Letter to Obama's Economic Team

To President-Elect Obama's Economic Recovery Team,

I am very concerned about the direction President-Elect Obama seems to be headed as he tries to address what might be the biggest economic crisis the world has ever seen. Obama stated in his December 6 Youtube address that we cannot just throw money at the problem, but that is exactly what he has been doing so far. He supported the massive bailout of the financial system. He is supporting the bailout of the automakers. Bloated institutions with toxic balance sheets need to go bankrupt so we can clear the toxic debt out of the system. Shareholders of unsound businesses should be wiped out; bondholders should take losses. Instead, Obama is perpetuating a system where profits are privatized, and losses are socialized. His strategy is basically welfare for the elite.

Citibank and Bear Stearns should have gone under. Our country has hundreds of small banks and credit unions that have made wise lending decisions that would be thrilled to take market share away from the mega-banks, but Obama is picking winners and the winners are the most politically connected. If we need big banks to finance large-scale investment, then the Government should set up new banks with clean balance sheets, not prop up these worthless institutions with poor corporate leadership.

As for the automakers, the Big Three should allowed to fail. They should pursue a "prepackaged" bankruptcy that allows them to clear their debt, renegotiate with labor, and get back to making cars. If they have too many factories, they should sell some of them at fire-sale prices to up-and-coming battery-electric and plug-in hybrid manufactures. That is how the market is supposed to work. There is no way to save jobs if fewer people are buying cars! Bailout or no bailout, some jobs will be cut because demand is shrinking!

Finally, I am very disheartened that Obama made no mention of green-energy in the overview of his jobs plan. Solar, wind, and geothermal are the future of sustainable American energy. These technologies are quickly approaching "grid-parity" on an unsubsidized basis, but their progress will be stopped in its tracks without significant government support over the next few years.

If we keep throwing money away by constantly bailing out the well-connected entrenched elite and the dysfunctional corporations they own and run, the government may not have enough resources left over to create a better future for this country.

Obama will bankrupt our future if he continues down this road. How are our grandchildren ever going to dig themselves out of this mess? Obama says he welcomes diverse opinions about how to solve this problem, yet he hasn't invited anyone to join his economic team who actually saw this mess coming. People who don't understand the root causes cannot provide working solutions. Please check out Mike Shedlock's blog Mish's Global Economic Trend Analysis. Mr. Shedlock has been warning about this economic tsunami for years, but no one in power has listened. He understands the root of the problem and how to fix it. Here's a hint: it's not bailing out the shareholders, bondholders and executives of failed corporations.

I pray Obama stays true to his word and seeks guidance from those who saw this mess coming and understand that the root of the problem is too much debt. The solution cannot be for the government to try to Socialize the debt, as that just turns private debt into public debt. The debt MUST be allowed to be destroyed.

Thank you,
Underdog

Timminco's Questionable Inventory Part II

In Timminco's Questionable Inventory, I mentioned that I had some concerns with the solar-grade metallurgical (UMG) silicon producer's balance sheet. Timminco's Q3 financial statements indicated a disturbingly large increase in inventory levels and I have some concern that the company is struggling to meet its purity and yield targets in the production of solar grade silicon. More specifically, I am concerned that Timminco might only be able to meet its targets using the highest quality silicon coming out of its metallurgical division, and that to produce the quantity of high purity metallurgical silicon required by the UMG division Timminco might be producing way more mid-grade metallurgical silicon than they could ever hope to utilize profitably.

In Timminco's 2008 Q1 conference call, CEO Heinz Schimmelbusch indicated that 2008 sales prices for silicon metal would be somewhere around $1.40/kg which would give us around 25,000 MT of metallurgical silicon sold in Q3. Since all of the $20 million Q3 increase in inventory is attributed to the silicon business, Timminco seems to have added enough inventory to produce an additional 16,000 MT of metallurgical silicon for use in the UMG ramp-up given that gross margins in the metallurgical business of around 10% would not be applied to inventory.

