REC Silicon (REISI.OL), the IRA, and the Benefits of being listed in the US
Let's go Brandon! Make those Chips!
As a natural cynic, putting out a post about a company that is positive, upbeat, and optimistic that a company’s management *isn’t* overpromising on the future feels deeply unnatural. But that’s what I’m doing today. It’s not exactly a first for me, but it certainly goes against the thematic push of this publication I’ve been shepherding for two and a half years now.
Green companies have been a hotbed for dodgy business plans, absurd unit economics and a playground for grifters for a long time. Long-time followers of mine know that, while I appreciate much of what the ESG framework provides in terms of investor disclosure and positive synergies between Market forces and responsible stewardship, the potential cash grab of promoting stocks based on non-economic considerations serves as a big flashing sign to bad actors that says “SUCKERS AHEAD, DO CRIME HERE!”
Perhaps no single asset symbolizes this pitfall more than the solar panel. We get a lot of energy from the sun. The irradiance upon a few thousand square miles of equatorial land is enough energy to theoretically power all human society worldwide. And it’s not like the mechanism to capture this energy is particularly complex. A photon strikes a photochemical cell, displacing an electron from a (typically silicon) layer from one end of the cell. This “freed” electron can then be routed through a conductive metal to the second (also typically silicon) layer of the cell. That flow of electrons is electrical work (or power).
I’m not going to belabor the intricacies of solar panels because it is both well above my pay grade and (almost) entirely incidental to the crux of this post. The point is that we need lots of silicon, in the form of polysilicon, to make solar panels.
Ironically, what spurred my initial interest in the “ESG” case as both a promise for a better future and the potentially grift-tastic downsides involved Solar panels but not silicon. In 2010, well after it was clear that Fremont, California-based solar panel manufacturer Solyndra was a Bad Business™️, the Obama administration rubber-stamped a half-billion-dollar Department of Energy loan. Fifteen months later, the company would declare bankruptcy.
Between 2009 and 2011, polysilicon prices fell 90%. Solyndra’s pitch was that their silicon-free solar tube technology would be economically viable because of their use of copper-indium-gallium-diselenide (CIGS) film instead of polysilicon. But everyone with a functioning brain, including the US Department of Energy as early as 2008, could see that polysilicon prices were headed towards a dramatic collapse as China spun up factories to produce the stuff.
So tl;dr the US government bought some BoredApe Slurp Juice at the post-Beeple Sotheby’s NFT peak. It happens.
Solyndra wasn’t the only loser in the early 2010’s blowout. The REC Corporation, a Norweigan-based manufacturer of Silicon and Silane Gas, bought a Union Carbide Silicon plant in Lake Moses, Washington in 2002 via a joint venture with Komatsu. They added capacity in 2006, committed more capital to another polysilicon production train in 2007 and started up the final process unit in 2010.
The company also finalized the purchase of a Silane and Polysilicon plant in 2009 in Butte Montana. These were not incredible transactions, in retrospect:
Adding insult to injury, the company closed down its Washington facility in 2019, almost at the exact bottom.
The current iteration of the American asset portion of the company (following a split in 2013), trades on in Oslo. Sporting a market capitalization of 7.23 Billion Krone ($719 million), the fundamentals look horrific on the surface:
And the company trades like a distressed asset.
But the stock market is forward-looking, right? So what’s there to get excited about as an investor? Well, if we’re listening to company management, they’d tell you the following:
The Lake Moses, Washington Plant is set to re-start operations in late 2023
The facility will be able to produce at a rate of 20 million/per annum tons of solar grade silicon by the end of 2024
Silicon prices should stabilize in the $20 range which will lead to significant EBITDA growth
The Inflation Reduction Act (IRA) will be a significant tailwind as well
So, we have questions to ask ourselves:
Is the market not adequately pricing in these potential near term upsides? If so, Why not?
Do we trust management’s projections about the facility restart? How can we confirm this?
How should we value the company going forward?
Let’s dig in!
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