Saturday, November 17, 2007

First Solar Has a Dark Future

First Solar Inc. (FSLR) is a solar panel manufacturer. Its sole business is production of CdTe based solar panels. Its stock price rallied about 10 folds since the IPO about a year ago. I believe the FSLR stock is overpriced. More over, this company has a very dark future prospect if you understand the fundamental of its business. That's because it rely on cadmium telluride as its raw material. Cadmium is extremely toxic, but the mildly toxic tellurium is lethal to FSLR. FSLR is extremely vulnerable due to a possible shortage and price run on tellurium. It could be forced to go out of business in a few years due to competing demands on tellurium.

Tellurium, the No. 52nd element, is extremely rare on earth, rarer even than platinum the No. 78, according to Web Elements. Tellurium's crust abundance is 1 pbb versus 37 ppb for platinum (pbb is "parts per billion"). Tellurium is mainly produced as a byproduct from the anode slime accumulated during copper refining. But not all copper mines contain significant amount of tellurium. Chile produces 1/3 of the world's copper but virtually nothing in tellurium. According to USGS and Arizona State Geologist Lee Allison, the world produces any where from 160 to 215 metric tons of tellurium a year.

Tellurium was traditionally used in metal alloys and other uses. Demand from emerging new applications, like DVD discs, digital camera, computer flash memory and CPU thermoelectric cooling, among other things, has caused a severe shortage in recent years, and drove the price from below $4 a pound to over $100 in 2006, according to Lee Allison. Jack Lifton on Resource Investor suggested that investors could sense the shortage and start to hoard physical tellurium, adding fuel to the fire and causing a huge tellurium price run.

How much tellurium does FSLR use? They use about 7 grams of cadmium and about 8 grams of tellurium in each of the 2 feet x 4 feet CdTe solar panel. That's roughly 135 metric tons per each 1 gig watts (GW) of products. They have signed a bunch of sales contracts with per watt price fixed and mandated to go down 6.5% yearly, and they are aggressively building new factories and expanding production capacity. After finishing a new factory in German they are building 4 brand new factories in Malaysia.

Alright, they have plenty of customers, plenty of sales contracts to keep them busy for 5 or 6 years, and Malaysia has plenty of land for them to build new factories. The growth potential looks like unlimited. That's why investors bid up FSLR stock price like crazy.

But, where are they going to obtain all the new tellurium supplies needed for future expansion, at a price cheap enough to ensure profitability, and a quantity large enough to keep the new factories running? On Nov. 8, 2007, the CFO publicly commented that "We (FSLR) have identified "terawatts levels of tellurium availability". He had no idea what he was talking about. It's rather unfortunate that a CFO would mislead the investor community by such an audacious and outrageous false claim. One terrawatt is 1000 GW. No where on earth this amount of tellurium even exists underground, let alone available in a secret vault some where.

FSLR has a very dark future ahead for itself if a tellurium rush occurs as expected. If you own FSLR stock, sell immediately to avoid a total loss.

Full disclosure: I am short in FSLR and I plan to invest in physical tellurium metal ingots.

P.S. This article is now published on Seeking Alpha, on News Bad, and on The Big Hype. If you know any places else that this occurs, let me know.

On Nov. 24, Arizona Republic published a news article citing my Seeking Alpha article.

44 comments:

Anonymous said...

While your tellurim claims have merit, FSLR is facing a far bigger problem soon. A company called Applied Materials is selling entire production lines for a-Si based panels of a much larger size than FSLR that are far better suited for power plants and solar farms. Most importantly, the cost of these panels will be less than $1 per watt. CdTe will NEVER be able to compete at that pricing level.

As the Applied Materials SunFab production lines spread thoughout Asia and India, the new large, cheap, and effective panel will be the only practical choice available for industrial buyers. This is not a residential product.

If you were a purchasing agent for a power company or a factory, which would you choose? A large, cheap, warrantied panel or a small, environmentally toxic, unproven panel from some fly by night company that will probably be bankrupt in five years? The choice is clear.

Beanieville said...

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Anonymous said...

Oh boy, so much misinformation. First Solar is a client of AM, selling the parts and pieces. People please get your facts straight.

Anonymous said...

I was initially impressed by this argument (and sold my small FSLR position). However, while the US Geological Survey data on Tellurium production seem to suggest a looming shortage, this data is fragmentary. Production from the sole US producer is withheld, because it is proprietary. In fact, the data only includes production from three countries; Canada, Japan and Peru. (See this report from the USGS)

Production from other major copper producing countries (like the US, Australia, Belgium, Chile, China, Indonesia, the Philippines, Kazakhstan, Russia and Poland) are not included. (For info on copper producers see , this USGS report.)

Finally, when you look at Tellurium reserves (basically the estimated percentage of Tellurium in the economically recoverable copper reserves) these reserves are, indeed, massive: 21,000 MT vs annual consumption of, perhaps, 300 MTs.

Maybe I'm missing something, but I can't see Tellurium price increases being FSLR's Achilles heel.

igor said...

