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Edited Transcript of REC.OL earnings conference call or presentation 9-May-19 6:00am GMT

Q1 2019 REC Silicon ASA Earnings Call

Oslo May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of REC Silicon ASA earnings conference call or presentation Thursday, May 9, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Francine Sullivan

REC Silicon ASA - VP Business Development

* James A. May

REC Silicon ASA - CFO

* Tore Torvund

REC Silicon ASA - CEO & President

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Conference Call Participants

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* Andreas Bertheussen

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Preben Rasch-Olsen

Carnegie Investment Bank AB, Research Division - Analyst of Consumer Goods and Cruise

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Presentation

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Tore Torvund, REC Silicon ASA - CEO & President [1]

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Okay. I think then time is there, 8:00. So I would like to welcome you all for this presentation of our Q1 2019 for REC Silicon.

Today, I have also brought James, you have seen on every occasions. And also Francine Sullivan is here today. Francine has been in charge of trying to solve the trade issue between the U.S. and China at least for REC Silicon. And she will give you an update on the trade since, definitely, the trade issue is our major problem for the moment, as it has been for the last 5 years. So we will allocate decent time to Francine to give you an update, and she will also be ready to answer questions. Francine has been working now on this issue for the last 4 years, regular spending a lot of time in Washington, D.C. to try to follow up our issues.

But let me start with the numbers. And as I said in the press release as well, it is not satisfactory situation from a financial point of view. We had a revenue of $45 million this quarter, and we have then an EBITDA loss of $4.7 million. The cash balance is about $25 million as of the end of Q1. And the FBR costs, the costs -- cash costs for making our FBR out of Moses Lake is about $13.50, which is way above what is the actual price in the market as of today. The reason for this is, as you know, that we still operate around 25% on the capacity. And then the fixed cost becomes too large to be able to bring down the cash costs to a level where we are competitive. And the 25% is due to the fact that as -- today, we have just one customer left. We think now that 97%, 98% of the customers are into China, and as you know, we don't have access to these customers.

The silicon gas sales is still strong. We were able to sell about 800 metric ton -- 829 metric ton of silicon gas, and that this our main product out of REC Silicon for the moment. James were working very hard, and we got a private placement in place in April, so we still have decent amount of cash to keep going for a while.

And we will -- then we have already started to shut down our production in Moses Lake. That will occur by mid-next week. And we will then keep our employees for another 6 weeks until we see what is the outcome of the trade war. If the outcome of the trade war is negative, we regrettably have to go do a major layoff in Moses Lake, which is definitely not only hurting REC Silicon but also the local community. But that's the only option remains if we don't get access to the Chinese market.

On the other hand, we are hopeful that we will be part of a solution between China and the U.S. You know that this is a priority from the U.S. side, but we also know that there might be some resistance in China to let U.S. polysilicon get access to the Chinese market. But Francine will come back to this.

On the key metrics, nothing -- there is one positive thing here, and that is that we have been able to sell more than we produce. On the other hand, we have been able to produce less than what we anticipated, and it's a strange situation. In fact, we try to produce as little as possible. The unit is not possible to be reduced further, and that's why 25% is the limit. And basically, we were able to produce a little bit less than the guidance, and that means that we were able to reduce our inventory by some 500 metric ton. All the other elements is according to guidance.

Okay, let me then hand over to James to give more details on the financials, and then I will come back thereafter.

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James A. May, REC Silicon ASA - CFO [2]

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Good morning. On April 9, we successfully completed a private placement of 254 million shares of our equity, as Tore indicated. At that time, we released financial results associated with those efforts, which indicated that we'd have $8.1 million of EBITDA for the first quarter. However, when we did that, it did not include the impacts of the implementation of international financial reporting standard #16, IFRS or IFRS regarding leases. We've now implemented that standard. And really, what it does is it reclassifies $3.4 million that would have otherwise been inside of EBITDA, in manufacturing overhead, and puts it into a debt component with interest. And then on the income statement, there's a noncash item for depreciation of leased assets. The impact to that is $3.4 million on EBITDA. If you add the $3.4 million -- or take out the $3.4 million from the $4.7 million reflected there then right back at the $8.1 million. So there's no change from the results that we reported at that time. This means that if you consider IFRS 16 and add the impact back, we were $4.3 million larger loss than we had in the prior quarter. $3 million of this is due to electricity costs at the Butte facility, and the remainder of it is because of lower quarter-on-quarter sales of silicon gases from the Butte facility.

