Swimming in prawns

Today’s CEO is Chris Mitchell, the CEO of Seafarms Group which is a prawn company that’s developing a massive prawn project in Northern Territory. It’s currently got prawn farms in Queensland and is producing quite a few thousand tonnes there, but the project in Northern Territory is the one that the company’s really all about.  The market cap is $100 million dollars.  

They reckon they’re going to build three farms in the Northern Territory which will produce 15,000 tonnes of prawns and the current price is $15,000 dollars a ton, so 15,000 times 15,000 is more than $200 million dollars in revenue and the margin is going to be, he reckons, 30%, so we’re talking quite a lot of money eventually. They’re a fair way off though.  Mind you, they’ve just announced an offtake agreement and investment from a Japanese firm, Nissui, the big seafood company which has bought 15% of the business and invested $25 million dollars in total at 10 cents a share. 

The shares are selling at 7.8 cents, so still below what Nissui is paying, and the share price did jump quite a lot when that was announced in May. In fact, it jumped before the announcement which is what I started the interview with Chris Mitchell about. 

Here’s Chris Mitchell, CEO of Seafarms Group. 

Chris, before we get onto the business and your projects, I just wanted to talk about an interesting sequence of events in May. 

Obviously, you made the big announcement of the offtake agreement and investment from the Japanese seafoods business, Nissui, and that was on the 23^rd, but the stock started moving on the 15^th of May and actually jumped quite a lot a few days before that.  I suppose that indicates that it got out, does it?

I don’t think so at all.  We had a look into that very, very carefully and it was one of those small random events.  It’s a huge movement in the stock price, relatively small trades can actually move it and this is what occurred in this time. 

I mean, the thing jumped about 15-20% in not very long and it just seemed to me…

You can always put in some sort of conspiracy theory but there is randomness in the market and this is one of those instances.

Okay, all right.

We did look at it in some detail and we looked at who came in and out, there were people we hadn’t seen, there hadn’t been large volumes and so it was a blip that moved as a result of that, up and down.

That was a well-timed investment, shall we say then, because they were buying in at 6.6 cents and the Mitsui investment was 10 cents for 15% of the business.

That’s exactly right.

Not Mitsui, Nissui.

That’s right, Nissui bought at 10 cents, the share price didn’t quite hit that much so Nissui’s still buying at a premium.

And it’s still not there, is it?  It’s still just under 8 cents, so obviously people can buy in below what Nissui paid.

That’s right, and Nissui said to us and continue to say that they regard this as a strategic investment, they see considerable upside over the longer term and they’re happy with what they’ve done.  Also considering that the offtake agreements I think are quite important to them.

Yes of course.  Okay, well just talking about the business then, it seems to me there’s obviously two things.  You’ve got the operating prawn farms in Queensland where you’re producing prawns and selling them and you’ve got the big project, Sea Dragon in Northern Territory, which is in a sense what the business is all about.  But can we just focus for a moment on the Queensland operation.  How many prawns are you producing there and how much money are you making there? 

I think we’re about 1,700 tonnes this year.  We’re not quite exactly on the numbers at the moment because of course some of the prawns remain in the pond and we’ve got to do fair value adjustments and we’ll be reporting our numbers to market probably on the 16^th of July I think, as we’re trying to reconcile back to that important 30^th of June date.

I’m just looking at the cash flow statements from the half-yearly – I’m just trying to get it up now – but the half-year revenue from Queensland was quite a lot, wasn’t it?  It was $6 million or so?  

Yes.  The thing is, we reported to the market that we had challenges with the Christmas crop, this last half-year has gone a lot better.   It’s a very seasonal kind of market.  It’s very typically you get a lot of your sales through the Christmas period, it then goes cooler.  You tend to keep a little bit of inventory ready for the Christmas crop again and we’re right in the middle of that cycle now.

I suppose what I’m trying to get to is a sense of how much of the $100 million or so market cap that you’ve currently got, how much of that is based on the future project with project Sea Dragon and how much of that comes about from revenue that you’re making in Queensland now?

A fair amount is based on current revenues, remembering it’s a complex company.  We also have CO2 Australia which will demerge and that adds positive revenues to the company overall.  I don’t know how investors are exactly looking at it.  This company overall I think has got $30 million of revenues or thereabouts and that will increase as we continue to improve our operating systems, our farming practices and as project Sea Dragon becomes near its reality.

What are the profits from the prawns and the CO2 that you’re making?

Well, I said we’ll report that on the 16^th of July – we can’t do it now, Alan.

What about the last time you reported?  I’m not looking for a scoop but just the last time you reported?

We actually reported a loss last time again as a result of that Christmas crop which didn’t go as expected, so we’ve caught up.

