Also in August, the company was hit by a scornful analyst report published by the independent Toronto firm Veritas Investment Research, adding dissonance to the pro-Timminco chorus on Bay Street. That chorus included a handful of bullish Bay Street analysts from small sell-side shops (which were also underwriters of Timminco financings) such as Carolina Vargas of Clarus Securities Inc. and Marvin Wolff of Paradigm Capital Inc. They each called Timminco a screaming buy and respectively claimed the stock was destined to hit $45 and $50 a share.
Unlike the sell-side firms such as Clarus and Paradigm, Veritas has no sales, trading or investment banking operations. Its report, by Neeraj Monga and Chris Silvestre, said it would be a “miracle” if Timminco was able to deliver on its promises, and said a decision to invest in the company “boils down to management’s credibility.” Veritas suggested that there were two possible scenarios to account for the company’s stratospheric stock increase.
“The first is that management is promising the moon with respect to product specification, cost estimates and production capabilities, and that Safeguard LP wisely timed the IPO of Timminco and its exit thereof [through the IPO of AMG]. The second is that the private-equity LP had reached the end of its specified life and management is telling the truth. The stock is either worth $0 or a lot more than where it’s trading. We advise erring on the side of caution. Sell.”
Veritas had the right call. In late November, 2008, just six months after Timminco stock was trading above $35, it had plunged below $3. Apart from problems particular to Timminco, the solar industry itself was imploding amid the deepening global financial crisis. The price of polysilicon was in free fall.
The bad news kept coming. Timminco started issuing stock to raise cash, and AMG purchased most of the shares. In March, 2009, Timminco slashed production of silicon and halted expansion plans. In April, Timminco disclosed that some of its customers were terminating their contracts due to what it called “non-compliance.” The following month, the company revealed that it was refunding a customer’s $5.6-million contract deposit with 3.6 million Timminco shares. In October, AMG said it would buy 80 tonnes of Timminco’s solar-grade silicon–offering the company a temporary repository for a product that was no longer wanted by the solar industry. In March, 2010, almost three years to the day from its breakthrough announcement, Timminco said it would suspend production of silicon for the solar industry. By August of 2011, Schimmelbusch had stepped down as CEO. During that year, the price for polysilicon fell to $27 a kilogram, down from the $400 a kilogram it was fetching at the peak of the solar boom in 2008. Despite a series of emergency loans from AMG, on Jan. 3, 2012, Timminco filed for bankruptcy protection from its creditors.
Almost no one emerged from the Timminco debacle unscathed.
While the temporary gains from its Timminco stake helped Eric Sprott and his firm mount a successful IPO, the fund company–Tardif’s fund aside–eventually suffered significant losses on the stock. “Eric rode it up and he rode it down,” David Tomljenovic says. Shares of Sprott Inc. have not yet returned to their $10 IPO price. Sprott’s fund returns, however, recovered strongly, as commodity prices and resource stocks rebounded, and the firm now has about $9.7-billion of assets under management. Sprott declined to be interviewed for this story.
Jean-François Tardif, the fund manager who sold out of Timminco shares before the crash, “retired” from Sprott in 2009, leading to a temporary spike in redemptions from some of the company’s funds. Tardif recently launched a new investment management company associated with First Asset Investment Management. He also declined to be interviewed for this story.
David Tomljenovic no longer works for Sprott and is now an investment banker in Toronto with Beacon Securities, a small investment advisory firm based in Halifax. He insists that he and Eric Sprott believed that Timminco had the ability to transform the market for solar-grade silicon.
“We all drank the Kool-Aid,” Tomljenovic said in an interview. “I did as much digging on that as I could have done.” Timminco, he said, was an investment with miles of potential upside but also plenty of risk. “If it works, it’s a global sea change in a huge industry. And if it doesn’t work, it fucking goes to zero.” Tomljenovic doesn’t believe the short sellers were right and maintains that, thanks to the solar industry collapse, it’s not possible to know if Timminco could have delivered on its promises. “The process wasn’t allowed to run its course,” he said, adding that he stands by his research and his call.