Genex Power Limited. Pumped up on energy storage

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1 Genex Power Limited Utilities James Bullen Analyst Canaccord Genuity (Australia) Ltd December 2017 SPECULATIVE BUY A$0.40 A$0.38 GNX-ASX PRICE TARGET Price (11-Dec) Ticker Pumped up on energy storage 52-Week Range (A$): Market Cap (A$M): Shares Out. (M) : Dividend /Shr (AUc): Dividend Yield (%) : Enterprise Value (A$M): FYE Jun Sales (A$M) EBITDA (A$M) Net Income (A$M) Net Debt (Cash) (A$M) A 0.0 (6.3) 2018E E (6.6) (3.4) (3.1) Dec-17 Oct-17 Nov-17 Sep-17 Jul-17 Aug-17 Jun-17 Apr-17 May-17 Mar-17 Jan-17 Feb GNX Source:FactSet Priced as of close of business 11 December 2017 Genex Power Ltd. is a power generation development company, which focuses on the production and storage of renewable energy. Its projects includes Kidston Solar and Kidston Hydro Pumped Storage projects. Canaccord Genuity (Australia) Limited has received a fee as a Joint Lead Manager and Underwriter to the Genex Power Limited capital raising announced on 3 February GNX represents a unique yet easily understood investment proposition in the Australian utility sector, in our view. Through its 250MW pumped hydro development at Kidston in QLD, we believe the company is extraordinarily well positioned to benefit from the changes occurring in the National Electricity Market (NEM). With (1) the 50MW Kidston Stage 1 Solar (K1-Solar) project in production; (2) momentum building at the 250MW Kidston Stage 2 pumped hydro development (K2Hydro) and co-located 270MW solar (K2-Solar); and (3) higher-than-expected industry support for the Federal National Energy Guarantee (NEG), 2018 is shaping up as an exciting year for GNX, in our view. We initiate coverage with a SPEC BUY rating and A$0.40ps price target (SOTP based). A changing grid Globally, solar and wind are now the two leading generation technologies in terms of new capacity additions (see Figure 5). Given the continued bipartisan federal support for Australia's international emissions commitments and the state schemes designed to facilitate new renewable developments, the penetration of intermittent electricity sources is expected to rise substantially. This move to embrace intermittent sources in conjunction with a gas shortage has provided a material opportunity for electricity storage, particularly when sourced from a low cost, tried and tested technology such as pumped hydro. First mover advantage The last pumped hydro project in Australia was built over 30 years ago. While a recent ANU screening study identified some 22,000 potential pumped hydro sites, only one of them has been the subject of a detailed feasibility study, has received multiple government grants and is expected to reach financial close in CY18. Government support a key enabler... The federal government's push to ensure grid reliability by requiring retailers to hold a certain percentage of forward contracts with dispatchable resources and the QLD government's support for renewables is a key funding enabler, in our view. ARENA has provided grants of $17.9 million, CEFC provided debt funding KS1 and NAIF is currently conducting due diligence on funding for K2-Hydro and K2-Solar....and so is industry support for the NEG Industry wants energy policy certainty and we have been encouraged by the support from the likes of Infigen, AGL and Origin for the NEG. Clearly the devil will be in the detail, and there are no details at this point, but it is off to a promising start. Catalyst calendar Over the coming months we will be looking for (1) capex finalisation for K2-Solar; (2) NAIF term sheet finalisation; and (3) a potential announcement on energy offtake and partnering for both K2-Solar and K2-Hydro. Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein. For important information, please see the Important Disclosures beginning on page 23 of this document.

2 Figure 1: Financial summary FY Jun E 2019E 2020E E 2019E 2020E PROFIT & LOSS (A$mn) Revenue KEY PRICING ASSUMPTIONS Operational Costs NSW Electricity Prices ($/MWh) Other income SA Electricity Prices ($/MWh) Corporate & Other WA Electricity Prices ($/MWh) EBITDA LGC Prices ($/LGC) DD&A Other EBIT REALISED PRICES Financing Income Bundled price ($/MWh) Financing Costs NPBT GENERATION FORECASTS Tax Australian Generation (GWh) Normalised NPAT Sig Items, Discon Ops & Mins Total (GWh) Reported NPAT Effective income tax rate 0% 0% 0% 0% 0% PER SHARE DATA Check Average Shares (Diluted, M) CASHFLOW (A$mn) EOP Shares (Diluted, mn) Cash receipts Normalised EPS (A /sh) Payments to suppliers CF PS (A /sh) Interest received FCF PS (A /sh) Interest paid Other RATIOS Operating Cashflow Dividend Yield 0% 0% 0% 0% 0% Payments for PP&E PE Payments for Intangible Assets PCF (Debt Adj) Payments for Growth Developments EV / EBITDA Asset Sales / (Purchases) Other Gearing (ND / ND + E) -14% 21% 79% 64% 80% Investing Cashflow Share Issuance / (Buyback) Net Debt / EBITDA 0.1x -0.9x 93.8x 25.8x 20.3x Drawdown / (Repayment) of Debt Interest Cover 789.1x -17.8x -1.0x 0.1x 1.2x Dividends Other ROE (Reported Profit / Av Equity) N/A -47% -15% -5% 3% Financing Cashflow ROIC N/A -24% -1% 0% 3% Surplus / Defecit ROACE N/A -15% -1% 0% 2% Check FCF Yield -23% -16% -39% -27% -92% BALANCE SHEET (A$mn) Current Assets DIVIDEND AND FRANKING Non-Current Assets Dividend (A /sh) Total Assets Payout ratio 0% 0% 0% 0% 0% Current Liabilities Franking Balance (A$mn) Non-Current Liabilities Total Liabilities VALUATION Risked Unrisked Net Assets K1-Solar Total Cash K2-Solar Total Debt K2-Hydro Net Debt Developer Margin TOTAL PREMIUM/(DISCOUNT) 0.0 PRICE TARGET 0.40 Source: Company Reports, Canaccord Genuity estimates 2 Speculative Buy Target Price A$ December 2017 Utilities 2

