“Profit from the Great Silicon Shortage”

By Travis Johnson, Stock Gumshoe, April 11, 2007

This one comes from Robert Hsu, who offers to tell you “How to Get Rich When we Run Out of Silicon!” — if you’ll subscribe to Asia Edge (and it ain’t cheap).

“We’ve run out of sand. Silicon: cheaper than dirt, more vital than oil. Gone.”

There are some numbers to back up his argument that you can profit from the silicon shortage — “Prices for solar-grade silicon, for example, have gone from $9 per kilo to $60…to $70…to $200 recently.”

And he says that “Solar is a $5 billion market racing towards $50 billion.”

He gives “two ways to win” in this situation — one is the company I revealed a few weeks ago, Trina Solar, that manufactures solar cells without expensive polysilicon. That post is here if you’re interested.

And the other is what he calls the “ultimate arms dealer play” in solar power.

What hints does he provide about this second one?

“The world’s largest pure play in silicon is located in Missouri. It is also the best value. It has wisely secured its’ own proprietary supply of raw silicon so that, even as the price soars, the company’s profits double. Better yet, increased manufacturing capacity is about to come online.”

Forward PE of 15.

48% rise in net income last year.

Profit margins of 45% last year, and “heading for 50%.”

So what is this company that Robert Hsu says has “cornered the market?”

A few minutes of stirring the wisdom stick around in the ol’ Gumshoe’s brainpan, and I can now tell you that this firm is …

MEMC Electronic Materials (WFR)

This was actually a bit of an easy one for me, since I happen to own the stock (my buys and writeups are over at http://oneguysinvestments.com/WFR if you’re interested).

That said, there are a few things to point out about this company: They have come a long way in a few years, from a real financial mess in 2003/2004 to dramatic growth in the couple years I’ve owned it — you could have bought it for about $10 two or three years ago, and it’s now over $60, so it already reflects some dramatic margin expansion and a much improved market for its goods.

And it’s the fourth-largest silicon wafer producer in the world, though it’s the only semiconductor wafer manufacturer that’s really vertically integrated, with it’s own polysilicon manufacturing capacity. So it hasn’t really “cornered the market” — though the other three are not traded in or based in the US as MEMC is (yes, they’re in Missouri — and the original name was Monsanto Electronic Materials Company, they’ve been around for, I think, close to 50 years).

WFR is indeed planning a dramatic production capacity increase over the coming year or two to help supply the solar business, as they just started selling solar wafers this year (their main customers remain the chipmakers, and semiconductors are still a dramatically larger business than solar — though solar is growing a lot faster). They’ve got some interesting deals, including a supply agreement with SunTech Power that also includes a nice warrant that allows MEMC to buy 5% of the company.

And all of the big producers are increasing their polysilicon production this year and next year, or at least they’ve announced plans to do so, so there is some fear that the prices will drop faster than demand inreases. In truth there’s plenty of silicon, of course — what’s lacking is enough production of polysilicon, which is the processed silicon that is formed into wafers for semiconductors and solar cells.

So I own these shares, and I can’t give an unbiased opinion — but go into it with your eyes open, and think about the fact that increased demand from solar and semiconductor companies had indeed spurred a rush to increase supply. Whether that will bring the market back into sensible balance, or cause an oversupply and a price drop, is for you to guess.

And at least, thanks to your friendly Gumshoe, you didn’t have to subscribe to Asia Edge — which costs, believe it or not, almost $3,000 a year, just to find out the name of this company.

(If that isn’t enough of a reason to join the Stock Gumshoe Irregulars, I’ll eat my hat!)

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