Folks at berkeley wrote the following in their "Future State of PV Industry -Trends and Technologies" report:
On CdTe availability...
"Even though the module efficiency of CIGS and CdTe has potential to exceed those of Si based technologies, there are constraints that limit those technologies to become the primary choice for second generation photovoltaics. The biggest constraint is materials availability, especially indium and tellurium. The scarcity of indium and tellurium will lead to limitation of expansion production about 20 GW/year for CdTe and 70 GW/year for
CIGS..."
On price/KWh argument:
"that regardless of ... material prices and/or efficiencies, CdTe continues to be the low cost provider in the market through 2010.
This is true unless tellurium prices continue their meteoric rise
(from $29 per kg in 2004 to $216 in 2005) or tellurium supply becomes a binding constraint. Even then, since tellurium represents such a low portion of the materials used in a CdTe cell, tellurium prices would need to increase more than 20x current prices in order for other technologies to reach cost parity with CdTe—assuming standard
margins are maintained..."
This DOES NOT mean, that the price war is about to slash other PV manufacturers margins:
"Despite the competitiveness of CdTe modules, this does not signal a large scale change in system pricing. Current production targets for CdTe still represent a small portion of the total solar production by 2010. If CdTe took over even a small portion of the market,
we would then likely see resource constraints and the kind of material cost increases discussed previously. Therefore, the market will most likely be set by a mix of other technologies.."

JJ2000426 said...

Anonymous 3:

USA, Canada, Peru and Japan are the 4 major tellurium producers of the world. Productions from other countries are much less. The USA production, though undisclosed, has an estimate of 50 tons per year. See this alternative document.

The USGS reserve number of 21,000 tons of tellurium is underground reserve. It assumes all tellurium contained in any copper mine will be efficiently produced. At current pace of mining, the known copper reserve will be depleted in 27 years. So the produceable tellurium is roughly current production, 215 tons, multiplied by 27 years, roughly 5800 tons.

ARamu said...

my conclusion after reading all the comments:

i am somewhat convinced by mark's arguments about Te's importance to FSLR, and nobody has made a argument which negates his position.

but i am not convinced that the scientific community cannot be wrong about rarity of Te ( i think its possible that they may be wrong, and if we look hard enough we can find Te in abundance for the right cost)

so if mark is right, First solar is going to have cost overruns pretty soon, and i think that may be a time to establish short position, since its quite possible that they will continue running higher making my job easy.

the worst thing maybe mark is right, whole world comes to know about Te and FSLR nexus and Te price goes to moon, everyone sells FSLR and i miss the opportunity.

i hope i can take some time out to do some research (since i dont want to miss the opportunity)

--techy2468

JJ2000426 said...

Techy2468:

Welcome to my place. Yes please spend some time doing some more research on tellurium. Please read my blog entry a week ago. There are a number of useful links.

I am only expressing my opinion and I am not trying to encourage people to buy tellurium, although that is the result I expect from people who do their own DD and cone to the same conclusion as mine.

You should also get interested in palladium and the SWC stock.

JJ2000426 said...

Some one posted a tellurium source Good Fellow. Don't buy from them as I suspect the price has high premium built in. I keep it here for reference. As of Nov. 16. 99.95% broken ingot was $830 per kilogram.

JJ2000426 said...

Kudos to some one from the message board send me an academic paper. It's abstract is here:

"The recent Si supply shortage has provided a foretaste of what might occur when a photovoltaic technology becomes materials-supply constrained. Non-silicon technologies, involving some of the least abundant materials in the earth's crust, have even more fundamental problems with material availability. For both Te and Se, Cu anode slimes produced during Cu electrolytic refining provide the present major supply stream. The availability of material from such slimes is reassessed using recent data and shown to be more limited than earlier estimates."

In the article body, the conclusion was

"Present planned CdTe photovoltaic module production levels of 100MW/annum by 2007 will increase Te demand by only about 10 tonnes. If market share of this technology is maintained or expanded, requirements would be more than quadrupled in 5 years at present photovoltaic industry growth rates and would become significant over such a timescale in relation to present market demand (estimated as circa 350 tonnes/annum)"

FSLR has far exceeded that 2007 growth prediction and hence tellurium supply will become a problem much earlier than 5 years.

JJ2000426 said...

Kev1ntx on Yahoo message board meantioned a paper on USGS web site talking about tellurium minerals. It contains some useful numbers.

David said...

I have identified a source! Terawatts! Let's replace all existing fossil fuel power plants with nuclear reactors and then reprocess all their spent nuclear fuel. SNF contains at least 5% stable tellurium (good to an order of magnitude).

JJ2000426 said...

On Seeking Alpha article's comment section Zawy reference another very detailed academic paper on CdTe. He seems to be very knowledgeable technical guy who knows what he is talking about and who can really dig out technical sources and digest them.

JJ2000426 said...

Very useful. Selenium-Tellurium Development Association web site.

JJ2000426 said...

Some one on Yahoo Message Board meantioned the important issue of RoHS compliance. Clearly The CdTe solar panel of FSLR does not comply and they are just lucky the CdTe solar panel was not explicitly listed. This is a loop hole.

The full text of the RoHS.

FSLR's own SEC filing, see page 17.

If this loop hole is plugged, FSLR is DOOMed.

JJ2000426 said...

The RoHS discussion thread on Yahoo message board.

JJ2000426 said...

This is NREL's own assessment of tellurium availability in 1999. The study was flawed, IMO. It's questioned by a later paper.

wpeyton said...

There's an article on Seeking Alpha which makes similar points, with a different spin. The author states that FSLR may be using as much as 15% of world tellurium production. Even if FSLR has locked in their prices, that will create a shortage for others.

See: http://seekingalpha.com/article/58766-alternative-energy-gambles-for-2008-part-iii?source=side_bar_short_ideas

The problem I am having is, how to make money with this. Ingots are well and good, but there is no real market for them. That leaves the problem of selling them (E-Bay?), and also establishing a market buy/sell price. For instance, one supplier is quoting $210/kg. But I can't tell whether that's s steal, or they want to rob me blind!

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