3 Table of Contents 1. Pumped up Valuation Funding Opportunities in the changing NEM Risks Board and management Appendix 1 Pumped hydro Appendix 2 The Kidston renewable energy hub Speculative Buy Target Price A$ December 2017 Utilities 3

4 1. Pumped up As intermittent supply from wind and solar increases its market share, back-up energy storage will become increasingly necessary. Enhancements and cost reductions of batteries will assist, but are not currently of the scale required to maintain grid stability and reliability. Pumped hydro offers this scale at a lower cost than batteries and GNX s Kidston development has first mover advantage. We initiate coverage with a SPEC BUY rating and A$0.40ps price target. We value K1-Solar at $0.14ps, K2-Solar at $0.08ps (50% risking), K2-Hydro at $0.07ps (50% risking) and include $0.11ps for an assumed sell-down (50% risking). A more detailed breakdown of our valuation can be found in section 2. A differentiated renewable project Construction of the 50MW solar project at Kidston (K1-Solar) has been completed in line with budget and broadly in line with schedule. This is a positive result which, in our view, should aid in building additional momentum for the larger 270MW solar development (K2-Solar) and 250MW pumped hydro (K2-Hydro). Over 7,000MW of solar developments have been proposed in QLD, but to our knowledge only Kidston has an associated pumped hydro project. With these competing projects providing highly synchronous output the risk of a glut during peak solar generation is high in our opinion. This risk of a glut, along with the opportunity to make money from ancillary services such as FCAS, should see a higher level of interest in Kidston by energy offtakers and potentially equity partners. Figure 2: QLD and Australia more generally does not lack solar radiation Source: BoM 4 Speculative Buy Target Price A$ December 2017 Utilities 4

5 Figure 3: A likely solar glut in QLD makes storage ( time-shifting ) even more valuable Source: AGL, AEMO which is 15x larger than Tesla s SA battery Pumped hydro is responsible for ~97% of world-wide energy storage. Grid-scale batteries are expected to make inroads in the longer term, but significant cost improvements and even larger storage capacity improvements are required for this to happen. A quick comparison of Tesla s SA battery with K2-Hydro highlights how much further batteries must go (see Figure 4). While the cost of the SA battery was never released Tesla s battery division head Lyndon Rive originally suggested a price of US$ kwh. This would put the cost of the 130MWh system at around $84 million. Compare this with K2-Hydro which has a storage capacity 15x greater and is expected to cost $330 million or US$130kWh. Figure 4: Storage and output capacity of K2-Hydro vs other projects SA Tesla Battery K2-Hydro Wivenhoe 0 Storage capacity (GWh) Output capacity (MW) Source: Company Reports, Canaccord Genuity 5 Speculative Buy Target Price A$ December 2017 Utilities 5

6 Bi-partisan support for international commitments Australian energy policy has been lacking in recent times, but bi-partisan support for the commitments made under COP21 has remained. Under these international agreements Australia has an emissions reduction target of 26-28% below 2005 levels by In order to achieve this target, Jacobs, in a report commissioned by AEMO, estimates that approximately 4,200MW of coal-fired capacity would need to be shut down. While this is far from the most aggressive closure schedule we are aware of, it does highlight the significant opportunity that is present for the renewable sector post This move towards renewables is not just Australia-centric worldwide generation additions from solar and wind outpaced coal and gas in Importantly, this trend has not been impacted by the ascension of President Trump, and we expect Australia to continue following the global experience. Figure 5: In 2016 new solar and wind developments outpaced traditional coal and gas (GW) Source: Company Reports, Canaccord Genuity estimates New generation developments (GW) and an increasing push to price grid reliability Clearly the increasing penetration of intermittent generation creates challenges for a traditional grid which is used to elevated levels of high inertia generation that is dispatchable. The Clean Energy Target (CET), which was proposed by Australia s Chief Scientist in the Finkel review, placed an increasing focus on grid security/reliability and the National Energy Guarantee (NEG), which has been put forward by the Federal Government as a CET replacement, has taken this a step further. Under the NEG, electricity retailers must meet their load obligations with a portfolio of resources which include a minimum amount of flexible dispatchable capacity, and an emissions level consistent with Australia s international emissions reduction commitments. The details/mechanics of the scheme are yet to be fully developed, but in our view, the likelihood of a carrot for developments such as Kidston, which ticks both the emissions and dispatchable boxes, has increased substantially. 6 Speculative Buy Target Price A$ December 2017 Utilities 6

