Administrators to be called in for Seafarms' $1.9 billion prawn project

Update (4:51pm AEDT): This afternoon Seafarms made a request for shares to be suspended from trading given "the outcome of the voluntary administration may materially impact SFG’s financial position" and "it will be very challenging to comply with its continuous disclosure obligations". The group also reported the board had resolved it was no longer in the best interests of the company to continue to fund Project Sea Dragon.

In yet another blow for outlandish Top End projects in 2023 after administrators were called in for the intercontinental renewable energy system Sun Cable, an ambitious $1.9 billion prawn farming development across the Northern Territory and Western Australia looks set to suffer a similar fate.

Seafarms Group (ASX: SFG) entered a trading halt this morning pending an announcement over the proposed appointment of an administrator to its subsidiary Project Sea Dragon (PSD) - a development that contemplates several operations spread over a wide geographic area from Gunn Point northeast of Darwin to the Ningaloo Reef gateway of Exmouth, although the primary sources of production would be 10,000ha of ponds in Legune Station, NT, feeding into a processing plant in Kununurra over the border in WA.

The news comes within two weeks of a decision from the Royal Institution of Chartered Surveyors that Seafarms owed $13.9 million to construction contractor Canstruct, in relation to money owed following the suspension of works on the project in December 2021 and the termination of contracts in April 2022. 

CEO Rod Dyer said the company was "extremely disappointed" with the decision, having only provisioned $8.7 million for a settlement of the dispute. He noted Seafarms had the capacity to cover the difference, but claimed the determination was "excessive" and the group would be considering its options including legal redress.

"With respect to the future of Project Sea Dragon, as stated in our announcement of 30 November 2022 the assessment of key risks to PSD in 2022 found there was no technical reason why it should not continue," Dyer said earlier this month.

In that announcement, Dyer said a June 2022 assessment had validated the effectiveness of large-scale prawn farms, hatcheries and packing, and importantly the viability of 10-hectare ponds.

The November announcement referenced a visit to overseas operations, including a 1,000ha-plus prawn farm in Ecuador with biomass assumptions and yields similar to Project Sea Dragon models.

Seafarms also claimed logistics providers to major supermarkets and customers had confirmed transit times and logistics arrangements for PSD were sound with acceptable shelf life for the product, and that an off-take partner in Europe had confirmed its commitment to the project.

The group also reported it was in advanced negotiations with potential funders for any revised proposals for PSD, with Dyer indicating a decision regarding its future would be made in early 2023. More details will be known once details of the administrator's appointment are revealed, which is expected to take place before the close of trading on Thursday, 16 February.

Prior to the adjudicator's decision, on 11 January chairman and West Australian rich lister Ian Trahar had even upped his stake in the company to 29.19 per cent, showing his confidence in the future of Seafarms and its flagship project.

In May last year Trahar led a successful push to remove then CEO Mick McMahon, an Inghams (ASX: ING) veteran who joined the company in November 2021 and within a month had suspended works on Project Sea Dragon, kicking off a review to test the planned development's feasiblity from a funding standpoint.

After five years of funding, Seafarms had raised $110 million for the project by mid-2020, with the Northern Territory Government committing to spend an additional $56 million on roads.

Seafarms raised a further $92.5 million for the project before construction began in June 2021, $20 million of which came from Trahar, but fell significantly short of raising enough to cover the costs of the first phase of construction.

When the review was published on 31 March 2022, it recognised the failure of Seafarms to raise the sufficient capital needed for the next phase of the project, concluding it would not "not generate acceptable financial returns".

Within just over a month, McMahon and CFO Ian Brannan were ousted from the company leadership, and PSD chief project officer Rod Dyer was promoted while the business conducted another assessment that came up more favourably for PSD based on the aforementioned benchmarks in Ecuador and partner commitments.

Finances have been under strain however. After reporting a $75 million loss in FY22, this figure was revised to more than $85 million in November 2022 in light of impairment losses, construction costs and employee benefit expenses.

Despite the fate of PSD hanging in the balance, Seafarms - worth around $38.7 million on the ASX - still has operational farms producing Black Tiger and Banana prawns in Cardwell on Queensland's Cassowary Coast.