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REC Silicon ASA
11/7/2024
And welcome to the third quarter 2024 presentation. I'm Curt Lovins, CEO, and I'm here with Jack Yoon, our CFO. And we're going to be taking roughly the next 45 minutes to an hour to present our results and also answer questions. We're going to be discussing Moses Lake facility update, Butte operations update, briefly silane for silicon anode material, financial highlights, and some market updates. In the quarter, we have revenues of 33.8 million. Our EBITDA loss was 42.7 million. was primarily due to startup costs associated with moses lake as well as weaker operational results from our butte facility our cash balance at the end of the quarter was 23.6 million additionally we we had announced that our qualification of moses lake polysilicon was delayed And as a result of that, we turned down our operation at our Moses Lake facility in order to conserve liquidity. Additionally, side lane shipments were affected very much by the global PV slowdown, particularly around utilization and also due to trade concerns. So I'd like to take you through a timeline, which is going to kind of lead us up to where we are right now. If you recall, we started up nearly one year ago with the operations part, with the FBR part of the operation. It took some time to clean up the system as we worked through it. We fought and worked through a lot of different issues, which is typical for continuous process that is all full of interconnected and related systems. We got to a point where we had most of the specifications where we could meet. However, there was still one primarily that was causing us issues. We continued to troubleshoot We formed a task force from all disciplines, as I explained prior when we were first talking about this issue. The task force determined that the impurity came from surfaces in the product handling part of our system. We prioritized and attempted various methods to mitigate, including changing of materials, passivation, inerting, control parameter changes, all of these successively in priority for what was gonna get us to the specification the quickest. Finally, we decided upon isolation. However, for this isolation to be effective, we needed to loosen some other specifications since we would not be operating that particular equipment. until we had a new solution in place. We proceeded to negotiate with our customer where they accepted a change in the specification conditioned upon successful qualification in a production environment. They then made arrangements with a company that was suitable for this purpose and we prepared material to ship. We sent material and we worked with our customer, forwarders, and customs to answer questions, provide paperwork, data, whatever was required for us to get this process continuing to move. At some point, customs determined that they wished to test material themselves at another lab. This was not something that we had expected. Please note that during this time period as well, there were at least two national holidays in the country in which we were doing this testing, which further expanded the amount of time and reaction from the authorities on this matter. We worked with all parties to determine if we could expedite or provide more data. We involved different expediters as well to try to help us who we worked with in this country before. After exhausting all these mitigation efforts, and trying to get a firm timeline, we then realized that we would be unable to have that firm timeline before we needed to communicate and understanding that this affects our business materially. We then communicated our delay and began taking measures for interim operations. We still continue to work with our customer to support as needed and determine a targeted time for release from customs. And I want to be clear that this is completely within the purview of the customs agency. We do not have any sort of control over that other than to make sure we continue to provide information as requested. in a timely fashion, and we will continue to look for other ways that we can move this through. So, as I said, we went to a situation where we needed to put our operation into a turn down mode, primarily to conserve liquidity. So how we're operating now, is that we're operating one silane unit. We operate that unit intermittently. So we run it to fill storage tanks that are then going to feed our FBR reactors. We then turn it down. I want to note this is not the most optimal way to run a chemical process, but we're doing it because that's what's necessary at this time. We are running multiple FBR reactors. However, these reactors are running at very low flow rates at this moment. There are options to run less reactors at higher flow rates, and we will continue to observe and make the best decision for the situation and the data results that we're receiving. We're then feeding into two different product handling systems, one half of each system And this is where we are really focusing on product quality improvement. If you recall what I said back in the previous slide, the reason why we are, you know, having this particular qualification right now is primarily driven by the change in specification that we desired. so another way to get there quicker is for us to hit the original specification that was agreed to so what we're doing now is driving towards that as well as running our reference line which is in fact the line that has the isolation that we discussed earlier in it so the line has one of the lines has modifications that we made that are there to address the original issue of impurity that we ran into and then the other line is our reference line which is the line as i stated that had the isolation measures put in place so that we could ship to the agreed upon specification conditional upon the qualification and then we're running part of our packaging line. Everything is balanced with the system in front of it so that we aren't running extraneous systems that are not required at the current run rates. So, word summary wise, operationally, we turned down to 15% We want to highlight that this turndown will affect our ramp timing. We cannot just flip a switch, bring all the systems back online simultaneously, and begin running full out. It will be a process to bring the systems back online, turnaround systems, and it will take some time. As a result of this, the facility will not be at 100% by year end. While we will have all of this equipment, as