Salmon Farming Industry Handbook 2013

The Marine Harvest Salmon Industry Handbook The purpose of this document is to give financial analysts and

investors a better insight into the salmon farming industry, and what Marine Harvest considers to be the most important value drivers

.

Contents 1. Introduction 3 2. Definition of segment 4 2.1 Seafood as part of the larger protein space 4 2.2 Stagnating wild catch – growing aquaculture 5 2.3 Salmonids contribute 4.5% of global seafood supply 6 2.4 Supply of wild and farmed salmonids 7 2.5 Salmonids harvest 2012 8 3. The attributes of salmon 9 3.1 A healthy product 9 3.2 Resource efficient production 10 4. World market of farmed Atlantic salmon 12 4.1 Estimates of the market for farmed Atlantic salmon 12 4.2 Historic total harvest of Atlantic salmon 13 4.3 Trade and product flow - Atlantic salmon 14 4.4 Projecting future harvest quantities 15 4.5 Yield per smolt 16 4.6 Development in standing biomass 17 4.7 Supply and demand – historic prices for Atlantic salmon 18 4.8 Historic price development by local reference prices 19 4.9 Different sizes – different prices (Norway) 20 4.10 Price indexes vs. FOB packing plant 21 4.11 Price neutral demand growth - historically 6-7% 22 4.12 Price of Atlantic salmon relative to other protein sources23 5. Industry structure 24 5.1 Top 5-10 players in main producing regions 24 5.2 Number of players producing 80% of Atlantic salmon 25 6. Production of salmon 26 6.1 Establishing a salmon farm 27 6.2 Access to licenses – Norway 29 6.3 Access to licenses – Scotland 32 6.4 Access to licenses – Chile 33 6.5 Access to licenses – Canada 35 6.6 The Atlantic salmon life/production cycle 36 6.7 Production inputs 38 6.8 Factor influencing the pace of production 40

7. Cost dynamics 41 7.1 Economy in salmon farming 41 7.2 Production costs 42 7.3 Cost component – disease and mortality 43 7.4 Salmon feed 44 7.5 Salmon feed producers 45 7.6 Raw material market 46 7.7 Price, cost and EBIT development – Norway 47 7.8 Salmon farming is a capital intensive industry 48 7.9 Capital needs when building biomass 49 7.10 Accounting principles for biological assets 50 7.11 Investments and payback time for new entries 51 8. Salmon health and R&D 53 8.1 Salmon disease prevention and treatment 53 8.2 Most important health risks 54 8.3 Fish health and vaccination (Norway) 55 8.4 Research and development areas 56 9. Secondary Processing (VAP) 57 9.1 European value-added processing (VAP) industry 58 9.2 Market segment (2012) 59 9.3 The European market for smoked salmon 60 Appendix 61 Weight conversion ratios and key words 62 Some historic acquisitions and divestments 63 Marine raw materials in salmon feed 65 Sustainability of fish feed 66 Atlantic salmon production cycle 67 Marine Harvest history 68 Marine Harvest worldwide 69 Marine Harvest downstream (VAP) 70 Marine Harvest sales channels (2012) 71 Sources for industry and market information 72

  Updated as of April 27th 2013 Disclaimer While every reasonable precaution has been taken in the preparation of this document, Marine Harvest assumes no responsibility for errors or omissions, or for damages resulting from the use of the information contained herein. The information contained in this document is believed to be accurate. However, no guarantee is provided. Use this information at your own risk.

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1. Introduction 

  

  

Salmon Salmon is the common name for several species of fish of the family Salmonidae (e.g. Atlantic salmon, Pacific salmon), while other species in the family are called trout (e.g. brown trout, seawater trout). Although several of these species are available from both wild and farmed sources, all commercially available Atlantic salmon is farmed. Salmon live in the Atlantic and Pacific Oceans, as well as the Great Lakes and other land locked lakes. Typically, salmon are anadromous: they are born in fresh water, migrate to the ocean, then return to fresh water to reproduce. Atlantic salmon farming started on an experimental level in the 1960s but became an industry in Norway in the 1980s and in Chile in the 1990s. About 60% of the world’s salmon production is farmed. Farming takes place in large nets in sheltered quiet waters such as fjords or bays, or in tanks on land. Most of the cultured salmon come from Norway, Chile, Scotland and Canada. Salmon is a popular food. Salmon consumption is considered to be healthy because of the fish's high content of protein and Omega-3 fatty acids. The quantity figures in this industry handbook are mainly expressed in HOG (head on gutted). For a weight conversion table, see appendix.

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2. Definition of segment 2.1 Seafood as part of the larger protein space

Source: FAO, Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision Although 70% of the Earth’s surface is covered by water, only 6% of the protein sources for human consumption is produced in this element today. The global population is expected to grow by 2 billion, to more than 9 billion, by 2050. Assuming consumption per capita stays constant, this implies a 40% increase in demand for protein. The estimates for population growth, however, assume that the growth will mainly occur in Asia and Africa, which have the lowest protein consumption per capita today. When factoring in a trend of increased consumption per capita in these areas, the demand may double by 2050. Knowing that resources for increased land based protein production will be scarce, a key question is how protein production in sea can be expanded.

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2.2 Stagnating wild catch – growing aquaculture

  Source: Kontali Analyse, FAO, OECD There has been a considerable increase in total and per capita fish supplies over the past few decades. Aquaculture is the fastest growing animal food producing sector, and in 2012 the aquaculture industry contributed nearly 50% of the fishery output for human consumption. On average, fish provides about 30 kilocalories per person per day globally. The dietary contribution of fish is more significant in terms of proteins - it provides the world’s population with 6% of their intake of protein. While global human population is growing at a rate of 1.7% annually, aquaculture outpaces this rate by 1.4% - growing at 3.1% annually. Annual per capita fish consumption rose from 9.9 kg in the 1960s, to 18.4 kg in 2009. A total of 126 million tonnes (live weight, LW) fish was available for human consumption in 2009, where Asia consumed almost two thirds. To maintain current consumption level in 2030 taking population growth into account, an additional 23 million tonnes of fish production is needed. With the stagnating wild catch, the growth in fish production (and protein supply) is expected to come from the fast growing aquaculture industry. Food and Agriculture Organization of the United Nations (FAO) estimates that in 2030, aquaculture will have increased from 45 million tonnes to 85 million tonnes.

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2.3 Salmonids contribute 4.5% of global seafood supply

   Source: Kontali Analyse Even with an increase in production of Atlantic salmon of more than 600% since 1980, total global supply of salmonids is still marginal compared to most other seafood categories. Whitefish is about ten times larger and consists of a much larger number of species.

 Note: live weight (LW) is used because different species have different conversion ratios The graph compares selected species and their respective harvest/catch quantities in 2011. Harvest of Atlantic salmon was more significant than Atlantic cod and pangasius. But, compared to two of the largest whitefish species, tilapia and Alaska pollock, Atlantic salmon was less than half the quantity harvested.

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2.4 Supply of farmed and wild salmonids

Historical supply of farmed and wild salmon

Note: Small and large trout are not included in farmed quantities Source: Kontali Analyse The general supply of seafood in the world is shifting more towards aquaculture as the supply from wild catch is stagnating in several regions and for many important species. Wild catch of salmonids is varying between 700 000 and 1 000 000 tonnes HOG, whereas farmed salmonids are increasing. The first year the total supply of salmonids was dominated by farmed, was in 1999. Since then, the share of farmed salmonids has increased and has become the dominant source. The total supply of all farmed salmonids was over 2.1 million tonnes (HOG) in 2012. The same year, the total catch quantity of wild salmonids was about 824 000 tonnes, with pink, chum and sockeye being most common species. Origin and markets for wild salmonids

Source: Kontali Analyse The diagram shows competition of wild salmon in different markets for Atlantic salmon. About 25% of total wild catch of salmon has been imported frozen to China (from the US, Russia and Japan), and later been re-exported as frozen fillets. Once re-exported from China, one cannot distinguish between the different origins.

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2.5 Salmonids harvest 2012 – Farmed Atlantic salmon dominates

Source: Kontali Analyse Atlantic salmon: By quantity, the largest species of salmonids. It is a versatile product, which can be used for a variety of categories such as smoked, fresh, grilled, sushi, as well as ready-made meals. The product is present in most geographies and segments. Due to biological constraints, seawater temperature requirements and other natural constraints, farmed salmon is only being produced in Norway, Chile, UK, North America and New Zealand/Tasmania. In 2012, the total supply of Atlantic salmon was 1.78 million tonnes HOG. Pink: Caught in USA and Russia and used for canning, pet food and roe production. Quality is lower than the other species and is therefore a less valued salmonid. The fish is small in size (1.5-1.7 kg) as all catch happens in a very short time period Large trout: Produced in Norway, Chile and the Faeroes and the main markets are Japan and Russia. Trout is mainly sold fresh, but is also used for smoked production. Small trout: Produced in many countries and most often consumed locally as a traditional dish as hot smoked or portion fish. Small trout is not in direct competition with Atlantic salmon. Chum: Caught in Japan and Alaska. Most is consumed in Japan and China. In Japan, it is available as fresh, while in China it is processed for local consumption and re-exported. Little chum is found in the EU market. Varied quality and part of the catch is not for human consumption. Coho: Produced in Chile and is mostly used for salted products. It is in competition with trout and sockeye in the red fish market. Although Russia has increased its import of this specie the last years, Japan remains the largest market. Sockeye: Caught in Russia and Alaska. It is mostly exported frozen to Japan, but some is consumed locally in Russia and some canned in Alaska. Sockeye is seen as a high quality salmonid and is used as salted products, sashimi and some smoked in EU. Chinook/King: Low quantity species, but highly valued. Alaska, Canada and New Zealand are the main supplying countries. Most quantities are consumed locally. Chinook is more in direct competition to Atlantic salmon than the other species and is available most of the year.

