re: the full report
SILEX SYSTEMS LIMITED 2003-06-04 ASX-SIGNAL-G
HOMEX - Sydney
+++++++++++++++++++++++++ I am writing to you today in order to provide comments and updates on the following matters:
* Current market perceptions of Silex * Arrangements with USEC * Status and plans for the SILEX Uranium Project * Status of other projects and business activities
1) CURRENT MARKET PERCEPTIONS OF SILEX:
Following our press release of 1 May 2003, regarding USEC's withdrawal from the SILEX Uranium Project, our share price has slumped to levels barely above our current cash backing (30c per share) as the market expresses its disquiet.
At the outset, I would like to reassure shareholders that despite USEC's withdrawal from the SILEX Uranium Project, Silex remains a strong and financially healthy company. We currently have good prospects for a successful commercial outcome in several of our technology development projects, including our core uranium enrichment project. We remain confident of ultimate success.
I believe that the market reaction to USEC's withdrawal ignores the momentum being maintained in all our various technology programs, and the potential returns from these programs if commercially successful. Whilst I agree it is often difficult to place a commercial value on developmental technology, I am surprised that the market currently places so little value on our impressive technology portfolio. I therefore provide the following updates so that recent events are put in better perspective.
2) UPDATE ON ARRANGEMENTS WITH USEC:
In our press release of 1 May 2003, we advised you that USEC had decided to withdraw from the SILEX Uranium Project. The withdrawal from the project was not anticipated, particularly as it came shortly after Silex had achieved definitive uranium enrichment test results in the existing "Direct Measurement Program", and shortly before that testing program was due to be completed. It also came at a time when both parties were discussing approaches to introduce a third party to assist with funding for the project.
Nevertheless, Silex has acted quickly to ensure that delays to the completion of the testing program as a result of USEC's withdrawal are kept to a minimum. We are now pressing ahead with the SILEX Uranium Project without USEC's involvement. An update on thestatus of the existing testing program and our current plans for the future of the SILEX uranium project is detailed in section 3 below.
We stated in the May press release that there may be a number of issues to be resolved with USEC in connection with USEC's withdrawal. Silex's and USEC's respective obligations to each other during the development and commercialisation of the SILEX Technology were detailed in a Development and Licence Agreement. USEC has purported to terminate that Agreement and has asserted certain rights and sought to impose obligations on Silex in connection with that purported termination. We disagree with several of these assertions, including USEC's claims that it is entitled to certain equipment which has been acquired as part of the SILEX Uranium Project. USEC has purported to demand a return of that equipment but has also offered to sell it to Silex. There is, however, no dispute regarding Silex's rights to the SILEX Technology or its ability to proceed with the Uranium Project.
Silex is in the process of exploring resolution of the outstanding issues with USEC. However, despite Silex's willingness to be realistic and commercial, we cannot be sure that negotiations or, ultimately, the resolution processes, will provide an outcome which is acceptable to Silex. If an acceptable resolution to these issues cannot be reached, your board of directors is fully prepared to defend Silex's rights against USEC and to take all action which is necessary to enforce those rights, even though this may involve significant expenditure.
3) STATUS AND PLANS FOR THE URANIUM PROJECT:
The SILEX Uranium Project has been progressing well, although USEC's withdrawal has caused some delays. It is expected that USEC's withdrawal could result in delays of approximately 6 to 12 months in the completion of the Direct Measurement Program, although this depends on resolution of contractual issues with USEC (as outlined above), and how quickly related equipment procurement issues can be overcome. A 6 to 12 month delay would result in completion of the Direct Measurement Program in the early to mid 2004 time-frame, but Silex needs to obtain clearer resolution on arrangements with USEC before committing more firmly to a new schedule for the Uranium Project. Shareholders will be appropriately updated in this regard, but in the meantime, an indicative draft schedule is provided below.
In relation to Direct Measurement Program testing activities, work has continued in our Lucas Heights Laboratories unabated. The core uranium project team remains largely intact, including a number of scientists previously contracted by USEC, who wish to remain on the SILEX Program. There are still several more weeks of current activities that can be conducted before the abovementioned delays take full effect.
The Direct Measurement Program tests that we have been able to conduct over the past few months have confirmed earlier results that the SILEX uranium enrichment technology works. Furthermore, we remain confident that the technology can be commercialised in other words, is scalable and cost effective. The SILEX approach to uranium enrichment is unique, and at present is the only third generation laser-based enrichment technology in the world.
With regard to future plans and strategies for the SILEX Uranium Project, we intend to find a new commercial partner in due course. However, since Silex has sufficient funds to complete the Direct Measurement Program, we believe it would be in our best commercial interest to endeavour to resolve issues relating to USEC's withdrawal and to complete that program before we actively pursue a new commercial partner. We will then potentially be in a much stronger position technically, and if so, will therefore be able to attract the strongest partner under the most favourable terms.
