Timminco spilled by Sprott, sponged up by Fidelity

2008-08-20 12:55 ET - Street Wire

Also Street Wire (U-TIMNF) Timminco Ltd

by Lee M. Webb

Timminco Ltd., a Toronto Stock Exchange (TSX) solar play that has taken a nosedive in the wake of disappointing second-quarter results, is still tightly held by three players -- AMG Advanced Metallurgical Group N.V., Sprott Asset Management and Fidelity Investments -- that reportedly control approximately 82 per cent of the company's stock.

Sprott has recently caused a bit of a flap by trimming its position, but the major Timminco booster evidently did not spill enough shares to trigger a reporting requirement. Meanwhile, Fidelity has sponged up even more shares of the controversial solar play.

The big three

Amsterdam-based AMG maintains its grip on 52.6 million Timminco shares representing approximately 50.5 per cent of the company's stock. AMG and Timminco are both headed by Heinz Schimmelbusch, who holds executive positions and directorships in a number of other ventures.

AMG is subject to the normal insider reporting requirements under which any transactions must be disclosed within 10 days. Institutional investors like Sprott and Fidelity are subject to different, and far more lenient, reporting requirements.

Under the provisions of National Instrument 62-103, within 10 days of the end of the month in which their holdings exceed 10 per cent of an issuer's outstanding shares, eligible institutional investors like Sprott are required to disclose their positions.

Once the reporting requirement is triggered, the eligible investor only has to report a change in position that is greater than 2.5 per cent of the issuer's outstanding shares. In the case of Timminco, that amounts to approximately 2.6 million shares. Again, that disclosure does not have to be made until 10 days after the end of the month in which it occurs.

At last report, filed on May 2, Sprott held approximately 17.7 million shares representing approximately 17 per cent of Timminco's outstanding stock.

Sprott's Timminco holdings, which carried a value of approximately $632-million when the stock hit its all-time high of $35.69 per share in June, are spread out through its managed accounts and a dozen of its funds. With Timminco now struggling to stay above $12, those shares are currently worth approximately $220-million.

One of Sprott's fund managers, Jean-Francois Tardif, recently acknowledged that he had unloaded most of his shares well in advance of the release of Timminco's disappointing second-quarter results and the dramatic decline in the stock price. Indeed, the sharp trader was evidently bailing out as Timminco's share price was peaking.

Notwithstanding Mr. Tardif's sale of an unknown number of shares, Sprott's founder, Eric Sprott, claims that his firm still controls approximately 17 per cent of Timminco's shares.

While Sprott was quietly unloading some of its Timminco shares, Fidelity added to its holdings.

Fidelity first disclosed its position on June 10, reporting that it held approximately 12.7 million Timminco shares representing approximately 12.24 per cent of the outstanding stock.

On Aug. 11, the same day that Timminco released its second-quarter results, Fidelity disclosed that it had purchased another 2.9 million shares since its last report, increasing its total holdings to more than 15.6 million shares representing approximately 15 per cent of the outstanding stock.

Through June and July, the period in which Fidelity added to its position as at least one Sprott fund manager was unloading shares, Timminco traded at an average price of $29 per share.

There has been little, if any, comment about Fidelity sponging up another 2.9 million Timminco shares, but the news that Sprott's Mr. Tardif dumped most of his holdings has sparked some controversy.

At the heart of the flap about Sprott unloading shares is the fact that representatives of the firm, including Mr. Tardif, have been among Timminco's most ardent cheerleaders. Indeed, Mr. Tardif was among the senior Sprott portfolio managers still touting the stock in July.

The cheerleaders

Sprott began acquiring its stake in Timminco more than a year ago when the stock was changing hands for less than 50 cents per share. Sprott added to its holdings as the company, helped along by bullish analysts and upbeat media reports, rolled out its story about a secret proprietary technology to produce upgraded metallurgical silicon pure enough to be used in the booming solar industry.

According to Mr. Sprott, the average cost basis of the 17.7 million shares now controlled by the firm rings in at approximately $6 per share.

As early as July of last year, Peter Hodson, another senior portfolio manager at Sprott, was singing the praises of Timminco on the Business News Network (BNN). At the time, Timminco was trading at $5.76 per share.

On July 8 of this year, Mr. Hodson was still touting Timminco during another of his appearances on BNN's Market Call program. The stock was well off its high of $35.69 notched a month earlier, but it was still changing hands for approximately $24 per share.