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3. The Attributes of Salmon 3.1 A healthy product

Farmed salmon is a good source for the marine omega-3 polyunsaturated fatty acids eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA) that reduce the risk for cardiovascular disease. Data also indicates that EPA and DHA reduce the risk for a large number of other health issues. Salmon is viewed upon as a very versatile product, which can be used in numerous dishes in most culinary tradtions. It is popular with retailers as it is produced in a controlled environment and is stable in supply throughout the year (not subject to seasons).

Source: FAO, Marine Harvest Salmon is nutritious, rich in micronutrients, minerals, marine omega-3 fatty acids, very high quality protein and several vitamins, and represents an important part of a varied and healthy diet. FAO highlights “Fish is a food of excellent nutritional value, providing high quality protein and a wide variety of vitamins and minerals, including vitamins A and D, phosphorus, magnesium, selenium and iodine in marine fish”. The substantial library of evidence from multiple studies on nutrients present in seafood indicates that including salmon in your diet will improve your overall nutritional status, and may even yield significant health benefits. In the face of increasing obesity and decreasing health standards, governments and food and health advisory bodies in Europe and the USA are actively encouraging their populations to consume more fish as part of their diet.

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3.2 Resource efficient production

Protein production efficiency The main sources of animal protein are cattle, poultry, pork and seafood. The first three are farmed, and now also more and more of the available seafood is farmed. One method to measure how productive the different protein productions are, is by using the representative feed conversion ratio (FCR). In short, this tells us the kilograms of feed needed to increase the animal’s bodyweight by one kg. If we compare farmed salmon with the other three species, we find a variation in the FCR between 1.2 and 8.0, where salmon is the most efficient in production and cattle are the least. The main reason why salmon convert feed to body weight so efficiently is because they are cold-blooded and therefore do not have to use energy to heat their bodies. Wild salmon has a FCR of approximately 10.0.

Atlantic salmon boasts a high energy and protein retention compared to pig and chicken.

Source: Ytrestøyl et. al (2011)

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3.2 Resource efficient production

As well as a low FCR, Atlantic salmon has a significantly higher edible yield in comparison with other protein sources. As much as 68% of Atlantic salmon is edible meat.

Source: Norwegian University and Life Sciences (2002)

Most of the fish is edible meat, while other sources of meat have a higher level of waste or non edible meat. The combination of the FCR ratio and edible yield, gives salmon a favourably high quantity of edible meat per kg of feed fed, as the graph to the left shows.

Source: Norwegian University and Life Sciences (2002) Freshwater consumption in production Freshwater is a renewable but limited natural resource, which can only be renewed through the process of the water cycle. If more freshwater is consumed through human activities than is restored by nature, the result is that the quantity of freshwater available in lakes, rivers, dams and underground waters, is reduced. This can cause serious damage to the surrounding environment. Farmed Atlantic salmon requires only 1,500 litres per kg of fresh water in production whereas producing 1 kg beef requires 14 000 litres of fresh water consumption!

68%

52%46%

Atlantic Salmon Pig Chicken

Edible yieldEdible meat/total body weight

57 kg

17 kg

23 kg

Atlantic Salmon Pig Chicken

Edible meat per 100kg feed fed

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4. World Production and Market of Farmed Atlantic Salmon 4.1 Estimates of the market for farmed Atlantic salmon  

Source: Kontali Analyse  Supply of Atlantic salmon has more than doubled since 2000 (annual growth of 7%). Due to various constraints, Kontali Analyse expects annual supply growth of Atlantic salmon to drop to 3% in the period 2013-2020. The EU and the US are by far the largest markets for Atlantic salmon. However, emerging markets are growing at significantly higher rates than these traditional markets. As all harvested fish is sold and consumed in the market, the demand beyond 2013 is assumed equal to supply (estimated by Kontali Analyse). As can be seen from the graph below, salmon is one of the food categories that grow at a significantly higher rate than the world’s human population.

Source: Kontali Analyse, Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision

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4.2 Historic total harvest of Atlantic salmon

Source: Kontali Analyse

Farming of Atlantic salmon has always been dominated by a few producing countries as there are several natural conditions that need to be in place for optimal production, like seawater temperature range (see chapter 6), a sheltered coast line and certain biological conditions. In the beginning of the 2000s, Chile started to increase production sharply. However, in 2007 there was an outbreak of the ISA virus, which resulted in a serious production setback (2009-2011). Since 2010, Chilean industry has been subject to an aggressive rebuild. The production in Canada and the UK has been stable the last 5 years, and has limited potential for future growth. Other regions have generally been growing, but from rather marginal quantities.

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4.3 Trade and product flow – Atlantic salmon Historically, the main market for each origin has been:

• Norway – EU, Russia and Asia • Chile – USA, South America and Asia • Canada – USA (west coast) • Scotland – mainly domestic (limited export)

The logistic and perishability of the product has led to this supply trend. A new trend since the beginning of this millennium has been that Norwegian fresh salmon meet more competition from Chilean frozen salmon in the European market. This, together with strong competition between mainly Norwegian and Chilean salmon in the Japanese market, and the increase in export from Scotland and Norway to USA during the period of reduced supply from Chile, shows that the market is becoming more globalised. Nevertheless, there will still be regional markets for the different production countries due to cost of logistics for fresh salmon. It is only frozen salmon that can be made available in large quantities for distant markets at low costs. It is generally expected that the market will continue to have a preference for fresh salmon, going forward. Global trade flows of farmed Atlantic salmon - 2012 (HOG)

Source: Kontali Analyse

Norway, Iceland, Faroe Islands:Harvest: 1 130 000Market: 33 000

Russia:Harvest: 6 000Market: 155 000

Japan:Harvest: 0Market: 57 000

Other Asia:Harvest: 0Market: 137 000

Australia & New Zealand:Harvest: 33 000Market: 36 000

North America:Harvest: 129 000Market: 347 000

Latin America:Harvest (CL) : 328 000Market: 105 000

EU:Harvest : 156 000Market: 823 000

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4.4 Projecting future harvest quantities

The three most important indicators on future harvest quantities are standing biomass, feed sales and smolt release. These three are good indicators on medium term and long term harvest, while the best short term indicator is standing biomass categorized by size. As harvested size is normally above 4 kg, the available quantity of this size class is therefore the best estimate of short term supply. If no actual numbers on smolt releases are available, vaccine sales could be a good indicator of number of smolt releases and when the smolt is put to sea. This is a good indicator on long term harvest as it takes up to 2 years before the fish is harvested after smolt release. Variation in seawater temperature can materially impact the length of the production cycle. A warmer winter can for example increase harvest quantities for the relevant year, partly at the expense of the subsequent year. Disease outbreaks can also impact the harvest quantity due to mortality and slowdown of growth.

Standing BiomassSource: Kontali

Feed SalesSource: feed companies

Seawater Temperature

Source: Meteorological institutes

Disease OutbreaksSource: Media

Smolt ReleaseSource: Producing 

companies

Vaccine Sales

Source: e.g. ScanVacc

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4.5 Yield per smolt

Source: Kontali Analyse, Marine Harvest Yield per smolt is an important indicator of production efficiency. Due to the falling cost curve and the discounted price of small fish, the economic optimal harvest weight is in the area of 4-5 kg (HOG). The number of harvested kilograms yielded from each smolt is impacted by diseases, mortality, temperatures, growth attributes and commercial decisions. The average yield per smolt in Norway was estimated to 3.52 kg (HOG) for the year 2011.

Since 2010, the Chilean salmon industry has been rebuilding its biomass after the depletion caused by the ISA crisis commencing in 2007. In 2010/11, the Chilean salmon industry showed a very good performance on fish harvested due to the low density of production (improved yield per smolt). In line with the increased density, biological indicators have deteriorated significantly in 2012/13. Average yield in the UK and Faroe Islands in 2011 was estimated to 2.80 kg and 3.57 kg, respectively.

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4.6 Development in standing biomass

Source: Kontali Analyse

Because of the variation in sea water temperatures during the year, the total standing biomass in Europe has a S-curve, which is at its lowest in May and at its peak in October. The Norwegian industry is focused on minimizing the natural fluctuations as license constraints put a limit to how much biomass can be in sea at the peak of the year. In Chile the situation is different due to more stable seawater temperatures and opposite seasons (being in the Southern hemisphere). A more steady water temperature gives the possibility to release smolt during the whole year and gives a more uniform utilization of the facilities. The reduction of standing biomass in Chile in 2008 and 2009 is due to the impact of the ISA disease.

