Seafarms’ Project Sea Dragon “cannot proceed in its current form,” company review finds

Darwin, Australia-based Seafarms Group’s AUD 1.45 billion (USD 1.1 billion, EUR 941 million) plan to develop up to 10,000 hectares of ponds in Legune Station, near Kununurra in Western Australia, to grow up to 180,000 metric tons of black tiger shrimp annually is not viable, according to a recently published company review of the project.

In November 2021, Seafarms Group’s newly appointed executive chairman and CEO, Mick McMahon, and CFO Ian Brannan initiated a review of the so-called Project Sea Dragon, which was scheduled to be built in several stages contingent upon the receipt of funding. The first phase of construction got underway in 2021, at an expected cost of USD 281 million (EUR 249 million), with the goal of achieving a first harvest by late 2023 and eventually producing 10,000 MT of prawns annually. However, McMahon ordered a pause in the project’s development until 2022 because it was “not considered feasible to finalize debt and equity funding arrangements before the end of the calendar year,” he said upon his appointment.

In an October 2021 update, Seafarms issued a new estimate for the first phase of the project of between AUD 370 million and AUD 410 million (USD 279 million and USD 310 million, EUR 256 million and EUR 283 million), with the increase due to “scope and design adjustments, final engineering design, and cost escalation pressures in the market.” The company said further equity funding and additional debt funding would be needed to complete the project’s first phase.

In 2018, the project attracted the interest of Tokyo, Japan-based conglomerate Nippon Suisan Kaisha (Nissui), which invested AUD 25 million (USD 18.9 million, EUR 17.3 million) for a 15 percent share of Seafarms Group. At the time Nissui said it was seeking “to secure a differentiated farmed prawn business base and products.”

“Through this equity participation, Nissui will market the black tiger prawn products from Project Sea Dragon exclusively in Japan, in the Australia, and New Zealand markets, on top of potential global distribution through the Nissui Global Links network. Nissui Group will also distribute in Japan and Oceania region approximately 2,000 tons per annum of black tiger and other prawns sourced from Seafarm Group’s existing Queensland prawn farming operations, including products from its complete farming cycle,” Nissui said in a May 2018 press release.

McMahon and Brannan’s review, released publicly at the company’s general shareholder meeting on 31 March, 2022, acknowledged the failure of Seafarms’ effort to raise AUD 150 million (USD 113 million, EUR 103 million) for the Sea Dragon project, which had been initiated in June 2021. It also found the business model relied upon by Seafarms – cost-effective 10-hectare ponds – are “unproven in Australia” and its current farming operations have “fundamentally underperformed.”

“Project Sea Dragon cannot proceed in its current form – there is no funding to proceed given failure of debt financing process,” it said. ”In any event, the project review recommends against proceeding with PSD in its current form – it will not generate acceptable financial returns, the existing scope cannot be completed for targeted costs or achieve target completion dates, and the project currently involves unacceptable risk.”

Even though the project’s first phase had already been scaled back to a 6,000-metric-ton capacity in 2021, the review recommended a further pullback, advocating instead for a pilot project.

“A farming pilot is being scoped, building on the existing partially constructed [one-hectare] ponds at Legune. However, it will take up to three years to re-scope, construct, and conduct a pilot with minimum infrastructure, revisit permits and licenses, complete pilot construction, stock, and operate the ponds and assess outcomes,” it said, adding that sufficient funding to complete the pilot, even with the extended timeline, was not available.

Even if the project proceeded, it would need to fundamentally shift its target market – grading and freezing its prawns on-site for export and reprocessing overseas, rather than targeting the domestic market with fresh and cooked shrimp, the review said.

“To deliver on its promise, PSD will need to be export-oriented, large-scale, high-quality, and low-cost, and the review has identified areas of the project that need to be modified to achieve this aim,” it said.

The review blamed the dire outlook of the project on higher-than-anticipated construction costs, partially as a result of shortages, labor issues, and inflation caused in part by the COVID-19 pandemic. The project’s remote location had also made the project more expensive and logistically challenging. Moreover, the company’s breeding, processing, and farming operations are all not internationally competitive, it found.

“Project Sea Dragon’s viability is almost entirely dependent on farming outperformance at Legune against existing operations and competitors, as almost all other economic factors mitigate against viability. For PSD to proceed in any form, farming outperformance will need to be demonstrated,” the report said. “Prawn aquaculture is a complex, integrated, agricultural supply chain and the combination of a new location/environment, unproven 10-hectare ponds, and lack of an existing competitive farming system makes for unacceptable risk without piloting and proving farming outperformance.”

The report sounded a more-positive note in its examination of Seafarms’ existing operations in Queensland, Australia. The company operates two main farming sites in Cardwell and Ingham, which combined produced 1,366 MT of black tiger prawns in the 12 months ending 30 June, 2021, according to Australia’s Financial Review, and sells products via a retail partnership with Woolworths.

“[The Queensland] operations will continue to supply fresh and frozen, cooked, high-quality product to domestic customers. There is strong domestic demand for quality product, supported by pressure on wild-caught fisheries and a renewed drive to localize supply chains and replace imports in a post-COVID, higher-risk world,” the report said. “Seafarms has a strong brand in Crystal Bay and long-term, supportive customer relationships. There is demand from end-consumers and retail customers for banana prawns as well as tiger prawns and Seafarms is well-placed competitively to supply banana prawns (in addition to tiger prawns).”

Nevertheless, Searfarm’s operational and financial performance has lagged, with the company’s volumes produced dropping by around 50 percent from its peak-production period, and with the firm generating losses in seven of the past eight years. The review recommended the company focus on improving its Queensland operations as its most-viable strategy, with investment to be focused on building scale, farming and breeding capability, and operational streamlining. Such investment could also theoretically support the eventual development of Project Sea Dragon “especially in respect of technology, systems, processes, and capability,” it found.

In the days since the announcement, Seafarms Group stock, which is traded on the Australian Stock Exchange, has dropped nearly 50 percent in value, from AUD 0.03 (USD 0.022, EUR 0.02) to AUD 0.018 (USD 0.015, EUR 0.013). In the preceeding months, several of the company’s senior executives had departed or shifted roles in the company, including former executive director and company secretary Harley Whitcombe and former executive director Chris Mitchell, who both stepped down in November 2021; and former executive chairman Ian Trahar, the company’s largest shareholder, who remains a non-executive director of the Seafarms Group and the chair of the board of CO2 Australia, which de-merged from the Seafarms Group in 2018. Additionally, former board member Paul Favretto, who had committed at least AUD 5 million (USD 3.7 million, EUR 3.4 million) in funding to Seafarms, did not run for reelection and left his position in January 2022.

At the shareholder meeting on 31 March, McMahon – who had brought an “air of optimism” to shareholders regarding the viability of Project Sea Dragon when he took the reins of the company in November 2021, according to the Australian Broadcasting Company – apologized.

"It's fair to say we were shocked at what we found when we came into the business,” McMahon said. "I feel significant responsibility to shareholders who have invested their money into this company and especially those who have done so since I came into the business. To them I apologise for what we've had to present today."

Photo courtesy of Seafarms Group