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July 12, 2018

Powered by Money: Chilean salmon's surprisingly strong V-shaped recovery
Vaccines, new regulations and better salmon rearing played a role -but generous European enabled large producers to sidestep sustainability issues while triggering a wave of M&As.
By Eric J. Brooks

An eFeedLink Hot Topic
Whether we measure it in quantitative, qualitative or monetary terms, Chilean salmon farming has made an impressive comeback.
Pummeled by a 21.6% contraction in Atlantic Salmon output, disease outbreaks, allegations of antibiotic overuse and deadly algal blooms, SalmonChile states production across all salmonid lines fell 29.1% over two years, from 955,200 tonnes in 2014 to 676,500 tonnes in 2016.
With Chilean salmon farming's reputations bruised and their finances in shambles, Rabobank and Kontali conservatively projected Chile's Atlantic salmon production to stay in the 510,000 to 515,000 range in 2016 and 2017, only rising to 570,000 tonnes in 2018.
-Instead, 2016's 505,000 tonne Atlantic salmon output jumped a whopping 15% to 582,000 tonnes in 2017. It spearheaded a 16.9% production increase across all farmed salmonids from 676,600 tonnes in 2016 to 791,100 tonnes in 2017.
For 2018, Salmar projects Atlantic salmon output to rise another 5.9%, to 616,600 tonnes.  With the recovery one year ahead of schedule, eFeedLink estimates total Chilean salmonid production is poised to rise 7.6%, to over 850,000 tonnes this year.
With output rebounding a year ahead of schedule, exports have also made a classic "V-shaped recovery".  Based on SalmonChile's statistics, from 591,000 tonnes in 2014, they fell to 428,700 tonnes in 2016. Last year's sharp production recovery made possible a 22% rebound in exports, to At 523,038 tonnes. For 2018, exports look to rise around 11% to 580,000 tonnes, within a shade of their 591,000-tonne record set in 2015.
Several factors synergistically stimulated Chile's salmon production more than the sum of their individual impacts. The post-crisis introduction of ISA and SRS vaccines reduced mortality and boosted average finishing weights while minimizing the quantity of antibiotics required. To help prevent outbreaks, the industry transitioned from raising smolts in open lakes to more biosecure tanks. At the MultiExport Foods Investor forum held on 4 May 2018 in Santiago, Chile, Rabobank senior seafood analyst Gorjam Nikolik stated: "Stricter legislation combined with a myriad of biosecurity measures are the drivers behind the improvements in Chile."
Just as important as all the above measures, it simultaneously reduced stocking densities to sustainable levels and boosted output far beyond expectations. It did this by opening new farms in southern provinces, some of which are being operated without using antibiotics.

