Eco Investor June 2016

Pre-Revenue Securities

Capital Raising for Kalina Technology

Kalina Power is raising $5 million in the next step to recapitalize and rejuvenate the company. The capital is to strengthen its balance sheet and help it implement its business plan to commercialize its Kalina Cycle technology that uses waste heat from large industrial plants to produce more energy efficient and less greenhouse gas emitting power.

While it sounds like the sort of technology that should find a ready market in these carbon constrained times, some technologies take a lot of time and a lot of money to commercialize; and after 30 years and $125 million the Kalina Cycle is well in that camp. The technology was invented by Alexander Kalina and an early related US patent application was filed in 1979. Since then and many patents later 15 power plants have been developed around the world. But the commercialization path has been far from smooth.

In the early 1990s the commercialization vehicle was US company Exergy Inc, which was formed by Dr Kalina and in which then ASX listed Cape Range held a 15 per cent interest. In 2002 ASX listed Wasabi Energy made small loans to Exergy and by 2006 it had to impair $2 million in loans and interest. In 2005 Wasabi also acquired a 46 per cent stake in Exergy for US$0.4 million, and in 2011 it moved to full ownership.

But in 2014 a major restructure and recapitalization all but wiped out the existing shareholders with a 1 for 860 share consolidation. Wasabi Energy became Enhanced Systems Technologies and after writedowns made a loss of $31 million. The restructure continued and last year among other moves the company changed its name to Kalina Power, appointed new executive directors and management, simplified its structure and balance sheet, and set a new and cleaner path to commercialization.

This capital raising is the next step. But after such a dramatic history, investors will be asking what positives the company has and if this capital raising will be different. Fortunately, there are reasons for hope.

A key one is the technology. The Kalina Cycle is used with a modified steam Rankine Cycle configuration and, depending on the application, it is promoted as 10 to 50 per cent more efficient than Rankine Cycle and 20 to 40 per cent more efficient than Organic Rankine Cycle plants.

It has other benefits too. It uses an ammonia-water mixture as a working fluid. This can boil at different temperatures and its greatest efficiency is at low heat ranges below 260oC. The fluid improves a system's thermodynamic efficiency and provides more operating flexibility. The ammonia is not ozone depleting, nor explosive, and is in wide use around the world.

Environmentally, the waste to heat power can make a useful energy efficiency gain. For example, a 4 megawatt plant that displaces coal fired electricity can offset upwards of 19,000 tonnes per year of carbon dioxide.

Benefits of the Kalina Cycle Technology.

Another reason for hope is that the new directors - Ross MacLachlan, Tim Horgan and Jeffry Myers - look very experienced.

Mr MacLachlan is an executive director and chief executive officer. He has over 30 years of experience as an energy industry executive and venture capital investor including in technology development and commercialization, corporate finance and waste to heat projects.

Tim Horgan, also an executive director, has 20 years of experience as a corporate lawyer and business executive in Europe, Africa, Asia and Australia, and as a founder, director and advisor to mining and energy companies.

Jeffry Myers, who will join the board as a non-executive director, has 30 years of experience in the energy sector including the development, financing, execution and operations of over three gigawatts of mid to large power projects.

Some serious technology commercialization ability and power plant development ability are what the Kalina technology has always needed, and the new directors look to be as experienced and to have as long a track record as investors could ask for.

Messrs MacLachlan and Horgan came on board last year and the appointment of Mr Myers will be effective when the capital raising is completed.

Another plus is that the waste heat market is huge - cement, glass, petrochemical, steel and thermal power plants among them. On the renewable energy side, the technology can be used with geothermal, ocean thermal and solar thermal plants.

The 15 plants around the world that use the technology include petrochemical, steel and geothermal plants. Kalina says these have proven the reliability of the technology over a long period of time, and give the company experience across the whole project cycle of engineering, design, procurement and construction.

Kalina Cycle plants take at least four to six months of planning and 12 to 18 months to build, and Kalina Power says the capital costs and operating costs for its plants are competitive.

Mr MacLachlan told Eco Investor that growing the business is about revenue and achieving scale, and so another change is in the company's business model. In the past the company licenced its technology and the licensee may or may not have used Kalina's engineering team. Under Mr MacLachlan, Kalina is taking a much more active role, better selecting projects and ensuring that projects have proper plans and engineering partners. To do this Kalina is developing its relationships and partnering with major international engineering firms that have the capability to deliver projects for its clients.

