FSLR; The Betamax of Solar?

FSLR announced their earnings today. The results were great, particularly considering the overall economy.

I've given FSLR considerable thought in the last couple years, and I remain convinced that they have unspeakable future problems. On their investor relations page, they link to the pdf associated with their Q1 conference call. In it, they mention what they consider to be risks to their business, but nowhere do they mention the risk associated with availability of their critical Tellurium supply. Ok, so maybe they have it all figured out; but nobody's asking, and nobody's telling.

Ok, I don't know, but I want to get an idea of what kind of supply issue they're up against, so I've gathered some info.

Per Greentech Media, FSLR uses 6 grams of Tellurium per square meter. (See.)

Per First Solar, the FS-277 Module is .72m2 and has a peak power of 77.5W. (See.)

77.5W / .72m2 = 107.64W/m2

So, at 6 grams / m2, the amount of Tellurium required per Watt works out to be 6g / 107.64W = .056 g/W.

Well, we know that FSLR is aiming for a bit over a GW in annual production for '09 and '10, so rounding to 1GW gives roughly 55.7 Metric Tons of Tellurium required to produce that GW of modules.

The question, then, is how much Tellurium is out there, and what does it cost?

According to the USGS, the price has ranged from $41,800/MT in 2004 to
$82,000/MT in 2007. The World Supply of Tellurium according to US Geological Survey was 132MT in 2006.

Ah, no problem. If they're using 55MT to produce 1W worth of modules, and they're paying even the high price of $82,000/MT for their supply, then they're only paying a total of $4.5 Million for their entire yearly supply of Tellurium. That's less than a penny per Watt. In fact, during the CC, Jesse Peechel stated, quite possibly accurately, that First Solar's largest cost was glass.

Wait, a problem. Solar is big. A sensible look at the required future scale of Solar Energy puts the annual Global installation rate to be around 30GWp per year by just 2012. What if FSLR wants to maintain a significant share in this market?

Well, as it is today, it appears that over a third of the World's Tellurium supply is required for the production of a single Gigawatt of First Solar modules.
If FSLR were to take 10% of that market, they'd have to produce 3GW of modules, which by today's efficiencies would require 165MT of Tellurium, or more Tellurium than the World produced in 2006! Well, maybe the price of Tellurium is a pittance when the company is demanding only a third of the World supply of material, but I can guarantee that it won't remain so when that company is demanding 33MT MORE than the World's annual supply.

A big part of this problem is that there's no such thing as a Tellurium mine. Tellurium is only produced as a byproduct of mining other commodities, such as Copper. This means that it's very difficult to increase the World Supply independently of the supply of those other materials. If you were to mine Tellurium alone, the cost would be astronomical, and yet if you were to drive up the mining activity in Tellurium's sister elements, then you'd have the affect of driving down the prices of those materials, thus making them into less desirable targets for mining.

What about efficiency gains? Sure, if FSLR is able to pull off a tripling, or even just a doubling of their efficiency, then they could make do with dramatically less material. I can imagine several possible ways that they could do this, but I suspect that it will be a tough path. As it stands, per the CC pdf, FSLR has increased the conversion efficiency of their product by .3% since Q1 of '08. That's simply not going to cut it, particularly if you look out past 2012 when the market gets even larger.

I don't know. They have some very smart people there, and they're working hard in an exciting industry. The particular technology just doesn't seem to stack up to me, though, and like I said, nobody is asking questions and nobody is volunteering answers.

Ah well, in the short term, I'm quite certain that they are going to do great. Wall Street loves them, and they have excellent margins for the time being. They very well might be able to leverage some of that temporary financial advantage in order to open up new technologies to their benefit, so we'll see.

All that said, I'm not short FSLR, and I suspect that to go short FSLR would be a very bad plan.

Also, a final note, it's pretty obvious that I think that the strongest players at this time are out of China, but it's not that I don't like some US Companies. I really like Applied Materials, and Sunpower to name a couple of domestic players.

A couple points on FSLR.

I have to say, I'm not a fan of FSLR's particular technology, CdTe, because of the whole Tellurium Scarcity problem, as well as the Cadmium toxicity.

As evidence of this, I'll point out a line on their Q2 report.

Under "Liabilities," "Accrued collection and recycling liabilities" are shown as $23.5 Million for the Quarter. This compared to $69.7 Million in Net Income. One of the goals mentioned in the CC, was that they had produced their 500th Megawatt in Q2.

