Brad Adams doesn’t have anything against wearing a suit to work, as long as it’s made of neoprene. Most days, he takes a short boat ride from Augusta in Western Australia, to check on his 400ha sea ranch at Flinders Bay in the Ngari Capes Marine Park. “It’s better diving with the team than sitting in an office,” says Adams, managing director of Ocean Grown Abalone (OGA).
The protective abitats (abalone habitats) OGA invested in a few years ago are proving their worth. Like many businesses, OGA had to pause its harvest when COVID-19 hit. On the upside, leaving the abalone in their abitats means they’ll be bigger and worth more when finally sold.
“OGA remains focused on diversifying and generating sales opportunities, has a biomass of more than 263 tonnes of abalone (at 31 December 2019) and more than $3.4m in the bank,” reported OGA’s board in its April 2020 announcements to the ASX.
As of mid-May, Adams says OGA had planned 2020 would be break-even year. “We were in a growth phase and have reduced our targets by 30 per cent in response to the market — as well as our harvest. I don’t have a crystal ball, but we haven’t tapped into our cash reserves and have no plans to go into administration. We’ll make many decisions before considering that.”
Sustainable to survive
As a third-generation professional diver and seafood exporter, Adams knows the ebbs and flows of the sector. His father pioneered the wild-catch fishing industry in Augusta in the late 1960s, hauling in shark, tuna, lobsters, salmon and abalone. “It was an exciting and profitable industry during the 1970s and ’80s,”says Adams. “In the glory days, millionaires were made overnight when the price of abalone went through the roof. It was a cowboy scene, with no eye for the future.”
Like many business models that rely on natural resources, when demand exceeded supply, the abalone industry almost tanked. In the early 1990s, Adams left home to study biology and aquaculture, eager to learn about sustainable seafood production.
“My ambition is to rehabilitate the abalone grounds using hatchery-reared animals, because that’s the only future left.”
SME Director tools
It’s not only about surviving the next six months, writes Carl Gunther GAICD, president of the Turnaround Management Association Australia. SMEs should be thinking about their business in the context of at least two horizons:
- Survive: plan to get through the next six months
- Rebuild: plan to rebuild the business for the new normal.
While many wrong decisions can be fixed, indecision or taking too long to respond can have the most detrimental impact. Never has the adage “know your client” been more important. A laser-like oversight of cash receipts collection is critical and should be a daily exercise.
The federal government has a range of financial and operational assistance for impacted businesses, including $15b to enable smaller lenders to continue supporting Australian consumers and small businesses. Arguably the most significant initiative to date is the $250,000 “unsecured” loan offered by the federal government, but distributed through the banks. A number of non-traditional lenders have also been granted access to the scheme. In addition, many lenders are pausing and deferring existing loan repayment programs.
Recognising that additional debt and equity can be expensive, it’s important for SMEs to sweat their balance sheet assets harder. A number of asset-backed lenders provide working capital debt, and most will work with incumbent banks to make available the release of debtors or inventory from their security. Some will release up to 85 per cent of the invoice value for invoices less than 90 days from invoice date.
Three years after the abalone ranch was established, in the 2017 financial year, OGA harvested more than 17 tonnes of live weight abalone, with an average sale price of $45/kg; exporting nearly 60 per cent of the catch to Hong Kong. “The market for abalone is driven by Chinese migration,” says Adams. “We started exploring opportunities in other South East Asian economies, such as Malaysia, Vietnam and especially China, where a kilo of wild-catch abalone can sell for up to $100.”
The Chinese market is huge, valuable and supported by a free trade agreement allowing producers to market their brands more effectively. But for OGA to do well in China, it needed money to scale up. “Raising capital is about selling a good story and I’ve been proactive about that,” says Adams. “I left ab diving for a year to get my MBA and became better at explaining the economics of the business and building networks.”
OGA raised $10m when it listed on the ASX in November 2017. The sea ranch was expanded to a total of 10,000 abitats, about 30 people were employed and OGA trebled its abalone harvest to 55 tonnes in the 2019 financial year.
The company built a $3.4m processing facility to value-add to live and packaged exports. “Our advantage is we can bring abalone straight out of the water and within 10 minutes it’s in a seawater tank where it can be kept live and processed on demand,” he says.”
Then came COVID
The coronavirus pandemic wasn’t in Adams’ business plan. Like many fast-growth businesses, OGA was set up for export. The company is predicting a 12–18 month disruption to the market and planning for good times in five years as some Chinese abalone producers are selling their products below cost and will go under as a result. The company has had to stand down two divers and one other staffer from its original full-time workforce. Adams says they also employ six casuals, of which three full-time casuals are now on JobKeeper.
Sales into Asia had already dropped, when OGA sent a shipment on the last flight to Hong Kong in March. Adams was already lobbying for government support for a weekly airfreight service to Guangzhou. On 31 March, the federal government announced funding for freight flights to Asia and the United Arab Emirates, but like all things COVID, the situation changed quickly. Those flights turned out to be targeting larger producers. “Five tonnes is the minimum and if you want to send smaller amounts you need to consolidate with other producers via your freight forwarding company, which is a hassle.”
Other options have emerged. “Cathay is flying from Perth to Hong Kong once a week and other flights to South East Asia with Cathay and China Southern are helping,” says Adams. “And government support has meant some charter flights are cheaper than before COVID-19.”
Adams notes the road to recovery could be long. “We expect demand to remain soft until restaurants can freely trade and consumers have more confidence in their own safety. To that end we are continually monitoring the situation and adjusting our business plan.”
Most abalone farms keep the animals in sea cages or tanks on land where they can be monitored and protected. But caged animals need people to feed them and clean their quarters regularly, which adds cost. And because their diet is limited, cooped abalone don’t have the full flavour of the wild catch.
Wild abalone grow in shallow seawater under rocks or in reef crevices, then slowly move to open parts of a reef where more food flows past.
Adams decided the most sustainable approach for raising abalone was to replicate the natural habitat. “We raised capital in 2009 to test designs for man-made rocks and reefs. We trialled different ‘abitat’ (abalone habitat) designs, stocking densities, age of release and several locations within the bay, which gave us the confidence to commercialise the business with the current abitat design in 2014. We’re fortunate we’ve found a high-growth abalone area on sand, where we could get a 400ha aquaculture lease only a kilometre from the Augusta marina.”
That proximity to infrastructure on land is important, because although there are a few areas along the coast with the same pristine waters, sand and plenty of natural food sources, many are in isolated areas. It would be too expensive to service natural reefs in those places, let alone one made of thousands of pyramid-shaped abitats spread across 400ha of seabed.
The abitats have a low environmental impact because no nutrients are added to the ecosystem, the dive boats use hardly any fuel to reach them, and they help other species of marine life thrive by providing shelter and food. “Our sea ranch model gives us more certainty with harvesting and future supply,” says Adams. “We’re producing a wild-catch product with fast growth and high survival rates because the abs get plenty of natural food flowing into the abitats. Apart from cleaning and monitoring their densities, we just leave them be, and wait.”