Suntech cancels 4.6GW wafer supply deal with MEMC; incurs US$212 million costs

Financials

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Updated: A 2006 long-term wafer supply deal between Suntech and MEMC has been ‘mutually terminated' at a cost to Suntech of approximately US$212 million. Suntech said that the decision to cancel the wafer supply deal was due to ‘rapid changes in the market for silicon wafers.’ Suntech also announced that it was stopping investment in CSG Solar's research and development operations, which focused on crystalline silicon thin-film technology. MEMC remains a wafer supplier to Suntech under other supply agreements.

"The termination of this agreement with MEMC will bring greater flexibility to our sourcing strategy and help us benefit from the continuing drop in silicon and wafer prices,” commented Dr. Zhengrong Shi, Suntech's chairman and CEO. “While we have brought closure to this legacy agreement, we look forward to continuing collaboration with MEMC in areas including mutually beneficial supply relationships that support the growth of both companies. The closure of CSG will allow us to better focus on what we do best - supplying high performance and reliable crystalline silicon solar panels to global markets. While these charges are significant, they are all non-recurring and our core operations continue to perform well. We are seeing growing opportunities for utility-scale solar projects throughout the world and we are on track to meet our shipment guidance of low single digit sequential growth in the second quarter of 2011."

Suntech said that the terminated supply deal will aid its silicon sourcing strategy over the next few years as the terminated contract equates to 4.6GW of wafers to be supplied to the module manufacturer between 2011 and 2016. This had therefore allowed the company to maximise internal wafer production. Cost savings were projected to amount to over US$400 million in the next five years.

Suntech said it will relinquish US$53 million in prepayments to MEMC, while paying an additional US$67 million in four equal instalments to be made between July 2011 and April 2012. A non-cash accounting charge of approximately US$92 million is expected in relation to warrants previously issued with the supply agreement in 2006.

A charge of US$24 million in the second quarter of 2011 would be attributed to CSG Solar, according to the company.

Update

In a separate statement from MEMC, regarding the termination of the wafer supply agreement with Suntech, the wafer supplier noted that its had originally received a loan/security deposit from Suntech that included a warrant to purchase up to a 4.99% equity stake in Suntech.  However, the market downturn in early 2009 and issues related Suntech's price and volume purchase obligations ‘created challenges to finding a mutually beneficial arrangement between the parties.’

The wafer supplier noted that in the second quarter of 2011, MEMC had no revenue coming from Suntech, which was down from a little over 2% of total revenue in the first quarter of 2011. MEMC noted that Suntech had been responsible for over 50% of revenue in 2009, but efforts to diversify its customer base had also helped to reduce that figure considerably since.

"In early 2009 we began to diversify our solar wafer customer base, such that wafer sales to Suntech have gone from over 50% of our Solar Materials business in 2009 to just over 2% in Q1 2011 and 0% in Q2 2011,” noted Ken Hannah, President of MEMC Solar Materials. “By putting this behind us, we look forward to establishing a new and beneficial commercial relationship with Suntech.  MEMC's overarching strategy in solar, which includes wafer production, a diversified wafer customer base and a strong downstream pipeline through SunEdison, remains unchanged."

MEMC also said that after two formal contract amendments, which were signed in February 2009 and July 2009, that were intended to overcome problems with the original contract, these did not prove successful so the contract was terminated.

MEMC noted that it has retained the Suntech warrant from July 2006.
 

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