REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2017-Q4

[Operator]

Good day, and welcome to the REC Silicon Q4 2017 Results Conference. At this time, I would like to turn the conference over to CEO, Tore Torvund. Please go ahead.

[Tore Torvund, Chief Executive Officer and President]

Ready? Okay. Okay. Welcome again to REC's, and this time, it is our year-end numbers, which we are going to present to you. And again, it will be James May, our CFO, and myself who will take you through our numbers.Well, basically, what we are going to do is give you the highlights, financial numbers. I will give you an update on the PV market as we see it, touch on this trade war between the U.S. and China and how it affects our business, still. I'll give you an update on our investment in China, including some more updates on the agreement we informed you about on February 1 and then guidance on the next quarter, and then we will be ready for some Q&A.So the highlight this quarter is that we have a revenue of $78 million and EBITDA of $10.3 million. We still are able to have competitive cash costs out of our Moses Lake operation in spite of still operating at half capacity. And as we have already said, it just demonstrates how efficient these FBR technology in fact are. Silicon gas. Still very strong demand for our silicon gases, mainly into the semiconductor market. And we continue to see a decent growth in this market, and we are able to defend our market share, around 70% of the global market in -- within the silicon gases.The cash balance $104.5 million by year-end. So that's an improvement or an increase by some $16 million. Mainly, this time, there is not one-offs, this is mainly to the operational performance. And the Yulin JV, as I said, I will give you some update on the agreement. But Yulin started according to, let's say, earlier communicated start-up by the end of 2017.So on the key metrics, I would like to put focus on the fact that we have been able to now basically take down all our inventory. In fact, we are now in a situation where we are not able to deliver according to what is the demand, even though we are not into China. So we have moved out from, basically, self to allocate our volume to the 9 customers we have now developed outside of China.There is a very strong demand. We have no intent to increase the capacity. We are going to see how the market develops, so we have no intent to restart our second silane unit in Moses Lake until we see that this is a sustainable situation.On the semiconductor side, we have decided to, in Butte, to not grow what we call solar grade on purpose. We have some operational issues to be able to supply the concerning demand on the semiconductor, so that's why we are somewhat behind in production. Still also the demand for polysilicon in the semiconductor market is now very, very strong, and we think that, that will gradually improve through 2018.There is no doubt that the backbone of our, let's say, EBITDA for the moment is our silicon gas. We then reported -- we report this year -- this quarter 969 metric tons, just shy of 1,000 metric tons in a quarter. It is a growth between the previous quarter of 7.2%, and it's more than 10% increase from the same quarter last year. And we see that this market continued to be strong. It's not only the silane gas, but we also now have developed other silicon gases called MCS, TCS and disilane. And there is a very, let's say, attractive market coming up also in these derivatives of our silane gas business. So what we report here is the total of both silane, but also all these other gases, which as I said was 969 metric tons.Then I will hand over to James for the financial numbers.

[James A. May, Chief Financial Officer]