The Solar Materials segment revenue was $12.9 million. This was a healthy increase of about 30% compared to $9.9 million in the prior quarter, and it was a result of higher sales volumes, which increased from 1,270 metric tons during the fourth quarter to 1,742 metric tons during this quarter, an increase of about 37%. Granular polysilicon production for the first quarter, as Tore mentioned, was 1,900 metric -- 1,091 metric tons, which resulted in a 651 metric ton decrease in inventory in the Solar Materials segment. Despite the additional sales, EBITDA ended up at $7.4 million, and that's because of the already low prices coupled with the accounting requirement to write down the inventory as it's manufactured to net realizable values.

In the Semiconductor segment, revenues were $32.2 million for the first quarter compared to $39 million. In the Semiconductor Materials segment, we had a decline in polysilicon sales volume, which decreased by about 37% to 262 metric tons during the quarter. About 125 metric tons of this decrease was specifically associated with semiconductor-grade polysilicon. And the decline there is primarily because of seasonal purchasing patterns as well as growing concern over inventories in the supply chain which have been increased intentionally in order to meet higher future anticipated demand. And then as Tore mentioned, silicon gas sales were about 10% below the prior quarter but still strong at 829 metric tons. EBITDA contributed by the Semiconductor Materials segment was $9.2 million. It's about $3.4 million larger loss than we saw in the prior quarter. And again, $3 million of that is due to the electricity costs. The remainder of it is the lower sales of silicon gases.

Other and Eliminations for the quarter was a net cost of $6.5 million. While that's an increase from the fourth quarter cost of $5.6 million, those are primarily differences in timing of expenses rather than any change in the overall spending patterns.

In summary, EBITDA was $4.7 million. Again, the adoption of IFRS 16 will make results for the next few quarters not necessarily comparable prior to the first quarter. But on a side note, consider the idea that with the implementation of IFRS 16, it lowers our production costs that we report.

Our competitors, for the most part, own their gas facilities. So it makes our production cost more comparable with our competition and further demonstrates the idea that the FBR technology is far superior to the competing technologies. And this -- during this quarter, it's about $1.60 per kilogram that it would impact at.

In terms of cash flows, operating cash flows were outflows of $3.5 million during the quarter. This is an EBITDA loss of $4.7 million plus the imputed interest associated with lease liabilities of $700,000. The outflows were offset by $2 million inflow from working capital which was a decrease in accounts receivable of $2 million and then the changes in the inventories and accounts payable offset. They were about $200,000 each.

While inventories increased by $200,000, this is primarily because of an increase in raw materials of $1.2 million, raw materials and supplies inventories, while the finished inventories decreased by about $1 million due to the overall 496 metric ton decrease in inventories.

Cash outflows from investing activities were only $100,000 and were exclusively associated with CapEx. And then in cash flows from financing activities, it was $2.8 million for the pay-down of the lease liabilities associated with IFRS 16. And I'd like to point out that the $2.8 million change in the lease liabilities plus the $700,000 is the same $3.4 million that I discussed on the previous slide, so that clearly shows the impact of IFRS 16. In total, cash balances declined by $6.4 million to $25.4 million at the end of the quarter.

Once again, on this slide, the main point is going to be changes due to IFRS 16. Nominal debt increased by $28.1 million in the quarter. $27.9 million of this is because of the lease liabilities associated with IFRS 16. The remaining $200,000 is exclusively associated with the currency exchange effect on the indemnity loan, which is denominated in NOK. Nominal net debt increased by $34.6 million, and this is a combination of the $28.1 million increase in debt as well as the $6.4 million decrease in cash from the previous slide.

Once again for this quarter, there are no significant changes with respect to our expectations on the contingent liabilities faced by the company. We continue to believe that we have a strong -- that we have strong cases and we'll continue to press those cases. And we also believe that we will eventually prevail in these matters. Our current estimate is the statuses of these contingent liabilities will not change before year-end 2019.