7 2. Valuation We have valued GNX s three key projects using a free-cash-flow to equity model and assumed a 50% sell-down of stage 2 for a developer margin. We have elected this methodology over discounted cash flow analysis to better incorporate the potential funding outcomes for each development. Our valuation does not provide any credit for current cash balances or debits for ongoing corporate costs within the business. Figure 6: Valuation buildup Asset Equity Net Capacity Risk Risked FCF to equity % MW % A$mn A$ps K1-Solar 100% % GENERATION K2-Solar 50% % K2-Hydro 50% % Developer Margin 50% DEVELOPMENT ASSETS Premium / (Discount) 0.00 PRICE OBJECTIVE 0.40 Source: Company Reports, Canaccord Genuity estimates K1-Solar ($0.14ps, $40 million, 100% risking) Generation from the 50MW development commenced in Dec 17. Electricity is sold under a Revenue Support Deed with the QLD government under its Large-Scale Solar 150 Program. This Deed consists of a one-way price contract between GNX and the QLD Government, guaranteeing the sale of electricity above a set floor price (we assume $88/MWh). The $110 million capex budget for K1-Solar was funded through a $100 million debt package from SocGen and Clean Energy Finance Corporation (CEFC) plus an $8.9 million grant from ARENA. This minimized the required equity contribution from GNX and ensures an extremely low overall WACC for the project. The efficient funding model, significant tax loss credits ($39.5 million, not recognized on balance sheet but able to be used against future taxable earnings), a relatively high contract price and high solar radiation have driven our valuation to $40 million for the asset. This equates to an EV/MW of $2.8 million and an EV/GWh/annum of $0.97 million. Key assumptions: Capacity: 50MW Capacity factor: 33% (equates to 145GWh per annum) Capex: $110 million (excluding capitalized interest) Facility size: $100 million (as per announcement 14 Feb 17) Cost of debt: 4.5% on a blended basis Cost of equity: 11% Electricity price: $88MWh (Black + Green, no escalation) 7 Speculative Buy Target Price A$ December 2017 Utilities 7

8 Opex: ~$10/MWh (escalated at 2.5% per annum) 25-year operating life K2-Solar ($0.08ps, $24 million, 50% risking) GNX is targeting financial close for the 270MW K2-Solar development by mid While we have modelled and valued the project separately to K2-Hydro, their fortunes, in our view, are very much intertwined. The Kidston Renewable Energy Hub has been designated as Critical Infrastructure by the QLD Government, which has committed $150 million towards developing a transmission line that will allow the expanded development to connect directly into the national grid. Our assumptions for the project are largely in line with K1-Solar but we have allowed for some economies of scale and further solar capex reductions. That said, these are more than offset by lower electricity price assumptions and a lower proportion of debt funding. Our un-risked valuation of the pre-development project is $46 million or $0.34 mn/mw. It is, however, important to note that GNX is currently in the process of negotiating with potential energy offtake partners and this transaction, if it is completed, could take a number of shapes. There is consequently a large error-band on our valuation and for this reason we risk it at 50%. In our base case we assume GNX sells down 50% of its equity for a developer margin of $0.25mn/MW. Key assumptions (100% basis): Capacity: 270MW Capacity factor: 33% (equates to 783GWh per annum) Capex: $420 million (excluding capitalized interest) Facility size: $315 million Cost of debt: 5.5% on a blended basis Cost of equity: 11% Electricity price: $65MWh (Black + Green, escalating at 2.5% per annum) Opex: ~$9.5/MWh (escalated at 2.5% per annum) 25-year operating life K2-Hydro ($0.07ps, $20 million, 50% risking) GNX was floated in mid-2015 on the potential of pumped hydro utilizing the abandoned Kidston gold mine. At that point the investment thesis was centered on the exploitation of an oversupply of baseload coal-fired generation capacity and escalating peak power prices. While the project has pivoted slightly to take advantage of the solar opportunity, the basic premise of GNX s original thesis holds. 8 Speculative Buy Target Price A$ December 2017 Utilities 8

9 Figure 7: Schematic of potential operating profile Source: Company Reports, Canaccord Genuity estimates Our assumptions are largely guided by the feasibility study (published 8 Nov 16) and optimized feasibility study (published 20 Oct 17). Our base case assumes a pricing arbitrage of $60/MWh between generation and pumping operations. This is supported by the data illustrated in Figure 9 but it is not a conservative assumption, in our view. One potential point of contention within our modelling is the inclusion of revenue from ancillary services such as FCAS. For our valuation we have included $10 million per annum of ancillary revenue. As evident in Figure 8, FCAS costs are on the rise and we expect them to increase further as renewable penetration increases. Additionally, we note that the NEG has potential to include credits to facilitate the development of new dispatchable generation. Figure 8: FCAS costs in the NEM are on the rise ($mn) YTD Source: Company Reports, Canaccord Genuity estimates 9 Speculative Buy Target Price A$ December 2017 Utilities 9