Good morning. As you can see, we now have 5 consecutive quarters of positive EBITDA. Given the current market conditions, it's quite an accomplishment despite the idea that we will not be satisfied with EBITDA at these levels. But it does demonstrate how successful we've been in controlling our costs and in improving the efficiency of our operations. And as you'll see in a minute, that has translated to improve the company's liquidity position relative to the debt that matures in 2018.EBITDA for the quarter was $10.3 million. Cash costs were $10.40 for the second straight quarter, which ties the record we set last quarter, again despite operating at less than full production capacity.Cash costs were $0.80 below the guidance that we've provided on October 30.Similar to last quarter, stable operations resulted in lower-than-anticipated maintenance costs. To be noted that this is true cost-savings and it doesn't reflect any deferral of maintenance costs in the subsequent periods. In fact, just as we planned, we're bringing up the second silane plant right now and transitioning between the silane plants at Moses Lake. We're always committed to maintaining our plants in a -- so that they operate in an efficient and safe manner, and that is the case.Revenues for the quarter were $78 million, some $2.5 million up from the prior quarter. Polysilicon revenues were almost identical between the quarters, despite a 3.6% decline in volume. And what that has to deal with is an almost -- a 6.4% increase in sales prices for prime grade solar polysilicon. The real increase in revenues, the $2.5 million, comes from additional volumes of silicon gases.Polysilicon production for the quarter was 2,616 metric tons, nearly identical to the 2,610 metric ton guidance that we provided with the previous quarter. When combined with polysilicon sales of 3,943 metric tons, inventory dropped by about 1,330 metric tons. We continue to expect sales to be limited by production in future periods, which clearly demonstrates our success in capturing market share outside of China.As I said before, we had almost 6.4% of price increase in prime grade solar polysilicon. It should be noted that, overall, the average price of the polysilicon we sold went down by a little bit less than 0.8%, but that's specifically due to mix. We sold more volumes of the lower-grade products. The price continues to rise due to the high PV end use demand. We estimated last quarter that we expected about 20 gigawatts during the fourth quarter, it ended up with 22 and the full year ended up right at 100 gigawatts, which obviously was in line with our expectations. As a result, we saw the price increase to prime grade solar.As Tore said, fourth quarter sales of silicon gas has increased to 969 metric tons. At the same time, prices for silicon -- silane gas declined by a little less than 1%. Just as in last quarters, the primary reason for this is a higher mix of silane gas sales into the PV market, which has lower margin, as well as some competitive pressure offering discounts so that their productive capacity can be more fully used.As I indicated a moment ago, fourth quarter EBITDA was $10.3 million, and the increase in EBITDA is a result of what we've just discussed: higher silicon gas sales volumes and increases in the prime grade solar pricing, but most importantly, our ability to control costs and the achievement of $10.40 per kilogram of FBR cash cost.In terms of cash flows. During the fourth quarter, operating activities generated $18.8 million in cash. It's important to note that for a first time in a long time, the most significant contributor to operating cash flows was EBITDA. While I'm not going to complain that there were $10.1 million from working capital decrease, it's still just a little bit smaller.Changes in working capital. The $10.1 million was due to inventory decrease of $10.3 million, the 1,330 metric tons that I mentioned earlier, and then other changes in accounts payable and accounts receivable. Interest payments once again were $1.8 million, and this was offset by capital spending of about $300,000.Stronger U.S. dollar this time resulted in currency losses of about $1.8 million to on-hand cash balances in Norwegian kroner. In total, as Tore indicated, cash increased by $16.6 million to $104.5 million at the end of the quarter.At the beginning of 2017, I indicated that I expected cash balances to remain near neutral throughout the year. This morning, I'm pleased to acknowledge that I was wrong.My estimate included, among many other things, the assumption that production and sales would have been matched, so that there would have been very little change in inventory and that prices would be flat throughout the year. Well, in the inventory side, working capital contributed almost $40 million to our cash during the year, most of it from inventory. And as I indicated earlier, we saw strong price increases. Across the year, prices increased by almost 10%.More importantly, contributing to our cash flow was our efforts to control costs and improve efficiency. And it's a really testament -- a real testament to our outstanding workforce and their efforts to scrutinize all activities, scrutinize all expenditures and drive efficiency through our production operations.As a result, we've got $40 million more in cash than we did at the beginning of the year. And it probably goes out without saying, but I'll say it anyway, we're in a better position now to deal with our debt than we were at this time last year.In terms of debt, our nominal net -- our nominal debt is basically unchanged from the prior quarter. It did move -- decreased by $2 million due to a stronger U.S. dollar because of the debt denominated in NOK. Nominal net debt went down by $19 million, which is the $2 million decrease plus almost $17 million change in cash balances. There are a few changes to the indemnity loan, and the reassessment of tax with respect to the indemnity loan was callable in February of last year. It hasn't been called, and we don't expect it to be called before the second half of this year, although the timing is uncertain.In terms of the reassessment in tax -- of tax in November, we did file our response with the Norwegian Central Tax Office. Based on their response and our estimates of normal workflow times, we do not expect that to become due now before the second half of 2018 as well, although the timing is uncertain.Now I'll turn it back over to Tore to talk about market developments.

[Tore Torvund, Chief Executive Officer and President]

