Why the World Is Trying to Develop New Farming Technologies Multiexport Foods Conference 24 April 2019 | DNB Markets

MUST BE READ IN CONJUNCTION WITH PUBLISHED DNB MARKETS RESEARCH Header Header

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Why the world is trying to develop new farming technologies Multiexport Foods Conference 24 April 2019 | DNB Markets

Alexander Aukner, (Analyst) +47 24 16 90 79, [email protected]

Footer Footer | Header Header It appears traditional farming supply is struggling to grow…

Global supply of Atlantic Salmon (tonnes, wfe), 3Y average growth

3,000 50%

45%

2,500 40%

35% 2,000 30%

Content 25% Content 1,500 20%

15% 1,000 10%

500 5%

- -5% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Source: Kontali (historical data) DNB Markets (further calculations) Footer Footer 2 | Header Header Demand will ensure new production methods emerge

Wild catch and aquaculture production (tonnes, millions)

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Source: FAO 2016 Footer Footer 3 | Header Header Who, where and what can replace net pen farming?

Existing regions

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Source: Mowi Industry Handbook 2018 Footer Footer 4 | Header Header New regions developed with existing technology by existing players

New regions

Iceland and Eastern Canada developing… Content Content …but even when fully developed unlikely to represent more than ~10% of production

Source: Mowi Industry Handbook 2018, DNB Markets Footer Footer 5 | Header Header New regions have not been able to capture any market share

Norway and Chile’s combined market share (% of global harvest)

85% 80% 80% Norway and Chile have gained market share vs. 75% new regions over the past

70% decades

65% Content Content

60%

55%

50% 50%

45%

40%

Source: Kontali (historical data) DNB Markets (further calculations) Footer Footer 6 | Header Header New regions have not been able to capture any market share

Market share of producing regions

100%

90% Chile is the only region to

80% take meaningful market share in the last 20 years 70%

60%

Content 50% Content With current farming 40% technology, new regions are 30% too small to make a 20% difference

10%

Norway Chile UK Canada Faroes Others

Source: Kontali (historical data) DNB Markets (further calculations) Footer Footer 7 | Header Header Evolution - New technology could expand existing regions…

Existing technology and farming regions

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Source: Mowi Industry Handbook 2018 Footer Footer 8 | Header Header Evolution - …and open new ones

Evolution of existing sea-based technologies

Evolution through Content offshore in existing Content regions by existing players….

However, China may become a new region

Source: Mowi Industry Handbook 2018 Footer Footer 9 | Header Header Revolution - Land based to redefine salmon farming geography

Revolution with regards to where one can farm salmon

Content Content Revolution…

No real limitations on locations…

Source: Mowi Industry Handbook 2018 Footer Footer 10 | Header Header DNB Markets has produced two reports on land-based farming

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Footer Footer 11 | Header Header Onshore farming – Revolution or a big, expensive dead end…

Opportunities • Industrialisation potential • Lower environmental impact • Improved biological security • Lower mortality and faster growth • Transport advantage • Product faster to market • Reduced transport cost • Lower CO2 footprint • Turning waste into an asset Content Content

Challenges • High investment need • Energy-intensive production • Fish welfare with high density • Operational risk – H2S

Footer Footer 12 | Header Header Land-based farming – Poland, Switzerland and Denmark

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Footer Source: DNB Markets Footer 13 | Header Header Land-based farming – US, Canada and Dubai

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Footer Source: DNB Markets Footer 14 | Header Header Overview of land-based facilities

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Source: DNB Markets Footer Footer 15 | Header Reasons for looking at land-based salmon farming, defined two Header years ago, are still valid

Improved visibility on pricing – stronger for longer means less probability of a collapse in prices before land-based volumes hit 1 the market. We estimate a salmon price of NOK60/kg in 2019 and NOK59/kg in 2020.

In-sea production costs rising – NOK5/kg increase just in sea-lice-related costs. Average production costs have not come 2 down, but look fairly ‘stable and high’.

Increasing ‘upfront investment’ for traditional growth – licence prices increasing. In the latest auctions in Norway, but appetite Content 3 Content for licences was high, with the traffic-light auction implying a figure of ~NOK120/kg.

