SuntechPower (NYSE: STP ) obviously has some big plans and doesn't want to run short of supplies. That would seem to be the most obvious conclusion from the announcement that it had signed a letter of intent with silicon wafer supplier MEMC Electronic Materials (NYSE: WFR ) for a long-term agreement.
Under the deal's terms (which were left vague and have yet to be finalized), Suntech will buy $5 billion to $6 billion worth of solar wafers over a 10-year period. Pricing will be predetermined, and the contract will be executed on a take-or-pay basis. Moreover, Suntech will give MEMC either an interest-free loan or a security deposit to help defray the costs of the capacity expansion that MEMC will need for the deal. Lastly, MEMC will receive warrants to buy up to 4.99% of Suntech's shares.
There are plenty of different ways to approximate just how much silicon is involved in this deal -- you can use the price of polysilicon, you can look at Suntech's past costs of goods sold, and so on. Whichever method you use, though, it's pretty clear that this deal involves a lot of silicon. Consider that Suntech Power spent about $157 million in 2005 on cost of goods (which also includes labor, other chemicals, depreciation, overhead, etc.) and that the simple average annual purchase under this deal will be about $550 million, and you get the picture. Sure, prices have risen since 2005, but the overall point is still valid: There's a lot of material involved here.
Of course, supply deals don't guarantee anything. If Suntech goes out of business, MEMC would have a tough time collecting on that take-or-pay deal. Likewise, if MEMC simply can't produce the silicon, Suntech might find its growth constrained. Speaking of which, investors might do well to remember that MEMC has, perhaps, at least one black mark, given that it broke a silicon supply agreement with Evergreen Solar (Nasdaq: ESLR ) not that long ago.
To its credit, though, Suntech does have some backup supply agreements. And maybe it's just as well to focus on the positive interpretation of this deal. Skeptics might consider it to be grandstanding, but if Suntech thinks that it really can use $6 billion of silicon wafers over the next 10 years, patient and risk-tolerant investors could be in for some sunny days.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).