Yes. Also concerning the tax, we are definitely disputing the, let's say, the first assessment from the Norwegian tax office, and we definitely will not -- let's say, we will -- if they are going to make that as a final judgment, we will definitely go to the court to dispute that tax, $30 million tax claim.Let me then go back to the overall market. And as you know, 2017, which was anticipated to be flat between 2016 and 2017, in fact, in hindsight, grew with more than 20%. I think it seems to be that every time we believe that there will be not a strong growth in this market and it seems that [indiscernible] we are not a specialist within, let's say, what is the end market of solar. But it has been, let's say, definitely much stronger growth than what was anticipated. And again, between 2016 and 2017, a year ago, we said it's going to be flat between '16 and '17. In fact, it grew more than 20% in the same time. And it's now expected that we continue to grow also within 2018. And basically, what you see is that China is now more than half of the market of installation of solar panels. In fact, they were above 50 gigawatts last year. And it seems to be -- continue to be a very strong end market. So China is now making more than 80% of all solar panels on a global basis. But they also install, let's say, more than half of these panels in their own country. So China is by far the solar market solar hub on a global basis.We don't think -- I'll come back to this section 201 and what will be the effect in the U.S. We don't think that there will be a major effect in the short term. There is no doubt that there has been an inventory build ahead of the section 201 in the U.S., which then need to be depleted. And it will not show up as a, let's say, that the markets in the short-term will be reduced or the longer term there would be more uncertainty. And what you also see going forward; Europe is back as an important market for solar.On the short term, basically, the first quarter is somewhat weaker, expected to be weaker than the rest of the year. India is important now in the first quarter. There has been some deferral between 2017 and 2018. In the second quarter, we believe that China will be very strong. The 2017 FIT, feed in tariffs, will expire by the end of second quarter. That's why we again believe that there will be a rush in China in the second quarter. And then, also, in the last quarter, there will be a rush in China because of then the FIT for 2018 is now said to -- will expire and not extend into 2019.I think what we see, basically, is that, let's say, after we've been working in this market for a while, to me it seems that since China has about 80% of the total capacity, it's more than 3 million people now involved in manufacturing solar equipment in China, what China does is basically they take all the opportunities outside of China and then they adjust the demand in China, so it match more or less what is the manufacturing capacity in China to avoid this huge up and down in the marketplace.You saw that in 2016. You saw that in 2017. So the volatility in the market is much less today than what it used to be because China is more or less managing the supply, and as I said, 80%. They also manage the demand, so there is not that same volatility we used to see in previous years.In terms of polysilicon prices, you see China has been close to $20 per kg. There is a discount today between inside China and outside China due to the trade war of some $6 per kg. So huge discount outside. The reason why is that, let's say, the capacity in the U.S. -- the capacity in the U.S. on polysilicon side is 80,000 metric tons. That's equivalent to about 15 gigawatts, 15 out of 100 gigawatts. And the demand outside of China is about -- theoretically, about 10 gigawatts. So there is a tremendous oversupply of polysilicon outside of China, and there is not enough polysilicon inside China due to this trade war.In terms of, let's say, and that's what we discussed in the U.S. let's say REC has today not a single customer in the U.S. We are completely dependent upon customers outside of the U.S. And our customers are mainly located in Taiwan or the semiconductor in Japan and Korea, and we have one customer in Singapore.So that's the discounts. We continue to discount compared to also our competitors outside of China because we are taking as much of the market as we can. There is still some long-term contracts among our customers, but we more or less now take all the spot market, which is available outside of China.So that's the, basically, the situation. I will come back to where we are on the trade war between the U.S. and China afterwards.When we look to, let's say, where are we on the cost curve compared to capacity, we still basically are the, let's say, the low-cost producer, even among Chinese, even though we operate then in the U.S. The red one here is the Chinese companies with their estimated cash costs. The white or the not colored is then the capacity existing outside of China. This includes both what is the semiconductor grade capacity and the PV capacity.Semiconductor capacity is about 30,000 out of the 500,000. So it is a very marginal market in terms of capacity, but definitely a very attractive one. So you might say that some of the semiconductor has definitely higher costs. But also we, in the semiconductor market, enjoy much higher prices. And basically, there is only, today, 4 to 5 companies who is able to deliver into the semiconductor market, and there is no Chinese there yet. And we are among those who can deliver into the semiconductor market.Being a Chinese polysilicon company today, you enjoy good return on your investment, $20 per kg. There is a good margin, and that means the Chinese companies make a decent amount of money. Those operating outside China, not having