This would be on top of the inventory build up from Q2. Granted the second quarter's inventory increase included a substantial amount of material for the magnesium business which would hopefully have been drawn down to some extent by the end of Q3. In any case, it is safe to assume that the $20 million inventory increase in Q3 is not all coal and quartz, so it is entirely conceivable that Timminco has built up 10's of thousands of metric tons of silicon metal that did not achieve the necessary purity levels for UMG silicon over the last few quarters, while producing less than 700 MT of finished UMG silicon. I am not claiming that there is proof of this happening, but it seems within the bounds of the inventory levels reported.

So the concern here is that to achieve profitability on paper in the silicon business, Timminco might have built up massive amounts of silicon metal for which they do not currently have customers and might not be able to refine into UMG in a profitable manner. Furthermore, in order to scale up to the planned 14,400 MT of annual UMG capacity, the future inventory could conceivably be enormous .

Fortunately for shareholders (including this blogger), this is all just speculation for now. It is possible that some of the raw material increase is for specialty quartz with lower levels of impurities than what is available in Timminco's quartz mines. It is also quite possible that Timminco fully expected a large inventory build-up in the early stages of the expansion and they have a proven path to work it down in the coming quarters. In fact, they have given possible indication towards the latter in the Q3 conference call.

René Boisvert, the head of the UMG silicon expansion had this to say around the 35 minute marker during the 2008 Q3 conference call:

The quality level of [the mid-grade material in our inventory] in general is very high quality, but in most cases not as good as some of the other material that we've used as feeding stock. So it's higher quality than what we sell as metallurgical grade silicon to our, let's say, customers of the past few years, but not as high a quality as some of the other material we've used as feedstock. But in the 4th quarter because of our additional purification capacity, we'll be able to use that intermediate material in the process.

...Some of the material produced [in our silicon metals division] did not reach what we considered the minimum spec for the purification process. But as we improve the purification process it enables us to use lower grade quality of material as a feeding stock.

Over the past two weeks, I have placed numerous calls to investor relations representative Lawrence Chamberlain and CFO Robert Dietrich. Given the nature of my questions, Mr. Chamberlain told me I would need to speak with Mr. Dietrich directly. As of this entry, Mr. Dietrich has not returned my calls.

My questions were as follows:

• Was the large inventory increase anticipated and if so why were shareholders not warned ahead of time?
• Does Management have verified path to working down this inventory in the coming months?
• What is the likelyhood that some of this inventory buildup intended for use in the UMG division will ultimately not be able to be refined to the level required by Timminco's UMG customers? What percentage?
  
• What is the likelyhood of further net inventory increases over the next three quarters as the expansion progresses?

I hate to add to speculation if it is unwarranted, but I believe that these are serious questions that need to be resolved, and so far Timminco's management and investor relations representative have not provide sufficient clarity on the issue. I sincerely hope my concerns are unwarranted. I have been doing a little more digging to see if I can get any more clues from publicly released information and I intend on doing at least one more follow-up entry on this subject in the coming weeks.

In the meantime, current shareholders still have a few reasons to remain very optimistic. For one, the man in charge of the UMG silicon expansion, René Boisvert, has been furiously buying shares of the company at recent low prices. According to the Canadian insider disclosure system, www.sedi.ca, Mr. Boisvert has bought 59,000 shares of Timminco's common stock during the month of November at an average cost of C$3.74/share. This was a personal investment of C$220,633 by the one person who knows more than just about anyone else about the future prospects of Timminco's UMG silicon expansion.

Also, in the video below from Solar Power Internatioal 2008, Q-Cells CEO, Anton Milner weighs in on the prospects for metallurgical silicon. Fast forward to the 22:20 mark or so.



Q-Cells is one of the largest solar module manufacturers in the world and has substantial contracts for UMG silicon from Timminco. Q-Cells also has a contract for UMG silicon with Elkem Silicon, however Q-Cells recent financial statements discuss the Timminco partnership in detail with almost no mention of Elkem.

I hope to have more up on this soon. In the meantime, if you have more information on this topic that you wish to add to the discussion, please share your thoughts in the comments.