In order to provide shareholders with a perspective on revised timing for the SILEX Uranium Project, the following draft schedule is provided for preliminary guidance only. It must be emphasised that this draft schedule is forward-looking and is currently under review by the Silex board. The actual schedule which we adopt will depend on several factors not within our control, including the timing of resolution of matters with USEC, technical progress and securing a new commercial partner. It may therefore change as these factors are taken into account in finalising the schedule. (Note all dates are calendar years).
i) Completion of Direct Measurement Program: Early to mid 2004 ii) Commercial Partnership discussions/ negotiations: Mid 2003 to mid 2004 iii) Demonstration Loop (Pilot Plant): Mid 2004 to end 2006 iv) Commercial Plant (Phase I) design/ construction: Mid 2006 to end 2008 v) Commencement of initial commercial operations: 2009 or later
4) STATUS OF OTHER PROJECT AND BUSINESS ACTIVITIES:
4.1 SILEX STABLE ISOTOPE PROGRAM
The Company continues to make substantial progress in the Stable Isotope Program, with the primary focus on Silicon, Zirconium and Oxygen. We provide the following summary on the status of each of these applications of the SILEX Technology.
* SILICON ENRICHMENT PROJECT
Good results have been achieved in the SILEX Silicon Project. The highlight of the period since the last update in March was the enrichment of Silicon to 99.7% Silicon-28 in a single process step (from the natural assay of approximately 92%). This is already very promising, even without process optimization. We intend to characterize the process further over a wide range of operating conditions in the coming quarter. Analysis of process costs for Silicon enrichment continues in parallel with these activities and current indications of that analysis are favourable. Economics is now the single most important issue for Silicon enrichment, as we have high confidence in our ability to scale-up the technology.
The Silicon Pilot Plant Program, which commenced earlier this year, is currently on track with the concept design for Phase I of the Pilot Plant nearly complete. The objective of Phase I is to demonstrate continuous Silicon enrichment at a modest production rate by the end of 2003. After completion of this phase of the program, we will evaluate whether to upgrade the facility during 2004 in a second phase pilot program, to provide for a much larger semi-commercial production capacity.
Meanwhile, good progress has been achieved in our collaboration project with Sumitomo Mitsubishi Silicon Corporation (SUMCO), one of the largest Silicon wafer manufacturers in the world. The first shipment of enriched Silicon (sourced from Russia) was shipped in May to SUMCO's plant in Saga, Japan. SUMCO intends to use this material to fabricate enriched Silicon-28 test wafers later this year, with a view to those wafers being subsequently tested by semiconductor device manufacturers for improved performance.
Depending on the outcome of those tests, we anticipate that similar wafers will be manufactured in the second half of 2004 using SILEX derived Silicon-28, and results from all tests compared.
We are hopeful that this project will lead to a new enriched Silicon wafer technology with superior technical performance compared to today's natural Silicon wafers. The Silicon wafer industry is currently worth approximately US$6 billion per annum. We believe that the SILEX technology could enable the commercial availability of enriched Silicon-28 for the first time.
* OXYGEN ENRICHMENT PROJECT
The construction of a small diagnostic facility to investigate Oxygen enrichment with the SILEX Process is nearly complete. This facility will enable Silex to undertake a technical and economic feasibility study during the second half of 2003. A decision will then be made whether to proceed with a Pilot Plant, which may be capable of producing a significant portion of the current annual requirements for the Oxygen-18 isotope, used in PET Medical Imaging. The world market for Oxygen-18 is currently estimated to be about US$40Mper annum, although Silex believes there is considerable potential for expansion.
* ZIRCONIUM ENRICHMENT PROJECT
Silex and US-based Westinghouse have been conducting a collaborative R&D project on Zirconium enrichment using the SILEX laser process since late 2000. Westinghouse has estimated the incremental value of Zirconium enrichment in application to nuclear fuel tubing to be in the order of US$100M per annum. We expect this feasibility project to be completed in the second half of 2003, leading to a decision on the future development of this application.
Specialised equipment has been constructed and installed at our Lucas Heights Laboratories for making and manipulating volatile Zirconium compounds, and examining the effect of laser radiation on these compounds. Initial diagnostic tests resulted in modifications to the equipment being undertaken. These modifications are nearing completion, allowing for a resumption of tests in the near future. Concurrent process modeling is also being used to identify the technical avenues that could achieve Zirconium enrichment in a most cost-effective manner.
4.2 TRANSLUCENT PHOTONICS PROJECT
In April 2001 SILEX reached agreement with US based semiconductor start-up Translucent Photonics Inc (Translucent), to fund the development of an invention in the field of photonic semiconductor technology known as Planar Lightwave Circuits (PLCs).