access to China, that's the U.S. companies, are not enjoying a good return. While South Korea and Germany, which is the 2 other countries having access to or making polysilicon and also having access to the Chinese market, are doing relatively well. So it has to be located in the U.S., which is the issue in this respect. China continued to import about 45% of their total consumption of polysilicon from outside, and that is South Korea and Germany.Concerning our situation. Let's say, as both James and I alluded to, we have been able to take -- let's say, reduce our inventory. We don't have any inventory now. Let's say, you saw that, basically, the ASP for prime, that means our best quality, increased during last quarter. The overall price went down, and one of the reason why that happened was that we were able to sell also our secondary grade polysilicon during the quarter. And that made the, let's say, the average price below what we had in the previous quarter. But the price of polysilicon has gone up. But as we then realized our inventory, the average price went down.In Q1, we are going to build a little bit inventory. The reason why is that we make and it takes about 45 days from making the polysilicon in Moses Lake until we can reach the market because we are dependent upon relatively long distances to reach the market in Taiwan or in Asia. So that's why we are going to build a little bit inventory in Q1. It is not that the market is weak, it is just that we don't have polysilicon available where the customers are in this quarter.Let me then give you an update on the, let's say, the never-ending trade war, which now affected, let's say -- it started out in 2011, it has affected our numbers since 2013, so that's 5 years now. The section 201, which was then this, let's say, the U.S. government's response to the SolarWorld and Suniva claim that they were, let's say, taken out of business due to, let's say, unsustainable competition from outside. It was communicated in January 24, and it imposed 15% duty on panels and on cells produced outside of China when they are imported -- no, outside of the U.S. when they are imported into the U.S. And that's basically to all, that means that every solar panels made outside of the U.S. will get a duty of 15%, which will be, let's say, reduced over a period of time of 4 years and then will go away 4 years from now. It is already in effect. It started to be in effect on February 7.On the other hand, and the idea behind this, is to protect the companies who make solar panels in the U.S. The strange thing is that, today, there is almost no production of solar panels. Let's say, less than 1 gigawatt could be available in a market, which is supposed to be between 10 and 11 gigawatts. So less than 10% of the solar panels used in U.S. could be produced in the U.S. So basically, what will happen is that, let's say, solar panels just become more expensive. But it will not -- and the duty is not anticipated to be high enough to generate any new capacity in the U.S.So basically, this 15%, no one is satisfied with it. The manufacturer of solar panels said that is way too low. Those who use solar panels are then facing that it will be 15% more expensive. So no one really was satisfied with this. And basically, it is more supposed to be, let's say, a political decision, which will not have any positive effect for the manufacturing capacity in the U.S., and it will have a negative effect in terms of the market share of solar in the U.S.We are still hopeful. You might say that I have been hopeful now for 5 years. We do not give in. There is one important thing here, and that is basically that, for China, you get now 15%. And on top of that, they have what we call the AD/CVD, that's the old trade war, which now has increased the tariff to 60%. So basically, solar panels made in China moving into the U.S. has now between 75% and 80% duty.The Chinese companies have basically circumvented. A lot of these companies has good production capacity in countries outside of China, and that's the big Chinese companies having manufacturing capacity in Vietnam and Malaysia, which they can use to enter into the market. But for China itself, and definitely to make solar panels in China is cheaper than make it in Vietnam and in Malaysia. They do not have any access to the U.S. market due to this duty now. And as we, we don't have access to the Chinese market because there is a retaliation from China towards the U.S. until this will be resolved.In the statement from the U.S. President, there is a section, which were basically the U.S. have said that they want to try to resolve the AD/CVD case. And we are working now again with the Department of Ross -- Secretary Ross and with Lighthizer, who is the ambassador of USTR. And we again have meetings, and we work very closely together with Hemlock, which is the Dow chemical company in the U.S. and definitely has very strong political ties to the Republican Party; and also with Wacker, which has invested $2.5 billion in a 20,000 metric ton polysilicon plant in the U.S. because we are in the same situation that no one can get access to the main market.So we are still hopeful. We have meetings next week again to discuss this. The uncertainty also now definitely will the Chinese be interested to find a solution? So we are dependent upon finding a solution in the U.S. We are still dependent upon SolarWorld, which is in bankruptcy proceedings. But still, we have -- we are still alive, and we are dependent upon the Chinese who will be interested to find a solution to this. But it is not dead as a concept, and hopefully, we might [indiscernible]. It is hurting the U.S. business. It's hurting the Chinese business, because China definitely would like to have access to more polysilicon to reduce the prices of polysilicon, which make solar