May 18, 2008
Knobias Clip Report (05-16-2008)
By admin
Submitted By Knobias ClipReport
HOKU: Loses Merrill Financing; Reports New PV Project
Friday’s session oil gain another dollar and reach another all time high. The liquid saw more speculative buying after Goldman Sachs revisited their expectations for the commodity and noted that they see $140+ oil in the second half of the year. With oil’s rally comes a rally for the alternative. Solar names were seeing increased action as all solars were green with the exceptions of ASTI, WFR, and YGE.
One of the largest gainers was Hoku Scientific (HOKU). The Company’s story has been well documented over the past year and a half as the Company has planned to open a polysilicon manufacturing facility in Idaho and has amassed $1 billion in take or pay contracts before the facility even began groundbreaking. The Company had planned to finance the facility with the early payments, cash on hand, small equity offerings, and a debt deal with Merrill Lynch.
Over the past 6 months, the Company has had to amend some of these early pay contracts to extend the deadlines since construction has taken longer than originally expected. In all actuality, the financing part is what has taken so long. Giving hundreds of millions of dollars to a Company with little experience in the polysilicon process whose margins would be depressed if they finish the construction and begin manufacturing isn’t something that many financiers are willing to do in the current environment. It just makes sense to run from risk especially with the reward which the Company might not even be able to afford.
And so the Company has extended these take or pay contracts with their fixed prices, but with each amendment came an increase in the contract amount to keep the Street from utterly bludgeoning the stock. But the increased amounts on the contracts are probably more in the way of negative news than the extensions themselves. These contracts most likely have fixed prices below market. And an extension of the deadline has to be something the clients are willing to give up for more polysilicon at these set prices. It’s a give and take. There’s no way it would be a “take, take” for HOKU. That’s just not how business works, especially one in an extremely competitive global market such as solar.
On Tuesday, HOKU reported earnings. There was nothing spectacular and also nothing really to see in the form of actual results. The Company has yet to construct the facility, and has no results to really report. But in the earnings report was a tidbit about the financing with Merrill Lynch. It fell through.
HOKU said that the two have mutually agreed to end the arrangement which leaves a $110 million gap of additional financing needed to complete the $390 million construction of the facility. To supplement, HOKU has filed a universal shelf registration statement with the Securities and Exchange Commission to raise additional financing.
The amount hasn’t been filed yet so there is no way to know, but in speculation, one can assume that it is probably a pretty hefty sum which will attempt to close or completely close that $110 million gap.
Following the earnings, shares didn’t quite act as assumed. If a Company loses financing for whatever reason, investors could assume that the financier performed due diligence which showed an unwanted amount of risk or an inability to recoup payment. But in true HOKU fashion, the Company reported a new project for 218 kilowatt PV system to be implemented on the roof of a Hawaiian Electric Company building. According to the release, HOKU will operate the system and sell the power generated to Hawaiian Electric at a fixed rate for 20 years and give them the ability to buy the system after 5 years.
Following that news, shares jumped over 10% on a miniscule amount of power when compared to their polysilicon facility. With the shelf registration soon to be filed, investors should be wary of the amount of dilution expected and who will actually buy the securities and at what terms. With that in mind, investors would be wise to watch.
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