Improved ‘new’ land-based technology – enables increased scale and quality issues are addressed. The large equipment 4 providers and salmon farmers report sizeable investments in recirculating aquaculture systems (RAS).

Demand in remote markets picking up – land-based farming has an advantage in transport and freshness if production is close 5 to the end-consumer. US consumption of salmon is continuing to rise, while prices in Miami were fairly stable throughout 2018.

Source: DNB Markets Footer Footer 16 | Header Header Surge in land-based driven by higher traditional capex

Traditional farming CAPEX Land-based CAPEX

120 No licence fee 100

60 96

Content 90 Content 40 53

20 16

15 15 15 0 Additional growth 2014 price. License Market price today? Land-based avg. model. License NOK66m License NOK120m NOK20m

Equipment License Land-based avg.

Investments in land based used to be 2x more expensive than traditional growth. Now the situation has reversed

Source: Directorate of Fisheries, DNB Markets estimates Footer Footer 17 | Header Header Surge in land-based driven by higher traditional capex 167

Traditional farming CAPEX Land-based CAPEX

120 No licence fee 100

60 96

Content Content 40 53

20 16

15 15 15 0 Additional growth 2014 price. License Market price today? 2019e Land-based avg. model. License NOK66m License NOK120m NOK20m

Equipment License Land-based avg.

Investments in land based used to be 2x more expensive than traditional growth. Now the situation has reversed

Source: Directorate of Fisheries, DNB Markets estimates Footer Footer 18 | Header Header Grieg Seafood - Investment need for traditional growth skyrocketing

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Grieg Seafood – Capital Markets Day 5th September 2018

Source: Grieg Seafood Capital Markets Day 2018 Footer Footer 19 | Header Header Transport advantage gives margin of safety in US and Asia

Margin of safety

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Transportation costs at NOK13–18/kg from Norway to US and Asia

Source: DNB Markets estimates Footer Footer 20 | Header Header Current plans versus where we were two years ago

Volume plans identified in 2016 vs 2019

550 523

450 Project backlog grown 3- fold in ~2 years 350 No of projects doubled 250 (from 20 to +40 projects) Content Content 154 150 114

50 27 5 7

2018 2019 Planned capacity -50 Identified in 2016 Detected as of 10/04/2019

Volumes have been pushed out in time, and some projects will probably never materialise

Source: Company information (on volumes in total and distribution if available), DNB Markets(estimate on distribution if not available) Footer Footer 21 | Header Header Bill Gates describes our view on the land-based salmon well

Expectations vs. change

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We overestimate the change that will occur in the next two years and underestimate what will change in the next ten

Source: https://abcnews.go.com/Technology/PCWorld/story?id=5214635

Footer Footer 22 | Header Header A friendly reminder from the unconventional oil supply development

5.0 USD 4.5 1,000 4.0 900 3.5 800 -70% 3.0 700 2.5 600 2.0 500 1.5 400 300 1.0 Content 200 Content

million barrelsmillionoilperday, shale 0.5 100 0.0 0

2011 2012 2013 2014 2015 2016E

jan.00 jan.02 jan.04 jan.06 jan.08 jan.10 jan.12 jan.14 jan.16

mai.11 mai.01 mai.03 mai.05 mai.07 mai.09 mai.13 mai.15

sep.12 sep.00 sep.02 sep.04 sep.06 sep.08 sep.10 sep.14 sep.16

Monterey Austin Chalk Granite Wash Woodford Marcellus Drilling cost / lateral length Haynesville Niobrara-Codell Wolfcamp Bonespring Spraberry Bakken Eagle Ford Yeso & Glorieta Delaware Utica

Steep increase in volumes from take-off and improved efficency

Source: US Energy Information Administration (EIA), Range Resources (Cost & Efficiency improvement – Northern Marcellus) Footer Footer 23 | Header Header Breakdown of identified plan of production in 2016 vs. 2019 (HOG, kt)