panels more competitive also in China.Okay. Let me then move to Yulin. We informed you about an agreement we made with our partner in China. We sent out an update, a detailed update on that February 1. And I read the, let's say, the analyst view on that. It seems that you were very disappointed by this agreement. That's your view. We are not that disappointed with it. But for some of you, you have not been following the company for that long.Just to give you some background on this agreement. We signed the agreement back in 2014, February 2014. As part of that agreement to transfer our FBR technology into the JV, we got then a proceed or we got paid $198 million just for giving the Chinese access to our technology, to invest in a JV where we were supposed to have 49%. This $198 million, let's say, in one way, at the time, we didn't have too many alternatives, especially we had debt, which was basically -- and remember now, REC -- REC Silicon is the surviving company of REC. A lot of the debt we are dealing with as of today is debt which was taken to invest in Norway, in Heroya, in Glomfjord, and in Singapore. And due to the bankruptcy we had in 2013, we had tremendous debt when we took over as the surviving company of this. And we had a debt in 2014, which was more than $140 million. We didn't have the money. And the proceeds from the JV was what make it to 2014. So basically, we spent $142 million to take out the debt in 2014. And then we used $75 million to reinvest in the JV, and we got 15% in the JV.We had then $169 million to go to keep our 49%. What we now have agreed with our Chinese partner is that we are going to have 15% ownership. But, we have an option to buy back this 34% in 2021, between January and July 2021.The way we are going to do -- have yet, let's say, looked into the valuation of this $169 million for this 34% is that in 2021, there will be an assessment of the value of this 34% based upon the net present value. It would be done by the state -- state appraiser. Given that, let's say, it is an attractive and in fact if we have the money to invest at that time, we might then start to negotiate to take over the 34%.There is, let's say, a bidding procedure. This is a state-owned company, there is a bidding procedure. But we also know that the way it's done in China is that, let's say, dependent upon what is, let's say, our partner's view on what kind of investor that they want into the company, they can then make very specific what kind of skills the company or those who would like to take over the 34% needs to be to allowed to bid for this.There is no doubt that REC, we have technology, which has not been part of what we have transferred to China so far. What we did in 2014 is that we transferred the technology we had at that time. Let's say, we have developed a lot of new technology, which is not accessible for our JV partner. And definitely, in 2021, that will be one of our base, let's say, offering to our JV partner that we might transfer, let's say, other parts of our FBR technology, but also other parts of our semiconductor technology. So I am very hopeful that we will still have a decent valuation at that time. And we will have the opportunity to come back with the 34%, given that we have the financial strength to do it. And at the same time, we do not pay any interest, it was very important, because, as you know, we are not a very financially strong company.At the same time, to understand how to operate in China, that's what we have learned a lot over the last 4 years. We have a very good relationship with this company, this Youser Group is a huge company in China, have more than 40,000 employees. It's one of the biggest company in the Shaanxi Province. So we have a very, let's say, strong and good cooperation relationship. Personally, I was in China 11 times in 2017, and we are going to continue to have this strong cooperation. We have today 35 Americans working on the plant to help out with the start-up of the plant.But we will also learn a lot about how it is to operate in the next 3 years without any financial risk and then that still continue to be a very decent way to work together with the Chinese. Definitely, we will have a lot of experience. And remember, we are the first company, which do have a JV within polysilicon in China, and China is 80% of the market as of today.In terms of operations. We started, let's say, the reactors. These reactors are brand-new. It is what we call the FBR-B reactors. They are supposed to then produce semiconductor-grade quality. We are not doing that yet. We will not do that until the second half of 20 -- or this year. But we started the first reactors back in October. We started the first silane unit in mid-December, and we are running now at 25% capacity. And we are doing the tests, trials. There is a lot to, let's say, adjust to come back or to be back to the full capacity. But our people -- let's say we now have operators over in Yulin helping out with the start-up. And definitely, our operators from the U.S. are really impressed by both the design, but also the quality of the plant we have built in Yulin.The second unit, second silane unit, will be started in the second quarter of this year. The estimated volume altogether to be produced will be about 8,000 metric ton. You might say that it seems not to be a lot compared to what is the, let's say, capacity of this plant, which should be about 20,000 metric tons. But let's say, our experience, let's say, I know that you get a lot of announcement that other companies are going to build such a plant based upon a year, 18 months. They're going to have full capacity immediately, full high quality immediately. Let's say, after been working now for years in China, China is tremendously impressive. But they are faced with the same issues we have everywhere