we had stated, we've finished our construction activities, our project-related activities, the initial large project that we had. However, we're not going to be operating all of that by year end. In terms of the qualification and the quality, right now, we're still in a state where there's unknown timing and results. However, we're using this time to focus on improving the quality of our product so that we move towards the original specification and then continue to move beyond that original specification to our target benchmark specification that we have discussed in previous presentations. because that's where we wanna get to eventually. So some things to talk about and to consider, I think, is the understanding that we are working to determine new timeline. We will communicate further updates when they're available. When we have any information that is material and actionable, and understood, then we will pass that on. We are evaluating further financing requirements in a variety of scenarios, and we're prepared to negotiate for another qualification if for some reason qualification is unsuccessful. And that is not to say that it will be unsuccessful. We've also included on this slide an excerpt from our quarterly financial report that we would encourage everybody to go back and read through. But we are working diligently and positively towards this matter. However, we've noticed that we've received a lot of different questions which have to do with the variability around the different outcomes and the unknown unknowns and potential situations, and we've done our best to highlight those so that everyone's understanding of, you know, what the situation is. For butane in silicon gases, as I touched upon before, primarily PV and flat panel display demand is affecting our volume rates right now. There is globally lower utilization rates in those particular segments, as well as facilities, which has been suspended. Why have those facilities been suspended? There's been concerns around trade issues, particularly with regards to a large cluster down in Southeast Asia, as well as rampant oversupply within the PV space. and lower demand globally right now. In addition to that, there was lower utilization of some flat panel display facilities. And in fact, one facility that we supplied outside of China was closed. So that affected our volumes in Q3. But if you look at the underlying demand for our target semiconductor market segment. The demand for all of our silicon gases is on track. Silane is growing, yet it's growing slower than we would like right now. And that is primarily driven by segmentation weakness in the semiconductor industry. a large demand driver for silane is in fact the memory market. And outside of memory related to AI, there are still some questions about ongoing utilization rates and what volumes are going to look like going forward. So that is affecting us. However, I'll say that for our other silicon gases, we're seeing that, um, demand is growing at a higher pace than it is for the underlying silane demand, which is good. On our semiconductor-grade polysilicon, we are winding down this process, as we had indicated before at the beginning of this year. Our target is still to clear our finished goods inventory by the end of the year. We're making progress towards that. There are still some restructuring activities ongoing as we go from operating a plant with two major business lines to a plant with a single business line and all of the related interconnected activities in that. Just a note that we will continue to run minimal amount of reactors in order to characterize our gas purity, and that will continue now. into the foreseeable future. We've hit upon this point before. However, when it comes to what we're trying to accomplish at Butte, it's to move from situation where we were heavily dependent upon undifferentiated markets, even for our silane gas, large volume undifferentiated markets and our electronic grade polysilicon to more niche markets focused on chemical vapor deposition, particularly in semiconductors, but also in solar, depending upon where it's located. And the silicon anode material space. So there's a gradual shifting of our capacity and utilization from these other applications, regions, markets, over time to more differentiated markets. We'll just spend a little bit of time on this. I know that there's been a lot of questions regarding the status of silicon anodes. We did announce that we signed a multi-year contract with SELA that is going to start next year. This contract is, we are not disclosing some, key information, and that is as a result of our agreement with our customer, as well as the fact that because of our presence in this particular market, regionally, our size, we don't feel that it would be proper to disclose certain parts of our contractual arrangements as well. We don't think that's best for the shareholders in terms of how we could create value as well as sensitivities around the fact of our market size here in the United States. The overriding factor, of course, is the fact that we do have an agreement with the customer that says we won't as well. This, the value that is created by this is already been covered or considered in the guidance that we gave before of 100 to 300 million EBITDA for the company at full ramp of our facilities. We are still discussing supply and still supplying at least six companies. I'm not going to go into the names of all the different companies because I don't know that that benefits, again, either of those companies, but more importantly, whether that benefits our shareholders and our position in discussions with them around where we're at and what the conditions are going to be of supply. However, we have been seeing consistent growth in the amount of silane that's going into silicon anodes. And as we get more information on our discussions, or as we successfully are able to close on contracts, then we will make sure that we disclose and announce to the market what we were able to achieve. And I want to note that these contracts or supply modes are across the spectrum in range of cooperation. Anywhere from, you know, potential for larger production, co-production, to smaller container size, to longer term contracts, to shorter term contracts, to shorter term PO type arrangements. So it runs the gamut depending upon where the counterparty is in their life cycle as a company and what their plans are for how they're going to manage their value chain, their