By Greg Peel
So voracious is the Japanese appetite for Southern Bluefin tuna (SBT) that the handful of licensed fishing families in South Australia have become multi-millionaires. Their success not only reflects the demand for this ocean delicacy, it reflects the fragile nature of SBT stock and the restrictions placed on commercial wild fishing by the relevant authorities.
As global fish stocks come under threat from over-fishing, aquaculture is slowly becoming a booming industry in this country. Trout farming has long been successful and Tasmanian-based Tassal Group (TSL) has proven the potential in highland salmon farming. Tassal shares rallied from $1.00 to $4.00 over three years before the GFC took its toll.
However the farming of ocean species is...ahem...a different kettle of fish altogether. The interestingly named Kinki University in Japan has nevertheless seen success in "closing the life-cycle" of the Northern Bluefin tuna, which basically means it has successfully turned little fish hatched scientifically into big ones. Utilising the knowledge and assistance of Kinki experts, South Australian-based Clean Seas Tuna ((CSS)) has been undertaking a world-first project in attempting to commercially breed the SBT.
It has not all been smooth sailing. First attempts by Clean Seas saw success in turning eggs into larvae and that was about it. But this week the company has announced it has now successfully bred fingerlings. Success unfortunately finally came towards the end of the tuna breeding season, meaning the waters off South Australia will now become too cold for the young sushis-in-waiting to be released out of their land-based breeding tanks and into caged waters to grow. The commercialisation of the breeding program must thus wait another 6 months.
But Clean Seas is now in "unchartered" waters, as noted by the analysts at RBS. This was always going to be a speculative venture, but a venture with tremendous upside. The global wild catch of SBT has been declining for 50 years, leading to ever increasing fishing restrictions. Clean Seas holds the only captive SBT broodstock in the world and if further success is achieved, the aquaculture production of SBT is "unlimited", RBS notes. The company expects to be able to put 25,000 fingerlings into commercial production - into ocean cages to grow - by the end of 2009.
The venture is nevertheless not cheap, and Clean Seas has flagged it would need to raise a further $100m in some debt but mostly equity over the next two to four years. Flushed with recent success, Clean Seas this week successfully raised $23.9m through both a share placement and a rights issue. The raising was 20% dilutionary.
The potential within Clean Seas has not been lost on the market. The issue was placed at 55c but out of its trading halt the shares are back trading at 75c. For the two brokers in the FNArena universe which cover Clean Seas, the fingerling milestone has meant a de-risking of the project and a subsequent jump in current valuation. RBS previously applied a 50% risk discount to its discounted cash flow valuation. The broker has now increased its forecasts to arrive at a valuation of 81-93c for the shares but also reduced the risk discount to 25%. This has resulted in an increase in the 12-month target price from 41c to 69c.
JP Morgan has similarly raised its target from 50c to 60c.
The shares are currently trading above these levels, but Clean Seas is not a stock for which one might quibble over 10c. This is a long term investment prospect for the patient, offering the potential for significant reward and the reality of significant risk. We all know just how ecstatic zoologists around the world are when they successfully breed certain animals in captivity. Nature does not yield willingly.
And the risk lies not simply in the ability to nurse little pelagic fish into big ones in cages. Clean Seas is having to raise funds - both equity and debt - in the middle of the GFC. The same GFC has seen Tassal's share price halve in value.
Both RBS and JP Morgan thus are maintaining Hold ratings on the stock. Caution reflects the risks involved and the fact the stock is already trading above risked valuations. But there is also somewhat of a downside safety net. Clean Seas already boasts a commercially operational Kingfish farming program.
The other point to note is that each milestone, if achieved, will be met by further dilutionary capital raisings, although both brokers factor this into their valuations. RBS is assuming that of the $100m required, $76m will be raised as equity.
Maybe Clean Seas might consider starting a wasabi farm as well?