I have seen a business case for pumped hydro in SA which had similar power output (225 MW 6-8 hours) which had a significantly higher capital cost (about $480m compared with $220m for HGO). This other project claimed it could achieve an after tax irr of 8% to 12% despite the much higher capital cost. The other project was higher risk - 3km pipelines, 5 year implementation, start from scratch, ocean water (unproven technology).
In theory if you believe that the other business case stacked up HGO could build the project for $220m and sell it for $480m ! Obviously a truckload of assumptions and different risks in terms of making it happen but could be very lucrative !
I think some of the obvious risks are:
- HGO has no expertise in this area
- Has any large construction project ever been delivered in line with original budget
- what is the true market value of a completed pump hydro project ?
- Change of government in SA might mean less support for renewable energy
- How does all of these ponds and construction affect the ability to conduct underground operations and access all available resource ?
- HGO burns cash as it keeps the project going
Potentially loads of upside but lots of assumptions and risks. Ideally they sell off the project and get a bundle of cash without taking on the ongoing risk.
HGO Price at posting:
8.9¢ Sentiment: Buy Disclosure: Held
