PVCS.L Regulatory News (PVCS)

Principal risks

Nature of risk

Mitigating actions

Price of wafers on the spot market remain below cash cost of production

The Group has previously sold wafers under long-term contracts and at spot prices. As pricing on the spot market decreased during 2011 and 2012 we cooperated with our long-term contract customers and offered lower prices but at a premium to spot prices. However, during 2012 spot pricing remained below our production costs and so selling to customers without any contractual commitment was no longer attractive except to reduce inventory levels and free up cash.

• Limiting production to long term contracted customer demand where the price obtainable is above production cash costs.

• Selling at spot price to reduce inventory and to release cash.

• Lowering production costs.

• We negotiate with our suppliers to achieve polysilicon prices at close to the spot price where possible.

• Temporary reduction in ingot and wafer production.

• Continuing cash conservation measures.

• Restructuring Group operations.

• Maintaining a strong balance sheet which gives the Group the strength to weather the ongoing price squeeze.

Contracted polysilicon feedstock continues to exceed our own internal requirements

The Group obtains polysilicon feedstock through long term contracts with two polysilicon feedstock suppliers. Due to our reduced wafer production output the contracted feedstock and is significantly in excess of the Group's requirements..

• Following suspension of our internal polysilicon production in December 2011 we are now in the process of closing that facility at Bitterfeld.

• We look to obtain flexibility in terms of price, volume and timing of deliveries by negotiating amendments to the terms of our long‑term contracts with our suppliers.

• We have and will continue to trade excess volumes of polysilicon feedstock.

The loss of a major long‑term contract customer might adversely impact the Group's financial performance

Sales to a small number of customers represent a substantial portion of the Group's wafer sales revenues and the loss of any major customer either to a competitor or through its own business circumstances might impact significantly on the Group's financial condition. Where a long-term contract is in place the Group is able to achieve a higher selling price than through sales at spot market prices.

• Where possible we concentrate on customers that are financially strong with a clear strategic vision for the PV industry and accordingly have the potential to be long-term major players in the industry. However the extremely challenging PV market has led to many customers exiting the industry either voluntarily or through insolvency.

• We work with our customers to ensure that the quality, specifications and efficiency of our wafers are suitable for their current and future needs.

• As pricing on the spot market has fallen below contract prices we cooperate with our long-term contract customers to offer lower prices but at a premium to spot prices.

PV market development is reliant on Government incentives, support and legislation

The solar industry is dependent on the support of individual governments to encourage the installation and use of solar electricity within their territories. Without such support the increased uptake of solar electricity may reduce or be slow to develop.

• We focus on supplying those major PV companies which are better equipped, therefore, to sell product into global markets.

• We ensure that the Group operates internationally thus spreading risk among several markets.

• We focus on cost reduction and efficiency enhancement strategies to reduce the need for Government support in the long term.

Over capacity in the PV industry reduces module prices and adversely impacts on profitability

Over capacity in the PV industry has caused significant reductions in module prices during 2011 and 2012. This reduction in module prices has led to a reduction in wafer prices. It could be several years before the supply/demand capacity comes into balance. The reduction in price has led to reduced profitability across the value chain.

• Since H2 2011 the Group has generated operating losses. With take or pay polysilicon contracts and ever reducing spot wafer prices this situation is worsening.

• We work with our customers to maintain contract volumes.

• Where we have long-term contracts we are able to obtain prices at a premium to spot prices.

• In the last resort we can enforce contract terms through arbitration.

• We focus on cost reduction and efficiency enhancement strategies.

• We have a strong balance sheet which gives the Group the strength to weather the ongoing price squeeze.

• Due to the expectation of continued low prices over the coming twelve months we are continuing our cash conservation strategy, are carrying out a radical organisational restructure and minimising production whilst maintaining core competencies to survive into the medium term.

Exchange rate fluctuations might create earnings and balance sheet fluctuations

The Group reports in Euros but trades internationally and has operating subsidiaries reporting in Sterling, Euros and Yen and is therefore subject to currency fluctuations arising on transactional foreign currency exposures and the translation of subsidiaries' balance sheets.

• We strive for a natural hedging position at operating level by sourcing raw materials and other direct materials and services (where possible) in the same currencies as sales revenues are derived.

• We have been working to balance exposure to currency due to debtor balances by matching these with equivalent liabilities in the same currencies. The Group has balances in Japanese Yen in respect of accounts receivable and has taken out borrowings in Yen to reduce the impact of any changes in the Yen exchange rate.

Loss of a key production facility could disrupt our ability to deliver contracted wafer volumes and to retain core production capabilities

The Group sells wafers and excess polysilicon feedstock but has operations at different stages in the value chain. The loss of a facility at any stage would impact the Group's ability to fulfil contracted wafer or to retain core production capabilities.

• We are currently producing at levels considerably below capacity due to our cash conservation activities.

• Ingot manufacturing is carried out in the United Kingdom where the Group has four separate sites available for production.

• Wafering is carried out at our internal facility in Germany and at sub-contractors in Japan.

• We have health and safety, fire prevention and security procedures in place at all facilities.

• We have comprehensive property damage and business interruption insurance in place.

Imposition of trade barriers and restrictions may have a significant impact on the PV industry

The ongoing trade disputes between the United States, China and the European Union may have a significant impact on the solar industry. The USA has introduced anti‑dumping duties and countervailing duties in relation to government subsidies that contravene international trade laws against Chinese imports. The Chinese Ministry of Commerce and the European Union have both initiated similar investigations, the results of which will be announced and any actions implemented in 2013.

• Any duties imposed on imports of Chinese PV products into Europe is expected to benefit the Group as demand for our wafers is likely to increase as a result.