Pumped up on energy storage Genex Power Limited · A differentiated renewable project…...

Genex Power Limited

Utilities

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 allthe companies and securities that are the subject of this report discussed herein.

12 December 2017

SPECULATIVE BUYPRICE TARGET A$0.40Price (11-Dec)Ticker

A$0.38GNX-ASX

52-Week Range (A$): 0.17 - 0.43Market Cap (A$M): 109Shares Out. (M) : 287.8Dividend /Shr (AUc): 0.0Dividend Yield (%) : 0.0Enterprise Value (A$M): 201

FYE Jun 2017A 2018E 2019ESales (A$M) 0.0 7.1 12.8EBITDA (A$M) (6.3) 1.0 5.9Net Income (A$M) (6.6) (3.4) (3.1)

Net Debt (Cash) (A$M) 6 92 152

0.45

0.4

0.35

0.3

0.25

0.2

0.15

Jan-17

Feb-17

Mar-17

Apr-17

May

-17

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

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GNX

Source:�FactSet

Priced as of close of business 11 December 2017

Genex Power Ltd. is a power generation developmentcompany, which focuses on the production and storage ofrenewable energy. Its projects includes Kidston Solar andKidston Hydro Pumped Storage projects.

Canaccord Genuity (Australia) Limited has received a fee asa Joint Lead Manager and Underwriter to the Genex PowerLimited capital raising announced on 3 February 2017.

James Bullen | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.2.9263.2728

Initiation of Coverage

Pumped up on energy storageGNX represents a unique yet easily understood investment proposition in the Australianutility sector, in our view. Through its 250MW pumped hydro development at Kidstonin QLD, we believe the company is extraordinarily well positioned to benefit from thechanges 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 (K2-Hydro) and co-located 270MW solar (K2-Solar); and (3) higher-than-expected industrysupport for the Federal National Energy Guarantee (NEG), 2018 is shaping up as anexciting year for GNX, in our view.We initiate coverage with a SPEC BUY rating and A$0.40ps price target (SOTP based).

A changing gridGlobally, solar and wind are now the two leading generation technologies in terms ofnew capacity additions (see Figure 5). Given the continued bipartisan federal supportfor Australia's international emissions commitments and the state schemes designed tofacilitate new renewable developments, the penetration of intermittent electricity sourcesis expected to rise substantially.This move to embrace intermittent sources in conjunction with a gas shortage hasprovided a material opportunity for electricity storage, particularly when sourced from alow cost, tried and tested technology such as pumped hydro.

First mover advantageThe last pumped hydro project in Australia was built over 30 years ago. While a recentANU screening study identified some 22,000 potential pumped hydro sites, only oneof them has been the subject of a detailed feasibility study, has received multiplegovernment 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 holda certain percentage of forward contracts with dispatchable resources and the QLDgovernment's support for renewables is a key funding enabler, in our view. ARENA hasprovided grants of $17.9 million, CEFC provided debt funding KS1 and NAIF is currentlyconducting due diligence on funding for K2-Hydro and K2-Solar.

...and so is industry support for the NEGIndustry wants energy policy certainty and we have been encouraged by the supportfrom 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 calendarOver 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 andpartnering for both K2-Solar and K2-Hydro.

For important information, please see the Important Disclosures beginning on page 23 of this document.

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Figure 1: Financial summary

Source: Company Reports, Canaccord Genuity estimates

FY Jun 30 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E

PROFIT & LOSS (A$mn)

Revenue 0 0 7 13 27 KEY PRICING ASSUMPTIONS

Operational Costs 0 0 -1 -2 -3 NSW Electricity Prices ($/MWh) 51.7 86.5 95.4 80.5 75.5

Other income 1 3 0 1 1 SA Electricity Prices ($/MWh) 61.7 109.2 100.5 79.0 74.5

Corporate & Other -8 -9 -5 -6 -6 WA Electricity Prices ($/MWh) 50.0 50.0 50.0 50.0 50.0

