Dr Chris Mitchell is the chief executive of Seafarms.
Seafarms is a prawn breeder with operations in Queensland and the Northern Territory. I spoke to Chris to find out more about the company and its plans for the future.
First things first, Chris, why don’t you tell us a little bit about Seafarms, how the company was formed and how long you have been around for?
Seafarms is, as you said, Australia’s largest producer of farmed prawns. We have been in the prawn business since about 2013-2014 when we took over the existing operations in Queensland. We have had an objective from the very start to really develop Australia’s prawn industry, being an artisanal industry – much potential but it was really still all small family held farms and we considered that with global food supply inevitably going to be constrained over the coming decades the importance of protein, key global food, that prawn agriculture was a great opportunity for Australia that had not been captured. We have been working on our Project Sea Dragon for a number of years now and we have been using our Queensland operations as a pilot and test bed for this large project.
Sure. How does your production method kind of differ compared to say wild prawns or the other methods of farming prawns? Are there many advantages to the way you’re doing it at the moment?
Yeah. A wild catcher is really just literally going out fishing, so you get whatever you get when you cast a net and that occurs in Australia’s Northern Prawn Fishery so you’ve got a very unpredictable source of supply and unpredictable quality. Prawn farming is a massive industry globally, typically prawns are grown out in farm ponds. Now, around the world you can have very intensive agriculture which now is beginning to move indoors to some extent, or you can have much more expensive aquaculture. Most of the prawns around the world are white shrimp, Pacific white shrimp or Vannamei, various names. They’re what’s typically seen in the supermarkets here. They’re a commodity product.
We know black tiger prawns are a much nicer prawn, it’s the difference between say chicken and turkey, although they’re still prawns black tiger prawns are much nicer. They’re suitable to be grown in Australia and what we do is we are continuing to refine the culture system. Unlike other forms of seafood you can actually close off the prawn cycle. We take wild group stock in, that’s the adult pairs, and we breed from them in a hatchery and then we take them through and grow them out in ponds. That’s the basic process that’s used now but as we go to Project Sea Dragon we will completely close that loop. We will have what’s known as a domesticated population of animals so we don’t need to go to the wild at all. We will take those through to brood stock, then to hatchery and then grow out and into a processing plant. We integrate and close the production cycle.
Sure. It sounds like it’s going to be a massive project, based on what I read it was probably 100 times bigger that what you’re already doing at the moment, is that about right?
That’s right, but you step it out step by step by step. The first step that we’re in the process of commencing early works prior to financial close is for a farm that will have about 360 hectares of production, his is roughly about twice the size of what we currently have give or take. We’re also putting in place upgrades to our facility at Exmouth where we produce what are called specific pathogen free animals, that’s where we test them for viruses and other diseases. We have started to break ground at a place called Bynoe Harbor which will be a first step hatchery but also a brood stock maturation facility and we have conducted and finished some very early works at the grow-out centre called Legune Station.
I imagine the process of setting up a massive project like this if you’re building it out that you’d need a lot of approvals and there’d be a lot of costs involved in actually bringing the project to fruition. Maybe you can just talk us through exactly what’s involved or what you’ve had to do so far and what you see having to happen ahead of you before you’ll actually be consistently producing prawns from these projects.
The first step in any project of course is to gain the approvals for it. In Australia approvals are more or less continuous so even when you’re in production of course you need to maintain your operating approvals. We have all the approvals really required to start construction of a project so that means we have the main environmental approvals for all the sites, we also have an indigenous land use agreement at Legune station which is a multi-decade agreement with the National Native Title holders and the Northern Land Council. That agreement is in effect operational now and we have planning and development approval for the processing plant and the works approval for the processing plant. We’re able to start construction today subject to finance.
The company has invested of the order of $100 million to get to this point. That includes acquisition of Queensland facilities, as I said, to be a pilot project or a test bed for some of our concepts. It includes gaining all the approvals and it keeps keeping those approvals live so there’s a substantial undertaking but we are ready to go subject to finance.