supply chain, But one thing that we hit upon last time was that when it comes to the amount of silane that's going to be available, we have a pathway to increasingly contribute silane to this particular market. From where we are now to 2030, and there's even more ranges that we could look at beyond this. And it's all going to be dependent upon what the requirement is and how we can align with those companies to supply. But one thing we don't feel there is, is a shortage of silane, particularly from us, to be used in the silicon anode material space. So just from a high level, when we talk about our earnings, we hit upon this in the initial slides, but our revenues were 33.8 million. Primary weakness is because we weren't shipping from Moses Lake any appreciable amounts. And we had weakness in our silane component of our silicon gas sales. primarily related again to the PV and flat panel displays. In addition to that, in our semiconductor materials segment, we had an annual planned outage that ran for a significant part of the quarter, which resulted in some increased costs and lower production quantities. I JUST WANT TO POINT OUT IN TERMS OF THIS SLIDE WHEN WE LOOK AT THE DEBT MATURITY PROFILE. WE DID SUBSEQUENT TO THE QUARTER CLOSE ON SOME BRIDGE FINANCING AS WELL AS EXTENSION OF THE AUGUST FACILITY INTO FEBRUARY OF 25. Just a few comments on markets. What I want to draw your attention to is the U.S. semiconductor capacity increase in wafer starts per month. And when you look at that relative, while some of the other markets right now are much larger and, of course, very important and material to us to supply into, you can see that the initiatives here in the United States are going to increase capacity by over 200%. And so for us, this is directly scalable to an increase in demand for our silicon gases across the spectrum at differing levels, but for all of our silicon gases, INCREASE IN U.S. SEMICONDUCTOR CAPACITY IS GOING TO HAVE A DIRECT EFFECT ON OUR OPPORTUNITY THE PV MARKET AS AS WE HAD STATED IS RIGHT NOW IN A BIT OF SOFTNESS ALL OF THE REGIONS THAT WE SUPPLY TO ARE EXPERIENCING LOWER UTILIZATION FROM A PRODUCTION STANDPOINT again, driven by demand, driven by their own overcapacity, driven by uncertainty around trade issues, driven by cost of money. I mean, there's just a number of different factors, but what it all results in is if you look at this example that we have from a third party provider, as well as some of our own market research, You can see there that an operating rate of an average of 45%, which is far lower than what those rates were prior to the occurrence of these particular mechanisms. And that has a direct effect on those other markets we talked about where we ship into, although they're not our primary target markets, we do ship into them in order to take advantage of volume opportunities while our business grows here in the US as the onshoring efforts continue. In Chinese polysilicon, we do see some production decreases. They appear to be attempting to control inventory and balance their demand. There are a number of producers that are in maintenance shutdowns. By those, I mean more than 10 that are in maintenance shutdowns in order to, again, try to control inventory. We are hearing about some rationalization, but I clearly, we expect that there's gonna be some rationalization in the industry. And then here in the U.S., we're seeing that there's increased activity around reshoring. There were some additional announcements on capacity after some cancellations that were also announced. But the important thing for us is that it includes wafer and cell capacity. And why that matters to us is that wafers drive opportunity for not just polysilicon, but also cells. Wafers, for us in the materials business, is the linchpin of the PV market. So it drives polysilicon, but it drives cell opportunities, and cell opportunities drive silane to meth. So quick update. This is the government situation as of, today. Obviously, I know that we have had an election, and that's still being finished for different parts of our government, and I'm sure that there will be more information to share at some point. We, at this point, do not know what sort of effects that this election may have outside of what's been everyone else's notes and what's been published and or communicated by the various candidates. But there was a lot of activity in the last quarter. There was the finalization of definition on battery grade materials. which directly affects 45X credits. Also some further definition around what is meant by the ingots and wafers in terms of their origin for them to be qualified for credit, which is good. It's explicit now that it must be in the US. There was a US commerce determination for CBD on Southeast Asia solar cells. And there is some current information is that there will be some additional information around the AD portion of that sometime towards the end of this month, beginning of next month. We'll have to see. Additionally, U.S. solar wafer makers can now qualify for 25% tax credit under the CHIPS Act. because of some of the way the wording was written between the IRA and the chips, there was maybe some items that were working counter to each other. So by doing this, this should incentivize more ingot and wafer production here in the US. USTR proposed a tariff increase from 25% to 50% for polysilicon and wafers imported from China. This is going to be something that, if put in place and when finalized, will be next year at some point. We don't understand yet when that may be. And then for the bonus domestic content, Treasury has indicated that it's IT'S LIKELY GOING TO HAVE WHERE U.S. WAIVERS CAN BE PART OF THE DOMESTIC CONTENT CALCULATION. AGAIN, BELTS AND SUSPENDERS, BETWEEN THAT, BETWEEN THE CHIPS ACT MONEY GOING TOWARDS THIS, BETWEEN THE 45X CLARIFICATIONS, THIS SHOULD GIVE A LOT OF SUPPORT and tailwinds to increased ingot and wafer capacity here in the US. So in summary, the Moses Lake facility right now is in a minimal operation rate, 15%, and our focus is on improving our product quality. Qualification timing at this point is uncertain, but we are following it, and we will communicate as soon as we have further information on this matter. PV production utilization globally remains low, and this is affecting our sales, particularly our silane sales. The restructuring process is progressing, and we were able to sign a contract for Silane to supply into Silicon Anos with SELA. So thank you. And we'll take some questions.
