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How Eric Sprott got Solar Burn

Eric Sprott has an outstanding track record and I have linked to his interviews several times on this site. In general, I find him to be an independent thinker and someone well worth listening to.  With that being said, the story of why his firm bought 17 percent of Timminco, a Canadian solar wafer producer that ended up going bankrupt is fascinating. Most interesting are the many warning signs that were ignored. Here are a few straight out of the article:

1) The CEO had a murky past:

Heinz Schimmelbusch had been, more than a decade before, CEO of Metallgesellschaft AG. In the late 1980s and early 1990s, the Austrian-born Schimmelbusch was a dashing business leader and a confidant of German chancellor Helmut Kohl. Schimmelbusch envisioned Frankfurt-based Metallgesellschaft as a world-beating metals giant and a German corporate champion. “We are a miniature version of Mitsubishi,” he told BusinessWeek in 1990. “With environmental services and materials technology, it will be very difficult to make this company unstable.”

Under Schimmelbusch’s direction, Metallgesellschaft went on a $2-billion (U.S.) acquisition spree and soon comprised some 258 companies around the world. But the “mini-Mitsubishi” story ended abruptly in 1993, when Metallgesellschaft suffered a loss of $1.1-billion (U.S.) stemming from a wrong-way bet of Schimmelbusch’s on oil futures. The firm nearly went bankrupt and Schimmelbusch was out as CEO.

2) The company refused access to their plant for outsiders and third parties:

Rupert Merer, an analyst at National Bank Financial, recalls what happened next.

“They opened up some of the [plant] doors while we were sitting in the vehicle, so we could see the equipment through the doors. They did have one of the furnaces working, so you could see the glow of the flames inside the furnace. But that was as close as we got,” he says.

So the bus doors never opened?

“That’s right. We weren’t allowed off the bus.”

3) They created a “groundbreaking” product virtually out of the blue:

Out of the blue, the company announced it had won a contract with an unnamed solar cell manufacturer to supply 4,000 tonnes of “high purity” silicon over five years.

One of the architects of the new process was René Boisvert, an electrical engineer and long-time employee of Timminco’s Bécancour Silicon subsidiary. As president of Bécancour, it was Boisvert, not Schimmelbusch, who became Timminco’s public face when it came to explaining how the tiny metals firm had come up with a world-beating process. In the press release, Boisvert said that the company had been working with solar-cell manufacturers over the past year to develop a metallurgical process to “purify” the chemical-grade silicon it produced in Quebec. Timminco “has a patent-pending process which enables it to produce high-purity or solar-grade silicon,” Boisvert said in the release. (“High purity” was defined as 99.999 per cent pure.) This represented a “tremendous breakthrough” for the Bécancour research and development team, he added. Talks regarding “long-term commitments” were already under way with other solar cell makers.

For anyone who followed Timminco at the time–given its size and stock performance, there were likely few who did–this was an astounding and completely unexpected announcement. Until that moment, the company had never publicized any plans to develop solar-grade silicon.

4) The company refused to disclose details:

Timminco stuck to its claims as doubts mounted. Citing competitive concerns and its patent-pending process, Timminco disclosed few details about its breakthrough, saying only that it had employed well-known metallurgical techniques, along with a number of new tweaks and innovations. But the wall of secrecy only gave more ammunition to Timminco’s critics.

5) Insiders were cashing out

In addition to Timminco, AMG controlled several other metals businesses. But none would generate the hype and headlines that Timminco would. In July of that year, with the help of investment bankers from Credit Suisse (a firm that owned a minority stake in Safeguard), AMG conducted an initial public offering on the Euronext exchange in Amsterdam. The IPO raised $433-million (U.S.), including almost $190-million (U.S.) for Safeguard and its investors. Whatever business reasons were behind this new corporate configuration, it also had the effect of allowing Schimmelbusch, Spector and any other investors in Safeguard to cash out of Timminco without ever directly selling any stock in Canada, which would risk depressing the company’s share price.

6) The company lashed out against its critics:

Timminco responded to Sood’s comments by filing a $6-million libel suit against him, alleging that Sood’s statements “meant or were understood to mean” that “Timminco conducts business in the same way as Bre-X did.” A similar legal action was filed against Manuel Asensio. The critics were muted.