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Low Profit Margins due to high price of Tellurium

First Solar's valuation (at $267) seems out of line because of an inherent limitation on their profitability.

Their solar panels are based on Cadmium-Telluride (CdTe) thin film technology, and Tellurium (Te) is one of the scarcest elements in the Earth's crust. In 2006, First Solar's 60MW of production consumed 4% of the world's annual supply of the metal.

In 2008, analysts expect revenues of approximately 4x the 2006 number, meaning they will need approximately 16% of new annual Tellurium supplies. PrimeStar Solar, a private company is using a recent infusion of capital from General Electric to quickly begin production of their own CdTe modules. They do not disclose the timing of production "for competitive reasons," but their hiring and equipment orders speak of an aggressive schedule; production expected to begin this year.

With this much demand on short-term Tellurium supplies, we can expect continued price increases. First Solar cannot set the price of their product in the market, because they will be in direct competition with conventional solar modules as will as thin film modules based on CIGS and amorphous silicon technologies.

If First Solar produces 240MW of panels in 2008, and Te prices remain at $100/lb, as they were in 2006, Tellurium cost alone would be $87 million, compared to First Call average estimated Revenues of $800M, and $146M estimated earnings. I don't know what Tellurium prices were used in those estimated earnings, although expected to be over $100/lb. Whatever those estimates were, a $200/lb underestimate would completely wipe out earnings for 2008.

NOTE: The best data we can conclude is that FSLR uses 6g of Te per 60 Watt panel. @240 MW that is 4M panels * 6g = 24Mg / 454g/lb = 52,800 lbs of Te .. @ $100/lb that's just $5.3 million dollars. @480MW (2008 production) it's about $11M. You can expect Te to be at least $200/lb - $22M. FSLR surely has contract agreements however that will cover them for a solid period of time---- at least on SOME of their supply.

HOWEVER, the SUPPLY OF Te is the BIGGER concern. If you read Google Posts, you'll see a several page article I wrote on the constraints of Te that proves that FSLR is using between 20-25% of the world supply of Te. With GE entering vigorously - -you can expect not only Te to rise, but supply constraints to get worse.

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