Moving into the questions, there's numerous questions surrounding the qualification process and customs issues. I think you addressed quite a few of them. Some of the additional questions related to that are, was the testing facility and country where the testing takes place selected by REC Silicon or was that REC Silicon's customer?
Yes, this process is controlled by our customer. That is something that is customary in these cases. I want to point out that for this to be a true production level test, for it to be valid, there are only so many places where this capacity exists and only so many companies that have this competence. And we would say that our understanding is that of all the options that are available to our customers, this is the one that was most favorable.
Okay, you kind of addressed the second part of that question is, are there any options for the testing to take place in another country? Not at current time. To... Do you see that risk of the new U.S. administration doing anything with the tax credits?
Yeah, as I had stated during the presentation, I'm really not qualified to comment on that. I only know what maybe everyone else knows because I listen to the same news feeds, and we do have consultants who help us work through these issues. So to say there's a risk, I would have to say, of course, there's always a risk with that. However, we're not yet able to say that that is something that's going to actualize or not.
Okay. Sticking with the tax credits topic, Will RAC receive the tax credits at the same time as when the polysilicon is sold from Moses Lake?
That is a technical, I guess, accounting question in terms of how those are, how those are accounted for. Jack, do you want to?
Yeah, so when we sell And then we decarbonize the tax credit as income every month.
And then one more with the tax credits. Will REC Silicon receive a 10% tax credit on silage sold that is used for energy storage?
Under the current interpretation now, as I pointed out in the slide on government battery materials, it is our understanding that that is the case.
Many, many questions, a lot of them. as expected are related to the testing and qualification. It has been noticed that the open RAC positions have been removed from job boards recently. Can you comment on that? And do you expect any layoffs?
So regarding open job positions, as we stated, at this point, the focus in our operation is to conserve cash. And as such, and given the fact that we are in a turndown mode, it does not make sense for us to go ahead and continue hiring at this time. So we need to remain balanced with the amount of PERSONNEL THAT ARE REQUIRED FOR US TO RUN AT OUR CURRENT RATES AND TO CONDUCT OUR BUSINESS.
OKAY. THERE'S ALSO MANY QUESTIONS ON THE SILICON ANODE. GROUP 14 ANNOUNCED ITS INTENTION TO CONSTRUCT ITS OWN STYLING PLANT PRODUCTION FACILITY. WAS ITS ANNOUNCEMENT A SURPRISE TO REC SILICON? Do you expect RAC Silicon to serve as a supplier of silane to Group 14 until their facility is operational?
Yeah, so this announcement was not a surprise, although the timing was unknown as to when this may be. It has been known that Group 14, as well as other anode material producers, had in fact either procured other companies that produce silane or participated in programs with the U.S. government that would allow them to receive grants for the supply of silane. So in terms of how those companies want to balance their supply chain, it was not necessarily a surprise. Having said that, are there opportunities for cooperation? Absolutely. I think I've said before, if anyone's going to build silane plants, we would like that opportunity and we are prepared to participate given that all the parties can align on the terms and what that would mean for them.
In the report, it's noted that there's a, POLYSILICON PRODUCTION THAT OCCURRED IN THE THIRD QUARTER IN BUTTE. ARE WE STILL PRODUCING POLYSILICON IN BUTTE?
