Quote:About 63 per cent of the company's older abalone stock - those three years and older - died in the third quarter, although the industry average mortality rate for such abalone is in the single digits, he noted.
Such a high death rate is highly unusual. Some simple reasons: contamination, sabotage, bad weather, or plain bad luck.
Also, how did the company know that they lost 42m abalones? Did they count every dead abalone, or did they count what was left and subtracted that from the previous count? If so, was the previous count correct to begin with? If they counted the abalones left instead of the dead abalones, how do they know that no abalones were stolen?
How do they do their counts, anyway? The 2010 annual report says they had 30,123 tanks with 178.3m abalones at 31 Dec 2010. That's about 6,000 abalones per tank. Did they count every abalone? If not, how did they estimate the population? Who did the counting or estimation, and how robust was their method?
If we look at the reported abalone populations in the last 4 quarters we see:
4Q10
>5.8cm 38m
<5.8cm 140m
Total 178m
1Q11:
>5.8cm 45m
<5.8cm 123m
Total 168m
2Q11:
>5.8cm 28m
<5.8cm 181m
Total 209m
3Q11:
>2.7cm 93m
2-2.7cm 75m
Total 168m
2 things come to mind:
1. In 2Q11 the large abalone population fell significantly. This was explained as sales of laggards (keeping superior stock) and increased mortality (overcrowding due to further growth in size).
Selling of laggards could be done by sorting based on size versus expected age. There will be some measurement errors but they can set the bar low enough to compensate e.g. 20% below expected size. But they sold over 1/3 of the large stock so it suggests they were not just culling the slow growers but also needed to generate cash.
Given how slowly adult abalones grow (~1 cm per YEAR) the overcrowding issue doesn't make sense. Either they were already overcrowded to begin with and would have died anyway, or they were not overcrowded to begin with and should not have become overcrowded within 3 months.
2. In 3Q11 the cut-off was set at 2.7cm versus 5.8cm in the previous 3 quarters
The simple answer is that there are very few (or zero) abalones remaining that are >5.8cm in size. In fact the total population of 168m is below the 181m of <5.8cm reported in 2Q11. In other words every abalone they now have is probably <5.8cm i.e. they either sold or lost all their large abalones.
The original RTO circular (when Oceanus was injected into TR Networks) indicates on page 110 that Juveniles "graduate" to Adult status at 15 months of age, when they are about 4-4.5cm long. Over the next 40 months they grow to 6.5-10.5cm in length. On the same page it states that survivability of Adults is 97% or more. Oceanus lost 63% of their older (>3 years) abalones, in other words they lost 63% of their adult stock when they should have lost less than 3%.
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So what is in store for Oceanus?
First of all they need to figure out what went wrong. Was the stock lost from contamination, sabotage or theft? With 209m abalones in 30,000 tanks, the odds of pure bad luck are astronomical.
Second, can they recover? They have high (and rising) fixed costs in the form of electricity, labour and feed. At the same time they have loans coming due from banks and convertible loan investors.
At a glance it seems that they could probably restructure the convertible loan, since the investors have no expertise in operating the business and would not want to foreclose. So probably it means a higher coupon rate, increased dilution, or both. Once the convertible loan is restructured the bank loan is relatively easy to fix.
What does this mean for minority investors?
There is no good news at all. If they can't restructure the convertible loan it is game over since they have no cash flow (there are very few/zero saleable adult abalones left). If they do restructure the convertible loan the company will lose most of its cash flow to interest payments, or the stock will be severely diluted, or both. Either way there will be little left for minorities.
So it is a no-win situation. It is just a question of how much minority investors are going to lose.
As usual, YMMV.
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