Curtains for Hoku Materials?

Hoku Scientific Inc. (HOKU - Snapshot Report) closed last week with apprehensions over the survival of its subsidiary Hoku Materials in the near term. Although Hoku Scientific is scouting actively for new debt and equity financing to revive withering fortunes of its polysilicon unit, it has met with little success.

As a result, the Hawaii-based solar energy company made public its intention to find a buyer for the subsidiary on Friday, July 10, and retained Deutsche Bank Securities Inc. (DB - Snapshot Report) as financial advisor for the purpose.

With approximately $200 million already invested in the 4,000 metric ton polysilicon plant in Pocatello, Idaho, Hoku Scientific has reasons to be worried. Of the total estimated cost of $390 million for the project, the company has been able to secure only $243 million in customer prepayments to date, apart from an additional $41 million in equity.

This still leaves a gaping hole of $106 million to complete the plant which has till now accumulated an order backlog of $1.9 billion spread over the next ten years. However, Hoku’s dismal performance on the bourses following the global economic slowdown rules out the equity-dilution option to plug the shortfall.

Separately, with the fate of its plant hanging in balance, Hoku amended a supply agreement with China-based Suntech Power Holdings (STP - Snapshot Report). This is Hoku’s fifth consecutive amendment in fiscal 2009. Suntech Power postponed the deadlines for Hoku to achieve three polysilicon plant operation milestones while Hoku lowered Suntech’s aggregate prepayment obligation.

The amendment will give Hoku some leeway to make a last ditch effort to salvage the plant. We reaffirm the Hold recommendation and will keep a watchful eye on Hoku.