And then with that, I'll turn it back to Tore to discuss the company's market outlook.

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Tore Torvund, REC Silicon ASA - CEO & President [3]

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Okay. Thank you, James. Let me then give you a short update on the solar market. That was on.

For the first time between '17 and '18, there was no growth in the solar market. It came out in a report yesterday from EIA saying that the total installed capacity in '18 was 97 gigawatt, which is exactly the same as in '17. No growth between '17 and '18, and that is -- was due to what we call the effect of 31/5 in China, where they suddenly reduced the subsidies overnight, and that meant that the installation in China went down approximately 17 gigawatt. There was growth in the rest of the world, but, China pulled very strongly back in 2018. It's supposed to be a growth between 15% and 25% between '18 -- no, between '19 and '20. And we see that basically it's starting to pick up. We see now it has been very slow so far in Q1 and in Q2 due to China. China installed about 5 gigawatt in Q1, expected to install because now the uncertainty about the FiT regime in China has been announced last week, and it is expected to be installed around 30 gigawatt in the second half in China. So as you see, both PVI and IHS expect a strong demand for solar in the second half, and we already see that there is an increased demand for polysilicon as well.

The important thing on the price side is that China has now -- versus China a year ago, had about $18 to $20 per kg in polysilicon prices. The red dotted line shows that how the Chinese ASP has developed over the last year. And now China is in par with what has been the international prices. There has been a lot of focus on new investments going on in China. Definitely a lot of these new polysilicon plants are now coming onstream, which is basically what is behind the sharp decrease in price in China. On the other hand, there is no doubt that also these investments was based upon much higher prices than what they observe today, so also these new investments are not making money under these circumstances. So in one way, this is a good development. There will probably not be any new investments going on in China based upon what has now been the price development.

We see that, basically, this is a situation from the silicon -- no, China Silicon Industry Association saying that almost all the companies now are not making money on the polysilicon side. On the bottom, I have taken an analyst's view on a company which is listed, which also states that these companies are not making money on today's prices. And you can see from Bloomberg that polysilicon in lithium wafers and modules are now not having -- having a negative EBITDA, while on the cell side, there is still a very, very small margin. So basically, no one in the value chain are making money on today's prices.

What we see is that there is now curtailment of production. 142,000 metric ton has been taken out between Q4 and this quarter, while there is an additional this new capacity coming on in inner Mongolia of some 201,000 metric tons. So there is still an oversupply, but basically, we see now that and I think the last update from China this morning was that now prices is coming up a little bit this week. So it is no doubt that the polysilicon industry is struggling. These prices we observe in the marketplace is basically not sustainable.

Why would we be still bullish that we could compete into this market even from the U.S. side? Most of you have seen this before. But just to reiterate, the FBR technology, and in fact, still REC is the only company able to operate a commercial FBR plant, we spent approximately 50% of the power. All the new power in -- all the new polysilicon in China is now coming in from inner Mongolia where they have access to subsidized power. You see that the CO2 emission in these areas, because it's coal fire power, it's now increasing. You can see that on the statistics out of China that CO2 is increasing because this -- all the power-intensive industry is now moving to this kind of areas. But also the fact that it is very effective to produce the FBR is that it's not very labor intensive. As an FBR reactor -- our FBR reactors now in Moses Lake, they are running for more than a year without any turnaround, so basically, there is no people employed by running them. They are all sitting in the control room. While -- when you have a Siemens, you have to harvest the Siemens reactor every week. So we estimate that we use approximately 1/3 of the labor compared to a Siemens plant.

And the third thing is that what we make is directly usable for our customers, while if you make Siemens, you have to crush the ingots -- oh, not the ingots, the rods, and we estimate that, that add approximately $2 to $3 in cost just to do this crushing.

So basically, an FBR technology is way more efficient. And that's why that if we were able to run at full capacity, we would be able to have a cash cost around $8 a kg, which is competitive with what is now the market price in China.

So we feel confident that we have the right technology, and I will come back a little bit to an update from China, where we also now are ramping up our FBR plant together with our partner over in China.