10 0:30 1:30 2:30 3:30 4:30 5:30 6:30 7:30 8:30 9:30 10:30 11:30 12:30 13:30 14:30 15:30 16:30 17:30 18:30 19:30 20:30 21:30 22:30 23:30 Genex Power Limited Our un-risked valuation of the pre-development project is $42 million or $0.34mn/MW. Like K2-Solar there is a large error-band on our valuation and for this reason we risk it at 50%. In our base case we assume GNX sells down 50% of its equity for a developer margin of $0.25mn/MW. Figure 9: Historic QLD pool prices under different scenarios ($/MWh) Figure 10: Historic QLD pool prices by time ($/MWh) AVG Peak 8 hrs AVG Off Peak 10hrs Yearly Source: AEMO, Canaccord Genuity Source: AEMO, Canaccord Genuity Key assumptions (100% basis): Generation capacity: 250MW Storage capacity: 2.0GWh Facility utilization: 38% Pumping efficiency factor: 80% Capex: $330 million (excluding capitalized interest) Facility size: $231 million Cost of debt: 5.5% on a blended basis Cost of equity: 11% Peak to off-peak arbitrage: $60MWh (flat) Revenue for other services: $10 million per annum (escalating at 2.5% per annum) Opex: ~$5/MWh (escalated at 2.5% per annum) 40-year operating life Developer margin ($0.11ps, $33 million, 50% risking) We assume that GNX sells down 50% of its interest in the stage 2 developments to reduce the funding burden and crystallise value. We assume that it is able to achieve a developer margin of $0.25mn/MW. This is within the range highlighted by analysis conducted by Deloitte (see Figure 11), but slightly above the recent $0.2mn/MW paid by Goldwind for the Stockyard Hill windfarm. We believe this premium is appropriate given the scarce nature of approved pumped hydro developments 10 Speculative Buy Target Price A$ December 2017 Utilities 10

11 Figure 11: Lifecycle/value creation for solar PV assets (Euros) Source: Deloitte: A market approach to valuing solar PV assets, Speculative Buy Target Price A$ December 2017 Utilities 11

12 3. Funding At the end of the SepQ GNX had net debt of $36 million. We expect this to increase towards $70 million by the end of 2017 and the $100 million debt facility be close to fully drawn in the MarQ. With EBITDA from K1 Solar expected in the $13 million range this places GNX on 6.9x net debt / project EBITDA which is well above the likes of TLT (4.1x), IFN (2.9x) & WND (net cash). The highly contracted nature of the revenue and the concessional funding package make the debt burden manageable, but we doubt that the large K2 developments will be supported at a similar gearing level. A highly geared $110 million market cap company funding a $730 million development is clearly challenging. Assuming a 70:30 debt-equity split this would require a ~$250 million capital raising (allowances made for capitalized interest and working capital). While the market is clearly supportive of the development, a selldown, which would reduce this equity requirement, seems likely in our view. As discussed in the previous section GNX has advised that it is currently negotiating with potential energy offtake partners. The result of these negotiations will have a material bearing on how the Stage 2 development is structured and financed. Figure 12: Funding structure as proposed by GNX Source: Company Reports, Canaccord Genuity estimates 12 Speculative Buy Target Price A$ December 2017 Utilities 12

13 4. Opportunities in the changing NEM Australia s electricity system is in transition. There is no going back from the massive industrial, technological and economic changes facing our electricity system. No country is immune to the change. Finkel Review, Jun 17 The weighted average age of coal-fired-power generators in the National Electricity Market is 31 years and the weighted average closure age for coal-fired-power generators in Australia is 39 years. Since 2012 there have been over 4,800MW of coal-fired generators retired in the Eastern States. This equates to 17% of East Australia s coal-fired generation. Significant investment is required and with an increased focus on environmental considerations new generation will be biased towards renewable technologies. The Coalition government has committed Australia to an emissions reduction target of 26-28% below 2005 levels by 2030 a decision which received and has retained bipartisan support. In order to achieve this target Jacobs, in a report commissioned by AEMO, estimates that approximately 4,200MW of additional coal-fired capacity would need to be shut down. Both Finkel and the subsequent NEG all contended that this move to intermittent, lowinertia sources of generation must however be tempered by reliability and security considerations. In this regard, additional gas-fired generation, pumped hydro and batteries have been floated as bridging technologies for the transition. While new coal-fired power is being discussed, we see this as a lower probability outcome. Figure 13: Coal-fired power generator closures 1 Source: AFR 1 - Hazelwood ceased operating on 29 March Speculative Buy Target Price A$ December 2017 Utilities 13

