First, Q-Cells is a legitimite big time player in the solar field. Such a long term deal legitimizes LDK Solar over the longer run - not that it necessarily needed legitimization based on how great the underlying business has been, but with the issues raised by it's former controller, the near term had been called into question. One reason I have continued to like LDK Solar for the mid to long term (despite being hesitant in the near term), is the continued march of new contracts by customers - most of which would be doing due diligence on the viability of LDK Solar as a long term partner. So while yes, there might be an overstatement in the gross margins when all is said and done due to 'inventory' count methodology, the revenue line is growing tremendously.
Related, this just continues to help sentiment and as we saw with the Arab infusion of cash into Citigroup (C) - it is not so much the action but simply the message it sends and how it affects sentiment that can drive markets in the near term. Since that infusion of cash the market has made a tremendous 7% type of move overall.
Last, Q-Cells is providing funding to LDK Solar (prepayments on the contract) which will help LDK Solar build out their own polysilicon plant. This reduces the amount of future potential equity dilution/debt facing current LDK Solar holders.
Now in the long run, and probably the reason most people laude this deal is the actual contract and the money that comes with it. This is also a good thing but its unknowable what the exact contract and terms are for the long run since it will be variable over time. But with fixed pricing in 2009-2010, again this is a large benefit to LDK Solar and provides a lot of visibility (one of my favorite things) for the company. But it should be quite a hefty payout over the year and due to the large size should serve as a bedrock to revenue/earnings over the years. Now LDK Solar just needs to find enough polysilicon to fulfill this order!
At this point I hold only a tiny position in LDK Solar, pending the audit results but my near term target was $60, which the stock is already approaching on the large run up last week, followed by this announcement. I did sell some of my Solarfun Power (SOLF) this AM on the sympathy move upward (+8%), as that stock has put in a very large move since my purchase late Thursday.
- German solar cell maker Q-Cells AG (QCEG.DE) agreed a 10-year supply deal for solar wafers with LDK Solar Co Ltd (LDK), setting the stage for future expansion, the company said on Monday.
- The contract runs from 2009 to 2018 and will enable Q-Cells to manufacture cells with an overall output of more than 6 gigawatt peak (GWp) in addition to current expansion plans, it said. The world's second largest solar cell maker after Japan's Sharp Solar is expanding rapidly and aims to reach an output in its core business of 1 GWp by 2010 from 370 Megawatt peak (MWp) at the end of this year.
- LDK, a manufacturer of solar wafers, will use silicon from its own polysilicon plant which is being built as well as silicon from other supply sources, it said.
- While parts of the pricing of the wafers will be fixed for 2009 and 2010, the fixed pricing element can be adjusted to market conditions thereafter, Q-Cells said. In addition, Q-Cells has an option to purchase 30 percent of LDK's additional silicon production if LDK expands its production capacity.
Long LDK Solar, Solarfun Power in fund; long Solarfun Power in personal account