EBITDA -7 -6 1 6 18 LGC Prices ($/LGC) 70.3 85.4 79.0 79.0 79.0

DD&A 0 0 -3 -6 -6

Other 0 0 0 0 0

EBIT -7 -6 -2 0 12 REALISED PRICES

Financing Income 0 0 0 1 1 Bundled price ($/MWh) 0.0 0.0 88.0 88.0 77.7

Financing Costs 0 0 -2 -4 -10

NPBT -7 -7 -3 -3 3 GENERATION FORECASTS

Tax 0 0 0 0 0 Australian Generation (GWh) 0 0 81 146 343

Normalised NPAT -7 -7 -3 -3 3

Sig Items, Discon Ops & Mins 0 0 0 0 0 Total (GWh) 0 0 81 146 343

Reported NPAT -7 -7 -3 -3 3

Effective income tax rate 0% 0% 0% 0% 0% PER SHARE DATA

Check Average Shares (Diluted, M) 79 216 288 288 288

CASHFLOW (A$mn) EOP Shares (Diluted, mn) 158 288 288 288 288

Cash receipts 1 3 7 13 27 Normalised EPS (A¢/sh) -8.9 -3.1 -1.2 -1.1 1.1

Payments to suppliers -11 -5 -6 -7 -9 CF PS (A¢/sh) -12.3 -1.3 0.3 0.8 3.0

Interest received 0 0 0 1 1 FCF PS (A¢/sh) -17.9 -12.6 -30.2 -21.0 -71.9

Interest paid 0 0 -2 -4 -10

Other 0 0 2 0 0 RATIOS

Operating Cashflow -10 -3 1 2 9 Dividend Yield 0% 0% 0% 0% 0%

Payments for PP&E -1 0 0 0 0 PE -8.7 -25.4 -65.9 -73.3 72.7

Payments for Intangible Assets 0 0 0 0 0 PCF (Debt Adj) -6.3 -68.5 105.6 42.8 14.4

Payments for Growth Developments 0 -33 -95 -128 -215 EV / EBITDA -17.3 -36.7 323.6 63.8 33.0

Asset Sales / (Purchases) 0 0 0 65 0

Other -4 9 7 0 0 Gearing (ND / ND + E) -14% 21% 79% 64% 80%

Investing Cashflow -4 -25 -88 -63 -215

Share Issuance / (Buyback) 3 19 0 0 0 Net Debt / EBITDA 0.1x -0.9x 93.8x 25.8x 20.3x

Drawdown / (Repayment) of Debt 4 15 86 101 207 Interest Cover 789.1x -17.8x -1.0x 0.1x 1.2x

Dividends 0 0 0 0 0

Other 0 0 5 0 0 ROE (Reported Profit / Av Equity) N/A -47% -15% -5% 3%

Financing Cashflow 8 34 91 101 207 ROIC N/A -24% -1% 0% 3%

Surplus / Defecit -6 7 4 40 0 ROACE N/A -15% -1% 0% 2%

Check FCF Yield -23% -16% -39% -27% -92%

BALANCE SHEET (A$mn)

Current Assets 7 13 11 52 52 DIVIDEND AND FRANKING

Non-Current Assets 8 52 144 266 476 Dividend (A¢/sh) 0 0 0 0 0

Total Assets 16 64 155 318 528 Payout ratio 0% 0% 0% 0% 0%

Current Liabilities 3 20 21 21 23 Franking Balance (A$mn) 0 0 0 0 0

Non-Current Liabilities 5 24 109 209 415

Total Liabilities 8 44 130 231 438

VALUATION Risked Unrisked

Net Assets 8 21 25 87 90 K1-Solar 0.14 0.14

Total Cash 4 11 11 52 52 K2-Solar 0.08 0.17

Total Debt 3 17 103 204 410 K2-Hydro 0.07 0.14

Net Debt -1 6 92 152 359 Developer Margin 0.11 0.23

TOTAL 0.40 0.67

PREMIUM/(DISCOUNT) 0.0

PRICE TARGET 0.40

Genex Power LimitedInitiation of Coverage

Speculative Buy Target Price A$0.40 | 12 December 2017 Utilities 2

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Table of Contents 1. Pumped up ............................................................................................................. 4

2. Valuation ................................................................................................................ 7

3. Funding ................................................................................................................ 12

4. Opportunities in the changing NEM ...................................................................... 13

5. Risks ..................................................................................................................... 14

6. Board and management ...................................................................................... 15

Appendix 1 – Pumped hydro .................................................................................... 16

Appendix 2 – The Kidston renewable energy hub .................................................... 19



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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



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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$400-600 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

Source: Company Reports, Canaccord Genuity

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http://www.afr.com/news/tesla-battery-boss-we-can-solve-sas-power-woes-in-100-days-20170308-gut8xh

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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 2030. 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

2020.

This move towards renewables is not just Australia-centric – worldwide generation

additions from solar and wind outpaced coal and gas in 2016. 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)


…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.

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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


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)

Asset Equity Net Capacity Risk Risked FCF to equity

% MW % A$mn A$ps

K1-Solar 100% 50 100% 39.6 0.14

GENERATION 50 39.6 0.14

K2-Solar 50% 135 50% 23.9 0.08

K2-Hydro 50% 125 50% 20.4 0.07

Developer Margin 50% 32.5 0.11

DEVELOPMENT ASSETS 260 76.7 0.27

Premium / (Discount) 0.00

PRICE OBJECTIVE 0.40



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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-2018.

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)


Facility size: $315 million


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)


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.



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Figure 7: Schematic of potential operating profile


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)


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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)

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%


Facility size: $231 million


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)


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

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Figure 11: Lifecycle/value creation for solar PV assets (Euros)

Source: Deloitte: A market approach to valuing solar PV assets, 2016



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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 sell-

down, 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




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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, low-

inertia 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 closures1

Source: AFR

1 - Hazelwood ceased operating on 29 March 2017



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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.



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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.



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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 motor-

generators were available. A seawater pumped hydro plant was first built in Japan in

1999.

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.



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%.