14 Furthermore, the Finkel Review pushed for the development and implementation of new mechanisms to promote: 1. Frequency control capabilities; 2. System strength capabilities; and 3. Other technical performance capabilities. In our view, this promotion will likely include increasing payments to suppliers of these services, a situation which would benefit GNX s bottom line. 5. Risks Energy policy risk: Australian energy policy has been extremely politicized over the last decade. Policy changes (both at a federal and state level) have occurred on numerous occasions. While we are hopeful that the NEG can provide the certainty craved by industry this outcome is far from certain. Regulatory approval risk: Kidston is subject to a number of regulatory approvals which could slow the pace of development or even result in the project being cancelled. The classification of the project as critical infrastructure lowers this risk in our view. Pricing risk: Electricity and green credit pricing are historically volatile. While this risk can be mitigated by securing long-term offtake agreements for relevant parts of the project, this could result in lower ultimate returns. Technology risk: Pumped hydro and solar PV are mature technologies. Future advances in other technologies used to generate, manage and store electricity (e.g., large-scale battery storage) may be more efficient and/or more cost-effective and could adversely impact GNX s finances. Development risk: the construction of a large development in remote QLD carries both budget and schedule risks. We believe the company will seek to minimse these risks through appropriate contracting strategies. Operational risk: GNX will be subject to operational risks which are beyond its control. Operations may be curtailed or cancelled as a result of adverse weather conditions, mechanical difficulties, shortages or cost increases of consumables, external services failure (including energy and water supply), IT system failures etc. This risk is partially mitigated by having an experienced management team and using experienced contractors to plan for and manage such events. Key personnel risk: A number of staff in GNX s management team has significant energy and/or hydroelectric industry experience and expertise. If one or more of these key personnel were to depart, it may be difficult to replace them adequately, in which case there could be an adverse effect on GNX s ability to execute its strategic plans. Financing risk: GNX will require future financing to pursue its development plans. There is no guarantee that funding will be available on satisfactory terms, which could result in the Kidston Project not proceeding. 14 Speculative Buy Target Price A$ December 2017 Utilities 14

15 6. Board and management Dr Ralph Craven (Chairman) Dr Craven is an energy industry specialist, with a background in power transmission, power generation and electricity retailing. He also holds the Chair at Stanwell Corporation, Queensland s largest power generator. Dr Craven is also a Director of oil and gas company Senex Energy and past positions include Directorships of Ergon Energy, Transpower New Zealand, NRG Asia-Pacific and Shell Coal. Michael Addison (Managing Director) Mr Addison is one of the founders of Genex, and a water engineer by background, with experience in large dams, spillway and water reticulation systems. He spent many years in investment banking, including 16 years at Baring Brothers working in Johannesburg, London and Hong Kong. He has held executive management roles in various ASX-listed companies such as Allied Resources, Stratum Metals, Menzies Goldfields and Carabella Resources, giving him excellent expertise in running public companies, and an intimate knowledge of the regulatory, legal and governance issues. Mr Addison is also a former Rhodes Scholar, with a post graduate degree in Management Studies from Oxford University. Simon Kidston (Executive Director) Mr Kidston is a co-founder of Genex, with a background in investment banking at Macquarie Bank, HSBC and Helmsec Global Capital. Mr Kidston is responsible for business development and project finance for the company. He has been a Director of listed coal companies Carabella Resources, Estrella Resources, and Endocoal. Ben Guo (Finance Director) Mr Guo is also a founder Genex, and holds responsibility for the finances of the company. Mr Guo worked with Mr Kidston and Mr Addison at Carabella Resources, and Estrella Resources. Mr Guo previously worked at PwC and EY, and is currently completing a PhD at University of NSW. Mr Guo is also fluent in Mandarin. Alan du Mee (Non-executive Director) Mr du Mee has strong background in power generation and development. He is the former CEO of Tarong Energy, a major Queensland power generator which is now part of Stanwell Corporation. He also had responsibility for the 600MW Wivenhoe pumped hydro project, the second largest pumped hydro plant in Australia (after the Snowy Hydro s Tumut 3 plant). Mr du Mee also advises Glencore on its clean coal strategy. Yongqing Yu (Non-executive Director) Mr Yu is a senior hydro engineer and represents the major shareholder Zhefu of China, and has been key member of Zhefu since its inception. He has been involved in many large Chinese hydro projects, and his technical expertise significantly strengthens the Board s technical, industry and corporate knowledge. 15 Speculative Buy Target Price A$ December 2017 Utilities 15

16 Appendix 1 Pumped hydro Pumped hydro systems work through the principle of storing the gravitational potential energy of water by pumping it to high elevations from a lower elevation. Upon discharge, the energy is recovered by allowing the water to fall and release its stored energy. The basics Conventional pumped hydro storage systems (Figure 14) like K2-Hydro use two water reservoirs at different elevations to pump water during low cost or off-peak hours from the lower to the upper reservoir (charging). When required, such as during periods of high electricity demand, the water is released to the lower reservoir to turn turbines with a generator to produce electricity (discharging): similar to the way in which conventional hydropower plants generate electricity. There are different options for the upper and lower reservoirs: for example, high dams may be used as pumped hydro storage plants, while the lower reservoir may capitalise upon flooded mine shafts, other underground cavities and the open sea. Figure 14: Schematic of a pumped hydro energy storage installation Source: CSIRO Maturity and application Pumped hydro energy storage is a mature technology. The first plants were used in Italy and Switzerland in the 1890s. By 1933, reversible pump turbines with motorgenerators were available. A seawater pumped hydro plant was first built in Japan in Pumped hydro storage is the largest and most widespread energy storage technology in the world. It is the only technology that is currently capable of storing energy up to multiple GWh scale. With more than 127 GW worldwide, pumped hydro storage power plants represent nearly 97% of worldwide installed electrical storage capacity, which is about 3% of global generation capacity. Many existing pumped hydro storage plants store at least 6 hours or more of energy, making them useful for bulk power management, load levelling and providing firm capacity. Pumped hydro storage can also ramp rapidly while generating, making it useful for load following or levelling, and providing ancillary services such as contingency spinning reserve and frequency regulation. 16 Speculative Buy Target Price A$ December 2017 Utilities 16

