Lodbrok Capital LLP, which says it is one of the largest investors in REC Silicon ASA (OSE:RECSI), is unhappy with the aspirations of South Korea’s Hanwha Group to contract the entire output of the Moses Lake polysilicon factory given its statute of being, while indeed the largest one, still just a minority shareholder.
Mikael Brantberg, the chief investment officer of Lodbrok, has recently sent a letter to REC Silicon’s board of directors in which he expresses the opinion that the Norway-based company is significantly undervalued and has the potential to command much higher earnings before interest, tax, depreciation and amortisation (EBITDA) multiples. Lodbrok believes that the unsatisfactory development of REC’s share price over the past 18 months can be attributed, in part, to concerns about poor corporate governance protocols.
“We are deeply troubled by the departure and replacement of REC’s two leading executives during this crucial time, coupled with the sudden departure of one of two independent board members, leaving the board now controlled by a shareholder that holds a minority of the equity, at a time when that shareholder is potentially looking to acquire the vast majority of the company’s future production,” the letter reads.
As reported earlier this year, REC is negotiating an offtake contract for 100% of the production at Moses Lake with Hanwha Solutions Corp (KRX:009830) and Hanwha Corp (KRX:000880). The two companies are part of the Hanwha Group and became REC’s largest shareholder in May when they bought the entire remaining stake of Aker Horizons ASA.
Lodbrok opposes both the reported contract negotiations and Hanwha’s occupying of the majority of seats on the board of directors.
“If Hanwha wants to effectively control the board, while potentially signing offtake agreements for the majority of REC’s production, we believe Hanwha must increase its equity stake in the company,” Lodbrok said, adding that any such contract would constitute a related party agreement requiring the approval of shareholders other than Hanwha.
Lodbrok also estimates that the currently idle Moses Lake facility in Washington, where polysilicon production is planned to be restarted next year, can be valued at between USD 320 million (EUR 330m) and USD 420 million based on current share prices. Moreover, it calculates that the 18,000-tonne site could generate almost USD 500 million in annual EBITDA if it could sell 100% of its capacity in the open market, taking into account polysilicon spot prices of close to USD 40 per kg.
“While we recognise the expected supply growth from Chinese producers in the coming years and its potential impact on polysilicon prices, we believe that the energy markets in general – and the solar market in particular – will become increasingly bifurcated between Western and Eastern producers, from which REC should stand to benefit,” Lodbrok notes.
“Hanwha has the potential to be a great strategic shareholder for REC, but if Hanwha will remain a 1/3 shareholder with contracts for the majority of REC’s production, it is essential that the company maintains the right governance model and independent management team to ensure all other shareholders will be able to participate fairly in the great value potential we see for the business,” the letter concludes.
Lodbrok said that funds and accounts managed or advised by it currently own 5.2 million shares in REC and close to 20% of the 2023 senior secured bond. The investor declared it will vote to reject all proposals on the upcoming EGM unless it receives appropriate responses in relation to its recommendations. One of them is to actually postpone said meeting to provide more time for additional board candidates to be identified and considered.