Okay, it’s a bit difficult to know then obviously to what extent the $100 million is based on – what you’re paying in a sense for the option on project Sea Dragon, it’s a bit hard to tell.

That’s right, and I wouldn’t like to guess what goes through the minds of investors.

No.  Also, tell us about project Sea Dragon.  I don’t think we’ve had you on the Constant Investor before, so perhaps we better describe it in basic terms what you’re proposing?

Sure.  It’s a very significant project that integrates prawn production across the Northern Australia.  It takes animals from the wild, it puts them through disease screening processes to build the domesticated population.  It moves them to breeding facilities around about Darwin, then to grow out which is at Legune Station near the Northern Territory/Western Australian border, and then onto processing at the town of Kununurra.  It’s a stepped project which will go from one farm of about 400 hectares through to ultimately it has a blue sky of 27 farms.  First stage of the project has actually been approved and that’s for the first three farms. 

How big are those farms, how many hectares?

They’re each either 360 or 400 hectares, so that consists of 36 or 40 ponds each of 10 hectares – a real upswing in prawn production in Australia.

Yeah, I mean you already are if not the largest, one of the largest prawn producers, aren’t you?

That’s right, yes, we are largest prawn producer.

You are the largest.  What’s the total current production of prawns in Australia and how much of an increase will project Sea Dragon represent?

Grown prawns, roughly I think it’s about 3,500 tonnes.  It’s a bit variable of course with Southeast Queensland not producing at the moment.  The first farm is going to be of the order of 4,000 tonnes per year and up to 15,000 tonnes per year from those first three farms, so it is a massive increase in Australia’s prawn production. 

How does it sit within the global production, what’s the global production and demand for prawns? 

The global production is massive, it’s like 30 million tonnes of prawns.  We’re producing black tiger prawns which are the premium species and grade.  There continues to be incredible demand for seafood generally and prawns in particular.  Again, what Australia has to offer is this premium position in the market which is species, size and our food safety record and we’ve seen significant traction in all of those things.

Just on food safety, there was an interesting Four Corners the other night about quarantine and talking about the – I think it’s ‘white spot’ disease that was attacking prawns a while ago?

That’s right.

Tell us about that.  Did that affect you?

No, no, we’re thousands of kilometres away from that, so it hasn’t touched us at all.  Again, that’s one of the main reasons for project Sea Dragon.  We put the facilities well away from any areas where there are currently pathogens or disease.  We’ve identified particular facilities and separated them, so if something does get in the system as a whole doesn’t go down.  North Australia really is the ideal location for the project because not only is the climate suitable, but it’s isolations and clean waters mitigate these biosecurity risks.

What do you get for a ton of prawns these days?

$15 dollars a kilo of order.  Many, many size grades and quality grades within the prawn market, so $15 dollars a kilo is a fair sort of rough average.

And that applies to the black tiger prawns that you’ll be producing?

Yeah, that’s right.  Remembering there are different size grades and there are different quality grades within all of that.

And from what you’ve now decided to build in the Northern Territory, you’ll be producing 15,000 tonnes or is it 4,000 is the first stage?

Initially 4,000 with the first farm, then building up to the three farms.

15,000 times $1,500 a ton? 

That’s right - $15,000 a ton.

$15,000 a ton, I got that wrong, add a naught!  15,000 times 15,000, goodness me, that’s quite a lot!

It is quite a lot.

Will we become in some ways the Saudi Arabia of prawns?

No, Australia as usual will be an important exporter in a niche part of the market with its high quality, high value and high food security.  Again, prawns are the second most traded seafood product in the world producing right across tropical countries.  We’ve designed this very carefully so we hit that sweet spot which Australia’s really good at. 

And tell us about the Nissui deal that was done, was that a long time in negotiating that? 

Yes it was.

How did you go about identifying them…?

It was a long time in negotiation.  I think when foreign investors look at Australia they’re often concerned about whether or not there’ll be regulatory approvals in place.  I think Nissui were confident ultimately that the regulatory approvals are in place and that includes the key environmental approvals, it includes us having negotiated an indigenous land use agreement with the native title holders and going a long way down the path in fact to the operating approvals even though we haven’t built anything yet.  Really, the approvals were very important to Nissui because we see lots of significant projects in Australia which have difficulty with them.  We’re very pleased to have got through that part.  I think we’re pleased that there is the offtake component of this because I think as far as domestic investors were concerned they were slightly concerned about whether we could open up those export channels and very clearly now we’ve not only demonstrated those export channels are open but there is significant demand for the product.  In fact, as part of this agreement they’ll be taking some of the Queensland product immediately. 

That’s right, I saw that.  As discussed, they’re buying 15% of the company for 10 cents a share, so you’re raising $25 million dollars from them?