The agreement involves the funding of a A$10million development program in return for a 30% equity interest in Translucent, and an option to move to 55% upon successful completion of the demonstration program.
The Translucent PLC has enormous commercial potential because it aims to push low cost silicon into the photonics arena (optical communications technology) for the first time, delivering significant cost and performance benefits. If successful, Translucent PLC's are expected to have broad application in the very substantial photonics and semiconductor markets.
In our March 2003 market release, we indicated the Translucent Project was moving steadily towards the final milestone for the core technology. We are informed that positive progress to this end has been maintained. Additionally, we reported in the same release a potentially significant spin-off technology for the main-stream microprocessor industry. We continue to be optimistic about the prospects for this spin-off technology.
Translucent's 3-phase development is now approximately half-way through the third and final phase, and the critical issues relating to the core technology have been largely answered. Translucent is hopeful of demonstrating the Milestone results in July August 2003. This is a very important period for the Translucent project.
Upon or before the evaluation of the Milestone demonstration, Silex will consider the extent to which additional funding will be required by Translucent in order to commence initial commercialization activities. One option to be addressed in this respect is whether Silex should provide further funding in return for increased equity.
The combination of Translucent's optical technology and Silex's isotopic Silicon technologies could enable significant increases in the speed, and reduction of the heat-load, of electronics Processors (ie integrated circuits (ICs)) of the type used in the personal computer (PC) and telecommunications industries).
With PC speeds and communications data rates growing ever faster, Translucent anticipates strong acceptance of this new technology. The fast processor (ICs) market exceeds $140B, split approximately evenly between telecommunications chips and PC chips. Silex's recently announced strategic relationship with SUMCO is the first step in entering that mainstream electronics market. With success in the Translucent Project, we anticipate additional strategic partnerships with major semiconductor/photonics manufacturers.
4.3 SILICON ISOTOPE SUPERLATTICE (SIS)
As discussed in our March update, the SIS Feasibility Project being conducted by Silex and Prof Itoh's group at Keio University can be described by five key steps. These steps, and the current status of each, are summarised below:
i) Fabrication of initial SIS structures completed. ii) Identification of practical SIS fabrication techniques completed. iii) Measurement of zone-folded Raman Phonon spectra completed. iv) Measurement of enhanced electron mobility 'Hall Effect' delayed. v) Preliminary Cost/Benefit assessment in progress.
The completion of the SIS electron mobility measurements (step (iv) above) continues to suffer delays due to material impurities. A potential solution to this issue may have been identified in recent days, and will be actively pursued. If this solution is effective, we expect to be able to complete the mobility measurements and feasibility assessment during the final quarter of this calendar year.
The SIS technology has the potential to increase the speed of conventional Silicon semiconductor devices significantly, at a time when manufacturers are finding it increasingly difficult and costly to extend the performance of Silicon. However, it must be emphasised that this project is still in the research phase, and still has some way to go before any commercial potential can be quantified.
4.4 FIBERBYTE PTY LTD
In May 2002, Silex acquired a controlling interest in Fiberbyte Pty Ltd, an Adelaide based Photonics company with a unique suite of optical communications products and technologies. Since that time, Fiberbyte has focused on developing its technology in line with market needs and expectations, resulting in a series ofmodifications to its initial products and business strategy.
Since launching its first products at the Optical Fiber Communications Convention (OFC 2003) in Atlanta in March, the Fiberbyte sales team has been following up on leads and building contacts with potential future customers. Whilst Fiberbyte has received some initial request for quotes, it has become apparent through the OFC interaction that market conditions in the optical communications industry remain very depressed, and that it will take some time to recover.
Accordingly, Silex will closely monitor Fiberbyte's progress over the next few months, to ensure that the prospects for success are appropriately factored into our investment strategy.
5. CONCLUSION:
USEC's withdrawal from the SILEX Uranium project has surprised us, particularly in view of the positive status of the project. However, I would like to reassure our shareholders that Silex remains confident of the commercial potential of the SILEX Technology and intends to pursue its development vigorously.
I confirm that, with nearly $40M in the bank, Silex has sufficient financial reserves for the foreseeable future with respect to current activities. Subject to the various outcomes of each of our projects, Silex may seek high quality partners to help fund the commercialisation of some of its technologies. This strategy, combined with a committed team and a portfolio of promising technologies, means that Silex is well placed to pursue its vision to become a successful technology company on the world stage.
In closing, I would like to express my gratitude to the many shareholders who have written to us conveying their continued support and best wishes for the Company.
Dr M Goldsworthy CEO AND MANAGING DIRECTOR
Contacts:
Dr Michael Goldsworthy (02) 9532 1331 Chris Wilks (02) 9855 5555
SLX Price at posting:
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