Photo:Lutor44, Creative Commons, Flickr
The management of SunTech (STP – Last trade $39.48) has demonstrated great ability to negotiate long term polysilicon supply agreements. It has now become obvious that one of the company’s primary goals is to secure long term supply contracts. During the company’s 1Q07 conference call, the CEO said that the company expected supply from long term contracts to hit 45% to 50% during 2Q07, compared to 28% in 1Q07.

Thomas Weisel estimates that STP purchased about 30MW of wafers from MEMC Electronics (WFR – Last trade $59.66) during 2Q07, almost half of STP’s guided production at 77MW of modules. That is a sharp increase from the 8MW purchased from WFR during the last quarter, strong evidence that the companies are stepping up their cooperation.

What about 2Q07 and beyond? During the last WFR conference call on July 25, management said that its current expansion will have “implications” on existing partners. Is WFR hinting at closer cooperation with STP? I believe it is inevitable that WFR and STP will cooperate more closely in the months ahead, and both companies have much to gain from such a partnership. With a long term polysilicon contracts in place, STP will be insulated from rising polysilicon prices [3] in the spot market and margins should remain steady.

STP will release earnings on August 9. There are three reasons why STP should rally on its earnings:

• Superior gross margins on the wafers from the existing WFR supply contract, which makes up about half of its total production during the quarter
• STP is well positioned in Spain (more than 12% of total revenue comes from Spain), Greece and Portugal. These countries have higher average selling prices than mature markets like Germany, and provide potential upside to STP’s earnings.
• STP management could use the earnings release to announce an extension of its supply contract with WFR. It is almost guaranteed that STP will boost its guidance upon completion of such a contract. 

Disclaimer: I do not own any of the stocks mentioned above. I don't own a solar panel.

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Eben Esterhuizen  STP  Solar Energy  WFR 

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