Redes sociales

for marine industries in DNB, Kristin Holth, stated in 2019 that land-based farming is in a early stage with high risk. Therefore it is normally equity financing that must take these projects to a certain level before debt financing becomes relevant (Knudsen, 2019a). We assume that the project pay out all excess cash to shareholders in the form of dividends in line with weighted average cost of capital (WACC) assumptions regarding a constant debt-to-equity ratio. Some projects might be able to achieve some form of debt capital, either in the form of bonds or bank debt. In such a scenario, the cost of capital would theoretically be lower and the cost of equity higher. The overall effect would be a reduced cost capital as the interest tax shield obtained from increasing the debt share would more than make up for a higher cost of equity.

Liu et al. (2016) estimated the capital structure to consist of 40.0% equity and 60.0% debt in their NPV analysis. We argue that their choice of capital structure may not be realistic. Bjørndal and Tusvik (2017) modeled NPV before tax and thus argued that the NPV is independent from the choice of capital structure. This is based on the propositions by Modigliani-Miller for perfect capital markets. We argue that this is a simplistic and unrealistic way of modelling the profitability as taxes represent a true cost for salmon farmers and as the choice of capital structure matters. This is especially true for land-based salmon projects where there seems to be limited debt financing available.

7.4

Comparison of capital expenditures

7.4.1

Land-based facilities

In this section we present our estimate of capital expenditures required for the project, and compare this to other Norwegian land-based projects. We also compare the required capital expenditure to that of a corresponding sea-based facility.

62 7.4 Comparison of capital expenditures

Figure 7.5: Capital expenditures per kg (HOG) of planned facilities in Norway, Atlantic Sapphire and previous studies, Sources: ilaks (2019f,a); Andfjord Salmon (2019); Kyst (2018, 2017a); ilaks (2019b); Kyst (2017b); ilaks (2019e,d, 2018a,b, 2016); Tekfisk (2019); Atlantic Sapphire (2019b); Liu et al. (2016); Bjørndal and Tusvik (2017); Bjørndal et al. (2018)

Figure 7.5 outlines capital expenditures per kg for all planned Norwegian land-based facilities with available information, as well as for Atlantic Sapphire2 _{and previous studies.}

There seems to be considerable variations in capital expenditures per kg between the projects, with some at twice the level of others. Although economies of scale may be important, we find large projects (capacity over 20,000 tonnes) in both ends of the scale. Nordic Aquafarms has an estimated capital expenditure per kg of NOK 144.0, while Atlantic Sapphire is estimated to NOK 85.0 when fully developed.

Although scale may explain some of the variations, key design elements such as the ratio between the number of RAS and number of fish tanks will have a large impact on capital expenditure per kg (Atlantic Sapphire, 2019a). This is a choice made in the design phase and determines the biosecurity of the plant.

Multiple RAS systems increase capital expenditure per kg, while offering better biosecurity, as a smaller part of production is affected in case of operational problems like occurrence of H2S. Contrary, a lower RAS density lowers capital expenditures per kg while increasing

the risk of operational problems. The variation in capital expenditure per kg may reveal

7.4 Comparison of capital expenditures 63

differences in operational risk as well as scale.

Two FTS facilities are included in the figure. However, there seems to be insignificant differences in capital expenditures per kg when comparing them with RAS facilities. Salmon Evolution has an estimated capital expenditure per kg of NOK 123.0 while Andfjord Salmon has 73.0 when fully developed. This is on comparable levels with RAS facilities.

Our facility has estimated capital expenditures per kg (HOG) of NOK 155.9. This is well above both Liu et al. (2016), Bjørndal and Tusvik (2017) and Bjørndal et al. (2018). Note that Bjørndal et al. (2018) understates capital expenditures per kg as they used estimated capital expenditures for a 5,000 tonnes facility, however without scaling it to 6,000 tonnes which was the modelled capacity used throughout the study. Further, our estimate is in line with the most expensive projects disclosed. However, the disclosed capital expenditures for these projects are likely to be positively biased. This because these estimates are based on news articles for projects which typically lacks financing. We believe the news articles are part of marketing the projects in order to attract capital. This reduce the robustness of the numbers. Nevertheless, these are the best estimates currently available and serves to give an industry overview rather than precise numbers.