Does the company have a preference in terms of the type of finance it will be seeking?
It’s a combination of equity and debt as you might expect.
Does the company have some idea about how much it would cost to build out say just the first stage of a project like this?
We have a very good idea. We’ve done a full feasibility study and we’ve done very significant market testing on the costs, obviously the detail of that is between ourselves, equity players as they may arise and debt funders or financiers. Again it is a little bit in that of course as we begin to build out some of these facilities piece by piece what’s required to complete becomes less over time.
Okay, so you can’t kind of divulge at this stage what the initial cost might be to put these projects into place or anything?
We’re very happy to keep that confidential between our potential financiers and other participants who might want to come on board.
Sure. I can understand why, maybe for commercial reasons or something like that so fair enough. In terms of your customers when you’re selling the actual prawns themselves have you kind of forward sold a lot of the production from these facilities and how many different customers do you have?
In Australia we’re fundamentally a domestic producer so customers are the major mass merchants, Coles, Woolworths, Costco, etcetera. We also go into the trade food service, etcetera. We expect to be able to grow those markets over time. We also have a very significant strategic partner, Nippon Suisan Kaisha, they have taken 14.99% of the company. They’re the world’s second largest seafood company and they have an offtake with us of about 15% and we are negotiating other offtake agreements.
Those off-take agreements, are they are certain margin above spot price or how do they kind of work?
They’re generally volume based. In the global prawn market these offtake agreements are very special, most of the global prawn market – prawns or shrimp as they’re known internationally, they’re actually the second most traded seafood commodity but to date it’s all been done on the spot. The fact that we have managed to secure offtake agreements and we’re doing more is actually very unusual if not unique, I think it shows some of the strength of what we’re putting forward to the market.
In terms of the pricing is there a certain percentage above the cost or how do you kind of work out the pricing of these contracts?
It’s benchmarked against food and pricing parameters for black tiger prawns. The market doesn’t have kind of referenced pricing in the same way that you might get for some of the hard commodities, it works a little bit differently and that’s not uncommon in the food sector. Black tiger prawns generally have a price that’s above the white shrimp or the Vannamei pricing but the other thing is it is complex because you’ve got a whole bunch of different size categories so larger shrimp or larger prawns attract a higher price than smaller ones obviously. There’s quite a set of complex formula and agreements, it’s too much to swallow in one hit.
I suppose the main thing is that you’ve got customers in place already to take the prawns off your hands at some point so that’s no worries.
Correct.
In terms of the contracts as well though do you have any idea of how long they run for and is it guaranteeing minimum purchases?
Generally, they tend to be volume based and they run for a number of years.
In terms of your competitors are there any precedents for these kinds of projects or any kind of benchmark that you’re looking to where this has been done somewhere in the world before?
As I said prawn farming around the world is actually a massive industry, it’s the second largest seafood commodity on a trade basis around the world and there are thousands of hectares under production around the world. What is different about this proposition is it is in a developed country. Mostly around the world we’re talking about tropical countries and nearly all tropical countries are developing or newly developed countries. Globally prawn farming is not so much under pressure but it’s fully occupied. It’s very difficult to do what they call horizontal expansion or find new geography because a lot of mangrove areas historically have been cleared and many of the best sites are captured. Australia offers a unique opportunity and we have really designed the system for Australian conditions.
As I said earlier some prawn farms are very large with very large ponds, relatively low intensive stocking and others are very small with very high intensity. We’re planning 10 hectare ponds with what I’d call intermediate yields and we have shown that this can work extremely well in Australia.
In terms of any foreign listed competitors or anything that if we wanted to take a look at those is there any around that you can think of?
