Seafarms is a prawn farming business currently producing 1,800 tonnes of prawns (mainly Tiger) out of QLD. The company has a vision to establish one of the world’s largest aquaculture operations in the NT; Project Sea Dragon (PSD). PSD is estimated to have a capital cost of US$1.5 billion to reach production of 150,000 tonnes of black tiger prawns. 

Big visions have long and winding journeys, however the following give some comfort that success is possible:

• ‘Major Project Status’ has been awarded by the NT Government (putting it among big name projects such as Bonaparte Gas and Prelude FLNG)
• The NT is investing $56 million in roadworks relating to the project (https://business.nt.gov.au/publications/publications/business-bulletins/april-to-june-2019/business-bulletin-16-may-2019)
• Global seafood supplier, Nippon Suisan Kaisha, has a 15% cornerstone investment in Seafarms guaranteeing offtake rights and recently participated in a raising taking its total investment to ~$28 million
• The CSIRO and Australian universities are working with Seafarms on selective breeding programs to reduce risk of disease and improve growth rates (https://www.jcu.edu.au/brighter/articles/meet-the-supercharged-prawn-of-the-future)

A US$1.5 billion aquaculture project is not built overnight and the company intends to de-risk the venture by building it in stages. Stage 1 aims for 12,000 tonnes of production by FY23 and will be kicked off with Stage 1a (the first 5,000 tonnes by FY21).

There are many risks to success on this scale and it is difficult to outline them all, but some of the more obvious include:

• The US$1.5 billion (approx. AU$2.16 billion) capital required is not forthcoming
• Project costs turn out to be significantly more than estimated, destroying the business case
• Large Tiger Prawn farms get built around the world in coming years, increasing supply and pushing down price
• Climate change over the next decade results in the chosen land being inhospitable for the project

So how do you value a project that is all potential and has such obvious risk to realisation?

Step 1: Calculate an assumed price for Black Tiger Prawns. Seafarms had aquaculture revenue of $26.97 million and produced 1,498 tonnes in FY18 delivering an assumed price of $18.01 per KG of prawns.

Step 2: Calculate an assumed cost of production. This required a bit of research but I found a 2017 study on sustainable intensification of shrimp farms in Vietnam and Thailand (https://onlinelibrary.wiley.com/doi/pdf/10.1111/jwas.12423). This identified a high and low cost per tonne of tiger prawns produced based on farming intensity (US$10,245 to US$3,484).

Step 3: Create a production profile towards full production of 150,000 tonnes annually. I spread the profile over a 10-year period with stage 1a of 5,000 tonnes at FY21 and 12,000 tonnes at FY23. The assumption is that 150,000 tonnes is reached at FY28.

Step 4: Spread the $2.16 billion in capital required over the production profile of the project.

Step 5: Consider discounting the different production stages to reflect that the later and larger stages might be less likely to come to pass than the nearer smaller stages.

This has been an interesting thought bubble type exercise, but to be honest I am unsure of the benefit in valuing such a long-term proposition. If it all goes ahead and all discounts are removed then this could be a ’10-bagger’ given current share price of around 9 cents, but there is a long way to go before this prawn is cooked.