Chinese solar-wafer manufacturer LDK Solar could be facing a shortfall of $200 million to $300 million of the capital it needs to finance its planned silicon plants and wafer-production expansion, Chief Financial Officer Jack Lai said at a trade show in Munich, Germany, this week.
LDK’s previously announced silicon plants include one with the capacity to produce 1,000 tons per year, expected to open this summer, and one with the capacity to produce 15,000 tons per year, expected to be completed next year.
The company plans to spend $1.2 billion on its first two silicon plants, in Xinhua City, China, and $600 million to expand its wafer production, according to a report from Photon’s Photovoltaic Technology Show 2008 Europe by Hakan Telenius, organizer of the LDK Investor Group.
At the conference, Lai said LDK will finance the bulk of the $1.8 billion in capital expenses through its operations, including expected net profits of $200 million in 2008 and $400 million in 2009, as well as about $1 billion in expected customer deposits for long-term wafer contracts for this year and next year.
That leaves a shortfall of at least $200 million and means the company likely will need to raise between $200 million and $300 million, which Telenius wrote seemed reasonable considering the company had $220 million in cash at the end of last year.
"I am sure they are out hustling for the best terms right now," he said Friday. "We know that they have unused [credit lines] that would cover this shortfall, but Jack has said many times he does not want to continue the use of this facility for [capital expenses]. They will presumably want to do a deal when there is more wind in their sails, so who knows when that might happen."
Industry insiders and investors have speculated for months on how the company would pay for its expansion and its move into silicon production. In a research note in October, Piper Jaffray analyst Jesse Pichel wrote that the company might not have enough cash.
"Additional financing may be required; shareholder dilution and/or higher interest expense may ensue," Pichel wrote at that time.
LDK is priming Wall Street investors for a financing, Pichel said Friday, adding that the financing probably would come in the form of convertible notes because of the current share price.
"It's pretty clear, based on their plan, that they need money," he said. "With the share price and the amount of money they have to raise, it's going to dilute shareholders pretty significantly. If they do a $300 million convert they are going to need an equity deal at some point later. Shareholders are going to get diluted from this thing."
According to a report from the LDK Investor Group in January, Lai said the plan then was to manage on current resources, including operating profits, customer prepayments and its existing $600 million in credit lines.
“However, he said that the rapid growth and the capital expenses make for a tight equation,” Telenius wrote. “He 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.”
In March, the group released another report finding that LDK had more than $300 million remaining on its credit lines, about $100 million in the bank, and expected a net profit of $200 million in 2008, as well as an anticipated $400 million to $500 million in customer prepayments – just enough for the $600 million to $800 million in capital it expected to use this year.
“Whilst this seems likely to be enough for stated 2008 capital needs, it makes for a tight equation and it is clear that the line of credit is less than ideal as the fill-gap solution,” Telenius wrote. “Interest expenses already amount to some $1.5 million per month (assuming a 6 percent rate on $300 million) and – more importantly – the line of credit is on a 12-month revolving basis. LDK needs to have either another [longer term] loan, or issue equity to reduce the reliance on the line of credit. When asked on this, Mr. Lai said that they are considering their options but that the market conditions at present clearly make equity issuance expensive.”
Also at the conference Thursday, Lai said LDK is sold out of its expected capacity for 2008, and has sold 95 percent of its capacity for 2009 and 60 percent of its capacity for 2010. The company already said in October that it was almost sold out for 2008 and 2009, and repeated the statement in a press release in March (see LDK Says Inventory Discrepancy Allegations Have ‘No Merit’ and Solar Roundup: Chinese Solar Buys and Brags).
And on Friday, the company announced it had signed a 50-megawatt, six-year agreement to sell wafers to Silcio, a 33-megawatt, four-year agreement to sell wafers to Arise Corp. and a deal to buy 1,450 tons of polysilicon from 2008 to 2011. The company didn't disclose its silicon supplier.
LDK has been under close scrutiny since October, when its former financial controller, Charley Situ, accused the company of misstating its silicon inventories (see 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," but analysts have continued to express concern after LDK posted fourth-quarter earnings in February that separated out its inventory into material that it could use within a year and material that it couldn’t (see Inventory Concerns Keep Haunting LDK and LDK Defends Its Inventory Accounting).
LDK shares grew 13.5 percent to close at $35.89 per share Thursday. That’s up 82.7 percent from the stock’s 52-week low of $19.64 per share on March 13, but down 53.2 percent from a high of $76.75 per share on Sept. 27.