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4.7 Supply and demand – historic prices

Source: Kontali Analyse Due to the long production cycle and the short shelf life of the fresh product (maximum 3 weeks), the spot price clears on the basis of the overall price/quantity preference of customers. As most of the farmed salmon is perishable and therefore marketed fresh, all salmon produced in one period has to be consumed in that same period. In the short term, the production level is difficult and expensive to adjust as the planning/production cycle is three years long. Therefore, the supplied quantity is very inelastic in the short term, while also demand is shifting with the season. This has a large effect on the price volatility in the market. Factors affecting market price for Atlantic salmon are:

• Supply (absolute and seasonal variations) • Demand (absolute and seasonal variations) • Globalisation of the market (arbitrage opportunities between regional markets) • Presence of sales contracts reducing quantity availability for the spot market • Flexibility of market channels • Quality

Comparing FCA Oslo, FOB Miami and FOB Seattle, there are clear indications of a global market as the prices correlate to a high degree.

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Price development Atlantic salmon 2000 ‐ Q1 2013

Price ‐ Norwegian gutted Atlantic salmon (FCA Oslo)

Price ‐ Chilean Atlantic salmon fillet 2‐3 lb (FOB Miami)

Price ‐ Fresh Atlantic salmon 8 ‐ 10 lb (FOB Seattle)

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4.7 Historic price development by local reference prices

Source: Kontali Analyse The three graphs above shows quarterly average prices of salmon from 2000 to Q1 2013. As in most commodity industries, the producers of Atlantic salmon are experiencing much volatility in the price achieved for the product. The average price for Norwegian whole salmon the last decade has been about NOK 27/kg (HOG), for Chilean salmon fillet (2-3lb) USD 3.31/lb, and for Canadian salmon (8-10lb), USD 2.11/lb (HOG). The pricing of Scottish and Faroese salmon is a derivate of the price of Norwegian salmon. The price of Scottish salmon is normally at a premium of 3-5 NOK to Norwegian salmon, whereas the Faroese is normally at a small discount.

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4.8 Different sizes – different prices (Norway)

Source: Kontali Analyse The most normal market size for a salmon is 4/5 kg HOG. The reason for the different sized fish is mainly because salmon farming is a biological production process, where the fish has different growth cycles and the biomass represents a normal distributed size variation. The markets for the different sizes vary, as can be seen in the above graph. The processing industry in Europe mainly uses 3-6 kg HOG but there are niche markets for small and large fish. As these markets are minor compared to the main market, they are easily disrupted if quantities become too high. Generally, small fish sizes are discounted and large sized fish are sold at premium.

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4.10 Price indexes vs. FOB packing plant

* Average difference between SSB and return to packing plant Source: Fishpool, NOS/FHL, SSB, Norwegian Seafood Council, UrnerBarry, Kontali Analyse Several price indices for salmon are publicly available. The two most important providers of such statistics for Norwegian salmon are NOS/Fish Pool and Statistics Norway (SSB). Urner Barry in the US provides a reference price for Chilean salmon in Miami and Canadian salmon in Seattle. In Norway the price is found by deducting freight cost from the farm to Oslo and the terminal cost from the NOS/FHL price (~0.70 NOK). If using the SSB custom statistics, you need to adjust for freight to border, duty and taxes, and also to adjust for quality and contract sales to get the achieved spot price back to producer. Average difference between SSB price and FCA Oslo is ~1 NOK, which gives the average difference between SSB price and back to plant at NOK 1.50**. Calculating Urner Barry – Chilean fillets, back to HOG plant is more extensive. It is necessary to use UB prices for both 2/3 lb and 3/4 lb and adjust for quantity share, market handling (4 cent), market commission (4.5%), premium fish share (92%), reduced price on downgraded fish (30%), airfreight (USD 1.50/kg) and HOG to fillet yield (70%). **Historically this difference fluctuates from week to week and will normally be observed in the range of [-2 to +4]

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4.11 Price neutral demand growth - historically 6-7%

Source: Kontali Analyse Combining the data gives a linear correlation between change in global supply and change in the Norwegian FHL price. This relation had an explanatory power of almost 87% of the annual price development between 2000 and 2011. Including 2012, this figure decreases to 66%. The price correlation across regional markets is generally strong for Atlantic salmon. The Norwegian FHL price represents about two thirds of the global quantities for Atlantic salmon. Growth in global supply of Atlantic salmon is estimated to 119% in the period 2000-2012 (annual CAGR 7%), varying between -2% and 22% (2011-12) annually. Variation in growth rates has been the main determinant for the variation in prices. Annual average prices have varied between NOK 19.50 (2003) and NOK 37.45 (2010).

Y-o-YGlobal supply

changeChange in av. price

FHL price

2000‐01 13 % ‐25 %

2001‐02 7 % ‐10 %

2002‐03 8 % ‐3 %

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2004‐05 4 % 17 %

2005‐06 2 % 23 %

2006‐07 10 % ‐21 %

2007‐08 7 % 4 %

2008‐09 ‐2 % 18 %

2009‐10 ‐1 % 24 %

2010‐11 12 % ‐19 %

2011‐12 22 % ‐13 %‐30%

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4.12 Price of Atlantic salmon relative to other protein sources

Source: International Monetary Fund, Marine Harvest Compared to other food sources containing animal protein, salmon has become relatively much cheaper during the last decades. Relative price of salmon in terms of other protein sources in selected major markets (snap-shot of consumer prices in selected retail stores, salmon fillet compared to beef steak, pork fillet and chicken breast fillet, April 2013) Salmon/Beef Salmon/Chicken Salmon/Pork UK 0.9 1.4 1.5 US 1.3 2.3 1.9 Belgium 1.3 1.7 1.9 Japan 1.3 2.0 2.0 Despite salmon having become relatively cheaper over time, it is still a rather expensive product in the shelves.

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5. Industry Structure 5.1 Top 5-10 players in main producing regions of farmed Atlantic salmon

Source: Kontali Analyse The Marine Harvest Group represents the largest total production and holds about one quarter of the quantity in Norway, and about one third of the quantity in North America and UK. In North America and the UK, production is more consolidated (see next page). In Norway and Chile there are several more companies with a significant production quantity of Atlantic salmon. In Chile, several of the companies also produce other salmonids, such as coho and large trout.

2012E tonnes wfe

Top 10 Norway H.Q. Top 10 UK H.Q. Top 10 North America H.Q. Top 10 Chile H.Q.

1 Marine Harvest 283 700      Marine Harvest 44 700        Marine Harvest 44 700        Marine Harvest 44 400       

2 Lerøy Seafood 140 000      Scottish Seafarms 30 100        Cooke Aquaculture 30 000        Pesquera Los Fiordos 44 000       

3 Salmar 114 000      The Scottish Salmon Company 26 600        Cermaq 21 100        Salmones Multiexport 40 000       

4 Cermaq 56 700        Morpol (Meridian Seafood) 25 600        Grieg Seafood 15 100        Mainstream inkl. CM Chiloé 34 500       

5 Grieg Seafood 43 700        Grieg Seafood 19 000        Northern Harvest 10 000        Camanchaca 31 120       

6 Nordlaks 40 000        * * Blumar 30 600       

7 Nova Sea 38 400        Australis Seafood 19 000       

8 Alsaker Fjordbruk 27 600        Empresas Aquachile 18 000       

9 Bremnes Seashore 27 000        Invertec 18 000       

10 Norway Royal Salmon 23 500        Salmones Cupquelan (Cooke) 14 000       

Top 10 794 600      Top 10 146 000      Top 10  76 200        Top 10 293 620     

Others 388 600      Others 10 200        Others 66 700        Others 70 680       

Total 1 183 200   Total 156 200      Total 142 900      Total 364 300     

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5.2 Number of players producing 80% of the ocean-farmed salmon and trout quantity per region

Source: Kontali Analyse Historically, the salmon industry has been made up by many, small firms. This has been the case in Norway, and to some degree in Scotland and in Chile. The higher level of fragmentation in Norway compared to Chile is the result of the Norwegian government’s priority to decentralised structures and local ownership. In Chile the government put fewer demands on ownership structures in order to grow the new industry faster. During the last decade the salmon farming industry has been through a period of consolidation in all regions. The consolidation trend is expected to continue. The recent increasing number of players making up 80% of the quantity in Chile is explained by the major reduction in output in connection with the ISA crisis. Given the current rebuild, the situation is expected to gradually revert to fewer players. See appendix for some historic acquisitions and divestments.

