The Australian Agricultural Co has ended speculation about the future of its proposed Darwin abattoir, confirming to shareholders this afternoon that final stage funding approval had been granted, and the plant should be operational in the second half of next year.
The announcement from AA Co chair Don McGauchie was made during the company’s unusual ‘transitional’ annual general meeting held in Brisbane this afternoon, only three months after the last AGM, as the company moves to a new 31 March yearly financial reporting cycle.
Mr McGauchie told the meeting that the board had given its approval for the final phase of the abattoir’s construction at a board meeting just prior to the AGM, meaning work could now be moved on site and construction completed.
The total capital cost has risen a little from earlier forecasts, now estimated at $91 million.
Mr McGauchie said while the board was fully committed to the concept of the abattoir, it had taken a ‘considered, staged and fiscally responsible’ approach to approvals for the construction.
Since the stage one civil works were completed earlier this year, a significant amount of time had been spent finalising design and specifications of the plant.
Mr McGauchie said the Darwin project was an important part of AA Co’s clear focus on driving shareholder value by building a global, vertically integrated red meat supply chain, with particular focus on Asian markets, servicing the rising demand for red meat protein.
“Predictions from ABARES suggest that Australia will need to double its food production by 2050 to meet demand from the Asian region,” he told shareholders.
“This demand is coming from the emergence of an Asian mega middle class – which in the next 15 years alone will increase sixfold to 3.2 billion people, more than five times the total population of Europe and the US combined.”
“Their rising incomes mean an increased demand for better food, including red meat protein. This means a much bigger population will no longer be satisfied with essentially a subsistence carbohydrate diet.”
AA Co was committed to being a part of that ‘dining boom,’ he said.
However, it was important that in order to maximize shareholder value, the company must earn adequate returns on its assets.
“In order to achieve acceptable returns on invested capital, AA Co can no longer afford to merely be a primary producer, but must also touch as many parts of the supply chain as possible, including processing, value-adding and marketing, in order to capture available margin,” Mr McGauchie said.
The current price disparity between global beef and domestic livestock prices meant the company could no longer sit back and simply supply to third parties who were afforded the opportunity to capture this available margin.
“We must capture more of that margin ourselves, and the Darwin abattoir is a key part of that strategy,” he said.
“It will be a state-of-the-art facility, opening up new channels to international markets as well as reducing freight costs currently incurred by moving cattle from the north to eastern Australian abattoirs.”
The completion of the facility would go some way towards insulating AA Co from volatility in domestic and live export markets by accessing generally higher and more stable global beef prices, he said.
“It will also allow the company to control the supply chain so that we can market our beef to maximum advantage, including maximising the value of our genetics.”
Once fully operational, the abattoir was forecast to deliver a return on capital employed in excess of the company’s pre-tax cost of capital, Mr McGauchie said.
In April, AA Co announced that it intended to fund construction of the plant from its own balance sheet. Discussions were held with several potential investment partners, but the company decided in the end that none met the criteria the board had set, of being able to bring strategic benefits to the project rather than simply financing or off-take agreements.
Mr McGauchie told the meeting the board was yet to make a decision about the prospect of strengthening the balance sheet in advance of the Darwin project, which could include a capital raising.
- See this morning’s second AA Co AGM report, covering shareholder reaction to the Darwin announcement.
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