Double your money with solar

Solar panelsThis has been a very happy morning indeed for shareholders in PV Crystalox Solar, which makes multi-crystalline silicon, the key component of solar panels.

A sunny day for PVCS
Four months ago, I picked out PVCS as one of 10 candidates for a portfolio of punished penny shares. At 4p, PVCS was valued at a mere £17 million, thanks to a 98% collapse in its share price from its previous peak near £2.
In my January article, I warned that several of these 10 bombed-out shares could go bust, saying: "I see the above share prices as nothing more than options on possible paths to recovery in the future." Following publication, a few Fools admitted that they had lost money punting on PVCS.

The good news for PVCS owners is that its share price has soared from 4.27p to 9.45p, up 121% as I write. That's right: PVCS shares have more than doubled this morning, following the release of this trading statement.

Stuffed with cash
In this latest update, PVCS warns that:

"Trading conditions remain extremely challenging, with significant industry over-capacity and high inventory levels maintaining the intense pressure on prices which developed during last year. Spot wafer prices have fallen by 70% since April 2011 and are below industry production costs.

"As a result of this adverse pricing environment, we have to date been unable to reach agreement on acceptable wafer prices and volumes for Q2 2012 with some of our contract customers. Consequently, shipment volumes during the first half of the year are now expected to be in the range 55 to 70MW, which is below our earlier expectation of 80-100MW."

Normally, such a devastatingly gloomy trading statement would send shares crashing southwards. However, PVCS also unveiled this sparkling news for investors:

"As previously disclosed, the Group has been negotiating compensation for the termination of a long-term wafer supply contract. A satisfactory agreement has now been reached and this will result in a cash settlement of approximately €90m before tax, which the Group will receive and recognise as income during H1 2012."

With nearly 417 million shares in issue, this cash payout of €90 million (£72.4 million) comes to around 17.4p per share. Given that PVC shares closed at 4.27p yesterday, such a major cash injection explains why the firm's value has more than doubled this morning.

Solar struggles
As a result of this transaction, PVCS has a cash pile worth several times its current market value of £40 million. However, as a business, it is struggling in "these continuing difficult market conditions [and] the board remains committed to the cash-conservation strategy which we announced in October 2011".

To cope with reduced order levels, PVCS "continues to operate at reduced wafer-production levels and polysilicon production remains suspended at the Group's facility at Bitterfeld. In parallel, the Group is accelerating its cost-reduction programmes".

In other words, PVCS may be stuffed with cash, but business is very rocky indeed and the group faces an uncertain future in a highly competitive market dominated by low-cost Chinese firms.

Will the sun keep shining?
Of course, today's share surge is excellent news for PVCS shareholders, especially those brave 'capitulation investors' who took a punt on its survival at prices of 3.5p to 5p.

Even so, there remains a big question mark over PVCS's medium-term future. At its peak, PVCS was a FTSE 250 firm valued at £830 million, with lots of cash, long-time founder-managers with large stakes, plus a prominent industry position.

Today, PVCS is a small-cap survivor, having axed its dividend after the €0.02 payout in June 2011. In 2011, the group ran up a loss before tax of €67.1 million, versus a profit of €33.7 million in 2010. What's more, its net cash fell from €54.8 million at the end of 2010 to €22.6 million a year later.

In other words, this is a business that is devouring cash, so the latest windfall is a valuable lifeline. What's more, sales of solar panel are set to drop off in the UK from 1 July, when FITs (Feed-in Tariffs) are lowered.

In summary, while PVCS shares currently trade at levels well below its net cash, PVCS fails my number-one question for investors: are this company's earnings sustainable?

Hence, while contrarian traders who caught this falling knife at bargain prices have done very well, this is not a share I'd buy to build wealth over the longer term!

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