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6. Production of salmon

In all salmon producing regions, the relevant authorities have a licensing regime in place. In order to operate salmon farming, a license is the key prerequisite. The licenses constrain the maximum production for each company and the industry as a whole. The license regime varies across jurisdictions. The salmon farming production cycle is about 3 years. During the first year of production the eggs are fertilised and the fish is grown into approx. 100 grams in controlled freshwater environment. Subsequently, the fish is transported into seawater cages where it is grown out to approx. 4-5 kg during a period of 14-24 months. The growth of the fish is heavily dependent on the seawater temperatures, which varies by time of year and across regions. Having reached harvestable size, the fish is transported to primary processing plants where it is slaughtered and gutted. Most salmon is sold gutted on ice in a box.

27

6.1 Establishing a salmon farm

License and location (Norway) Since 1973, a license has been required to operate a salmon farm in Norway. A license gives the right to farm salmon either in freshwater or in the sea. In addition, a site where the license can be used must be granted. One license can be associated with up to four sites, and one site may use several licenses at the same time. These licenses are awarded by the Ministry of Fisheries and are administered by the Directorate of Fisheries. It is also possible to apply to the Directorate of Fisheries to change the size of a site and licenses can be traded between companies in the industry. Since 1982, new licenses have been awarded only in limited numbers the years 1985, 1988, 1999, 2001, 2002 and 2009. At the end of 2012, there were 963 seawater licenses in Norway. One license is set to a maximum allowed biomass (MAB) of 780 tonnes (900 tonnes in Troms and Finnmark). Most Norwegian fish farming sites have between 2 340 and 3 120 tonnes allowed maximum standing biomass. License and location (Scotland) In Scotland, the licensing system is very different. Instead of a license, there are 3 institutions that that have to give permission before one is allowed to make use of an area: Planning Permission; SEPA and Marine Scotland. Individual site biomass is governed by environmental concerns, namely the assimilative capacity of the local marine environment. As a consequence, individual site biomass is not uniform but varies between 100 tonnes to 2 500 tonnes maximum depending on site characteristics.

28

6.1 Establishing a salmon farm

License and location (Chile) In Chile the licensing is based on two authorizations. The first is the authorization to operate an aquaculture facility under certain technical requirements, which is issued by Fishery Sub Secretary (Economy Ministry). The authorization is for unlimited time and can be traded. The second authorization is for the physical area to operate (or permission to use national sea areas for aquaculture production). This is issued by the Sub secretary of the Navy, which belongs to the Defence Ministry. The use of the license is restricted to a specific geographic area, to defined species, and to a specified limit of production or stocking density. The production and stocking density limit is specified in the Environmental and Sanitary Resolution involved for any issued license. License and location (Canada) Marine sites are located on Crown land. The Provincial Government needs to grant a so-called tenure license to occupy a certain area of the ocean bottom. These tenures are issued for periods varying from 5 to 15 years. An annual tenure rental fee is charged depending on the size of the tenure. Fees are increased annually with inflation. In 2012 the annual fee for a typical tenure of 25 ha is CAD 9 800. Tenure licenses can be renewed upon request. In addition, the Federal Government needs to grant a license of operation. This Federal License states all the conditions which the farm has to observe and regulates production parameters, such as the Maximum Allowable Biomass, the use of equipment, etc. A typical site license will range in size from 2,000 MT to 4 500 MT of Maximum Allowable Biomass. The Federal License is presently issued for one year at the time and is renewable. It is expected that as of 2014 a fee will be charged for this license based upon the amount of production on the farm, however, the exact details are not known at this point of time. The Provincial and Federal licenses are specific for one location only. Licenses may be lost for non-compliance issues and non-payment of fees. Equipment To equip a grow-out facility you need cages (steel or plastic), mooring, nets, cameras, feed barge/automats and boats. For a normal facility in Norway (850 000 smolt release) the investment costs would be in the range of 25-30 million NOK.

29

6.2 Access to licenses - Norway It is legal to trade licenses in Norway, however there are some restrictions. If the buyer, through trade, gets control of more than 15% of the total licensed biomass in the country, he/she has to apply for an approval from the Ministry of Fisheries and Coastal Affairs. The Ministry cannot give the approval if it implies that the buyer gets control of more than 25% of the total biomass in the country. No owner can control more than 50% of the total biomass in any of the regions. In 1993, a salmon farming license was traded for NOK 200 000, while the price today is normally about MNOK 20-70. In the last round of new licenses from the government, the price was however heavily discounted (cost of MNOK 8 per license) and awarded to small players operating in rural areas. Many of these licenses have since been sold at large gains. When assignment for a license is given, it has to be used within two years with a minimum of one third of the allowed biomass. A license can be pledged. A license cannot be leased out. Example The figure below depicts an example of the regulatory framework in Norway.

1 company Number of licenses for a defined area: 5

o Biomass threshold per license: 780 tonnes live weight (LW) o Maximum biomass at any time: 3,900 tonnes (LW)

Number of sites allocated is 3 (each with a specific biomass cap) In order to optimise the production and harvest quantity over the generations, the

license holder can play within the threshold of the three sites as long as the total biomass in sea never exceeds 3,900 tonnes (LW).

30

6.2 Access to licenses – Norway

2013 utilisation per license for the industry and the largest companies

Source: Marine Harvest, Kontali Analyse, Fiskeridirektoratet, Quarterly reports The graph is organized by highest harvest quantity. Number of sea water licenses for salmon and trout in commercial use in Norway:

o 2007: 929 o 2008: 916 o 2009: 988 o 2010: 991 o 2011: 990 o 2012: 963

Because of the regulation of standing biomass (maximum allowed biomass - MAB) per licence (780 tonnes LW), the production capacity per licence is limited. Annual harvest quantity per license in Norway can be as much as 1 200 tonnes HOG. Larger players typically have better flexibility to maximise output per license. The average utilisation for the industry is hence lower than the utilisation for the largest companies.

 ‐

 200

 400

 600

 800

 1 000

 1 200

 1 400

AverageNorway

MarineHarvestNorway

Company A Company B Company C Company D

Thousand tonnes HOG/G

W

Average harvest per license 2013

31

6.2 Access to licenses - Norway Industry production is approaching its limit (Norway)

Estimated MAB-utilisation in Norway 2009-2013E

Source: Kontali Analyse Due to the fact that the two counties Troms and Finnmark, in Northern Norway, have a higher MAB per license, the total MAB capacity is slightly higher than 780 tonnes LW per license. Total biomass of salmon and trout in Norway is increasing each year and is approaching the limit in terms of MAB, particularly in the second half of each year due to the seasonality of farming operations. Norwegian authorities are planning to issue approximately 5% new licence capacity during 2013. Of this, approximately 1.5% is anticipated to be applied during 2013.

300 000

400 000

500 000

600 000

700 000

800 000

900 000

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Tonnes whole fish equivalent (W

FE)

Total MAB Capacity incl. wellboat/holding cages

Total biomass ‐ Salmon and trout

32

6.3 Access to licenses - Scotland In Scotland it is legal to trade licenses and although no restriction on number is given, there is a limit on production quantity ascribed to any one company. This limit is determined by the Competition Commission Authorities. Licensing aquaculture operations in the UK is currently in a transitory state; all new applications require planning application for permission to operate, as well as an environmental and Crown estate license. The granting of the planning permission is aligned to the Crown estate lease for a 25 year period. All existing fish farm leases in Scotland are currently undergoing a review process which transfers them from the Crown estate to local regional councils. These grants are automatically given a 25 year lease. Any site with Planning Permission is not required to go through this review process The environmental license can be revoked in some cases of significant and long-term non-compliance. Most existing licenses are automatically renewed at the expiration of their lease period. New license applications take around 6-12 months for the planning permission and around 4-6 months for the environmental discharge license. Expansion of existing facilities is the most efficient route in terms of cost and time, whilst brand new sites will take longer and has to go through an Environmental Impact Assessment (EIA) process. The environmental license is charged annually at GBP 5 338, whilst the standing rent is levied to the crown estate on production basis as follows: GBP 22.50 per tonne harvested for Mainland sites; GBP 20.50 per tonne for Western Isles sites; GBP 1 000 annual charge if no harvesting; GBP 2 000 annual charge if dormant. The applications are also charged at GBP 174 per 0.1 hectare of farm area, while the environmental license costs GBP 2 600 for a new site.

33

6.4 Access to licenses - Chile The trading of licenses in Chile is regulated by the General Law on Fisheries and Aquaculture (LGPA), in charge of Ministry of Economy and Defense. Licenses granted before April, 2010 are issued for an indefinite period of time. However, for companies that require loans from the state, license period is cut from indefinite to 25 years (extension may be granted). According to the new regulation, licenses issued April 2010 onwards and licenses that have been subject to modification have a defined horizon of 25 years. This time horizon may also be extended under certain circumstances. Licenses can be lost in case of specified violations to regulation, operation under the minimum limit during certain period, or voluntary resignation. It can be lost if e.g. the license is used for a different purpose than the one for which this was granted, or environmental/sanitary violations, among others. Aquaculture licenses must operate within the terms established by LGPA in order to avoid expiration. Aquaculture licenses operations must be performed within one year from the date of its official receipt and must not paralyze its operations for more than 2 consecutive years. Besides the above, the minimum operation requirements established in Regulation issued to this effect must be met, which corresponds to 5% of production reported in the Technical Project of the license. And in the case of licenses that do not have a Technical Project, 5% corresponds to the maximum operation reported between 1995 and 2000 the National Marine Fisheries Service.