That’s right.

How far will that get you in terms of developing the three farms?

It’s really just the starting point.  We’re in the financing mode now.  We’re clearly talking to both the potential equity investors but also debt financiers and that’s the process we’re deeply engaged in at the moment.

Do you have an idea of how much dilution building those three farms will involve for shareholders?

Not at this stage because we’re still working through with some of the debt financiers how far we can get on that school.

Right.  Perhaps take us through the offtake agreement with Nissui, how’s that going to work?

Essentially they’re taking 15% I think it is of the Queensland product and market based crisis.  We already have a local distributor, we’ll be working with Nissui’s half-owned company here which is called Sealord, as we do that.  Sealord already operate in Australia, they’re owned actually half by the Maori in New Zealand, so that’s quite satisfactory from our point of view.  Then we have a marketing committee which will begin the process of improving the brand position as it goes forward into Japan, ready for project Sea Dragon.

According to the announcement, they have the right and obligation to take between 10-20% of the PSD, the Project Sea Dragon annual production, percentage determined by Nissui’s direct and indirect shareholdings in PSD?

That’s right.

I take it they are going to have a direct shareholding in the project as well as a shareholding in you?

At the moment they’ve got a shareholding in us, it’s open to them to have a direct shareholding in the project.  But they’re wanting a share within us because of course at the moment that 15% of production comes from Sea Farms Queensland as opposed to Project Sea Dragon.  

I see.  Will they take a direct shareholding in PSD?

I can’t speak for Nissui.  They may or they may continue to choose to hold the holding company level.

But it is open to them to do that?

That’s right.

And where it says Nissui has the right and obligation, what does that mean?  I mean, can you have both the right and obligation?  Do they have an obligation to take at least 10% is that what that means?

Yes, that’s right, it means that they have to take at least 10% and then they’ve got other rights to increase depending on whatever that marketing committee is saying.

Right.  What’s the kind of marketing plan for the rest of the product, the other 80 or 90%?

We would expect to see further offtake agreements entered into over due course.  We don’t want all of the product to be subject to offtake considering that there will be opportunities to sell product at very attractive prices.  It’s got some volatility, this market, and you don’t want to lock everything in on purely volume and price.

Is there a kind of spot market for prawns?  How does it work?

Yeah it is a spot market.  It’s not particularly transparent because China is a very major both producer and consumer and prawns can go through quite a few transformations in the market.  Sometimes if you see prawn stick in the supermarket, those prawn sticks may have been thawed and frozen up to 6 times depending on the processing it’s been through.   In fact, prawns will change hands when they’re on the high seas.

And is there a futures market as well?

No, there’s not.

So it doesn’t give you the chance therefore to hedge in some way, does it?

Not in that case, no.  As I said, even though it’s a massively traded set of commodities, there are lots of different quality grades, different price points, different species.  It’s not a single simple commodity like oil or gas.

What sort of profit margin do you get from prawns?

You can get 30-50%, depending of course on the nature of the crop, where you’re growing and all those sort of things.  There are a lot of variables of course.

What do you think the profit margin in project Sea Dragon is going to end up being?

We’ll go for at least 30%.

Right.  15,000 times 15,000 is over $200 million.

Yep.

And so we’re talking 30% of that?

That’s the objective.

Right.  Well then that’s a fine objective, you’ll be making your current market cap in profit every year.

Yes, we’re a relatively small company, it’s a very significant project and we’ve actually come a very long way in Australian terms in a very short time.

Tell us a bit about the background, when did you start developing the project and how did it come up?

We started looking at this, I think about five years ago in a very preliminary way.  We were actually looking at the best use of water resources in Northern Australia, which seems to be a very sideways approach to it but you see a lot of opportunities across the north of Australia and when you look at the natural resource base it turns out that prawn aquaculture is probably the one of the most potentially profitable enterprises for the use of natural resources.  So, we began to investigate that and here we are today. 

Do you look at it in terms of yield per megalitre of water?

We look at it in terms of yield per hectare.  The fresh water comes in to balance out evaporation in that part of the world.  But if you look at it in terms of value generated per megalitre of water it’s the second highest use of fresh water with the exception of gold mining.

And what are the next milestones that investors should be looking for with the project?  Obviously as you said in the announcement about Nissui, that was a company transforming announcement.  Are there likely to be more of those along the way or what? 

As I said, we’ll update everyone on the 16^th of July, we’re now in the financing process and as usual we’ll keep people up to date when and if there is something  to announce.

Very good.  Well we’ll look forward to the 16^th July then.

Okay.

Thanks Chris.

Thanks very much, Alan.

That was Chris Mitchell, the CEO of Seafarms Group.