18

Figure 15: Characteristics of different energy storage technologies

Source: CSIRO, Canaccord Genuity

Parameter → Typical

life time

Power

density

Energy

density

Typical

discharge time

Recharge

time

Response

time

Operating

temperature

Self-

discharge

Critical

voltage/cell

Years Wkg-1 Whkg-1 °C %/day V

Technology ↓ (cycles) /kWm-3 /kWhm-3

Lead-acid 3–15 75– 30–50/75 min– h 8–16 h 5–10 ms –10 to 40 0.1–0.3 1.75

battery (2000) 300/90–

700

Advanced lead- 3–15 75– 30–50/75 8–16 h 5 ms –10 to 40 0.1–0.3 2

acid battery (3000) 300/90–

700

Nickel-cadmium 15–20 150– 45– s–h 1 h ms –40 to 45 0.2–0.6 1

battery (2500) 300/75– 80/<200

700

Lithium-ion 8–15 230– 100– min–h min–h 20 ms–s –10 to 50 0.1–0.3 3

battery(500-

340/1300–

10000

250/250–

620

6000)

Sodium sulfur 12–20 90– 150– s–h 9 h 1 ms 300 20 1.75–1.9

battery (>2000) 230/120– 240/<400

160

Sodium nickel 12–20 130– 125/150– min–h 6–8 h 100 ms 270 to 350 15 1.8–2.5

chloride battery (4000- 160/250– 200

4500) 270

Zinc bromide 5–10 50–150/1– 60–80/20– s–10h 4 h <1 ms 10 to 45 0–1 0.17–0.3

flow battery (300- 25 35

1500)

Vanadium redox 10–20 NA/0.5–2 75/20–35 s–10h min <1 ms 0 to 40 0–10 0.7–0.8

flow battery (13x103)

Flywheel > 20 400– 5–130/20– 15 s– <15 min < 4 ms–s 20 to 40 20–100 NA

(107) 1600/5000 80 15 min

Super/double- > 20 0.1–10 0.1– ms–1h s–min 8 ms –40 to 85 2–40 0.5

layer capacitors (5x105) /40000– 15/10–20

120000

Superconducting 20 2.6 10–75 ms–8 s NA < 100 ms < –200 10–15 NA

magnetic energy

storage(104–105) /0.006

Pumped hydro 50–100 NA/0.1–0.2 0.5– h–days 1 min–h s–min Ambient 0 NA

(>500) 1.5/0.2–2

Compressed air 25–40 NA/0.2–0.6 30–60/12 h–days min–h 1–15 min Ambient 0 NA

(underground) (No limit)



19

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 decision-

maker 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.

Figure 16: The Kidston renewable energy hub vision

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 17.



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.



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



22

Figure 19: Pumped Hydro site, showing old open pits from Kidston Gold mine




Appendix: Important DisclosuresAnalyst CertificationEach authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) therecommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent andobjective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoringanalyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to thespecific 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 ofCanaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communicationswith a subject company, public appearances and trading securities held by a research analyst account.Sector CoverageIndividuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoringanalysts of the report.

Investment RecommendationDate and time of first dissemination: December 12, 2017, 14:35 ETDate and time of production: December 12, 2017, 14:35 ETTarget Price / Valuation Methodology:Genex Power Limited - GNXWe 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 developermargin. We have elected this methodology over discounted cash flow analysis to better incorporate the potential funding outcomes foreach 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 - GNXEnergy policy risk: Australian energy policy has been extremely politicized over the last decade. Policy changes (both at a federal andstate level) have occurred on numerous occasions. While we are hopeful that the NEG can provide the certainty craved by industry thisoutcome is far from certain.Regulatory approval risk: Kidston is subject to a number of regulatory approvals which could slow the pace of development or evenresult 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 offtakeagreements 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, manageand store electricity (e.g., large-scale battery storage) may be more efficient and/or more cost-effective and could adversely impactGNX’s finances.Development risk: the construction of a large development in remote QLD carries both budget and schedule risks. We believe thecompany 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 asa 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 teamand 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 andexpertise. If one or more of these key personnel were to depart, it may be difficult to replace them adequately, in which case there couldbe 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 onsatisfactory terms, which could result in the Kidston Project not proceeding.



Distribution of Ratings:Global Stock Ratings (as of 12/12/17)Rating Coverage Universe IB Clients

# % %Buy 573 60.25% 40.49%Hold 263 27.66% 27.00%Sell 19 2.00% 10.53%Speculative Buy 96 10.09% 65.62%

951* 100.0%*Total includes stocks that are Under Review

Canaccord Genuity Ratings SystemBUY: 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 therelevant issuer.Risk QualifierSPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in thestock 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 periodmay be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx

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 thisperiod, 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 fromGenex Power Limited .Canaccord Genuity acts as corporate broker for Genex Power Limited and/or Canaccord Genuity or any of its affiliated companies mayhave 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 Bankingservices 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 notcontributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding theirpreparation, 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 responsibilityor liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports.



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Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

AUD0.40AUD0.35AUD0.30AUD0.25AUD0.20AUD0.15AUD0.10AUD0.05

Genex Power Limited Rating History as of 12/11/2017Genex Power Limited Rating History as of 12/11/2017

Closing Price Target Price

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

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