A Haiku for Hoku

Polysilicon
Build it and they will cometh
Sanyo then Suntech!

I admit, the above haiku is not exactly mindblowing...but Kapolei, Hawaii-based Hoku Scientific's (NASDAQ: HOKU) 46% surge in the stock market earlier today certainly is!!

The reason for the surge? Hoku signed up a 10 year agreement to supply Suntech Power (NASDAQ: SPWR), one of the world's leading manufacturers of PV panels, with polysilicon, the raw ingredient to crstalline-based PV panels that is currently in short supply, starting mid-2009, for a total contract value of $678 million (read press release for more details of the agreement). The Bard I am not, but Hoku's energy transformation is poetic to solar bulls like me.

Hoku has historically been in the fuel cell business. The Company is currently expanding its business to manufacture polysilicon and install solar modules for the solar market. Hoku doesn’t currently make silicon and doesn’t operate any silicon plants but according to Red Herring, Hoku estimates it will cost $260 million to build its first polysilicon factory, which is scheduled to begin operations in Pocatello, Idaho next year. T he company also said it wants to raise $150 million in debt capital to finance construction. The plant will be capable of producing 2,000 metric tons of polysilicon per year in Pocatello, Idaho.

This news comes on the heel of Hoku's annoucement in January of the signing of a seven-year polysilicon supply contract with SANYO Electric Co., Ltd. that would provide for approximately $370 million in payments to Hoku over the term of the agreement.

The polysilicon bottleneck has forced the hand of leading solar players like Suntech and Sanyo to enter into long-term supply contracts and locking in the price for polysilicon at today's prices.

This strategy may or may not pan out to be wise in light of the forecasts that polysilicon shortages will start to ease as early as 2008 as more production capacity come online, such as that from Hoku's, start to come on line. But it is precisely such long-term contracts that spur investment in polysilicon production and entice enterprising companies like Hoku to be part of the solar solution.