I can’t remember CP is listed, Charoen Pokphand. Again, they’re a little bit different because many of those have actually started out as food companies or hatchery companies and then expanded along the value chain. We’re unusual in that we have taken an approach to do an integrated operation from the start and this is fairly uncommon. If you’re really trying to benchmark I think the best thing to try and do is understand what happened to salmon. I suppose a couple of decades ago salmon was basically found in Scottish streams and in Canada and the salmon aquaculture industry was just starting. They have industrialised the production of salmon so you can see what’s happened right around the world as breeding, technology, capital and knowhow have all come into place to knock down the price points of salmon and to expand the industry enormously.
You mentioned that you’re looking to build out 360 hectares so it’s approximately double what you already have in place what are the ongoing costs of maintaining the prawns? I imagine you probably have some food and there’s some power costs and you’ve got to make sure that there are all health and things like that. How many prawns can you actually create each year from that sort of sized property?
It depends on the way you. Go to costs first, there are fundamentally three classes of costs and that’s feed, power and people. You can see how efficient the prawn farm is by the so called feed conversion ratio. Typically a good feed conversion ratio is about 1.5 so that means you’re putting 1.5 times the amount of food in for the mass or the way the prawns get out. Power comes into it because you need to aerate the water in the ponds and that requires use of paddlewheels or some similar kind of technology and the reason why you need to aerate the water is of course prawns respire and so they need to have sufficient oxygen and when you’re growing them more intensively than occurs in the wild you need to make sure that you’ve done that.
Of course you need to make sure that, as you say, the prawns are healthy and they need to be fed but you also need to have harvesting crews to bring them back out of the water and then processing people in the processing plant. They’re the main costs and I have lost track of the second part of the question.
The second part I suppose is just trying to work out how many prawns you can grow, say over the course of a year.
Okay. In this first step of the project we’re targeting about 5,000 tonnes of prawns a year so again one of the wonderful things about this business is as you begin to develop your genetics or selectively breed the prawns you can increased their growth rate which means that you may start out doing perhaps 1.7 or 2 crops a year but as that process occurs over a number of years you can then begin to reduce the length of each crop and grow more prawns out accordingly. This can be a relatively rapid process because you’re not dealing with beef which have a long time cycle. The generation time of prawns to do this breeding is just a bit over a year and the harvest period or cropping period is about half a year, about 140 to 145 days depending on when you’re doing it and how big you want the prawns to grow.
It sounds like the sky is the limit for the size of our prawns, soon maybe we will get some pretty large prawns coming out by the sounds of things.
That’s right. We’re aiming to actually grow larger prawns than have been typically seen in the market, up to 40 to 45 grams, but like any other animal you’ve got a size distribution so they don’t all come out the same size so of course you’re dealing with that size range which is what you would normally expect with any sort of animal.
5,000 tonnes a year, say you get to that achievement, what would that be worth in terms of revenue roughly?
Let’s do 5,000 tonnes a year times about 15 US, that’s of the order of magnitude, so you’re looking at $75 million.
That would be a standard kind of target roughly.
Yeah, I’d say that as a rough approximation. One of the things about it is it does depend on the quality and the size so it is at this stage worth doing a finger in the air type arrangement rather than trying to be too precise before you’ve actually started the whole enterprise in that way.
Any idea around the types of gross margins that you’d be earning at that level?
You’re targeting towards 50%.
That’s before any of your fixed costs or anything like that I guess.
Yeah.
Okay, if all goes according to plan you should hopefully be a pretty profitable enterprise.
That’s right, it takes about two dry seasons to build these facilities out.
Yeah, so you imagine that once you’ve got the financing in place for the project it should take about two years to build it out.
It takes two dry seasons, we’re building in Northern Australia so it depends on us being able to hit the ground for construction sort of April/May and making full use of those dry seasons. Remember we are building in Northern Australia, it has that very strong seasonal cycle that makes construction during the wet somewhat challenging. The great thing about prawn aquaculture in that part of the world is it can go all year and that’s quite different from any of the other enterprises which have to slow down because of the wet.
Cheers for your time, Chris, thanks for coming on.
Okay, thanks a lot. Bye.
That was Dr Chris Mitchell, the CEO of Seafarms.