else. Let's say, don't build a $1 billion U.S. plant -- U.S. solar plant in 18 months. Let's say, 85% of what we have used as equipment in China is made in China. Let's say, it is not that different between China and the U.S. or maybe [indiscernible] Norway.It takes 4 years from you make design until you are up and running. It take a year from your start-up until you are up full -- running at full capacity. So it's not that when you get this kind of announcement that we are going to build a polysilicon plant. The capital cost will be $20 per kg. It will, let's say, happen within 18 months is not a reality, and that's what we see. If you add on all the capacity, which as announced took in 700,000 metric ton, out in the market, there is less than 500,000 metric ton.There is not a lot of accountability in this industry because it's a -- let's say, it is an immature industry, there is a lot of CEOs just talking about plans that they don't deliver according to. Let's say, when you work on the oil and gas business, it's much more accountability. It will happen in this industry as well, but not yet. So be careful just to add on what is announced, it never happened in that -- even not in China. Things are, let's say possible to do in such a different, different way.On the other hand, I'm impressed by Chinese quality. I'm impressed by Chinese work ethics. And definitely, China will be a tremendous competitor, not only on the solar side, but also in other industries as such.Guidance. We have then given you the guidance, 2017 compared to what we achieved. It might seem impressive, it's not that impressive because the guidance was updated 3 months ago.On the other hand, I would just say Moses Lake operated this year in 2017. We had 15 hours of nonoperations or -- during 365 days. Less than 1 day we're out of operations. Let's say being someone who had been working this kind -- not this kind of industry, but in process industry for almost 4 years, it is an impressive achievement in terms of operation we have been able to do in China -- not in China -- in the U.S. this year.This is the guidance for Q1. You can judge the numbers yourself. Normally, I see, let's say, it seems that we are very close to what we guide and what we are able to achieve, and there is no reason to believe that we will be off a lot in this quarter as well.Then I know that you are basically -- this is what you are looking for, what to do with our debt. Let's say, given the -- I have to look at this one. Let's say, our debt is $55 million. There is a bond, which is due in May of this year. We have done a convertible bond of $110 million, which is due in September. The bond in May, we feel comfortable that we have no issues. We can pay that off with our cash on hand. We have $104 million on hand. But according to James' calculations, we will gradually have a little bit more cash going forward, so $55 million shouldn't be a problem.You also have this indemnification loan. Indemnification means, basically, that when REC Wafer went bankrupt in Heroya, there was the suppliers to that facility in Heroya, which was drove into the bankruptcy because the only sole customer they had was the wafer company in Heroya. And as part of the settlement with the bank, we had an indemnification loan, which is then NOK 200 million, and it's due to be paid when the bankruptcy court is closed. We don't know when it's closed -- going to be closed. But that might happen, it's not our -- under our control. So even if that is true, we should be able to pay that off with our cash.Then we need to refinance about $100 million. The way we intend to do that, we will come back to you. We are not certain if we are going to do that before May. We're going to do this because that is callable in September. So the timing is not set yet. But normally, our preferred solution would be to refinance, and it should be basically possible. We have had initial discussions. And there is, let's say, investment banks who would like to help us out with this $100 million. And according to at least what is the initial discussions, that should be, let's say, possible to do.We are not going to ask our shareholder for any equity. If by chance it is not possible to fine -- to finance this $100 million, we have already been out to see if we could divest what we call the non-core activity. To be a little bit more precise, what we define as a non-core activity is our gas business. That's where we have, basically -- let's say, it's a very strong contributor to our EBITDA and we have indicative offering on that part, which easily would be able to take care of our debt.It is not our preferred solution. But if we are not able to or if something happened in the market, we -- that will be our second alternative. So first alternative is to refinance. If that proved to be difficult, we will then divest part of our business to be able to deal with this $100 million.There is no doubt that, as an organization and let's say, our board prefer not to divest. We really believe that, also, our business in the gas has a tremendous growth potential going forward. So it's not a preferred solution. Our organization is definitely not that they really want to be part of REC, and that's why we have had a very strong drive to not spend money just to be able to be -- have enough cash to, let's say, deal with our debt.If we are able to have, let's say, a debt of $100 million on decent terms, definitely, the company is much stronger. We have much less debt. We have tremendous opportunities out in the market. And we have this option in China. And we also see alternative opportunities now to invest in FBR in this kind of JV. So we feel much stronger that the company has a bright future.I think that's what I, let's say, I would like to give to you today. Then if there is any questions, please let me know.