On one hand, government restrictions on stocking densities were meant to achieve sustainable disease control at the expense of lower output growth. On the other hand, Chilean salmon producers expanded salmon cultivation into new areas far more rapidly than most observers anticipated. Like most things in life, this takes money -and Chilean salmon farms have enjoyed renewed access to investment funding.
A 12 October 2017 Reuters article ("European banks test Chile salmon farms' choppy waters") notes "Northern European banks have quietly overtaken local lenders, an analysis of company financial statements shows."
Chilean banks retreated from lending after suffering massive losses during the 2014-16 crisis years but European banks, "Are stepping up to fill the void." Lenders with considerable agribusiness financing experience including Norway's DNB and Netherlands-based Rabobank boosted their lending to Chilean salmon farms.
Pesquera Camanchaca, Australis Seafoods and MultiExport Foods all had their debts refinanced by these two banks, whereas in the past they relied more on local Chilean lenders. In other cases, Chilean subsidiaries of European banks such as Spain's Santander have replaced locally based lenders.
Reuters stated "Leading exporter AquaChile received less than a third of its US$263 million in non-current loans from the two banks [Rabobank and DNB] in 2013; by the second quarter of this year, they made up more than half [US$111 million] of the company's US$222 million in bank loans due in over a year."
Burnt by US$800 million of industry losses during 2016's algal bloom, Chilean banks reduced their lending to companies mentioned in the Reuters article by US$82 million. European banks or their Chilean subsidiaries quoted in the article increased their lending or lines of credit to Chilean salmon by US$292 million. Much of this new capital was used to either establish new salmon farms in remote areas, expand existing ones or acquire existing operations in frontier regions.
While it explains Chilean salmon's V-shaped production rebound, this capital inflow is more than a passing fad among European bankers. It also reflects permanent changes in how Chilean salmon growers access capital and has triggered a wave of mergers and acquisitions (M&As).
Alongside lending it money, DNB also advised Camanchaca's late 2017 IPO on the Oslo Stock Exchange (OSE), when it became the first Chilean salmon grower to be listed on the world's leading seafood industry stock exchange. Impressed by Camanchaca's example, Australis Seafoods, which had raised US$70.2 million in February on a local Chilean exchange in 2015.  -announced plans to raise many times this sum by listing itself on the OSE.
Flush with cash from a successful recent growing season and European bank refinancing, June saw AquaChile announce it would boost capital expenditures by an additional US$340 million. It also intends to use its planned Q4 IPO on the OSE to finance its acquisition of southern frontier zone producer Salmones Magallanes for US$255 million. A few weeks earlier poultry, pork and salmon integrator Agrosuper acquired Salmones Friosur for US$225 million.
Besides leveraging their growing access to European capital, there is another factor motivating this wave of M&As: To fix the industry, the government passed laws that limit stocking densities. They restrict how much extra salmon a company can harvest from an existing operation over the medium term.
According to MultiExport Foods CEO Andres Lyon, new regulations and plentiful financing motivated large-scale companies with access to capital to acquire smaller competitors, especially those that have a foothold in underdeveloped, southern frontier regions. Salmon growers that list on the OSE will have access to billions of dollars in additional capital that can be used to establish new salmon farms or in M&As of geographically strategic smaller operators. All this is bringing new investment to Chile's southern coast, particularly the Magallanes region, with Tierra del Fuego and the Chilean Antarctic zone not far behind.
For example, mid-2017 saw MultiExport apply for permission to establish two new Magallanes salmon farms. A US$27.6 million 5,160 tonnes operation in Peninsula Munoz Gamero, along with a US$22.6 million, 4,700-tonne capacity facility in the Barros Arana Peninsula.
Before acquiring regional producer Salmones Magallanes, Q1 2018 saw Empresas AquaChile obtain licenses to establish three new Magallanes region salmon farms. It is currently seeking permission to establish a fourth one.  Similar investments in either Magallanes or the coast of Tierra del Fuego island have been made by Australis Seafoods, Cermaq Group, Nova Austral and Salmones Blumar.
This inflow of European banking and IPO capital made it possible for Chile's remote southern region to make up for the northern coastline's production losses. From 51,000 tonnes in 2015, Magallanes salmon output was 68,000 tonnes in 2016 and 95,000 tonnes in 2017.
Salmones Magallanes' farming director Oscar Garay estimates the region will grow 102,000 tonnes of salmon this year and that output could exceed 130,000 tonnes by 2022. Thus, eager European financing of new salmon farming areas increases the quantity of fish being grown without facing stocking density related issues such as disease outbreaks or allegations of antibiotic overuse.
With stocking densities no longer constraining output, falling mortality rates helped boost finishing weights. Dogged by their own stocking density issues, Norwegian salmon finishing weights have fallen from their peak of 5.6kg to 5.0kg. By H2 2017 Chilean salmon finishing weights averaged 5.2kg.
Best of all, this simultaneous boosting of finishing weights and minimization of fish mortality did much to lower unit production costs -and profoundly restored the cost competitiveness of Chilean salmon on the world market. At the 25 April 2016 Fishpool/DNB Seminar, DNB ocean industries analyst Dag Sletmo noted that while Chile's salmon production costs were 14.3% lower than Norway's in 2005, by 2015, average Norwegian unit costs were US$3.30/kg, while those of Chile were a whopping US$4.90/kg. -But two years later at the MultiExport Foods Investor Forum this May, Rabobank senior seafood analyst Gorjan Nikolik traced how despite enduring a severe crisis, Chile has defeated Norway's once great cost advantage.
According to Nikolik, early 2016's algal bloom, disease outbreaks and the resulting fall in finishing weights pushed Chilean unit costs to over US$5.00/kg in Q1 2016 and an all-time high of US$5.90/kg by Q1 2017. -At the same time, beset by problems with sea lice and no new frontier areas to exploit, Nikolik noted how Norway's own production costs rose to US$3.70/kg in Q1 2016 and to over US$4.40/kg by Q4 2017.
In Chile's case,  steeply plunging salmon mortality and a sharp rise in finishing weights resulted in nosediving production costs. By Q4 2017, Nikolik reported Chilean salmon farming costs had fallen 23.7% on-year, to US$4.50/kg - and just 2.3% above Norway's US$4.40/kg
When costs fall, profitability rises. Long dogged by inferior returns, Chilean salmon's profitability now rivals that of Norway's: Nikolik stated that 2017 ended with salmon farming earnings before interest and taxes (EBIT) US$1.10/kg in Chile, compared to US$1.30/kg in Norway. This is a huge improvement from several years ago, when Norwegian salmon had EBITs over US$2/kg and Chilean growers were suffering losses in excess of US$1/kg.
In 2018, Chile now appears to have a cost advantage: Based on slightly more up-to-date information, Marine Harvest's Salmon Industry Handbook 2018 notes that its 2017 salmon production costs were (based on 10 July 2018 exchange rates) US$5.80/kg at its Scottish subsidiaries, US$4.65/kg in Norway -and US$4.12/kg at its Chilean salmon farms. In less than two years, Chile went from having production costs 48.5% above those of Norway to 11.4% lower.
Nikolik concluded that "The Chilean salmon sector has overcome many of the biological problems that it faced in 2015-2016, with strong prices and improving farming performance combining to suggest it's well placed to perform well in the medium term. Particularly at a time when production costs in Norway are still high." With Chilean returns soon to equal or exceed those of Norwegian salmon farming, investment momentum will shift from trying to boost Norwegian stocking densities (where output has been flat) to opening up untapped, frontier regions on Chile's southern coast.
Clearly, experienced agribusiness lenders understood how Chile's untapped production regions could be actualized with an injection of investment capital. Perhaps the European financiers were just being practical: It was not lost on them that over the last five years, shrimp aquaculture has failed to register meaningful production increases in mature producing nations. All the post-2010 gains in world shrimp production came from untapped frontier regions in nations like Ecuador and India. -It now appears that the same investment logic is being applied to Chilean salmon.
With Canada unwilling to use more of its extensive coastline for salmon aquaculture, expanding Chilean salmon acreage appears to be the most sensible way of supplying the world with salmon and preserving the industry's profit margins. For now, the strategy appears to be working.

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