Essentially, the two big problems of CdTe lead to a company that MUST recycle the vast majority of their product for its lifetime. They MUST have that source of Tellurium, and in order to do business in places like Germany they've got to deal with their toxins at the end of a product's life. That could potentially lead to an increasingly expensive infrastructure required to support an increasing number of installations, which will be distributed widely around the planet.

I guess my hope would be that a big chunk of this expenditure is for the set-up of a recycling facility, and is a one time cost. What happens years down the road when FSLR has many GigaWatts of installed capacity?


On a totally unrelated note, it seems that they state in the CC that Conversion efficiency has increased by 10 "basis points," or .1%. I'm sorry, but that's peanuts. When asked about whether their newer facilities were producing more efficient modules, they replied that the 10.7% figure that they had been using was just an average, and that the actual efficiency varied, and they confirmed that 10.7% was the average at all of the facilities.

Based on this, I'd be very curious what kind of mid-term increases they are expecting in Conversion Efficiency, because otherwise it looks to me like they're close to "stalled."

As I've said before, just because I have a hard time believing in the fundamentals of this company, I wouldn't be shorting it unless I was willing to lose alot of money, at least in the short to mid term.

Disclosure, I have no position on First Solar.


Note: For more background on FSLR, See this.

Time Magazine Article - Thin Film - Global Solar, FIrst Solar, NanoSolar.

Solar Power's New Style.

"Mike Gering, CEO of the start-up Global Solar, picks his way along his factory floor, tracing the convoluted path that his thin-film solar panels follow from birth to shipping truck. The raw materials the workers carry are ultra-thin sheets of flexible plastic, which are then coated with a series of chemicals--indium, gallium, diselenide--that allows the module to turn sunlight into electricity."


The article goes on to touch on First Solar, and NanoSolar. It's a little brief on Thin Film basics.

First Solar product may be banned in Europe. Ouch!

First Solar CEO cashes half his stock in $257 million deal

"But cadmium, a toxic metal according to the U.S. Labor Department, is linked to breathing and kidney disorders. It's banned from use in batteries and related electronics in the European Union, where First Solar gets more than 90 percent of its sales.

An expansion of EU restrictions to solar cells would make the company's current technology "impractical," First Solar said in a Feb. 21 SEC filing."

Found by bjr149 of Yahoo.

FSLR and the Tellurium Fiasco.

It's interesting to see First Solar so well hyped, while the Tellurium issue goes undiscussed by the Investment Community. The possibility of a price spike in Tellurium has been discussed for some time over at the Stock Psychology Blog, and at that Author's posts at Seeking Alpha.

Here's his latest post on the subject.

It sure looks like there's a hell of a spike happening in the price of Tellurium. To me, it's reminiscent of what's been happening in Silicon, and it's just the kind of price movement that makes highly dependent industries struggle with competitiveness. The difference between Tellurium and Silicon, of course, is that Tellurium is incredibly rare on earth, while Silicon is incredibly common. With Tellurium, you can't just increase manufacturing capacity freely, because there simply isn't enough raw material of refine, whereas with Silicon, though refining is expensive, there is a vast amount of raw material available for as far as the eye can see.

Sanjay Shrestha Interview on CNBC.

The Solar Trade

Sanjay is debating a joker from The American Enterprise Institute. Sanjay puts up a strong defense of FSLR and SPWR's potential to become price competitive with Coal. In particular, he points out that the typical price given for Coal-generated power is at the "point of production" rather than at the "point of consumption."

As for the opponent, he's a senior fellow at the American Enterprise institute. These guys are Neocon and Big Oil all the way.


Kudos to ibcnu2day69 of Yahoo for the find.

A couple of articles on Tellurium.

arizonageology.blogspot.com

The Tellurium Supernova

The Plan...

I sold TSL the other day. I'm thinking that prices in the Chinese manufacturers are going to redistribute a bit, and it will be interesting to see what increased competition does to panel prices and profits.

Ultimately, though, I see ownership in a chinese company as a hedge against trouble in the US Economy, so I'll get back ASAP (probably back into TSL). I figure at some point things will get rebalanced, and continue going up from there. It's not like demand isn't continuing to increase, so the long term still looks very good.

It seems that FSLR isn't getting hurt so far, so I'm staying in.

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BTW: Rule of thumb. I welcome debate, so if I'm ever off base, let me know.