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.