7.4.2

Comparing a land-based and sea-based facility

In order to compare total capital expenditure associated with a 10,000 tonnes RAS facility with a Norwegian sea-based facility, we have to estimate required capital expenditures for the latter. We assume a production capacity of 10,000 tonnes live weight using 7 licenses which equals 5,460 tonnes of MAB in total. As such, we assume that one unit of MAB produce 1.83 units of salmon in live weight. For the MAB we use both average and high estimates from the June 2018 auction in order to provide capital expenditure per kg estimates, however we place most weight on the Norwegian average price. This equals a license price of NOK 145.5 million and NOK 194.6 million respectively, and this differs considerably from that assumed by Liu et al. (2016) and Bjørndal et al. (2018). The different assumptions on MAB prices is presented in table 7.5.

64 7.4 Comparison of capital expenditures

Table 7.5: Assumed price per MAB license, Source: Liu et al. (2016) and Bjørndal et al. (2018)

Study NOK million Liu et al. (2016) 55.0 Bjørndal et al. (2018) 93.6

Our study 145.6

We assume the production to be split in two locations. This is based upon assumptions on locality MAB and that a large location according to Iversen et al. (2018) consist of seven licenses. We have estimated necessary equipment for the facility based on Bjørndal et al. (2018). The number of net pens are estimated using the volume of a net pen with a diameter of 130.0 meter, equal to 25,000 m3 _{and the density limit of 25.0 kg/m}3 _(Bjørndal

et al., 2018). This results in a production per net pen of 625.0 tonne per cycle. However, due to two months fallowing we estimate a total production cycle in sea of 14 months. When adjusting for this, rounding to closest even number and add two net pens per locality as production buffer, we end up with 24 net pens for the sea-based facility. A more detailed overview of the components and prices assumed for the sea-based facility is presented in table 7.6 and 7.7. Please note that licences have an infinite life time and are therefore not subject to depreciation.

Table 7.6: Capital expenditures for a 10,000 tonnes sea-based facility using two locations and average MAB-price, Source: Bjørndal et al. (2018); Norwegian Directorate of Fisheries (2019a)

Component Units Unit price NOKm Sum NOKm

Floating rings (incl. moorings) 24 1.375 33.0

Nets 24 0.300 7.2

Light, camera and feed systems 24 0.158 3.8

Feed barges 2 20.000 40.0

Small boat 2 0.450 0.9

Large boat 1 3.000 3.0

Office building 1 15.000 15.0

Land and quay 1 20.000 20.0

Electricity (shore power) 1 20.000 20.0

Licences, average June 2018 7 145.461 1,018.2

Total 1,161.1

Capital expenditures/kg (HOG) 138.2

7.4 Comparison of capital expenditures 65

different MAB assumptions becomes clear. Despite the fact that capital expenditure per kg is estimated to NOK 138.2 and NOK 179.2 when using average and high MAB prices respectively, both these farms should theoretically have net present value equal to zero all else equal.

Both facilities have capital expenditure per kg in a comparable range to that of a land- based facility. Thus, it takes significant amounts of capital to establish a sea-based farming facility in Norway as licences must be included. Note that licences makes up between 87.7% and 90.5% of total capital expenditure in our estimates, which makes capital expenditures for sea-based facilities sensitive to changes in MAB prices. Of the two estimates, the one using average MAB price from 2018 has a slightly lower capital expenditure kg compared to the modelled land-based facility, however the one using high MAB price exceeds the modelled land-based facility.

Table 7.7: Capital expenditures for a 10,000 tonnes sea-based facility using two locations and high MAB-price, Source: Bjørndal et al. (2018); Norwegian Directorate of Fisheries (2019a)

Component Units Unit price NOKm Sum NOKm

Floating rings (incl. moorings) 24 1.375 33.0

Nets 24 0.300 7.2

Light, camera and feed systems 24 0.158 3.8

Feed barges 2 20.000 40.0

Small boat 2 0.450 0.9

Large boat 1 3.000 3.0

Office building 1 15.000 15.0

Land and quay 1 20.000 20.0

Electricity (shore power) 1 20.000 20.0

Licences, high June 2018 7 194.610 1,362.3

Total 1,505.2

Capital expenditures/kg (HOG) 179.2

In table 7.8 we present a comparison of capital expenditure for our modelled land-based facility and our estimate for a sea-based facility using average MAB price from 2018.