[Oscar Semb Fredricsson, Equity Analyst]

Oscar Fredricsson with Arctic Securities. First of all, on semiconductor -- semiconductor volumes for 2018, the guidance is lowered slightly from at least my expectations, could you please elaborate on that? And secondly, the cash cost guidance is somewhat above for 2018 compared to your recent -- your recent cash cost. Could you please give some color on that also?

[Tore Torvund, Chief Executive Officer and President]

That's very good questions. First, the semiconductor. I said that our Butte plant, let's say, we have already informed you that we focus now of semiconductor-grade polysilicon. Just to give you some background, let's say, the Butte plant was built -- started up in 1999. REC took it over in 2005. We became 100% owner in 2009. When REC took it over, we converted it from semiconductor to solar-grade polysilicon. Solar-grade polysilicon has much less quality requirements than semiconductor. But the reason REC was and is a solar company, the management at the time said it's -- we are interested not to be in the semiconductor market. We want the polysilicon to be shipped to Norway to do our wafer capacity for the solar market. In 2010, we decided to move back to the semiconductor-grade polysilicon. It has been quite a challenge because, in the semiconductor, there is long-term contracts. It takes often years to be qualified and then you have long-term contracts. At the time when REC took over the company, they were in breach with these contracts, which made REC not a very popular company out in the semiconductor market. Now we are back. Let's say, we have been to Japan, we have [indiscernible], we have said that we are now a reliable, let's say, semiconductor company. We have been able to readjust the quality. We have been able to qualify. And today, we are 1 out of 2 companies able to make what we call Float Zone. Float Zone is a tremendously -- let's say, that's the purest polysilicon you can make, and we are 1 out of 2 companies who's able to make it. We are now qualified to the 3 largest semiconductor companies. And we have now contracts for 2018 to deliver accordingly. These semiconductor-grade qualities take much more time to make. Let's say, typically, a reactor for solar make the same quantity in 1 week as we need 6 weeks to make this high quality. And that means that the volume go down. But typically, we get paid 6, 7, 8x per kilo compared to solar grade. So the volume goes down, but the value is more or less the same and the margin is much better to us. So that's why we guide much lower volume, but it is high-quality polysilicon. Concerning the increased cost of FBR, it is because, let's say, our raw material, which is metallurgical silicon, has increased in price, particularly in the U.S. Because again, let's say, America first. What does it mean? It means that you try to, let's say, duties on, let's say, everything, which come from outside into the U.S. And we have got duty on our MGS, which basically convert into $1 more expensive polysilicon because of increased cost of the duty of MGS. That's not the only reason, MGS has also increased in prices because of the fact that China has reduced the production of MGS because in their efforts -- because MGS is very -- MGS is what, for example, Elkem is making here in the U.S. -- in Norway. It is tremendously -- let's say, it utilizes a lot of power. And when now China try to reduce, let's say, the consumption of power, particularly into the industries, that has reduced the quantity of MGS on the greater market, which has then increased the prices. This is basically a $1, which is then through the value chain due to increased prices on MGS.

[Preben Rasch-Olsen]

Preben Rasch-Olsen, Carnegie. Could you just update us now on how much metallurgical silicon you're using to make 1 kilo of polysilicon? And how does that compare with the traditional Siemens reactors?

[Tore Torvund, Chief Executive Officer and President]

It is exactly the same quantity at Siemens. But -- and the conversion is about 1.4 or something, 1.4 kilo of MGS makes 1 kilo of [indiscernible].

[Petter Nyström, Lead Analyst]

[indiscernible] a bit more philosophical. But if we assume that there is a peak in solar module demand in June due to the China feed-in tariffs, when do you see the peak in polysilicon demand?

[Tore Torvund, Chief Executive Officer and President]

What we -- let's say, you probably saw that PV Insights reported 4% reduction in our ASP yesterday or something. Let's say, this week or today, you have the Chinese New Year, that means, basically, that China is shut down for the next 2 weeks in terms of manufacturing. This is the big holiday in China. But everybody believe that -- and what we see is, basically, that it is -- our customers today, if they don't have an order for next week, they just didn't buy polysilicon. It is -- let's say, it is no inventory in the value chain anymore. Let's say, when they don't have an order, they don't buy polysilicon. And we make orders now every week for maximum for the next 2 weeks. What we believe is that it will be a very strong market just after Chinese New Year. That means, basically, in the end of February, the market will come back. And that is for the rush towards the end of Q2.