34

6.4 Access to licenses - Chile Main issues in the new legislation are: General Law on Fisheries and Aquaculture (LGPA), modified February 2013.

Specific regulations released from LGPA, like:

o RAMA: Associated to environmental aspects, monitoring and correct practices to operate in environmental terms.

o RESA: Associated to sanitary aspects, fallow period, diseases, mortalities treatment, among others.

o Minimum operation: Establishes the minimum productive of licenses and the fallow period.

o REPLA: Establishes a protection area in case of plagues appearance, such as Alexandrium catenella

It establishes the obligation for licenses to be registered in the Aquaculture Licenses

Register (of Armed Forces) to be authorized to exercise aquaculture activities (all leases and transfers must be registered).

It includes new events that may lead to revocation of licenses and it strengthens some of the rules regarding such revocation. In fact, as indicated above the untimely reporting and the underreporting are now events that may lead to the loss of concessions and, furthermore, one of the previous causes of revocation (i.e. accumulation of 3 serious breaches within 2 years) was amended to a stricter standard (now it is the accumulation of 3 serious breaches, but within 4 years).

It eliminates the different regimes that aquaculture concessions were subject to; two types

of regimes that granted different rights depending on whether or not it had habitual quality (i.e. the right to extend the deadline to start operations or the right to transfer aquaculture concessions without the need to wait a period). With this amendment, all aquaculture concessions will be on equal conditions.

No impact on duration of current licenses.

Future production capacity will be impacted by the new law, and specifically by

the following: o Gradual opening of regions XII, XI and X after 12 months, in the first

case, and after five years in the second and third cases. o Regulations of zones, availability of areas suitable for aquaculture and

fallow periods will limit production capacity and growth rate until new licenses can be approved and/or new areas opened.

o As from 2014, dormant operations may cause loss of license. o Environmental conditions given by high density in some zones may

cause decreases of production limits. o New specific regulations about maximum production density are

announced to be enacted in 2013.

35

6.5 Access to licenses - Canada

In Canada, the Provincial and Federal licenses can be assigned to a different operator through a Government Assignment Process. The provision enables a company to transfer the licenses to another company for reasons such as: moved processing to new area, distance is too great and not feasible to operate, change in species, etc. The process involves First Nations consultation, and depending on the relationships between the parties, this can be a lengthy procedure.

Timelines vary from one year to several years to acquire licenses for a new farm. An estimate of cost to acquire a new license/site can range from CAD 300,000 - 500,000. Since 2007 only one new license has been issued.

36

6.6 The Atlantic salmon life/production cycle Source: Marine Harvest

The total production cycle takes approximately 10-16 months in freshwater plus 14-24 months in sea water – in total 24-40 months. In Chile, the cycle is slightly shorter as the sea water temperatures are more optimal. See the appendix for a more detailed illustration of the production cycle.

Spawn Brood - Parr - Smolt

Transfer to sea

Growth phase in sea

Secondary processing Primary processing (to HOG)

14-2

4 m

onth

s 10

-16

mon

ths

37

6.6 The Atlantic salmon life/production cycle Norway (3 generations)

Source: Marine Harvest In the autumn, the broodfish are stripped for eggs and the ova inlay happens between November and March. The producer has the possibility to speed up the growth of the juveniles with light manipulation to accelerate the smoltification process by up to 6 months. The light manipulated juveniles are called S0s and the normal grown juveniles are called S1s. In Norway, smolt is mainly released into seawater twice a year. S0s are released in autumn/spring within 12 months after ova inlay, and S1s in the autumn about 18 months after ova inlay. A very small part of the production is produced as S1½, which are only put to sea 2 years after the ova inlay. The harvest is spread all around the year. In Norway, typical harvest is the beginning of the year for S0s and second half of the year for S1s. During summer, the supply to the market is significantly different to the rest of the year as harvest go from S0s to S1s, and the large S0s and the small S1s dominate the supply. After a site is harvested, the location is fallowed between 2 and 6 months before the next generation is put to sea at the same location. Smolt may be released in the same location with a two year cycle. In the example above, Generation 1 (G1) is put to Location 1 (L1), G2 put to L2, and then G3 is put in L1 again as the fish from G1 have been harvested and the location has been fallowed. Harvest quantity is largest in the last quarter of the year as this is the period of best growth, and because most of the S1s are harvested in this period. Some of the last S0’s and some early S1½s could also be harvested in this period.

G1

G2

G3

L1

L2

L1

38

6.7 Production inputs

Eggs There are several suppliers of eggs to the industry. Aquagen AS, Fanad Fisheries Ltd, Lakeland and Salmobreed AS are some of the most significant by quantities. Egg suppliers can tailor their production to demand by obtaining more or less fish for breeding during the preceding season. Production can easily be scaled. The egg market is international.

Smolt The majority of smolt are produced ”in-house” by vertically integrated salmon farmers. This production is generally captive, although a proportion may also be sold to third parties. A smolt is produced over a 6-12 months period from the eggs are fertilised to a mature smolt with weight of 60-100 grams.

39

6.7 Production inputs

Source: Marine Harvest, Kontali Analyse, SSPO Labour In 2011, just under 5 900 people in Norway were directly employed in aquaculture, of which more than half was employed in salmon and trout production. According to Scotland Salmon Producers Organisation (SSPO), over 2 100 people are employed in salmon production in Scotland. The Scottish Government estimates that 6,200 jobs are reliant on the aquaculture industry. Estimates on Canadian employment say that around 2 500 people are directly employed in salmon farming industry. In Chile, employment has been significantly reduced as a consequence of the ISA situation that developed throughout 2008. Direct employment in Chilean aquaculture (incl. processing) is estimated to around 30 000 people in 2012. In Norway, both salaries and levels of automation are highest, while the opposite is the case in Chile. Salaries in UK and Canada are somewhat lower than in Norway. Electricity Electricity is mainly used in the earliest and latest stage in the salmon’s life cycle. To produce a good quality smolt, production normally takes place in tanks on land where the water is temperature regulated and/or recirculated which requires energy (8-10% of smolt cost in Norway). When the salmon is processed energy is consumed. However, this depends on the level of automation (3-5% of harvest cost in Norway).

40

6.8 Factor influencing the pace of production Sea Water Temperature

Source: Marine Harvest, racerocks.com The sea water temperatures vary much throughout the year in all production regions. While the production countries on the Northern hemisphere see low temperatures during the beginning of the year, and high temperatures in autumn varying with as much as 10oC, the temperature in Chile is more stable varying between 10oC and 14oC. Chile has the highest average temperature of 12oC, while Ireland has 11oC and the three other regions have an average temperature of about 10oC. As the salmon is a cold-blooded animal (ectotherm), the temperature plays an important role for its growth rate. The optimal temperature range for Atlantic salmon is 8-14oC, illustrated by the shaded area on the graph. Temperature is one of the most important natural competitive advantages that Chile has compared to the other production regions as the production time historically has been shorter by a few months. With high seawater temperatures, disease risk increases, and with temperatures below 0oC, mass mortality, both of which causes growth rate to fall.

41

7. Cost Dynamics 7.1 Economics of salmon farming

The salmon farming industry is capital intensive and volatile. This is a result of a long production cycle, a fragmented industry, market conditions and a biological production process, which is affected by many external factors. Over time, production costs have been reduced and productivity has increased as new technology and new competence has been achieved. This is believed to continue in the future as commercial aquaculture still is a young industry. Revenues Reported revenues Revenues are a gross figure; they can include invoiced freight from reference place (e.g. FCA Oslo) to customer, and have discounts, commissions and credits deducted. Reported revenues can also include revenues from trading activity, sales of by-products, insurance compensation, gain/loss on sale of assets etc. Price Reported prices are normally stated in the terms of a specific reference price e.g. the NOS/FHL price for Norway (FCA Oslo) and UB price for Chile (FCA Miami). Reference prices are not reflecting freight, and other sales reducing items mentioned above. Reference prices are for one specific product (FHL = per kg head on gutted fish packed fresh in a standard box). Sales of other products (frozen products, fresh fillets and portions) will cause deviation in the achieved prices vs. reference price. Reference prices are for superior quality fish, while achieved prices are for a mix of qualities, including downgrades. Reference prices are spot prices, while most companies will have a mix of spot and contract sales in their portfolio. Quantity Reported quantity can take many forms. Quantity harvested = Fish harvested in a specific period in a standardized term; e.g. head on gutted (HOG) or whole fish equivalent (WFE), the difference being gutting loss. Quantity sold can be reported using different weight scales:

Kg sold in product weight Kg sold converted to standard weight unit (HOG or WFE)

Quantity sold could also include traded quantity.

42

7.2 Production costs The figures below illustrate the main cost components and their relative importance in the farming of salmon in the three biggest regions. The cost level is chosen for illustration purposes.