But let me then hand over to Francine because this is the kind of information we also have given to the U.S. government why it is so important that we get access to the Chinese market.

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Francine Sullivan, REC Silicon ASA - VP Business Development [4]

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Okay. Well, I'll start by addressing the drama that's occurred earlier this week. As you will have read I'm sure, the President has reverted to his threat or promise to increase the tariffs that are in place to 25% and potentially create another set of tariffs on the remaining untariffed Chinese goods. Now I understand that this occurred because the Chinese backtracked over the weekend on the number of major commitments. They sent back a mockup of the document. The parties have been negotiating for some time, very large document with a large number of changes. So the President's reaction, as I understand it, was a considered move that him and Ambassador Lighthizer and potentially Secretary Mnuchin was involved in. They decided that it was time to increase the pressure on the Chinese to get this done.

So it's causing disruption in the markets earlier this week, but things have calmed down. I think this kind of thing is inevitable in these kind of negotiations to get this deal done. But the most important point about what's happened this week is that the Chinese are still coming to D.C. Even in the face of this, the Chinese are in Washington, D.C. this week. The Vice Premier, he's there today and tomorrow negotiating.

Now the President may very well increase the tariffs tonight. That's a strong likelihood. But I think we'll still see a deal soon. This kind of brinkmanship, which is what it is, is necessary in politics. Both sides are under pressure internally. The Chinese Vice Premier is under pressure not to give too many concessions to the U.S. And that's probably the reason for the last-minute changes last week. And of course, the President is under pressure to get a strong deal. Now that pressure on the President comes from all sides because this is a strongly bipartisan issue in Washington, D.C. So unless he comes back with a really good deal -- and actually, it doesn't matter what deal he comes back with, he'll be criticized for it. But it's important for him to use his leverage optimally and obtain the best deal from the Chinese. So I think that's -- this is what it is, it's brinkmanship, it's theatrics, it's necessary for politics, it's necessary for both sides before they can get a deal to have this sort of last-minute theater.

So we say the trade negotiation is ongoing and optimistic, and that's correct regardless of what's happened this week. The markets have settled down. And if you're reading any of the commentators that know what they're doing and know what they're talking about, they're still optimistic we'll see a deal very soon.

As for timing, I think the timing is probably the same or probably see a signing meeting in May or June. That's our view at this stage. We might know more about that in the next couple of days specifically, but I think we'll still see a deal in the near term.

Now as you know, I believe it's been mentioned here before that polysilicon has been widely reported by credible news sources as being a priority for the U.S. government. I think that's been reported in the FT, it's been reported in Reuters and Bloomberg for some time.

And on top of that, we've had the U.S. trade representative, Ambassador Lighthizer, has gone on the record in the last couple of months several times. I've extracted a couple of the letters there, and said that he's committed to this issue, and he's prioritizing this issue and the negotiations. Now Ambassador Lighthizer, he's the key guy in all this in the U.S. government. He sets the priorities and the negotiations. He's running the negotiations. And he's put pen to paper several times. There's even another letter last week to Representative Fleischmann where he makes the same commitment that this is a priority for him. So we're quite confident we're a priority in the negotiations.

I think the other point to note is that the U.S. government is continuing to negotiate from a position of strength. On the slide, we note that it's the strongest U.S. economy for some time. The economic indicators are very, very positive. There is strong bipartisan support for this deal and for generally cracking down on China's bad and predatory behaviors in trade matters. And there's international support for crackdown on China. The other thing I should add to this list now is that they are also going to be negotiating from a position of having very large tariffs on Chinese products probably within the next day.

Now just to talk a little bit about and explain to you why they're prioritizing polysilicon. U.S. manufacturing is becoming a topic -- a hot topic in Washington, D.C. There's an awareness of the importance of strengthening the industrial base, and there's a real -- a sort of change in things. I mean as Tore said, I've been going there for several years now, and things have really changed in the last year or 2 in terms of they are looking at strengthening manufacturing, they are looking at why U.S. manufacturing is being lost, and they are also looking at supply chains. It's not just about end products. They are looking at the whole supply -- all the important supply chains. So this is a key issue. And we're seeing a number of reports come out on this. We've had Dr. Navarro's report on the manufacturing base recently. And we've also had Senator Marco Rubio's report which is entirely focused on China's made in -- Made in China 2025 industrial policy and how that's costing the U.S. in terms of manufacturing and other industries. So there's a lot of attention on these issues, and it's growing, and I don't see it going away anytime soon.

