Global economic conditions have negatively impacted financial and industrial markets in North America, Europe and Asia in the first quarter of 2009. These developments have had a substantial impact on the company’s operations. Many of the company’s customers are experiencing financial constraints and have reduced or deferred their purchases. The resulting reduction in revenue, combined with unabsorbed overheads and significant capital expenditures, has led the company to raise additional common equity capital in February and April 2009. In addition, the company has during the first quarter and subsequent to the quarter end announced certain initiatives in both its Silicon and Magnesium Groups to reduce expenditures and accelerate reduction of working capital. The company believes that difficult economic and market conditions will continue to impact its operations and financial results in the foreseeable future.
“The weakness in the global economy and its impact on solar energy and silicon metal industries has had a significant impact on our business operations and our financial results,” said Dr. Heinz Schimmelbusch, chairman of the board and chief executive officer of Timminco. “Specifically, our financial results were impacted by lower demand for each of our Silicon Group product lines, significant costs incurred in our solar grade silicon operations as we continued to refine our process and utilized expanded and available capacity to recycle by-products of production, as well as reorganization costs related to the closure of our Aurora, Colorado magnesium facility as part of our divestiture of that business.”
Schimmelbusch added, “We have established a solar grade silicon business based on our proprietary process to produce upgraded metallurgical silicon. However, faced with extremely challenging market conditions, in the short term we are focused on containing costs and preserving capital to favourably position the Company when the solar energy and silicon metal markets improve. We remain confident in the long-term prospects for the solar energy industry and believe that upgraded metallurgical silicon will have a significant role to play in the future of the industry.”
Financial Results
Timminco has two reporting segments: the Silicon Group, which includes the silicon metal and solar grade silicon product lines, and the Magnesium Group, which includes the magnesium extrusion, fabrication and specialty metals product lines. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the first quarter of 2009 was negative CAD15.9 million compared with EBITDA of CAD1.4 million for the first quarter of 2008. The decrease is primarily attributable to significant costs incurred in the company’s solar grade silicon operations.
Net loss for the first quarter of fiscal 2009 included reorganization costs of CAD3.8 million related to closure of the Magnesium Group’s Aurora, Colorado facility as well as an additional write down of CAD0.7 million the impairment of the Fundo Wheels investment and CAD0.1 million for environmental remediation costs, which were offset by future recoverable tax losses of CAD4.9 million. Excluding these items, adjusted loss for the first quarter of 2009 was CAD22.6 million.
During the first quarter of 2009, Timminco invested around CAD19.5 million to support the expansion of its solar grade silicon production facility. On March 17, 2009, the Company announced that it will defer further capacity expansion of its solar grade silicon facility until customer orders for solar grade silicon exceed existing capacity.
Cash, cash equivalents and short-term investments at March 31, 2009 were CAD6.7 million compared with CAD4.6 million at December 31, 2008. The Company had funds available to it through its revolving credit facility at March 31, 2009 of USCAD5.5 million. During the first quarter of 2009, Timminco completed an equity offering of 7.04 million common shares at a price of CAD3.55 per share for aggregate gross proceeds of CAD25.0 million (net proceeds of CAD24.2 million). Subsequent to quarter end, the Company completed an equity offering of 7.4 million common shares at a price of CAD2.02 per share for aggregate gross proceeds of CAD15.0 million (net proceeds of around CAD14.7 million). Also subsequent to quarter end, Timminco amended its credit agreement to adjust the financial covenants, such that the company is currently in compliance with these revised covenants as of March 31, 2009, and to extend the maturity of its revolving credit facility from March 31, 2010 to July 2, 2010.
Silicon Group
Sales for the Silicon Group for the first quarter of 2009 were CAD23.6 million compared with CAD34.7 million for the first quarter of 2008. The decrease was due to lower sales volumes and lower average selling prices for each of the solar grade silicon and silicon metal product lines. Shipments of solar grade silicon for the first quarter of fiscal 2009 were 131 metric tons at an average price of CAD58 per kilogram, generating gross revenue of CAD7.6 million compared with shipments for the first quarter of fiscal 2008 of 100 metric tons at an average price of CAD65 per kilogram, generating gross revenue of CAD6.5 million. Sales of silicon metal for the first quarter of fiscal 2009 were CAD16.4 million compared with CAD28.2 million for the first quarter of fiscal 2008. The weakness of the Canadian dollar relative to the US dollar and the Euro had a favourable impact on sales of CAD2.7 million for the first quarter of 2008.
Gross profit for the first quarter of 2009 was negative CAD10.3 million, or negative 43.4% of sales, compared with CAD4.5 million, or 12.9% of sales, for the first quarter of 2008. The decrease in gross profit was primarily the result of lower sales volumes of the Company’s solar grade silicon and silicon metal product lines, as well as higher costs for the Company’s solar grade silicon product line. Based upon progress made in the fourth quarter of 2008, during the first quarter of 2009 the Company proceeded with further efforts to optimize its production process, primarily through the introduction of a new feedstock combination that was intended to reduce the costs of UMSi production and enhance the consistency of UMSi production at the quality and purity levels contemplated under customer contracts. The new feedstock combination, however, created unexpected processing challenges and resulted in lower production yields of UMSi than had been achieved in the fourth quarter. A consequence of lower production yields is the generation of a higher level of by-products requiring reprocessing, and this reprocessing utilizes production capacity. Given the completion of the commissioning of the sixth and seventh purification lines in the quarter, the Company had higher available production capacity and therefore higher production costs in the quarter. The production costs attributable to the reprocessing of by-products into saleable material cannot be fully recovered through the selling price of these products and therefore are appropriately expensed as incurred in the period as inventory is carried at the lower of average production cost and net realizable value.
EBITDA for the first quarter of 2009 was negative CAD11.7 million compared with CAD2.5 million for the first quarter of 2008. The decrease is primarily the result of the significant costs incurred in the Company’s solar grade silicon operations.
Net loss for the first quarter of 2009 was CAD10.5 million compared with net income of CAD1.0 million for the first quarter of 2008.