*HOG cost in box delivered at the processing plant including mortality Cost elements Feed: As in all protein production, feed makes up the largest share of the total cost. The variation in costs between the countries is based on somewhat different inputs to the feed, logistics and the feed conversion ratio. Smolt: Smolt production is done in two different ways; either in lakes or in closed/re-circulated systems in tanks on land. The smolt is produced in fresh water up to about 100g when the salmon through its smoltification phase gets ready to be put in sea water. UK has the highest costs as there has been low scale production in both land based systems and tanks. Chile has used lakes for this production and has had cheap labour, while in Norway there has been a transfer from production in lakes to large scale production in land-based systems. Salary: Salary level differs among the production regions but in general the salary cost is low because labour cost is a minor part of the total cost as much of the production is automated (e.g. feed blowers). Well boat/processing: Transportation costs of live fish, slaughtering, processing and packing are all heavily dependent on quantity, logistics and automation. Other operational costs: Other costs include direct and indirect costs, administration, insurance, etc.

Norway (NOK) Canada (CAD) Scotland (GBP) Chile (USD)

Feed 11,65 2,17 1,49 2,05

Primary processing 2,40 0,49 0,27 0,05

Smolt 2,11 0,60 0,29 0,60

Salary 1,38 0,43 0,15 0,16

Maintenance 0,75 0,15 0,07 0,23

Well boat 1,03 0,21 0,20 0,31

Depreciation 0,63 0,23 0,11 0,12

Sales and marketing 0,52 0,01 0,06 0,01

Mortality 0,30 0,04 0,01 0,05

Other 2,56 0,80 0,47 1,15

Total* 23,33 5,13 3,12 4,73

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7.3 Cost component – disease and mortality

EBIT costs per kg decline with increasing harvest weight. If fish is harvested at a lower weight than optimal (caused by for example diseases), EBIT costs per kg will be higher. During the production cycle, some mortality will be observed. Under normal circumstances, the highest mortality rate will be observed during the first 1-2 months after the smolt is put into seawater, while subsequent stages of the production cycle normally has a lower mortality rate. Elevated mortality in later months of the cycle is normally related to outbreaks of disease or predator attacks. There is no strict standard for how to account for mortality in the books, and there is no unified industry standard. Three alternative approaches are:

Charge all mortality to expense when it is observed Capitalise all mortality (letting the surviving individuals carry the cost of dead

individuals in the balance sheet when harvested) Only charge exceptional mortality to expense (mortality, which is higher than what is

expected under normal circumstances) It is not possible to perform biological production without any mortality. By capitalizing the mortality cost, the cost of harvested fish will therefore reflect the total cost for the biomass that can be harvested from one production cycle.

44

7.4 Salmon feed Development in use of ingredients in salmon feed receipts

Source: Marine Harvest

Growth intervals 0.1 – 0.2 kg 0.2 – 1 kg 1 – 2 kg 2 – 3 kg 3 – 4 kg 4 – 5 kg Feed consume* 0.08 kg 0.75 kg 1.00 kg 1.05 kg 1.10 kg 1.20 kg Time, months 2 4 4 3 2 2

*Estimates for Norway only – typical S1 smolt Historically the two most important ingredients in fish feed have been fish meal and fish oil. The use of these two marine raw materials in feed production has been reduced and replaced by agricultural commodities such as soy, sunflower, wheat, corn, beans, peas, poultry by-products (Chile and Canada) and rape seed oil replacing fish oil. This substitution is mainly done because of heavy constraints on availability of fish meal and fish oil. Fish meal and other raw materials of animal origin have a more complete amino acid profile compared to protein of vegetable origin and have generally a higher protein concentration. It is therefore a big challenge to produce the knowledge required to replace fish meal 100%. During the industry’s early phases, salmon feed was moist (high water content) with high levels of marine protein (60%) and low levels of fat/oil (10%). The industry then went through a development of pellet feeds with focus on protein and fat content. A typical recipe in the early 1990s consisted of 45% protein, whereof most of it was marine protein, i.e. fish meal. Today, the marine protein level is lower due to cost optimization and fish meal availability. However, the most interesting development has been the increasingly higher inclusion of fat. This has been possible through technological development and extruded feeds. Due to market demands, legislation and different availability of raw materials, the ingredients used in fish feed today are different from country to country, giving higher raw material flexibility in certain regions as e.g. Chile and Canada. This will have an impact on the feed price. Feed and feeding strategies aim at growing a healthy fish fast at the lowest possible cost. Standard feeds are designed to give the lowest possible production cost. Premium diets are available in most countries and are being used in certain situations where extra growth rate is profitable. Feeding control systems shall prevent feed waste and assure that the fish get enough feed to grow to its potential. Normally the fastest growing fish show the lowest feed conversion rate.

24%

17%59%

Global 1990

8%

49%11%

18%

12%

Norway 2012

7%

32%

10%15%

22%

12%

Chile 2012

45

7.5 Salmon feed producers

Source: Skretting annual report, EWOS annual report, BioMar, Marine Harvest During the last decade, the salmonid feed industry has become increasingly consolidated. Since 2008, there has essentially been three producers controlling the majority of the salmon feed output, and the companies are all subsidiaries of listed companies BioMar (Schouw), Ewos (Cermaq) and Skretting (Nutreco), and are all operating globally. Additionally, there are some producers who are only present in their regional market. The major cost elements when producing salmonid feed are the raw materials required and production costs. The feed producers have historically operated on cost-plus contracts, leaving the exposure of raw material prices with the aquaculture companies. One major issue in the salmon feed industry is the future supplies of the raw materials going into feed (see next page).

Feed producers' market share 1998

Skretting

EWOS

BioMar

NorAqua

Biomaster

Other

Feed producers' market share 2013E

Skretting

EWOS

BioMar

Other

46

7.6 Raw material market

Source: Marine Harvest, Holtermann Fish oil: Price in 2012 is about 1400 USD per tonne. Since 2009 fish oil prices have steadily increased and we expect fish oil prices to become uncorrelated with vegetable oil prices in the future. Rape seed oil: Rape seed oil prices have very much the same price trend as fish oil. As there is an increasing demand for bio diesel, there will be continued pressure on price, including other types of vegetable oil. Fish meal: In 2012 there has been a decreasing trend in the price, but this is not expected to continue. Soy: After having seen the soy prices climb to the highest level in 34 years in mid-2008, the prices fell slightly and has remained stable the last couple of years. The main reason for 2008’s price increase was because of less soy was planted due to a shift from soy to corn in many regions, and a high demand for vegetable oil in general. Corn is planted in higher quantities due to increased demand for ethanol produced from corn, i.e. former soy areas are used for corn production. Vegetable protein: Soy and corn have traditionally been very important vegetable protein sources in fish feed. As a consequence of less planting of soy and more corn used for energy purposes, the price for these raw materials increases. Parallel to this there has been an increase in genetic modified (GM) production of soy and corn. To be able to get non-GM production, a premium has been put on price, i.e. non-GM products are more expensive than GM products. Wheat: Wheat price has been rather stable since late 2010.

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2011

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USD

/tonnes Fish meal

Soy meal

Wheat

Rapeseed oil

Fish oil

47

7.7 Price, cost and EBIT development (Norway)

Source: Kontali Analyse Due to supply growth being higher than the structural growth in demand in the period 1993-2007 there was a falling trend of the price of salmon. In recent years, this trend has been broken due to the collapse of the Chilean industry, combined with effects of consolidation in the industry. As a result of cost benefits of industrialisation, consolidation and economies of scale, combined with improvements in the regulatory framework and fish health mitigation, the cost curve has also had a falling trend. The average EBIT per kg for the Norwegian industry has hence been positive with the exception of a few shorter periods, and NOK 4.02 per kg in nominal terms.

‐10,00

0,00

10,00

20,00

30,00

40,00

50,00

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1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

NOK

EBIT/kg Price/kg Cost/kg

Adjusted  according to CPI (2012 = 100)

48

7.8 Salmon farming is a capital intensive industry Cost of building biomass

Source: Marine Harvest For illustration purposes, the farming process has been divided into three stages of 12 months. The first 12 months is production from egg to finished smolt. After this, 24 months of on-growing in sea follows. After the on-growing phase is over, harvest takes place immediately thereafter (illustrated as “Month 37”). In a steady state there will at all times be three different generations at different stages in their life cycle. At the point of harvest there have been incurred costs to produce the fish for up to 36 months, where some costs were incurred to produce the smolt two years ago, further costs incurred to grow the fish in seawater and some costs incurred related to harvest (”Month 37”). Sales price should cover the costs and provide a profit margin (represented by the green rectangle). Cash cost in the period when the fish is harvested is not large compared to sales income, creating a high net cash flow. If production going forward (next generations) follows the same pattern, most of the cash flow will be reinvested into salmon at various growth stages. If the company wishes to grow its future output, the following generations need to be larger requiring even more of the cash flow to be reinvested in working capital. This is a rolling process and requires substantial amounts of working capital to be tied up, both in a steady state and especially when increasing production.