There's strong Congressional support. It's a bipartisan issue. The Democrats -- this is traditionally an issue for the Democrats and has become a real issue for the Trump government and the Republicans as well. So it's one of the very -- supporting manufacturing and revitalizing the U.S. industrial base is one of the only things both sides agree on right now.

So for these reasons, in addition to the actual public commitments we've had from the key trade guy in the U.S. government, Ambassador Lighthizer, this is why it really, really makes sense for them to conclude an agreement and start trade agreement with China that's supposed to be redressing unfair trade practices and not include an industry that has been targeted by China. Polysilicon is a Made in China 2025 goal. It's in their industrial policy to take over polysilicon, so this is why they're going after the industry. And that really riles the U.S. government, and that's got their attention.

Also specifically in relation to polysilicon, it's a foundational product. It's -- as I said, they're interested in supply chains. And polysilicon's foundational to semiconductors, solar and electric vehicles or lithium-ion batteries. Now these are all -- those 3 industries are also industries that China specifically targeted. So that's also got the attention of the U.S. government. China's trying to take the whole supply chain. The U.S. has an important part of the supply chain, and they want to preserve it.

There's also a lot of attention now on the fact that REC Silicon is the only supplier of silane gas in North America. Now that's an important issue. This is part of all this sort of tide change in Washington, D.C. There's a real interest now in looking at the battery supply chain and making sure they have all the materials available to them. And silane is -- it's on the horizon, and most experts in the industry are very, very confident that silane gas will be a very important part of the battery supply chain in future.

So this is why we're seeing the attention in our industry and the willingness of the U.S. government to prioritize our issue in the supply chain because it goes to these solar, semiconductor and China's planned dominance in batteries. So this is -- these negotiations are about countering Made in China 2025, ensuring that U.S. maintains independence in manufacturing and reducing reliance on China.

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Tore Torvund, REC Silicon ASA - CEO & President [5]

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Okay. Thank you, Francine.

Let me then shortly talk a little bit about Yulin. Most of this information you have been given before. But if you look to the near-term outlook, we had an incident in Yulin in February during the Chinese New Year celebration. One of the silane units -- or the silane unit which was operating was not properly operated, and we had to shut down. It was a major issue. And the Silane 10 unit is not yet up and running, but we have then restarted what we call the Silane 20, which came in operations by the end of March.

The reason behind this is definitely that our employees -- our Chinese employees in Yulin are still not very experienced. We are still having around 10 to 15, our own employees, U.S. employees in China as giving them necessary advice. But during the incident, what happened during the Chinese New Year, we didn't have people or no trained people to help them out. As I said, we are back in operations now in March. And it seems that everything is moving very smoothly forward.

In terms of numbers, we don't have given too many numbers. But we have now achieved the design basis on the silane unit. We have achieved the design basis on the -- these FBR-B reactors, which is going to then produce the semiconductor-grade polysilicon. We are not yet there on the quality side, but we are just started these days using our new liner, which is going to meet this quality performance. And it is gradually improving, but there is no doubt that there is a lot of training to be done towards our Chinese employees, so they know how to run this facility. As I said, it is quite complicated operationally to run an FBR plant.

On the other hand, let's say, in the month of December where we, let's say, produced half rate -- approximately half rate, we achieved cash costs around $8 a kg. So it just shows what kind of potential it will have when we now come to a full capacity in -- with basically Chinese cost levels. There is no doubt that this will be the best plant built in China or elsewhere when it's up and running at full capacity.

Let me then very shortly talk about the long-term perspective. There is no doubt and as you know, solar is still the fastest-growing energy source on a global basis. There is no doubt that there is a demand. It was not a demand increase for the first time between '18 and '19 due to what happened in China. Now gradually, we see that the growth continues. And in China now, a lot of the installations are competitive without subsidies. That's the basis.

