During a meeting with LDK Solar Chief Financial Officer Jack Lai last week, a group of LDK investors asked a series of questions on behalf of Greentech Media.
The questions were part of an attempt to clear up some of the mystery surrounding previous allegations that the Chinese solar-cell manufacturer misstated its silicon inventory.
During the current worldwide shortage of solar-grade silicon, the amount of silicon that solar companies have secured is seen as having a direct link to production, margins and profits, and investors responded to LDK's allegations dramatically, sending the company's shares to half of their peak value.
LDK last month said an independent audit found "no material errors" in its silicon accounting and reported earnings in line with expectations, but some analysts -- and shareholders -- said they still had unresolved questions (see Independent LDK Audit Finds 'No Material Errors' and LDK Profits Jump 40%).
As part of a due-diligence report, which included the meeting with Lai, the LDK Investor Group last week concluded that the company is on track and that there's a "high likelihood" it will be able to get the polysilicon it needs this year (see LDK Investors Say They're Satisfied).
The following is a transcript of the question-and-answer session, as passed to Greentech Media from Hakan Telenius, the investor group's organizer and author of the report. (Lai confirmed that the answers are correct.)
Q: What kind of margin is LDK expecting on the silicon it will initially produce from its own plant? Given LDK's lack of experience in making polysilicon and its success in acquiring polysilicon so far, why does the company think it makes sense to build its own plant?
A: [The] initial cost from [our] own plant is modeled at $80 per kilogram. The cost for incumbent players is around $30 per kilogram. LDK's overall target for 2009 is $80 per kilogram. Even at $80 per kilogram, this would translate to hundreds of millions in savings in 2009.
Q: Analysts have questioned why LDK's price estimates for silicon are so low compared to competitors that use the same equipment and that also use scrap silicon. Is LDK using the price of the recycled silicon without including the cost of refining that silicon to a usable grade?
A: We are not the lowest. Poly from recyclable material costs us around $50 to $60 per kilogram. The big impact comes from most customers who have secured contracts at $60 to $80 per kilogram. [Editor's note: Telenius added that the cost of recycling is only about $1 to $2 per kilogram because of low labor costs.]
Q: From LDK's press releases and the 'invitation-only' conference call on Oct. 4, it appears that the company originally began an independent audit with its usual external auditor, KPMG International, then on Oct. 30 announced what appeared to be a second independent audit with a 'Big Four independent audit and counseling firm' under the eye of Simpson Thacher. When LDK released results on Dec. 17, the announcement said the results were from the 'Big Four' auditors separate from the company's external auditors. So what happened to the first audit?
A: Outside auditors were used to check on both the company and KPMG's work. This is standard practice in these cases.
Q: It would seem that releasing the names of the auditing firms would allow for more accountability. So why did LDK and the auditing firms decide to keep the names of the firms private?
A: I cannot comment.
Q: How much of the inventory is made up of off-spec broken wafers?
A: Very small. And we can recycle 100 percent of what we cannot resell.
Q: LDK has said it already has been recycling wire-saw slurry. Can the company tell us anything about the efficiency of its slurry recycling and how expensive that process is? How does LDK's process differ from other companies' efforts?
A: Slurry has glyco, silicon carbide and some silicon. We recycle the glyco and the silicon carbide. We don't know if we can do it better than others. We recycle the silicon carbide and the glyco. We cannot recover the silicon. And there may be some scrap -- some wire. Efficiency is 60 to 70 percent.
Q: Has LDK heard any more about the SEC investigation? Has the SEC or any other government agency contacted LDK since the initial announcement of the inquiry in October?
A: I only received one phone call from the SEC. In the interest of full disclosure, we decided to disclose it.
Q: Why does LDK think shareholders have kept the share prices low, and some analysts have kept 'Sell' ratings on the stock, in spite of the audit and third-quarter results?
A: No comment.
Q: Now that audit results have come out exonerating LDK, is the company planning to take any legal action against its former financial controller, Charley Situ, or any others regarding these allegations? Why or why not?
A: They are not taking any action at this moment.
To learn more about this issue and to read other opinions, see "Related Stories" to the right of this article, as well as this commentary from Chip Stock Trader after a conversation with Piper Jaffray analyst Jesse Pichel and these message board comments.