700 105 628 600 523 310 500

400

300 213 88 154 200 -8 -40 Content Content 100

- Detected Appear Reduced Increased Current Additional = Identified Assumed = Total planned cancelled planned planned planned plans detected planned unknown (20% assumed capacity in capacity by capacity on capacity by capacity in additional) planned 2016 projects still in projects projects 2018 capacity progress identified in detected in 2016 which are 2016 still in progress:

We see larger and more projects within land-based salmon farming than before

Source: Company information (on volumes in total and distribution if available), DNB Markets (estimate on distribution if not available). Please note that there are probably a large amount of projects that we are not aware of Footer Footer 24 | Header Header Developments totalling ~500kt in annual production by 2026

Land-based volumes identified, kt

600 533

500

400 341

Content 300 Content 254

192 200

117 100 50 17 5 8 0 2018 2019 2020 2021 2022 2023 2024 2025 2026

~530kt corresponds to ~20% of global salmon production

* Including assumed identified Source: Company information (on volumes in total and distribution if available), DNB Markets(estimate on distribution if not available) Footer Footer | Header Header … And larger and more ‘sophisticated’ projects

Land-based volumes identified, kt

600

500

400

Content 300 Content

200

100

0 2018 2019 2020 2021 2022 2023 2024 2025 2026

Impressive pipeline of projects

Source: Company information (on volumes in total and distribution if available), DNB Markets(estimate on distribution if not available) Footer Footer 26 | Header Header 40+ projects with average planned output of 10kt

kt 100

Content 50 Content

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Source: DNB Markets Footer Footer 27 | Header Header Land-based - Scale lowers the investment cost per kg

250

200

150 Average all

100 Content capex/kt,NOKm Average >1.000tons Content

- - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 capacity, tons

Scale important for both production and investment cost per kg

Source: DNB Markets, Publicly available sources Footer Footer 28 | Header Header We have identified +40 projects with a planned output of 523kt

kt 10 projects +10kt 100 USD324m per project

Content 50 Content

30 15 projects 5-10kt 20 USD140m per project 15 projects 0-5kt 10 USD35m per project

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Source: DNB Markets (own research and own estimates) Footer Footer 29 | Header Header From PowerPoint presentations and excel sheets to reality….

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We see a handful of projects with ambitious volumes whereof one has started construction

Source: Atlantic Sapphire Footer Footer 30 | Header Header But 10 years from start-up to commercial-sized harvest volume

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Source: Atlantic Sapphire Footer Footer 31 | Header Header Atlantic Sapphire in US: Fish moved to start-feeding in Feb. 2019

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Source: Atlantic Sapphire Footer Footer 32 | Header Header Land-based farming is complicated

Numerous factors impacting the salmon… ...have led to challenges

Salinity 1 Bacteria and disease Water flow Temperature Light 2 High CO2 level Hormones Oxygen 3 Early maturation Carbon Organic material dioxide 4 Water quality and clarity Pathogens Stocking density 5 Off flavour Content Feeding rate Content 6 Component failure

Eggs Fry/smolt On-growing Lack of fish growth

Lower volumes than planned

Production cycle >24 months Higher costs

Source: DNB Markets, Langsand (presentation held at Freshwater Institute) Footer Footer 33 | Header Header Different risk profile vs. traditional farming

Risk (%) 100

50 Content Content 40

0 Size (kg) 1.0 2.0 3.0 4.0 5.0 6.0

Traditional Land based

Source: DNB Markets Footer Footer 34 | Header Header RAS development from other species to full-size salmon

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Source: Billund aquaculture(projects), DNB Markets (estimate on size on some of the facilities when confidential) Footer Footer 35 | Header Header Offshore farming – Evolution rather than revolution

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Source: SalMar Footer Footer 36 | Header Header Offshore farming – Evolution rather than revolution

Opportunities • Limit impact on coastal environment • Increase the available areas for aquaculture production • Better dispersion of biological waste • Less challenges with sea-lice • Improved biological security (greater distance between farms) • Lower ‘proof of concept’ risk compared to e.g. land-based farming • More natural farming environment for the salmon

Content Challenges Content • Harsher weather requires tougher equipment • Higher investment cost compared to near-shore equipment • Higher logistics cost • Still exposed to weather, sea temperatures and other ‘uncontrollable factors’ • * Possibly higher production cost than near-shore farming

*We assume the absolute cost should be higher due to longer supply distance, more advanced equipment and higher requirement for safety features on the facility. However, improved growth/yield due to better farming conditions may mitigate the higher absolute cost, leading to similar or even lower production cost per kg than we see in traditional farming nearshore.