What we are focused on now is how we are going to survive until we get, let's say, either an opening in -- on the Chinese market or we create an alternative value chain outside of China. That's definitely the plan B for the industry, that if we don't get access to the Chinese market, we have to create a value chain outside of China. And remember, U.S. is the world's largest economy and is the second largest PV market in the world. So there is no doubt that from a polysilicon point of view, we have capacity about 15 gigawatt of solar panels. We don't -- we lack the ingot and wafer capacity. Cells capacity existing in a -- to a limited degree in the U.S., but the market for PV is about 15 gigawatt. So there is -- if there is no solution towards the Chinese, there is no doubt that in Washington, D.C. now, there is a strong belief that then we have to make an alternative value chain which is not dependent upon China. And we have the end market, and we have the polysilicon capacity, and we miss some kind of the intermediate steps there.

On the semiconductor side, we were -- let's say when we reintroduced ourselves into the semiconductor, our Butte facility was transferred to a solar market quality during REC's, let's say, takeover in the end of 2009, 2010. We have now reintroduced Butte into the semiconductor market. And silane-based Siemens, as you know, is producing the best polysilicon there is. It's called Float Zone. And we are -- there is only one competitor to REC, and we see gradually that we are taking market share within the semiconductor space.

You will see that in 2019, we have lower sales than we had in 2018. That is due to the power surge we had in Butte. In Moses Lake, we have fixed power contracts. In Butte, we rely on the spot market. The power prices during February surged to $1,000 a megawatt, while as in now, it is down to some [$16]. We decided then to shut down capacity because it was way too expensive to continue to operate. And that's why we have an extra cost of some $3 million during Q1. That will reduce the production overall for 2019, but the market is strong in the semiconductor.

On the silane side, we continue to be dominating the market. We are about 60% to 70% of the global market is belonging to REC. And we have a very competitive situation there, and we don't see that there is new competitors coming on. And gradually, the market is demanding for more and more silane.

The third thing is then the battery thing. As you know and what Francine said, there is several companies now asking for capacity from REC. We are supplying very, very small amount out of the -- our Butte facility. But if they are successful to use silane to increase the capacity of the anodes or the battery, most would say that, that will increase the capacity of a battery between 30% and 40%. This market could be a huge market, $10 billion within 2025. There is several companies which has visited us in both Moses Lake and Butte because if they are going to do this production, they'd have to be adjacent to our production facility. There is no way you can transport silane. You have to build plants for making this anode material close to where we make silane. And as Francine said, we are the only company making silane in the U.S. And also, there is very limited competition out in the market elsewhere. So that's the -- basically what is our view. We are going to rely on our Butte facility until either there is opening into the Chinese market or we have built an alternative value chain outside of China, dependent upon what's coming out of these negotiations.

Unfortunately, we have to make a short-term, let's say, action. There is no doubt that we can't continue to operate in Moses Lake under these circumstances. It is mainly not because of the demand, it is the fact that we have just one customer now, and this customer has less -- doesn't have enough capacity to let us produce at full capacity. So that's why we have to curtail the production in Moses Lake. We have already made that decision. The Board took that decision last -- or yesterday. We have already started, and it will be then shut down by the middle of next week.

If there is a solution to the trade, if we get access to China, we will be able to ramp up immediately. We have said that we are going to keep all our employees until the end of June, and the reason behind this is that, there's a scheduled G20 meeting in Osaka in Japan in the end of June. And we know that the 2 Presidents will then be on the same location. So if there is going to be a final decision, that is probably the latest it will happen. And we will keep our people until that date. If there is no solution at that date, unfortunately, we will have to -- and this is a lot of very good people, very experienced people in a small community, but we will let -- have them let go by the end of June. That is devastating to our company. We'll keep a small core or core competence still working in the company. But also there has been some kind of estimate that, let's say, the multiplier of our people is about 4 in the community. So if we let go 150, we have to multiply that by 4 in terms of the economic consequences of Moses Lake as such.

We will keep then the plant operational. So if -- when things get into a normal situation again, we will be able to restart the plant within a time frame of some 6 months from decision until it will be back up and running.