49

7.9 Capital needs when building biomass

Source: Marine Harvest The illustration above shows how capital needs develop when one is building production/biomass from ”scratch”. In phase 1, there is only one generation (G) of fish produced and the capital needs is the production cost of the fish. In phase 2, the next generation is also put into production, while the on-growing of G1 continues, rapidly increasing the capital invested. In phase 3, G1 has reached its last stage, G2 is in its on-growing phase and G3 has begun to increase its cost base. At the end of phase 3, the harvest starts for G1, reducing the capital bound, but the next generations are building up their cost base. If each generation is equally large and everything else is in a steady state, the capital needed would have peaked at the end of phase 3. With a growing production, the capital needed will also increase after phase 3 as long as the next generation is larger than the previous (if not, capital base is reduced). We see that salmon farming is a capital intensive industry.

50

7.10 Accounting principles for biological assets

Biological assets are measured at fair value less cost to sell, unless the fair value cannot be measured reliably. Effective markets for sale of live fish do not exist so the valuation of live fish implies establishment of an estimated fair value of the fish in a hypothetical market. The calculation of the estimated fair value is based on market prices for harvested fish and adjusted for estimated differences. The prices are reduced for harvesting costs and freight costs to market, to arrive at a net value back to farm. The valuation reflects the expected quality grading and size distribution. The change in estimated fair value is recognised in profit or loss on a continuous basis, and is classified separately (not included in the cost of the harvested biomass). On harvest, the fair value adjustment is reversed on the same line. The biomass valuation includes the full estimated fair value of fish at and above harvest size (4 kg LW). For fish between 1 kg and 4 kg LW a relative share of future value is included. The best fair value estimate for fish below 1 kg, smolt and broodstock is considered to be accumulated cost. The valuation is completed for each business unit and is based on biomass in sea for each sea water site. The fair value reflects the expected market price. The market price is derived from a variety of sources, normally a combination of achieved prices last month and the most recent contract entered into. For Marine Harvest Norway, quoted forward prices (Fish Pool) are also included in the calculation. Operational EBIT Operational EBIT and other operational results are reported based on the realised costs of harvested salmon and do not include the fair value adjustments on biomass.

51

7.11 Investments and payback time for new entries (Norway) Assumptions Normal site consisting of 4 licenses: Equipment investment NOK 30-35m Number of licenses 4 Licence cost (second hand market) NOK 120-200m (~NOK 30-50m per licence) Output per generation: ~4000 tonnes HOG Number of smolt released: 1m Smolt cost per unit: NOK 8 Feed price per kg: NOK 9 Economic feed conversion ratio (FCR): 1.17 (to live weight) Conversion rate from Live Weight to HOG: 0.83 Harvest and processing incl. well boat cost per kg (HOG): NOK 3.25 Average harvest weight (HOG): 4.5 kg Mortality in sea: 10% Sales price: NOK 27 Source: Marine Harvest, Kontali Analyse For increased capacity to be established, there are many regulations to fulfil. In this model, we have used only one site for simplification purpose as we are looking at a new company entering the industry. Most companies use several sites at the same time, which enables economies of scale and makes the production more flexible and often less costly. To simplify, smolt is bought externally. Smolt is usually less costly to produce internally, but this depends on production quantity. The performance of the fish is affected by numerous factors as feeding regime, sea water temperature, disease, oxygen level in water, smolt quality, etc. Sales price chosen is the average sales price from Norway the last decade.

52

7.11 Investments and payback time for new entries (Norway) Results Because of the simplifications in the model and low, non-optimal production regime, production cost is higher than industry average. Due to high entry barriers in terms of capital needs and falling production costs with quantity, new companies in salmon production will experience higher average production costs. During the production of each harvest the working capital needed at this farm, given the assumptions, would be peaking at MNOK 75 (given that the whole harvest is harvested at the same time).

Source: Marine Harvest With a sales price at the historic average level, payback time for the original investments would be about 15 years. This result is very sensitive to sales price and economic feed conversion ratio (FCR), as the figure above shows. Sales price of NOK 27 is chosen as this is close to the historical average price in Norway. FCR at 1.17 is achievable on average, while lower economic FCR is possible for parts of production and is a target for the industry.

 ‐

 5,00

 10,00

 15,00

 20,00

 25,00

 30,00

 35,00

 40,00

 45,00

 23  24  25  26  27  28  29  30  31

Years payback time on investments

NOK/kg

FCR=1.0 FCR=1.2

53

8. Salmon health and R&D 8.1 Salmon disease prevention and treatment Maximising survival and maintaining healthy fish stocks are primarily achieved through good husbandry and health management practices and policies. Such practices, in addition, reduce exposure to pathogens and the risk of health challenges. The success of good health management practices have been demonstrated on many occasions and have contributed to an overall improvement in the survival of farmed salmonids. Fish health management plans, veterinary health plans, bio security plans, risk mitigation plans, contingency plans, disinfection procedures, surveillance schemes as well as coordinated and synchronised zone/area management approaches, all support healthy stocks with emphasis on disease prevention. For the majority of salmonid health conditions, prevention is achieved through vaccination at an early stage in production. Vaccines are widely used commercially to reduce the risk of health challenges. With the introduction of vaccines a considerable number of bacterial health challenges have been effectively controlled, with the additional benefit that the quantity of medicine prescribed in the industry has been minimised. In some situations however medicinal treatment is still required to maximise survival and even the best managed farms may use medicines from time to time. For several of the viral diseases, no effective vaccines are currently available.

54

8.2 Most important health risks Infectious Pancreatic Necrosis (IPN) IPN is caused by the IPN virus and is widely reported. It is a contagious virus that can cause mortality if not managed appropriately. IPN can affect Atlantic salmon fry, smolts and larger fish post-transfer. Available vaccines can protect against IPN and good results are obtained by optimizing husbandry and biosecurity measures. In addition, promising results are now seen by selection of families less susceptible for the disease (QTL-based selection). Pancreas Disease (PD) PD is caused by the Salmonid Alphavirus and is present in Europe. It is a contagious virus that can cause reduced appetite, muscle and pancreas lesions, lethargy, and if not appropriately managed, elevated mortality. PD only affects Atlantic salmon in seawater and control is achieved mainly by management and mitigation practices. Combined with these measures, vaccination is used where PD represents a risk and which provides an additional level of protection. Heart and Skeletal Muscle Inflammation (HSMI) HSMI is currently reported in Norway and Scotland. Symptoms of HSMI are reduced appetite, abnormal behaviour and in most cases low mortality. HSMI generally affects fish the first year in seawater and control is achieved mainly by good husbandry and management practices. Infectious Salmon Anaemia (ISA) ISA is caused by the ISA virus and is widely reported. It is a contagious disease that causes lethargy, anaemia and may lead to significant mortality in seawater, if not appropriately managed. Control of an ISA outbreak is achieved through culling / harvesting of affected fish in addition to other biosecurity and mitigation measures. Vaccines are available and in use where ISA is regarded to represent a significant risk. Salmonid Rickettsial Septicaemia (SRS) SRS is caused by an intracellular bacterium. It occurs mainly in Chile, but is also observed, to a much lesser extent, in Norway and the UK. It causes lethargy, less appetite and can result in elevated mortality. SRS is controlled by vaccination, but medicinal intervention (licensed antibiotics) may also be required. Gill Disease (GD) GD is a general term used to describe gill conditions occurring in seawater. The changes may be caused by different infectious agents; amoeba, virus or bacteria, as well as environmental factors including algae or jelly-fish blooms. Little is known about the cause of many of the gill conditions and to what extent infectious or environmental factors are primary or secondary causes of disease. Sea lice Sea lice, of which there are several species, are natural occurring seawater parasites. They can infect the salmon skin and if not controlled, they can cause lesions, secondary infection and mortality. Sea lice are controlled through good husbandry and management practices and the use of licensed medicines and cleaner fish (different wrasse species, eating parasites off the salmon skin) .

55

8.3 Fish health and vaccination (Norway)

Production and use of antibiotics in Norway

Source: Kontali Analyse, Norsk medisinaldepot, Folkehelseinstituttet Associated with the increase in production of Atlantic salmon in Norway in the 1980s was an increased incidence of disease outbreaks. In the absence of effective vaccines, the use of antibiotics reached a maximum of almost 50 tonnes in 1987. With the introduction of effective vaccines against the main health challenges at that time, the quantities of antibiotic used in the industry declined significantly to less than 1.4 tonnes by 1994 and has since then continued to be very low. These developments, along with the introduction of biosecurity and health management strategies, allowed for further expansion of the industry and respective production quantities. During the last two decades there has been a general stabilisation of mortality in Norway, Scotland and Canada, which has been achieved principally through good husbandry, management practices and vaccination. A positive development has also been observed in Chile after rebuilding the industry following the ISA epidemic.