Footer Footer 37 | Header Header Offshore farming works in Norway…

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• Successful completion of first production cycle with 1 million individuals • 2nd bigger unit, ‘Smart Fish Farm’ to be built following award of eight development licences • ‘Smart Fish Farm’ capable of holding 3 million salmon, 2x the capacity of ‘Ocean Farm 1’

Footer Footer 38 | Header Header …but many of the traditional challenges remain

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• Operates close to the coast • Escape due to human error (~16.000 fish) • Sea-lice present, but no need for lice treatment • Suspected ISA • OceanFarm design may not be what SalMar picks going forward… Footer Footer 39 | Header Header Offshore farming also works in China

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• Successful completion of first production cycle • China Construction and Communication Company CCCC won the tender to build a second unit, Shenlan-2, “Laying the foundation for further development of marine fishery resource development”

Footer Footer 40 | Header Header …but there are also challenges here

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• Towing to site and mooring delayed due to weather • Volatile feeding due to high water temperature and other fish swimming into cage • 2nd smolt stocking with higher density planned

Footer Footer 41 | Header Header Offshore growth in existing regions due to infrastructure advantage

Evolution of existing sea based technologies

Content Content … but China may become a new region

Source: Mowi Industry Handbook 2018 Footer Footer 42 | Header Header Offshore farming in China

. Bottom cages in Yellow Sea (rigs)

Content . Deep water from Content South China Sea (vessels)

. North/South Korea

Footer Footer 43 | Header Header Offshore farming – What else is being developed?

Applicant MAB Type Status 1 SalMar - OceanFarm 6,240 Offshore Rig Approved 2 Nordlaks 16,380 Offshore Vessel Approved 3 Norway Royal Salmon 5,990 Arctic Offshore Rig Approved Development licenses 4 SalMar - Smart Fish Farm 6,240 Offshore Rig Approved 5 Måsøval Fiskeoppdrett 3,900 Semi submersible facility Pending - 26 offshore project 6 Pelaqua Farming 22,620 Offshore Fish Cage Under review applications in 7 Unitech Salmo Solar 3,120 Floating in exposed locations Under review 8 Mowi 28,080 Aqua Storm' Offshore subsea Under review Norway… 9 Floating Fish Farming Unit 7,800 Offshore farming Under review 10 Gigante Offshore 6,240 Offshore Vessel Rejections 11 Gifas Marine 3,120 Submersible cage Rejections Content 12 Lerlow 6,240 Semi-offshore Rejections Content 13 Mowi 1 4,680 Beck cage offshore Rejections - Projects may be 14 Bremnes Seashore 4,680 Offshore concept Rejections 15 Mowi 4,680 Farming in vessels Rejections rejected in Norway 16 Viewpoint Seafarm/Nordlaks 15,600 Modular Oceanfarm Rejections 17 Erko Seafarms 12,480 Bottom structure offshore Rejections but still relevant in 18 Nova Sea 3,120 Closed offshore facility Rejections other regions 19 Gigant Offshore 7,020 Offshore cage Rejections 20 Mowi 2 4,680 Beck cage offshore Rejections 21 Roxel Aqua 10,920 Submersible in Offshore Rejections 22 Offshore Salmon 5,460 Submersible Offshore Rejections 23 Mohn Drilling 4,680 Autonomous oceanfarming Rejections 24 Wilsgård Fiskeoppdrett 8,580 Offshore tank fleet Rejections 25 Evna 7,800 Wave Master Rejections 26 Inocap/Subsea farming 4,680 Farming in exposed areas Rejections

Source: DNB Markets, Directory of Fisheries Footer Footer 44 | Header Header Offshore farming – What else is being developed?

Offshore projects

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