17 The Tumut Hydroelectric Power Station 3 in New South Wales is an open-loop pumped hydro system that was the first pumped storage hydroelectric power station built in Australia. It can generate 1500 MW of electricity through six Toshiba turbines. Additional systems at Shoalhaven (240 MW) and Kangaroo Valley (160 MW) in New South Wales, and Wivenhoe (500 MW) in Queensland also are in operation. Pumped hydro storage has historically been used by electric utilities to reduce total generation cost by time shifting and to control grid frequency. A conventional installation cannot function as a frequency controller while pumping, but an advanced, variable speed-control installation can do so by varying the rotational speed of the motor. Typical discharge times of pumped hydro storage range from several hours to a few days. The efficiency of pumped hydro plants is in the range of 70 85%. 17 Speculative Buy Target Price A$ December 2017 Utilities 17

18 Figure 15: Characteristics of different energy storage technologies Parameter Source: CSIRO, Canaccord Genuity Technology (cycles) /kwm -3 /kwhm -3 Lead-acid /75 min h 8 16 h 5 10 ms 10 to battery (2000) 300/ Advanced lead / h 5 ms 10 to acid battery (3000) 300/ Nickel-cadmium s h 1 h ms 40 to battery (2500) 300/75 80/< Lithium-ion min h min h 20 ms s 10 to battery Typical Power Energy Typical Recharge Response Operating Selfdischarge Critical life time density density discharge time time time temperature voltage/cell Years Wkg -1 Whkg -1 C %/day V ( ) 340/ / Sodium sulfur s h 9 h 1 ms battery (>2000) 230/ /< Sodium nickel /150 min h 6 8 h 100 ms 270 to chloride battery ( / ) 270 Zinc bromide / /20 s 10h 4 h <1 ms 10 to flow battery ( ) Vanadium redox NA/ /20 35 s 10h min <1 ms 0 to flow battery (13x103) Flywheel > /20 15 s <15 min < 4 ms s 20 to NA (107) 1600/ min Super/double- > ms 1h s min 8 ms 40 to layer capacitors (5x105) / / Superconducting ms 8 s NA < 100 ms < NA magnetic energy storage ( ) /0.006 Pumped hydro NA/ h days 1 min h s min Ambient 0 NA (>500) 1.5/0.2 2 Compressed air NA/ /12 h days min h 1 15 min Ambient 0 NA (underground) (No limit) 18 Speculative Buy Target Price A$ December 2017 Utilities 18

19 Figure 16: The Kidston renewable energy hub vision Appendix 2 The Kidston renewable energy hub The Kidston renewable energy hub is located in Northern Queensland on the site of the historical Kidston Gold Mine. The site is located 270km north west of Townsville near the township of Georgetown. It consists of an already constructed 50MW solar project (K1-Solar) and a proposed 250MW pumped hydro (K2-Hydro) developed integrated with a 270MW solar development (K2-Solar). See Figure 16. The hub has been declared critical infrastructure by the QLD government. The purpose of this declaration is to overcome unreasonable delays in obtaining approvals. Essentially it allows the Coordinator General to take control of local body approval processes for the project if required by issuing a step-in notice. This notice allows the Coordinator General effectively to "step in" to the shoes of the decisionmaker to make the decision on their behalf. A step-in notice can only be used after a progression notice or a notice to decide has been issued and effectively replaces the decision-maker with the Coordinator General for a period; this is an option of last resort. It is, however, important to note that it does not change the decision-making processes the project is subjected to. Source: Company Reports The proposed timeline for the stage 2 developments has little margin for error, but we have been encouraged by the results to date and have consequently adopted it for our valuation modelling. If successful in achieving financial close by mid-cy18, generation from K2-Solar is expected by early CY20 and K2-Hydro by early CY21. See Figure Speculative Buy Target Price A$ December 2017 Utilities 19

