Rec Silicon, the PV Phoenix?

Last time we teased about REC Silicon, a simple company unhappily sitting in the cross-hairs of complex Sino US politics, was in November 2017. We had a Sell recommendation. It was trading at NOK11 with $272m in revenues. It is now trading at NOK17 with $133m in revenues estimated for 2021. We see it as 49% too dear. That leaves a target price of NOK8. Its market cap of c. €600m is after a €100m fresh recap from willing Norwegian funds. REC is a one trick pony stock falling into the specialist investment corner. However, what REC is up to is quite central to the promises of the polysilicon industries. There will always be speculative funding and technological breakthroughs, the very combination that helped REC stumble along over the last 12 years. It only has optionality value which goes beyond our competences.

REC stands upstream of the polysilicon value chain. In financial market terms, that makes it a super derivative. It relies on superior technology to turn silane gas into polysilicon, will make a fortune if its main plant runs at 60% of capacity or more or will go cap in hand to meet new shareholders below that threshold.

The economics of photovoltaic grade polysilicon have been and remain disastrous with China being the swing market in all things PV. A multi-year attempt to tie up with a Chinese partner with production capacity set up in China (so called Yulin JV) has so far not lived up to expectations so that REC has decided to remain a junior partner at 15%.

With the PV market very difficult, REC’s main plant (Moses Lake) has remained closed but it is on the verge of being relaunched. REC made a living from a smaller unit (Butte) servicing the Semiconductor industry which is doing fine but this is not enough.

The epiphany came with late 2020 interests of new shareholders keen to use REC’s technologies to dig:

– into PV technologies again. Indeed REC’s main plant when at full speed does have a competitive hedge as the REC-owned technology enables polysilicon production at the lowest cash cost. According to management, the site will generate US$225m and EBITDA >US$100m at 75% capacity utilisation. This would be aimed at the US market in a post-Trump green spending effort; and

– into silicon battery anodes for ‘e-mobility’. 

Right words to ramp up hope content

One can see the power of those words in markets obsessed by the greening up of all industries, not to mention the surge in demand for semiconductors (even if it does not make a difference for REC).

The issue is that the projects to back a relaunch of REC’s industrial capacity are VC-based, i.e. backed by rather fast money. It comes through JVs with two young start-ups, long in technology but short in experience in ramping up capacity. The first, Violet Power, has some ideas about PV vertical integration. The second, Group 14, dabs into battery materials. That makes for a nice fit but a fragile assembly, nevertheless.

Short term, the good news is that Norwegian funds have paid up to see with a c. €100m capital increase that gives REC its chance. But for the partnerships to really fly, they would need to raise their own funding. Maybe, just maybe, the US greener political timing is right.

In effect, REC fits the speculative green bill with a derivative like profile.

Valuation. What?

Going for REC is akin to going for Tesla. Only the future will tell. Our traditional and agricultural valuation metrics do not fit that kind of bill. The one thing which would need to be valued is REC’s incredible survival capacity. Call it a call option on a green derivative and buy for the ride.

More research on REC SILICON : click here