Then we will rely on Butte. Butte has a positive EBITDA of approximately USD 50 million a year. And given at least if I rely what I do on James, that his calculation then shows that we will be cash-neutral during, let's say, forever given that we get this -- keep Moses Lake at that stage. And at the same time, we rely on the cash from Moses Lake. And that is the basis for our short-term business plan.

What is the reason why people should invest in REC Silicon? Definitely, there is a huge upside if the trade war or the access to China is restored or if we can run at full capacity. We will have very competitive cash costs, we will get access to a higher ASP. As you know, we have been necessary to discount now for 5 years compared to what is the market price. And $8 plus/minus will be competitive in this market.

The second thing is that we still have this option to increase our ownership in Yulin from 15% to 49%. We have very good relationship with our partner in China. On the other hand, also our partner in China is absolutely -- let's say, they need our assistance, and that's why we think that we have a very good negotiation position to increase to 49% at favorable terms.

And then longer term, the battery market definitely is a very attractive market for our silane operations. And remember, if we run full capacity of silane both in Butte and Moses Lake, we have 35,000 metric ton of silane available for that market.

So that's the presentation as of today. The guidance, this is the numbers. As you see, Q2 is not very attractive in terms of cash costs. The reason for this is definitely that we then shut down mid-quarter. On the other side, silicon gas sales estimated to be up to 960 metric ton in this quarter.

That is our prepared presentation. If there is any questions, Francine, James or I can try to answer those.

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Questions and Answers

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [1]

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Andreas Bertheussen, Kepler Cheuvreux. A few questions, if I may. So first of all, on the JV sort of maintenance question, do you expect to do FBR-B commercial volume production this year?

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Tore Torvund, REC Silicon ASA - CEO & President [2]

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Let's say we already make products -- the product we make, several thousand metric ton last year in China. But we are now running in what we call a metallic liner. And we're going to change -- let's say, the concept is that this -- reactors can change liners. We have now started with one of these liners it is going to make -- which is going to make high quality. And it will gradually now be replaced the metallic liner with this then high-purity liners. We sell now what we produce over there as a second-degree solar-grade material because the metallic liner doesn't create the high-purity polysilicon. So there will be some commercial sales into the solar market or -- in the second half of this year, but we already sell material out of this facility.

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [3]

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And then in terms of the sort of mono-grade quality, only limited volumes?

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Tore Torvund, REC Silicon ASA - CEO & President [4]

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Mono grade will be in the second half of this year.

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [5]

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Okay. Good. And then if you gain access to China near term, how comfortable are you with the 100% utilization that you are able to find offtake 400% of the volumes in the current market perhaps especially considering them shift to mono taking place in China?

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Tore Torvund, REC Silicon ASA - CEO & President [6]

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Yes. Let's say I see that you all talk about this, let's say, mono. Let's say still half of what is made in terms of solar panels are multi. Remember, let's say we make 20,000 metric ton of polysilicon into a market which is now 500,000 metric ton of polysilicon. Polysilicon today is a commodity. It's just everything is about price. If you give them a discount of $0.50, they take it. So if we were able to get the access on equal terms with what they do in China, there is no problem for us to undercut the -- most of the competitors in China, and then we will be back in 100%. Let's say we even sell some small quantities into China as of today with 57% duty on top of it.

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [7]

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Okay. So then multi, mono discussion is not a problem at least near term as long as you can undercut on price?

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Tore Torvund, REC Silicon ASA - CEO & President [8]

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Let's say I think you overstate this. Let's say there is some companies who has a very strong interest to try to explain that everything is mono. On the other hand, if you see the discount between the 2, it's very limited. And the market is there. And I just read an analyst yesterday that what the Chinese now have communicated will then spur the demand for multi again in China. If you read PVI for last night, you will see that.

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [9]

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And then finally, I guess on the -- probably you've given the answer, but you are not then considering upgrading the Moses Lake plant to FBR-B near term if access is gained to China?