"Is the best behind us?" BNN's Michael Hainsworth wanted to know.

Perhaps completely unaware that one of his Sprott colleagues had been unwinding his position, Mr. Hodson offered his enthusiastic assessment of Timminco.

"This is a great example of paying more for a company that is less risky than it was a year ago," Mr. Hodson opined about the $24 stock.

"So a year ago they didn't have the brand-name contracts, they didn't have the purity, they didn't have the quality and they didn't have the expansion," Mr. Hodson continued. "And quite obviously they didn't have the financing that they did last year as well, either.

"So a year later they've got everything in place, they've executed on everything they've talked about -- I know it's been very controversial, but it's only controversial because some people are saying it's a short -- but they've done nothing controversial in terms of execution."

Mr. Hainsworth raised the issue of Timminco's transparency and credibility.

"Quite honestly, that whole argument is a crock," Mr. Hodson stated, going on to draw a comparison with drug companies that guard their processes.

"The criticism is coming from the short sellers," Mr. Hodson continued. "There is no criticism from the industry whatsoever.

"In fact, you've got Q-Cells, the largest company in the world in the business, saying it's great.

"You've got the most recognized, respected industry consultant saying it's great.

"You've got the contracts.

"The only thing they haven't done yet is executed in terms of making money, but that will come."

Mr. Hodson wrapped up his July 8 spiel by predicting that Timminco will execute in terms of making money through the third and fourth quarters of this year.

Just a week after Mr. Hodson gave another of his enthusiastic endorsements of Timminco, Mr. Tardif was the featured guest on BNN's Market Call.

Once again, host Mr. Hainsworth wanted to know how much more upside there might be for Timminco, which was still trading at $24 per share on July 15.

Mr. Tardif, who did not mention a word about trimming his position, suggested that it all depended on the yield and quality of Timminco's upgraded metallurgical silicon.

Offering a fun-with-numbers assessment, Mr. Tardif went on to say that the stock could easily go to $50 or $100 per share.

According to the analyst who had already dumped most of his shares, if Timminco produced 30,000 metric tons of upgraded metallurgical silicon at a "conservative" cost of $15 per kilogram and sold it at prices in the range of $60 per kilogram to $80 per kilogram, the company could earn between $5 per share and $10 per share.

Given that Timminco has only shipped 321 metric tons of the material through the first six months of this year as it continues to work out the bugs in its 3,600-metric-ton operation and is still in the early stages of a planned expansion to 14,400 metric tons, any calculation based on annual production of 30,000 metric tons quite arguably falls into the category of promotional puffery.

Indeed, for some market observers, the essence of Mr. Tardif's fluffy calculations might aptly be captured by a line from an old rhyme: "If wishes were horses, then beggars would ride."

Mr. Tardif, as he strangely revealed to The Globe and Mail after Timminco's share price plummeted in the wake of the company's unsettling second-quarter results, had already galloped off to the bank.

Perhaps understandably, Mr. Tardif's surprising revelation sparked some controversy among investors who had piled into Timminco in part because of Sprott's bullish predictions.

Just how the news and the controversy played out among Mr. Tardif's Sprott colleagues is anyone's guess. In any event, Sprott's founder has since stepped boldly into the breach.

The major-domo

Mr. Sprott, the head of the Sprott family of funds, so to speak, has also been an ardent Timminco supporter. Unlike some of his fund managers, however, he is not known for frequent appearances on BNN.

The 63-year-old Mr. Sprott served up some thoughts on Timminco in an interview in the Aug. 18 issue of Barron's. Some of those thoughts, however, are off the mark.

Mr. Sprott told Barron's that his firm first bought Timminco when it was trading at 50 cents per share.

"It looked like a classic for us," said Mr. Sprott. "First of all, it's a tech stock with a technology that has caused them to be a major source of material for the solar industry."

Given that Timminco has only produced 321 metric tons of solar-grade silicon using the touted proprietary technology at its black-box project in Becancour, Que., it is far from a major source of material for the solar industry.

"Very early one, when we were aggressively buying it at $1 or $2 or $3, we imagined this company could earn $5 a share a couple of years out," Mr. Sprott went on.

While Mr. Sprott did not offer a Tardif-like calculation, evidently the firm's imagination is still functioning.

