Processing

AA Co’s Darwin abattoir projected to be ‘strong financial performer’

Jon Condon, March 18, 2013

 

Design drawing of AA Co's Darwin export abattoir, now under constructionTHE Australian Agricultural Company is proceeding with its Darwin abattoir project, with or without an equity partner, shareholders were told on Friday.

The publicly-listed, vertically-integrated beef producer held its twelfth annual general meeting before a small, but inquisitive Brisbane audience comprising a few ‘suits’ representing institutional investors, and a bunch of mostly ‘ma and pa’ investors.  

Much of the question-time during the meeting centred on AA Co’s plans to build a modern greenfield export abattoir near Darwin, to provide an outlet into nearby Asian markets for manufacturing beef from the region’s under-utilised cow and bull turnoff.

Chairman Don McGauchie was reminded that the company earlier said that it would require equity support from outside the company to raise the $85 million to complete the Darwin facility.

“Is that a fact, or can AA Co finance it itself?” a shareholder asked.

“We can do it either way,” Mr McGauchie said.

“It is a decision that will be reviewed on an ongoing basis, but any decision to engage outside capital will be based on the greater interest of the operation, rather than just raising money. It will be on our terms, that best suit our business, if we decide to do it,” he said.

Managing director David Farley said there was ‘plenty of capital managers out there’ who wanted to invest in the plant alongside AA Co.

“But principally it’s often for the wrong reasons: they want to control supply, taking the product into other customer countries at cost. But our objective is the opposite: to make as much money off every cut and every by-product, from every beast that we put through the plant,” Mr Farley said.

“A lot of the people we have had discussions with have plenty of money, but do not bring strategic partnership strength to the table, either with a presence in-country in Asian markets, or with cold storage facilities, for example. We will be very selective in any decision to bring a partner into the process, he said.    

 

'Best performing asset'

AA Co’s much-discussed Darwin beef plant had the potential to be one of the strongest financial performers among company assets, shareholders were told.

Malcolm Badgery from the Australian Shareholders Association made the observation that based on the accounts presented to the AGM, AA Co’s beef wholesaling business – part of the vertical integration strategy – produced a gross profit of only $4 million, a very small amount, in his estimation.

“Wholesaling doesn’t look like a very good business. I’m just wondering if vertical integration is the way to go for AA Co,” he said.

He also asked what the forecast internal rate of return was, from the Darwin abattoir feasibility study, and when the project could be expected to break even.

“I won’t give you a figure for projected internal rate of return, but on the numbers we are projecting, it will be one of the best, if not the best performing asset in the AA Co business,” Mr McGauchie said.

He would not be drawn on whether that figure was in excess of 15pc, but said the company was ‘looking upwards of that number.”

Mr McGauchie assured investors that the processing business would not be given a ‘free start’ through the financial cost burden being carried by other parts of the business.

He would not be drawn on a completion date, saying it was necessary to be cautious when building anything in the tropics, due to weather.

“The target is to have this thing at the right stage during the next wet season, so we can have animals flowing through it as soon as possible,” he said.

Referring to the profitability of the company’s wholesale business, managing director David Farley admitted it was ‘a challenge to make money out there’, to the extent that in international markets it was all US$ receivable.

“The programs set up for the forward purchasing of 100-day cattle for the 1824 program operate to a small amount in our feedlots, but most are external contracted. We try to match-up our hedging programs as best we can, but when you’re fighting an ascending A$, you lose margin on some of those sales.”

Mr Farley said the wholesale beef group was spilt equally between the company’s Wagyu program, and the 100-day grainfed 1824 program.

The company competed head-on in the 1824 program with major processors like JBS, Teys/Cargill and Nippon, whereas the Wagyu program had fewer competitors.

Mr Farley explained that where the company a year ago was custom-killing in four processing plants in NSW and Queensland, this had been rationalised, now dependent on only two. Kills previously conducted at Casino (Wagyu) and Stanbroke Beef (1824) are now being carried out at the two remaining plants – JBS Beef City (Wagyu)  and Nippon Oakey  (1824 and Wagyu).

“The most critical thing for us is the cost of kill and the cost of conversion into a box,” Mr Farley said.

“By rationalising the number of plants we use, we’ve been able to negotiate our margins down,” he said.

However it was important to understand that AA Co did not harvest and retain all of the material from animals killed for it. The red and white offals, blood products, meat and bonemeal, and tallow for example, were all retained by the processor.

“To make more money out of the 100-day commodity side of our business, we need to control the entire product, in order to get the full margin.”

In contrast, the margins being made in the company’s Wagyu wholesale program were ‘substantially better’ than for the conventional 1824 cattle. The margin figure in the annual report was a combination of both of those, he said. 

“The integration of an abattoir is the real goal to make money out of the wholesale business. There’s more money today in grassfed cattle just in the ‘drop credits’ for offals and fancy cuts.”

 

Capacity will leave 200,000 northern cattle short

Another investor asked what percentage of the total Darwin abattoir kill would be occupied by AA Co-owned cattle, and how much space would be available for slaughter cattle from other NT cattle suppliers.

Mr Farley said the plant would have a designed capacity of 220,000 cattle a year, double-shifting two 7:40 shifts a day, five days a week for seven months, and a single shift for a further four months, with a month off each year for maintenance and holidays.

It would have an installed footprint at the start of around 170,000 head. AA Co cattle would account for about 60pc of that in the first year, and under sustainable operating between 36 and 40pc of the plant’s slaughter cattle, based on the way the company currently had its herd structured.

“Therefore, of all the available cattle coming out of the north, there will still be some 180,000 to 200,000 cattle each year that will be disenfranchised form the abattoir – there will not be enough room to slaughter every available animal. We are looking at how we can manage that equitably with producers – whether it is to sell slot spaces, or encourage them to be part of the abattoir under some form of capital management of processing time and capacity,” Mr Farley said.

Mr McGauchie said the Darwin abattoir was one of the ways the company was seeking to minimise risk through its vertical integration strategy.

The board had approved the commencement of the construction project in October, and work on the facility was now underway.

“Darwin will be an extremely important strategic asset for AA Co that will deliver increased vertical integration and improved proximity to key southeast Asian markets,” he said.

In what could be interpreted as an ambitious claim, he said the plant would “secure the long-term future of Australia’s northern pastoral industry,” by providing the only material processing facility in the region with more than two million head of cattle.

Mr Farley told shareholders the abattoir would enable the company to capture more margin by moving closer to the customer, and more importantly, moving AA Co further away from being a pure pastoral company to a vertically-integrated beef production and marketing group.

The abattoir would play an important role in AA Co’s five year goal of strengthening its presence in southeast Asian markets.

“It will essentially be our gateway to Asia and the rest of the world,” Mr Farley said.

“Unfortunately Australia has the highest processing cost conversion for beef in the world. The Darwin plant, though, gives us the chance, especially by operating off a neutral carbon footprint at the plant, to substantially reduce the cost-per-kilo to process cattle.”

There would also be significant logistical advantages. Currently the company transports its northern cattle to the eastern side of Australia. The abattoir’s location would remove six million kilometres a year from the company’s NT herd logistics, he said.

“The facility will be state of the art, and will be internationally competitive in the efficiency of its processing operations. Already it is attracting the attention of the big international manufacturing meat players. Two of the largest international grinders supplying major burger chains will visit Darwin this week, receiving a presentation about the project, and an opportunity to meet local beef producers.”

 

 

 

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  1. Joe Marshall, March 5, 2016

    We are interested in this kind of project for our region , Nigeria/Africa. Please keep us updated

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