USD per mt of aluminum on oil. How much has that come down? We have looked at all these highlights and have not even talked about growth. I guess it is time to go back to the automobiles as promised. Growth The company expects to see 6% CAGR in transportation between now and 2024. The largest component of which will come from the automobile manufacturers. For each 10% reduction in vehicle weight, manufacturers gain 5-7% in fuel economy. The table below illustrates emission targets from around the world, which will be a key driver behind demand and growth. (click to enlarge) We are already starting to see this shift occurring as outlined earlier by Ford. The economy in Europe is still a concern at the moment, but the headlines yesterday are very encouraging. Mitsubishi November European car registrations: +12.8% (OTCPK: MMTOF ) Jaguar Land Rover November European car registrations: +4.2% (NYSE: TTM ) Mazda November European car registrations: +7.1% (OTCPK: MZDAY ) Volvo November European car registrations: +11.0% (OTCPK: GELYF ) Nissan November European car registrations: +20.4% (OTCPK: NSANY ) BMW November European car registrations: +9.7% (OTCPK: BAMXY ) These headlines are just confirming the data from the prior month, and October sales. Mitsubishi had seen a rise of 68%, Mazda 25% and Nissan again near 20%. It is not all about Transports for Norsk Hydro as outlined in the Capital Markets presentation; the company sees 4% CAGR in Construction and 5% CAGR in Electrical and Electronics by 2024. Conclusion This is a long-term shift in the attitudes of consumers, manufacturers and governments. I can find no other company as well positioned as Norsk Hydro to meet this demand in the aluminum industry. In my opinion the proactive steps taken by management puts Norsk Hydro 5 to 10 years ahead of their competitors. I say that in relation to the ability to leverage the environment, sustainability and corporate responsibility as a competitive advantage. The company’s tag line for the Capital Markets presentation was “Better, Bigger, Greener” and could be seen as a working outline for all industry looking to the future. The fact that the company is going to be even more profitable while achieving this should be a lesson to every manufacturer and producer out there. You do not need to rape the planet in order to make money. The company has too much going on for me to cover it all here. I highly recommend that you do your own research and read the Capital Markets Day Presentation in full. Currency fluctuations bring another complexity to this stock, so make sure that you also take those into account before making your own decisions. I do not view this as a short-term investment, although I do believe money can be made with a shorter time horizon. I view this as a multi-year or decade-long investment opportunity. I am happy to maintain a price target of $15-$16 over the next year or two. Management has faith in the company which has been illustrated by insider buying as recently as last month. I will finish by saying that I also forgot to mention the 3% dividend, which I expect the company to maintain going forward. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Additional disclosure: This article may contain certain forward-looking statements. I have tried, whenever possible, to identify these forward-looking statements using words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “potential” and similar expressions. These statements reflect my current beliefs and are based on information currently available. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual results, performance or achievements to differ materially from those expressed in or implied by such statements. I undertake no obligation to update or provide advice in the event of any change, addition or alteration to the information contained in this article including such forward-looking statements.