LDK Solar's shares dived nearly 23 percent after Q-Cells said Monday it had canceled a silicon wafer contract and now wants its deposit back.
China-based LDK (NYSE: LDK) had failed to fulfill its obligation under a contract signed in December 2007, Q-Cells said. The contract called for LDK to deliver wafers from 43,000 tons of silicon from 2009 to 2018, starting with 1,000 tons in 2009.
To secure the supply, Germany-based Q-Cells paid $244.5 million in early 2008, the Germansolarcell maker said. The company said it's having trouble getting that money back promptly from LDK.
UPDATE: LDK, for its part, said Q-Cells terminated the contract without cause. LDK issued a response to say that it was capable of delivering the required wafers to Q-Cells and did so through March this year. Then it stopped at the request of Q-Cells because the two companies were renegotiating the contract.
Signing that supply agreement was a nice win for LDK, given that Q-Cells was becoming the No. 1 solar cell maker in the world. Sales to Q-Cells made up more than 20 percent of LDK's revenue in 2008.
Back then, LDK was embarking on an ambitious plan to build its own polysilicon plant to supply the material for its own wafer production. At some point, the company decided to build a plant to produce 1,000 tons of silicon per year, and a second 15,000-ton plant.
Building its own silicon plants might have seemed like a wise move back when silicon prices were high. But pricing has crashed in the past year (see Contract Silicon Price Falls 50%, Close to Spot Price).
By October 2008, LDK said it had completed installing equipment for the 1,000-ton plant. But the company later said it had equipment trouble, and didn't expect to reach full production until the middle of 2009 (see LDK Solar Lower Sales Outlook, Delays Factory Plan).
In September, the company said it had completed an initial production run at its second plant, which had 5,000-ton capacity.
Incidentally, LDK's executive in charge of manufacturing, Nicola Sarno, left the company just a few weeks ago, according to LDK.
The company hasn't been immune to recession. Customers' demand to delay taking delivery has contributed to lower sales over the past year. LDK widened its quarterly losses during the second quarter this year. Gross margin reached negative 90 percent, prompting one financial analyst to ask why the company didn't stop production.
"Q-Cells' announcement will certainly weaken LDK's position in its negotiations with other customers," wrote Jesse Pichel, a senior research analyst with Piper Jaffray, in a research note. "A potential withdrawal of Q-cells' $244.5M prepayment would make LDK's balance sheet more onerous."
Q-Cells, which has posted losses and carried out layoffs this year, said it couldn't reach an agreement with LDK on details of terminating the contract. They have gone into arbitration with LDK at the International Chamber of Commerce in Paris, but haven't been able to agree on a settlement, Q-Cells said.
Q-Cells said a German bank provided guarantee for the $244.5 million payment if the cell maker ever terminated the contract and wanted the deposit back. LDK did file a temporary injunction to prevent Q-Cells from getting money from the bank, but a court in Berlin denied LDK's request, Q-Cells said.
LDK said since Q-Cells breached the contract and isn't entitled to get the money from the bank. LDK said the arbitration with the International Chamber of Commerce hasn't started yet.
LDK's shares tanked nearly 23 percent to close at $5.23 per share on Monday.
The two companies have three other contracts. One is a short-term wafer supply agreement that will end this December, said Stefan Lissner, director of investor relations at Q-Cells, in an email. He declined to say how much wafers were involved in this contract.
Another contract is an 11-year agreement, announced in September 2008, for LDK to process upgraded metallurgical (UMG) silicon into wafers for Q-Cells.
Q-Cells isn't using UMG silicon at this point, and "there are also no volumes to process," Lissner said.
The last deal, announced in April this year, turned the two manufacturers into project developers. The two formed a joint venture to develop solar power plants and sell them to buyers in Europe and China, and have started on a 40-megawatt project.
The wafer contract dispute won't affect the project under development by the joint venture, Lissner said. But Q-Cells doesn't expect to add new projects, he added.