20 Figure 17: Proposed timeline Source: Company AGM Presentation Stage 2 at Kidston would be the first integrated solar/pumped hydro project in the world. By pairing the two technologies, it is possible to create a reliable, predictable and affordable energy generator that is entirely renewable. K2-Solar is essentially just an expansion of K1-Solar and will either (1) power the pumped hydro scheme during the day, using the energy generated to pump the water back up into the upper reservoir (essentially 're-charging' the battery); or (2) supply power to the grid via the proposed Powerlink connection. The Kidston Pumped Storage Hydro Project will utilise the two existing mining pits (Wises and Eldridge) as the upper and lower reservoirs for the project to minimise construction time and cost. Given the significant potential water head differential that the pits offer, and the vast quantity of water the pits can hold, the project has now been optimised to support 2,000MWh of continuous power generation in a single generation cycle (250MW of peaking power generation over an 8-hour period). Power generated will be sold directly into the NEM. A concrete lined pressure tunnel will connect the upper reservoir to the underground generation powerhouse. A concrete-lined tailrace tunnel will, in turn, connect the powerhouse to the lower reservoir. A shaft from the surface will connect the underground infrastructure to a surface power control room, which will be connected to a transformer station located on an existing pit bench. During peak power demand periods water will be released from the upper to the lower reservoir, passing through reversible pump/generators acting in generation mode. During off peak periods, water will be pumped back from the lower to the upper reservoir with the pump/generators acting in pumping mode. 20 Speculative Buy Target Price A$ December 2017 Utilities 20

21 Figure 18: Aerial view of K1-Solar as at August 2017 Source: Canaccord Genuity The Kidston Pumped Storage Hydro Project (250MW) is a closed loop system, which will involve the transfer of water from the upper reservoir to the lower reservoir. This will ensure minimal environmental impact during operation, on what is already a disturbed historical mining site. The Kidston site benefits from extensive existing onsite infrastructure and materials, mitigating the need for significant capital expenditure normally associated with the building of a large scale pumped storage hydroelectric generation scheme. This includes: 1. An upper reservoir (Wises Pit) 2. A lower Reservoir (Eldridge Pit) 3. Significant volumes of good quality water currently in each pit 4. An onsite power distribution substation 5. An existing 132 kv transmission line connecting the site to Powerlink's Ross substation near Townsville 6. The existing 20,600 ML Copperfield Dam located approximately 18km from the site 7. A water pipeline from the Copperfield Dam directly to the Kidston site 8. Existing water rights to draw up to 4,650ML of water annually from the Copperfield Dam 9. Significant quantities of onsite building materials required for the civil construction process 10. On site accommodation and catering facilities, roads, fencing, diesel storage facilities, electricity and water 21 Speculative Buy Target Price A$ December 2017 Utilities 21

22 Figure 19: Pumped Hydro site, showing old open pits from Kidston Gold mine Source: Company Reports, Canaccord Genuity estimates 22 Speculative Buy Target Price A$ December 2017 Utilities 22

23 Genex Power Limited Appendix: Important Disclosures Analyst Certification Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst s coverage universe and (ii) no part of the authoring analyst s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research. Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of Canaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Sector Coverage Individuals identified as Sector Coverage cover a subject company s industry in the identified jurisdiction, but are not authoring analysts of the report. Investment Recommendation Date and time of first dissemination: December 12, 2017, 14:35 ET Date and time of production: December 12, 2017, 14:35 ET Target Price / Valuation Methodology: Genex Power Limited - GNX We have valued GNX s three key projects using a free-cash-flow to equity model and assumed a 50% sell-down of stage 2 for a developer margin. We have elected this methodology over discounted cash flow analysis to better incorporate the potential funding outcomes for each development. We value K1-Solar at $0.14ps, K2-Solar at $0.08ps (50% risking), K2-Hydro at $0.07ps (50% risking) and include $0.11ps for an assumed sell-down (50% risking). Our valuation does not provide any credit for current cash balances or debits for ongoing corporate costs within the business. Risks to achieving Target Price / Valuation: Genex Power Limited - GNX Energy policy risk: Australian energy policy has been extremely politicized over the last decade. Policy changes (both at a federal and state level) have occurred on numerous occasions. While we are hopeful that the NEG can provide the certainty craved by industry this outcome is far from certain. Regulatory approval risk: Kidston is subject to a number of regulatory approvals which could slow the pace of development or even result in the project being cancelled. The classification of the project as critical infrastructure lowers this risk in our view. Pricing risk: Electricity and green credit pricing are historically volatile. While this risk can be mitigated by securing long-term offtake agreements for relevant parts of the project, this could result in lower ultimate returns. Technology risk: Pumped hydro and solar PV are mature technologies. Future advances in other technologies used to generate, manage and store electricity (e.g., large-scale battery storage) may be more efficient and/or more cost-effective and could adversely impact GNX s finances. Development risk: the construction of a large development in remote QLD carries both budget and schedule risks. We believe the company will seek to minimse these risks through appropriate contracting strategies. Operational risk: GNX will be subject to operational risks which are beyond its control. Operations may be curtailed or cancelled as a result of adverse weather conditions, mechanical difficulties, shortages or cost increases of consumables, external services failure (including energy and water supply), IT system failures etc. This risk is partially mitigated by having an experienced management team and using experienced contractors to plan for and manage such events. Key personnel risk: A number of staff in GNX s management team has significant energy and/or hydroelectric industry experience and expertise. If one or more of these key personnel were to depart, it may be difficult to replace them adequately, in which case there could be an adverse effect on GNX s ability to execute its strategic plans. Financing risk: GNX will require future financing to pursue its development plans. There is no guarantee that funding will be available on satisfactory terms, which could result in the Kidston Project not proceeding. Speculative Buy Target Price A$ December 2017 Utilities 23

