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Weekend Edition

Porter Stansberry: This company may be bribing the government
Saturday, March 17, 2012

Last month, solar-panel maker First Solar released a disappointing annual report that sent shares tumbling. Among the many shortcomings revealed was the fact that First Solar's solar power panels don't work in heat. First Solar is a longtime short target of Porter Stansberry. And as you'll read, Porter believes superinvestor Warren Buffett will get wrapped up in the solar-power hoax. Here's Porter with the rest of his bear case...
 
 
Shorting stocks is hard... And figuring out which stock will go all the way to zero is even tougher. Even after you identify a good short target (or you think you have), it takes courage to lay out your case in detail... and say publicly that a stock will go all the way to zero. But recently, First Solar admitted most of what I've been saying for years. The company now faces warranty claims that could bankrupt it... And unknown to Wall Street, I believe the company will also be the subject of a Justice Department investigation for foreign bribes.
 
I've written many negative things about First Solar over many years, but this is as clear as I can be: Solar power will simply never work as a source of energy for the power grid. And by "work," I mean it will never be remotely economic. The reason has nothing to do with technical hurdles or innovations that have yet to be made. Solar power will never work because of the laws of nature – in particular, the Second Law of Thermodynamics...
 
Major investments are being made, driven by demands and financing from governments, to use photovoltaic semiconductor (PV) technology to convert sunlight into electricity for the power grid. I believe this is a tremendous waste of capital. It would NOT occur without the intervention of governments – which are notoriously bad at allocating capital – because it is horrendously inefficient. PV processes use photonic energy in sunlight (not heat) to "lift" electrons and create electricity. The thermodynamic limitations of this approach mean that many of the electrons fall back into the hole from whence they were lifted. That makes the panels very inefficient...
 
The catch is... in the real world, the materials needed to improve their efficiency are very rare and expensive. The other, even more important, catch is that the main impediment to PV efficiency is... heat. Yes, that's right. As PV solar cells are exposed to ambient temperatures above room temperature, their efficiency plummets. And seeing as how most of the places best-suited for solar power panels (like the roofs of buildings in warm climates) also have high ambient temperatures, I believe it's unlikely that this approach will ever prove worthwhile. I'm convinced that PV solar panels will never be economic.
 
The basic reason PV solar cells can't power the grid is simple: They do not generate heat. Without heat, there's no useful energy. That's a law of nature, not an engineering impediment. The hurdle manifests itself curiously... by changing the behavior of the electrons, rendering the PV solar cells almost totally inefficient above room temperatures.
 
A writer at TheStreet.com explained it this way recently: "Imagine a company that has predicated its future on building out large-scale projects in desert conditions. Now imagine the technology the company uses doesn't have a long-term track record of performing under intense heat. You don't have to imagine the company. It's First Solar..."
 
As a result of this problem, First Solar isn't going to commission its Mesa Arizona PV manufacturing plant. It's ceasing production at a plant in Germany, and it's no longer going to build a plant in Vietnam.
 
What will it do instead? Pay a lot of money in refunds.
 
So far, First Solar has spent a total of $125 million on warranty claims. It says future claims are likely to be "only" $44 million. I'd bet future warranty claims are closer to 10 times that amount.
 
The big problem for First Solar is that the company guarantees power efficiency – for solar panels that rapidly degrade under heat. These problems have already cost the company millions of dollars from panels made in 2008 and 2009. And the company says future losses from these problems will be limited. But the truth is, the company doesn't actually know – and can't know – how much it faces in future losses. The following is an excerpt from First Solar's 10-k...
 
Although our power output warranty extends for 25 years, our oldest solar modules manufactured during the qualification of our pilot production line have only been in use since 2001. Because of the limited operating history of our solar modules, we have been required to make assumptions regarding the durability and reliability of our solar modules. Our assumptions could prove to be materially different from the actual performance of our solar modules, causing us to incur substantial expense to repair or replace defective solar modules in the future.
 
So... despite the fact that First Solar doesn't actually know how its panels will perform in the real world and that everyone with any knowledge of PV physics knows the panels won't work in hot environments... the company has made huge, long-tail promises to buyers. First Solar's 10-K continues...
 
We also warrant to our owners that solar modules installed in accordance with agreed-upon specifications will produce at least 90% of their power output rating during the first 10 years following their installation and at least 80% of their power output rating during the following 15 years. As a result, we bear the risk of extensive warranty claims long after we have sold our solar modules and recognized net sales.
 
I think all of us are familiar with what happens to companies that pay out royalties and stock options for net sales booked today, when the real costs of fulfilling those sales evolve over decades. Think Enron.
 
Despite all these obvious problems, some people on Wall Street still don't get the sham. Jeff Osborn, analyst with the financial services firm Stifel Financial, says, "We see the disclosed heat-driven degradation issue as lowering the economics of expanding into new markets and potentially posing a product acceptance risk."
 
A "product acceptance risk"? Ah... the product doesn't work. It never has. And First Solar sold it mostly to governments, which were too stupid to care... or were they?
 
I've been wondering for a long time why anyone – even a government – would buy these things. Well... maybe there's an obvious reason: They were bribed. First Solar all but admits it bribes local government officials in many of the places where it operates...
 
We currently operate in, and pursuant to our Long Term Strategic Plan intend to further expand into, many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices.
 
In addition, due to the level of regulation in our industry, our entry into new jurisdictions, including India, China, and the Middle East, requires substantial government contact where norms can differ from U.S. standards... our employees, subcontractors, and agents may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows, and reputation.
 
While nothing in life is certain... I am more and more convinced that First Solar will actually go to zero.
 
One last thing to keep your eye on... Last December, Warren Buffett, through MidAmerican Energy, spent $2 billion to finance a First Solar power plant (the Topaz plant in California). The plant is scheduled to be completed by 2015. The deal was heralded as a triumph for solar energy, as the plant failed to get a Department of Energy loan and was the first large, privately financed plant to be built... except it wasn't really...
 
It turns out, 30% of the construction cost was covered by a Treasury Department cash grant. Furthermore, the plant was built because California's PG&E power utility promised to buy power from the plant (at absurdly high prices) for the next 25 years. As a government-regulated monopoly, PG&E will pass these costs on to its customers, whether they like it or not.
 
Buffett, meanwhile, will collect hundreds of millions of dollars from making the loan and pose for all of the accompanying goodwill. But what will happen when the plant doesn't work... and the bribes become public... and the whole thing blows up? I'm sure Buffett will walk away saying he knew nothing about it...
 
Regards,
 
Porter Stansberry
 




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