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Tore Torvund, REC Silicon ASA - CEO & President [10]

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No. In fact, let's say we have -- let's say in one way, the problems we have with having access to the market has made our organization very creative. As I said, our reactors now are running way more than a year. The design basis when we started Moses Lake was that we have to turn around a reactor every 15 days. Now we have -- we had a celebration 1 year -- of 1 reactor had a 1-year celebration 2, 3 months ago, and it's still going. So let's say the other thing which has happened is that we are very close to what you call mono based upon the reactors we have in Moses Lake. So if we got access to someone who tested our material now, we would have tested as a mono-grade material even with the reactors we have in Moses Lake.

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Preben Rasch-Olsen, Carnegie Investment Bank AB, Research Division - Analyst of Consumer Goods and Cruise [11]

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Preben Rasch-Olsen, Carnegie. Just one short question. What would be the quarterly costs in keeping the Moses Lake plant functional if we assume full shutdown from June 30?

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James A. May, REC Silicon ASA - CFO [12]

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You can see in our segmentation that there are really 3 elements -- oh, can I use your microphone? Sorry.

If you consider the segments that we report in our business, there's really 3 areas or segments. Tore has already indicated that the Semiconductor Materials business will be about $15 million in EBITDA, while the SG&A will come down a little bit, but it's still going to be in the $20 million range. If you look at that, then you've got another $20 million, then we have probably $15 million to $20 million that will be spent in Moses Lake to maintain the facility there. And that includes some common infrastructure for semiconductor operations, the slim rod facility there as well as to maintain the plant and status, so it can be brought back up.

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Unidentified Company Representative, [13]

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And I'll take one question from the web. You mentioned that battery producers has contacted REC and considering opportunities for deliveries. What actions has REC Silicon made towards the battery industry to kind of position yourselves for a possible pickup in markets?

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Tore Torvund, REC Silicon ASA - CEO & President [14]

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Now what happens is -- as I have said once before that I'm not an expert on batteries at least. But there is a handful of battery companies out there. We have all known -- all know the names of those. But then there is a lot of R&D going on to try to improve the efficiency of these batteries. On the cathode side, it seems that the improvement potential is now relatively limited, so focus is now towards the anode side. And as -- what I showed here, I didn't spend time on it, is basically if you look to silicon and graphite, 100% graphite is what is normally used in anode side as of today. And they have the opportunity to take basically electrons of 372 while silicon is about 10x more. So if you can increase the capacity on the anode side by 10x, that's very attractive. The problem with silicon is that when it takes these electrons, it expands. It expands 300x. And that basically when you do the recharge, this crash the silicon, and then it is not very, very useful. So basically, what people are working on is to manage what basically is volume change, how can we manage this volume change.

There's a lot of R&D going on, and there is a lot of companies that can -- that is working on this. These companies come to REC and says that, "We would like to have some exclusive access to silane." But the volume they're talking about now is probably 300 metric ton next year, which could move to 3,000 metric ton 3 years from now. We don't give any exclusivity. Let's say we want to stay there, see what's going to happen. And when then it is clear which company might be successful, we can start to negotiate. But what we tell them is that if you need silane, we have tremendous amount of capacity. So we are not actively out there, but we are -- let's say there has been 4, 5, 6 definite companies coming to REC to ask for can we get some kind of access to your facility. And we say, okay, we would like to see that this is going to be a firm contract until we will start to negotiate with them.

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Unidentified Company Representative, [15]

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And the second question, I think you mentioned it brief -- touched upon it briefly. But have you given any estimates on the costs related to a possible upgrade of Moses Lake to FBR-B to produce electronic-grade material?

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Tore Torvund, REC Silicon ASA - CEO & President [16]

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We have cost estimate. In fact, what we did before the trade war, let's say, started to take its toll, was that we were supposed to install 2 new FBR reactors -- FBR-B reactors in Moses Lake. We decided to halt that development when we had -- when we started to have this effect of the trade war. So we know what is the cost to upgrade. On the other hand, as I already told you, it seems that we can't find ways to improve the quality, and we have improved the quality because we are now -- let's say, typically what we produced some years ago had 150 PPB. Now we're down to 110, so that's in terms of metal in our products, without doing any physical change but the way we operate the reactors. So we think we can still use these reactors and be successful in the mono market. The problem again is that there is no customer outside of China making mono grade -- or using mono-grade polysilicon. So we don't have access to any customer as of today.

Okay. No more questions? Thank you so much for coming.