24 Genex Power Limited Distribution of Ratings: Global Stock Ratings (as of 12/12/17) Rating Coverage Universe # * *Total includes stocks that are Under Review Buy Hold Sell Speculative Buy % 60.25% 27.66% 2.00% 10.09% 100.0% IB Clients % 40.49% 27.00% 10.53% 65.62% Canaccord Genuity Ratings System BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months. HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months. SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months. NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer. Risk-adjusted return refers to the expected return in relation to the amount of risk associated with the designated investment or the relevant issuer. Risk Qualifier SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may result in material loss. 12-Month Recommendation History (as of date same as the Global Stock Ratings table) A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month period may be obtained at the following website (provided as a hyperlink if this report is being read electronically) Required Company-Specific Disclosures (as of date of this publication) Genex Power Limited currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies. During this period, Canaccord Genuity or its affiliated companies provided investment banking services to Genex Power Limited. In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services from Genex Power Limited. Canaccord Genuity acts as corporate broker for Genex Power Limited and/or Canaccord Genuity or any of its affiliated companies may have an agreement with relating to the provision of Investment Banking services. Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Banking services from Genex Power Limited in the next three months. This report was prepared solely by Canaccord Genuity (Australia) Limited. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Canaccord Genuity (Australia) Limited, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports. Speculative Buy Target Price A$ December 2017 Utilities 24

25 Genex Power Limited Genex Power Limited Rating History as of 12/11/2017 AUD0.40 AUD0.35 AUD0.30 AUD0.25 AUD0.20 AUD0.15 AUD0.10 AUD0.05 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Closing Price Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Target Price Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR) Online Disclosures Up-to-date disclosures may be obtained at the following website (provided as a hyperlink if this report is being read electronically) or by sending a request to Canaccord Genuity Corp. Research, Attn: Disclosures, P.O. Box Pacific Centre, Granville Street, Vancouver, BC, Canada V7Y 1H2; or by sending a request by to disclosures@canaccordgenuity.com. The reader may also obtain a copy of Canaccord Genuity s policies and procedures regarding the dissemination of research by following the steps outlined above. General Disclaimers See Required Company-Specific Disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager roles; 1% or other ownership; compensation for certain services; types of client relationships; research analyst conflicts; managed/co-managed public offerings in prior periods; directorships; market making in equity securities and related derivatives. For reports identified above as compendium reports, the foregoing required company-specific disclosures can be found in a hyperlink located in the section labeled, Compendium Reports. Canaccord Genuity is the business name used by certain wholly owned subsidiaries of Canaccord Genuity Group Inc., including Canaccord Genuity Inc., Canaccord Genuity Limited, Canaccord Genuity Corp., and Canaccord Genuity (Australia) Limited, an affiliated company that is 50%-owned by Canaccord Genuity Group Inc. The authoring analysts who are responsible for the preparation of this research are employed by Canaccord Genuity Corp. a Canadian broker-dealer with principal offices located in Vancouver, Calgary, Toronto, Montreal, or Canaccord Genuity Inc., a US broker-dealer with principal offices located in New York, Boston, San Francisco and Houston, or Canaccord Genuity Limited., a UK broker-dealer with principal offices located in London (UK) and Dublin (Ireland), or Canaccord Genuity (Australia) Limited, an Australian broker-dealer with principal offices located in Sydney and Melbourne. The authoring analysts who are responsible for the preparation of this research have received (or will receive) compensation based upon (among other factors) the Investment Banking revenues and general profits of Canaccord Genuity. However, such authoring analysts have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Investment Banking activities, or to recommendations contained in the research. Some regulators require that a firm must establish, implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of research. This research has been prepared in accordance with Canaccord Genuity s policy on managing conflicts of interest, and information barriers or firewalls have been used where appropriate. Canaccord Genuity s policy is available upon request. The information contained in this research has been compiled by Canaccord Genuity from sources believed to be reliable, but (with the exception of the information about Canaccord Genuity) no representation or warranty, express or implied, is made by Canaccord Genuity, its affiliated companies or any other person as to its fairness, accuracy, completeness or correctness. Canaccord Genuity has not independently verified the facts, assumptions, and estimates contained herein. All estimates, opinions and other information contained in this research constitute Canaccord Genuity s judgement as of the date of this research, are subject to change without notice and are provided in good faith but without legal responsibility or liability. From time to time, Canaccord Genuity salespeople, traders, and other professionals provide oral or written market commentary or trading strategies to our clients and our principal trading desk that reflect opinions that are contrary to the opinions expressed in this research. Canaccord Genuity s affiliates, principal trading desk, and investing businesses also from time to time make investment decisions that are inconsistent with the recommendations or views expressed in this research. This research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell any designated investments discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the designated investments discussed in this research may not be eligible for sale in some jurisdictions. This research is not, and under no Speculative Buy Target Price A$ December 2017 Utilities 25