"It could earn $5 a share," Mr. Sprott told Barron's.

Mr. Sprott acknowledged that Timminco's share price "got hammered" on disappointing second-quarter financial results and similarly disappointing solar-grade silicon production results.

"But these things often happen in a startup situation; the new technology doesn't always go as you anticipate," Mr. Sprott said. "We'll have to see if they can produce it in quantity. If they can, there will be tremendous upside."

Mr. Sprott went on to mention some recent developments at Timminco.

"In the past few months, they have had a significant extension of an existing contract, and signed a contract with CaliSolar, which would have been considered a competitor to Timminco," Mr. Sprott told Barron's. "That in itself is a real validation of the company."

In fact, CaliSolar Inc., a California-based startup hunting for the cash to build a plant to manufacture solar cells, not produce upgraded metallurgical silicon, would hardly be considered a competitor to Timminco.

In an e-mail forwarded to Stockwatch, one of CaliSolar's founders, Kamel Ounadjela, acknowledged that Mr. Sprott's claim was wrong.

Mr. Sprott then went on to offer a very questionable claim regarding Q-Cells AG.

"Q-Cells, Timminco's biggest customer, has been vocal about the high regard its team that audits Timminco's processes has for the company," Mr. Sprott said.

While Q-Cells has reportedly started delivering products made from upgraded metallurgical silicon, offering introductory rebates to entice customers, and is "very, very bullish" about the potential, the company is very tight-lipped when it comes to talking about any of its suppliers, let alone making any claims about auditing their processes.

Indeed, while Mr. Sprott's remarks might evoke images of teams of Q-Cells engineers and technicians sporting white lab coats and clipboards as they poke around Timminco's production facilities auditing the company's black-box processes, there is nothing to suggest that is the case.

Q-Cells chief executive officer Anon Miller fielded a number of questions regarding Timminco during the company's second-quarter conference call on Aug. 13.

Among other things, Mr. Milner was asked about the company's confidence with respect to Timminco meeting its upgraded metallurgical silicon supply commitments, given the production issues at its Becancour plant.

"I don't especially want to comment in depth on specific aspects with one partner," Mr. Milner began.

"We do not actually have Q-Cells people we're paying to sit around in Canada and check the volumes going out," Mr. Milner replied when asked whether Q-Cells had one of its own people at Becancour. "What we do have is technological co-operation where our teams are obviously in there."

Mr. Milner went on to remark that, even with those types of "safety measures," it is still to early to actually have solid information.

"All I can say is we have no information there that makes us want to change our plans," Mr. Milner added.

Stockwatch contacted Q-Cells to ask whether the company actually had teams physically at the Becancour plant and whether any of those teams audited Timminco's processes, as Mr. Sprott claimed in his Barron's interview.

"It is our company policy that we don't give out detailed information about the co-operation with a single supplier or customer," Stefan Lissner, head of investor relations, replied.

Stockwatch pressed Mr. Lissner on the issue of whether Q-Cells actually had teams at Becancour.

"Of course it is usual that people from our R&D team also visit Timminco ... but it is not a permanent assignment," Mr. Lissner replied.

Neither Mr. Milner nor Mr. Lissner had anything at all to say about Q-Cells auditing Timminco's processes.

Returning to the Barron's interview, Mr. Sprott was asked whether he had cut is Timminco position.

"No," Mr. Sprott replied. "I'm still by far the largest holder, with 17 per cent. One of our portfolio managers sold some of his shares, but a very small part."

According to the Aug. 13 Globe and Mail report, however, Sprott's Mr. Tardif sold more than "a very small part" of his Timminco shares, slashing his holdings from 4 per cent of his portfolio to 0.6 per cent.

"I sold most of my stuff on the way up and that's my style," Mr. Tardif said.

Perhaps Mr. Sprott missed the Globe and Mail article and neglected to check with Mr. Tardif before chatting with Barron's.

Meanwhile, tightly held Timminco is approximately $23 off the $35.69 high it notched in June, something that is not likely to have escaped Mr. Sprott's notice.

With approximately 1.05 million shares changing hands, Timminco closed at $12.31 on Aug. 19.

Comments regarding this article may be sent to lwebb@stockwatch.com.

(More information regarding Timminco Ltd. is available in Stockwatch articles published on May 14, 16 and 27; June 4, 20, 27 and 30; July 2 and 31; and Aug. 14, 2008.)