For example, its partner in Japan has built three Kalina projects over eight to twelve years and wants to do new projects in Indonesia and Philippines. In China, its partner Sinopec Engineering has the capability to rollout projects for other Kalina clients.

Kalina's own engineering team will grow from seven to eleven or twelve and comprise top level professionals who can oversee projects.

Likewise on the finance side, as Kalina is a small company the new business model is to use clients' and other people's money to fund projects. This commercialization strategy means Kalina can provide turnkey licensing without assuming the risks of developing its own power plants, and can deliver projects to clients without needing substantial capital.

As well as annual royalties from licensing Kalina Cycle projects, revenue will come from turnkey fees, engineering and design services, and upfront fees.

Kalina's directors believe the big opportunity is in China, where a 16 per cent energy efficiency gain is mandated for large industrial plants. Kalina Power is working with Chinese company China Petroleum & Chemical Corp (Sinopec), which is investing in technologies including the Kalina Cycle to achieve the target. Kalina Power is restructuring the commercial terms and management for the construction of the 4 MW Hainan project at Sinopec's petrochemical plant at Hainan Island.

Hainan is Kalina's main project and directors believe that success with Sinopec will be a company making event. On completion of the works Kalina expects to receive $500,000 in engineering fees. Sinopec has indicated that successful completion of Hainan will lead to a further 100 plants, and Kalina anticipates that on future plants it will earn a US$1 million royalty and $500,000 in engineering fees.

But a research report by Independent Investment Research says that if additional projects are not awarded, Kalina's near term revenue prospects will be significantly impaired.

So the Hainan project is also key to the company's near term growth and cashflow. Formal documentation with Sinopec is expected soon. Mr MacLachlan said the project is 80 per cent complete and directors are confident it can be completed in the September quarter.

If all goes well the engineering team will be self-financing within months based on the Hainan plants and development of two other near term projects. Directors anticipate becoming cash flow positive against all corporate costs within 18 months.

There are opportunities outside China where similar government initiatives and commercial demand drivers are in place. In Japan Kalina has submitted a design proposal for a 0.5 MW plant on a large hot spring and this is supported by a local conglomerate and the Japanese government. Kalina Power estimates 29,000 MW of generating capacity will be installed in Asia between 2014-2021 that is suitable for use with the Kalina Cycle.

Kalina is also active on business development in the USA, Germany, Central America, Iceland and Turkey and it anticipates being able to announce further company transformative projects in the coming year. The prospectus says the company is also looking at the oil sands sector in western Canada, where the oil sand operators want to reduce their emissions and energy consumption. But the sector is controversial.

Overall, much hangs off the capital raising. Chairman John Byrne said the raising is underwritten up to $3.4 million and the directors expect the offer to raise $5 million. But the underwriting is conditional on $5 million being raised. If that is not done, there is material uncertainty about whether the company will be able to continue as a going concern.

This was disclosed as the $2.5 million of the underwriting is through a convertible note from major shareholder, Harrington Global. The note requires Kalina to raise another $2.5 million for conversion otherwise it converts to a loan due in January 2017. Mr MacLachlan said directors are confident of raising the $5 million but if there is a shortfall there are options to raise the additional sums including placements.

If all goes well, the $5 million will be used to repay $2.5 million to Harrington. Another $1 million will be invested in subsidiary New Energy Asia, and $1.1 million will help to give Kalina working capital of around $3.5 million.

The one for two entitlement offer is at 7.5 cents per share. For every two new shares, investors will get an option exercisable at 7.5 cents by June 2017. The offer closes on 9 June. Kalina is a micro cap. If the offer is successful, net assets will only rise from $4.7 to $8.6 million.

Looking forward, key milestones over the next 12 months will be restructuring the contract for the completion of the Sinopec Hainan plant, appointing industry leading directors and recruiting more key personnel, negotiations with engineering, procurement and construction partners, agreements to roll-out additional plants in China and securing finance for these, and winning project funding for other international projects.

The prospectus says there is a risk that another capital raising may be needed but the directors said that while it is a risk factor it is not anticipated. They expect to be able to raise capital at the project level and will source debt and government grants as required. There would need to be either a significant adverse event such as fewer projects or project delays, or a significant positive event such as many additional projects for the company to contemplate an additional capital raising.

Mr MacLachlan said he took on the job as he believes Kalina Power is a big opportunity and can grow to significant scale. The company now has a clear plan to achieve that. Meanwhile Kalina Power is a pre-revenue business that will be speculative for some time to come. So investors can expect some share price pressure if there are delays in meeting milestones. (ASX: KPO)





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