News and Press Releases

Additional Details on Prawn Farm 4 Contractor Offer

Apr 21, 2016

As communicated in the prepared remarks on the conference call April 18th, “We have an offer from our construction subcontractor, one of the largest in China, on new terms to build the second Phase of the Zhongshan MegaFarm (Prawn Farm 4).” It was also communicated that “The estimated cost of $240M to complete construction of Prawn Farm 4 will be carried by the builder/contractor firm...”

During the conference call, a question came up regarding what portion of the offered cost relates to actual construction and what portion to financing. While all answers on the call were accurate, the Company offers this further explanation.

First, this offer is based on a solid understanding of the parties. However, it is not a firm contract. When it becomes a finalized contract, an 8-K will be issued. Second, the quoted figure of $240M is the total cost to the Company for Prawn Farm 4.

Construction will proceed in 6 modules over a period of roughly 3 ½ years.

Ordinarily, and for work to date at the Zhongshan MegaFarm, contractor payments are made when construction starts, with payments upon milestones being met, and finishing payments when construction is complete. Alternatively, for Prawn Farm 4, the understood terms call for deferred payments for each module to commence 6 months after construction completion for that module.

Therefore, as stated in the prepared remarks, “… cash flow from sales of goods will already be well underway to service deferred construction costs.”

The terms can be conceived to include an imputed interest rate as financing for the carry period. At this time the financing portion of the total cost cannot be calculated without revealing the underlying hard costs and profit for the contractor, the interest rate, and the number of monthly payments per module after the 6-month “grace period.” 

However, we can say that the carrying costs embedded in the terms represent a nominal financing component to the Company, because the local government is subsidizing the project by absorbing the majority of finance costs, and by helping to offset some of the upfront financing needed to complete the project.

Of salient interest to the company is the degree to which operations self fund each module. 

By way of example, and for illustrative purposes, each module’s total cost will be $40M on average. On average the designed production capacity of each module is 10,000 MT of prawns per year. Therefore construction costs will likely average $4.00 per kilogram. Assuming a conservative estimated sales price of $12.00 per kilogram, each module will potentially generate approximately $120M in revenue per year. Of course, while there can be no guarantees that these projected numbers will materialize, at this moment they are best method derived from experience to date.

Assuming one month of testing, 6 months of “grace period,” and 7 months to complete payments, the company will accrue one year’s production and cash flow from each module while completing payment of that module. 

The time period to complete module construction payment after the “grace period” remains a term to be finalized.

Contacts

Peter Grossman

Erik Ahl

Investor Relations

Nordic Countries

+1 (775) 901-0344

+46 (0) 760 495 885

info@sinoagrofood.com

erik.ahl@sinoagrofood.com

 


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