[Andreas Bertheussen, Equity Research Analyst]

Andreas Bertheussen, Kelper Cheuvreux. Just one question for me. Could you elaborate a little bit on the assumptions behind being slightly cash positive in Q1, especially given the expected inventory build? As you say, the prices are dropping. Do you have medium-term contracts that will secure volume if the market drops significantly equivalent of Q3 2016, for example?

[Tore Torvund, Chief Executive Officer and President]

Let's say, we do not expect that the ASP of polysilicon will drop in Q1 compared to Q4. Let's say, so far in this quarter, we have realized somewhat higher prices than what was the average in Q4. And as I said, we believe, basically, that -- let's say, that means we are exposed now to March, and we don't believe that the price will come down. And that's why we have said slightly more cash by the end of this quarter. Let's say, my CFO have all the details on that. It is not a lot of new cash coming in, but we think still that will be more cash by the end of this quarter than it is. That's what we reported now. But you don't get this $16 million to $20 million during that period of time. I say also that the organization this time -- let's say, there was no bonuses in 2016. In 2017, we will have bonuses in the organization, so that will be paid out also in this quarter. So that's one of the reason why we have to generate more money just to get, let's say, a positive development. Bonuses is important in U.S., as you know, probably Norway as well.

[Unknown Analyst]

[indiscernible] credit analyst at Swedbank. So I'm wondering, you talked about the tax assessment and you said that you expect that the final ruling will be in second half of 2018. And if that is unfavorable to REC, you will dispute it in court. Yes, so you expect this to be pushed out into 2019?

[Tore Torvund, Chief Executive Officer and President]

Let's say, it's hard to know exactly what will happen. Let's say, we have gone through -- let's say, we have definitely good legal advice on this. We have gone through, let's say, the background for this claim. I think also know there is, so far, some, let's say, rulings, which seems to be in favor, because we are not the only company which has been exposed to this interpretation from the tax office. Some other companies has been successful. So according to our lawyers, they feel that there is a relatively -- we have a strong case and it will take time. We have, let's say, we have to dispute it. We know that they are considering it. It will take some time until the final judgment will be there. And then we definitely will dispute if it's unfavorable to us. So there is good reason to believe that it will be beyond, let's say, and we said that -- internally, we have said it will at least not happen until late this year, beginning of next year.

[Unknown Analyst]

Okay. So one more question regarding the silane gas. You mentioned that for your semiconductor polysilicon you have to qualify for long-term contracts. How is this in the silane gas business? Is this the same?

[Tore Torvund, Chief Executive Officer and President]

Same, same.

[Unknown Analyst]

It's the same?

[Tore Torvund, Chief Executive Officer and President]

Yes.

[Unknown Analyst]

So you can say that you have long-term contracts?

[Tore Torvund, Chief Executive Officer and President]

Yes, that's, let's say, when I talk with my commercial guys, we have long-term contracts. When I look to the CFO, we don't have the same definition on it.

[James A. May, Chief Financial Officer]

We have framework agreements that pretty much locks us into the relationship, and then we negotiate price and volumes as we go forward.

[Tore Torvund, Chief Executive Officer and President]

But they take it from us. And basically, there is not other suppliers than REC. So as long as the end market is okay, they have to take it from REC.

[Unknown Analyst]

One last question for me regarding the potential sale of the Butte plant. You commented that you've had interests. Are you able to give any flavor on the value you've been getting there? Or...

[Tore Torvund, Chief Executive Officer and President]

Yes. Let's say, you know because I know that there is rumors out there. Definitely, we have been, let's say -- I have earlier said that, let's say, the board has asked me to put forward all alternatives. The priority would be refinance, second would be divestment, the last resort should be new equity. Today, we have taken out new equity. We are not going to ask for a new equity. We have been out. We have had a U.S.-based company, which has reached out in the marketplace. We have got indicative bids on it. And the indicative bids far exceeded what some of you expect the value of Butte. It's a very strong, strong asset. And Butte semiconductor, as I said, we are by far the biggest silane gas supplier, long term. And the reason why it is, is that the semiconductor market is very strong for the moment. And let's say, Butte is a semiconductor, it is not a solar company, it's a semiconductor company. So we are very confident that if by chance we are not able to get acceptable terms in the refinancing, we have an alternative. But it is not our preferred alternative.Okay. [ Chris ], any questions from the...

[Unknown Executive]

I'm looking at the questions from the web. I think you've addressed most of them here in the group session, Tore.

[Tore Torvund, Chief Executive Officer and President]

That's good. Okay, thank you all for coming.