YES. AS I NOTED IN THE SECTION ON OUR BUTTE OPERATIONS, THERE'S TWO THINGS. FIRST THING IS THERE'S STILL SOME MATERIAL THAT WAS HARVESTED BEFORE THAT IS NOW BEING FINISHED. we have a reaction and then after the reaction part of it, which is the energy intensive part, we then need to finish depending upon what type of material it is. So there are finishing activities that are winding down now and have been ongoing. We did that in a controlled manner so that we wouldn't spend a lot of money trying to get all that done in a very expeditious manner when that's not necessary. The second part is that on an ongoing basis, we will have some small amount of reaction because we use the polysilicon as a way of characterizing impurities in our silane gas.
Can you expand on what specific optimizations we are working on in Moses Lake?
Yes, what we've done is, again, we talked about isolation before. We also talked about some items that we had discussed when we first ran into the impurity issue around changing materials and construction. So this particular optimization variant is where we have different materials of construction utilized in the handling process. that will mitigate this particular impurity from getting into our material.
Can you comment on if REC Silicon's customer, QCILS, is able to accept product from REC at this time if it met specifications? And if their facility is not ready, do you know the timing of when that would be?
Yeah. So the first thing is, and I want to be clear about this because I've also heard some differing opinions, but this problem is not a Q-cells problem. This is an REC silicon problem. It's not something that we take lightly. And it's certainly not something that... we want to be in, but we have a contract to deliver product. And if we had material that was on specification, we would be delivering that product. Regarding QCEL's project, our understanding is that there's been a delay that was discussed And that is going to be sometime into next year at this point.
Switching topics a little bit here. It's noted that Hemlock received over $300 million in funding this fall and Group 14 was awarded $200 million. Can you comment on why REC Silicon has not received similar funding?
Yeah. The first thing is, is that in order to receive this funding, you need to be engaged in an activity that would qualify for that particular funding. That's the first item. The second thing is just I want to say generally, we are very interested in government funding that is applicable to our operations and our business case. And I'll just say that as a matter of procedure, it would not be appropriate or permissible for us to discuss whether or not we are currently or anticipate being in such processes. Other than to say, if we can get assistance from the government and it fits within the business case, we will pursue it.
Can you comment on any more detail for contingency plans if the testing is not successful or is significantly delayed?
Yeah, I think right now, as we said, we are working on various scenarios to look for differing financing options under a number of different outcomes. So from a contingency standpoint, a number of items. First is the financial part of that. The second part of that is, of course, from a product quality. And that's one of the reasons why we're utilizing this time to try some of these modifications to get our product to the initial purity specifications. which then would allow us to begin shipping our product.
Can you comment on what additional funding or capital raises the company may need considering the current challenges?
Not at this point. As I said, there's a range of scenarios. I DO BELIEVE THAT THERE ARE SOME ANALYSTS WHO FOLLOW US WHO HAVE CERTAIN VIEWPOINTS ON THAT. AND I WOULD RECOMMEND THAT PERHAPS YOU CONSULT WITH THOSE.
THIS ONE YOU MAY HAVE ALREADY ADDRESSED, BUT IT'S GOING BACK TO GROUP 14. IT'S NOT THE FACTORY IS SET TO OPEN. BEGIN PRODUCTION IN 2024. DOES REC SILICON HAVE AN AGREEMENT WITH GROUP 14 TO SUPPLY SILENT?
ARE THEY TALKING ABOUT SPECIFIC TO THAT FACILITY? CORRECT. BECAUSE WE DO SUPPLY GROUP 14 NOW TO THEIR OTHER FACILITY. YEAH.
THIS QUESTION IS SPECIFIC TO THE FACILITY UNDER CONSTRUCTION IN MOSES LAVE.
Yeah, as I had said before when I covered on that slide, we are in discussions with a number of different companies. So every company that's going to be using Silane in their process, we have discussions with. And when we have something that is finalized and or in a position where we can disclose something, then we will do that.
And do you have any more specific estimates on when the Moses Lake facility could reach 100% capacity? It's noted that it's been turned down to 15%. So the question is, when could it reach that 100% capacity? And do you know the restart cost that you might incur?
At this time, we don't have that information because it is highly related to the specific scenario. So first thing we need to do is determine when we should have a clear idea of when we will be qualified. And then from there, we can finalize or make more clear what the outcomes would be and have an idea of those matters.
Still. Questions and I'm going through here, but however, most all of them are related to the issues with testing and customs. I think most all these. questions have been addressed either by the presentation or comments afterwards. Okay.
Well, thank you all for your questions and your interest. And when we have more information, we will disclose more information. We'll see you in the meantime. We'll see you next quarter.