 ‐100

 100

 300

 500

 700

 900

 1 100

0

10

20

30

40

50

60

'000 tonnes HOG

Tonnes active substan

ce

Antibiotics use HQ ‐ Atlantic Salmon

56

8.4 Research and development areas Disease

• Development of better tools for prevention and control of listed diseases • Vaccine developments/ improvements • Develop new, and optimize use of current licensed medicines for lice control • Development of non-medicinal technologies for sea lice control, including commercial

production of cleaner fish

Environment • Environmental risk assessments and analysis • Capacity of coastal environment to assimilate discharges from aquaculture • Interactions between cultivated and wild species • Production of sterile salmon

Genetics and immunology

• Tools for health and performance monitoring of Atlantic salmon • Breeding and selection for disease resistant stock

Welfare

• Optimisation of slaughter methods • Physiological and behavioural measures of the welfare of farmed fish in relation to

stocking densities, environmental and husbandry factors

Feed and nutrition • Fish oil and fish meal substitution in salmon diets maintaining fish health, performance

and quality. • Functional diets for improved fish health • Bone health and the role of nutrition

Product quality

• Measures to reduce prevalence of melanin (black spots) in the fish flesh • Identify disposing factors and measures to reduce texture problems

Technology Most of the technology used in modern salmon farming around the world today is standardised. Technological development and knowledge exchanges continue at a constant pace. According to Zacco (Norwegian patenting office), patenting intensity in the salmon farming industry has grown rapidly in the last two decades. Considerable R&D is undertaken in several areas and the most important developments have been seen in the feed and vaccines sector, done by large global players. In this industry the majority of producers are small and have neither had the capital nor the competence to undertake and supervise major R&D activities. This is expected to change as consolidation of the industry continues. Smolt, on-growing production and processing The technology used in these phases can be bought ”off the shelf”. Very few patents are granted. Technology and respective operators are becoming increasingly more advanced and skilled.

57

9. Secondary processing (VAP)

In salmon processing we divide between primary and secondary processing. Primary processing is slaughtering and gutting. This is the point in the value chain standard price indexes for farmed salmon are related to. Secondary processing is filleting, fillet trimming, portioning, different cuttings like choplets, smoking, making ready meal or packing with Modified Atmosphere (MAP). The products that have been secondary processed are called value-added products (VAP).

58

Others19%

Shellfish and 

mussels15%

Fish66%

9.1 European value-added processing (VAP) industry

A total value of > EUR 25 billion

Employees > 135,000

Extremely fragmented – more than 4,000

companies

About 50% of all companies have less than 20 employees

Traditionally the EBIT-margins have been between 2% and 5%

The average company employs 33 people and has a turnover of EUR 4.2 million Source: Marine Harvest, Intrafish, EU

The seafood industry in Europe is extremely fragmented with more than 4,000 players. Most of the companies are fairly small, but there are also several companies of significant size involved in the secondary processing industry: Marine Harvest, Morpol, Icelandic Group, The Seafood Company, Deutsche See, Caladero, Royal Greenland, Labeyrie, and Lerøy Seafood. Most of the largest players are basing their processing on Atlantic salmon, producing smoked salmon, portions or ready meals with different packing as vacuum or modified atmosphere (MAP). Consumers are willing to pay for quality and value added. This means that we are expecting to see an increase in demand for convenience products such as ready-to-cook fish, together with a packing trend towards MAP as this maintains the freshness of the product longer than fish sold in bulk.

59

9.2 Market segment in the EU (2012)

Source: Kontali Analyse In the EU in 2009, more than half of the Atlantic salmon went to retailers, while 45% went to hotels, restaurants and catering (HORECA). Of whole salmon and salmon fillets, almost two thirds were sold as fresh fish and about one third as frozen. In the EU, salmon fillets and smoked salmon have an equal market share of 32% each, while whole fish has about 19%. In this graph, other VAP consists of all value added processed products, except smoked salmon which is represented separately.

69%

31%

Retail vs. Horeca

Retail Horeca

56%

44%

Fresh vs. frozen

Fresh Frozen

10%

23%

28%

13%

Different products

Whole Fillet Smoked Other VAP

60

9.3 The European market for smoked salmon (2012)

Source: Kontali Analyse The most common secondary processed product based on Atlantic salmon, is smoked salmon. The European market for this product was 160,000 tonnes product weight (PW) in 2012, where France and Germany were the largest markets. The amount of raw material needed for this production was around 258,000 tonnes HOG, up 11.5% since 2009. European smoked salmon producers (2012E)

Estimated Annual Raw Material  ‐ Tonnes HOG 

60 ‐ 80 000  20 ‐ 40 000  10 ‐ 20 000  5 ‐ 10 000 

Morpol (PL)  Labeyrie (FR‐UK)  Norvelita (LT)  Martiko (ES) 

   Marine Harvest (FR)  Youngs (UK)  Friedrichs (DE) 

      Mer Alliance (FR)  Neptune Intnl. (DE) 

      Suempol (PL)  Intermarché (FR) 

      Foppen (NL)  Ledun (FR) 

      Lerøy (NL‐SE‐NO)  Ubago (ES) Source: Kontali Analyse The ten largest producers of smoked salmon in Europe are estimated to have a joint market share of more 60%. The production is mainly done in Poland, France, UK, Baltic states and the Netherlands. After the acquisition of the German company Laschinger, Morpol is the largest producer of smoked salmon in Europe. Morpol is based in Poland and is selling most of its production to the German market. Labeyrie is the second largest and sells most of its products to France, but are also found in UK, Spain, Italy and Belgium. Marine Harvest has its smoked salmon production in France (Kritsen) and in Belgium (La Couronne). Marine Harvest sells its smoked salmon in France, Italy and Belgium. Marine Harvest has acquired about 87% of the shares in Morpol and is awaiting the outcome of a competition authority filing (expected during Q3 2013).

0% 5% 10% 15% 20% 25% 30%

Other

Scandinavia

Spain

Be/Ne/Lux

Italy

Germany

UK

France

Estimated % share of smoked salmon market ‐ EU 2012

61

Appendix

In the appendix there is an explanation of key words, and you will find key information about the Marine Harvest group such as key financial numbers, the company’s history together with information about our operations upstream and downstream.

62

Appendix: Weight conversion ratios and key words

   Atlantic salmon  Trout  Coho 

Live fish  119%       

Loss of blood/starving  8%       

Harvest weight  111%  114%  111% 

Round bled fish (wfe)          

Offal  11%  14%  11% 

Gutted fish, approx. (HOG)  100%  100%  100% 

Head, approx.  9%  9%  14% 

Head off, gutted  91%  91%  86% 

Fillet skin on   67 ‐ 77% (C‐trim approx. 70%) 

Fillet skin off  56 ‐ 68%  Source: Kontali Analyse

Net weight: Weight of a product at any stage (HOG, fillet, portions). Only the weight of the fish part of the product (excl. ice or packaging), but incl. other ingredients in VAP

Primary processing: Whole fish HOG/GW Secondary processing: Any value added processing beyond HOG Biomass: The total weight of live fish, where number of fish is multiplied with

an average weight

Ensilage: Salmon waste from processing added acid FCR = IB feed stock + feed purchase – UB feed stock Kg produced – weight on smolt release Price FOB Seattle (whole fish from Canada) Notifications FOB Miami (fillets from Chile)

FCA Oslo

63

Appendix: Some historic acquisitions and divestments Year Norway

1999 Hydro Seafoods - Sold from Norsk Hydro to Nutreco Aquaculture

2001 Gjølaks - Sold to PanFish

2001 Vest Laks - Sold to Austevoll Havfiske

2001 Torris Products - Sold from Torris to Seafarm Invest

2001 Gjølanger Havbruk - Sold to Aqua Farms

2001 Alf Lone - Sold to Sjøtroll

2001 Sandvoll Havbruk - Sold to Nutreco Aquaculture

2001 Fosen Edelfisk - Sold to Salmar

2001 Langsteinfisk - Sold to Salmar

2001 Tveit Gård - Sold to Alsaker Fjordbruk

2001 Petter Laks - Sold to Senja Sjøfarm

2001 Kråkøyfisk - Sold to Salmar

2002 Amulaks - Sold to Follalaks

2002 Kvamsdal Fiskeoppdrett - Sold to Rong Laks

2002 Matland Fisk - Sold to Bolaks

2002 Sanden Fiskeoppdrett - Sold to Aqua Farms

2002 Ørsnes Fiskeoppdrett - Sold to Aqua Farms

2002 Toftøysund Laks - Sold to Alsaker Fjordbruk

2003 Nye Midnor - Sold from Sparebank1 MidtNorge to Lerøy Seafood Group

2003 Ishavslaks - Sold to Aurora to Volden Group

2003 Loden Laks - Sold to Grieg Seafood

2003 Finnmark Seafood - Sold to Follalaks

2003 Ullsfjord Fisk - Sold to Nordlaks

2003 Henningsværfisk - Sold to Nordlaks

2004 Flatanger Akva - Sold to Salmar

2004 Naustdal Fiskefarm/Bremanger Fiskefarm - Sold to Firda Sjøfarm

2004 Fjordfisk - Sold to Firda Sjøfarm

2004 Snekvik Salmon - Sold to Lerøy Seafood Group

2004 Aure Havbruk / M. Ulfsnes - Sold from Sjøfor to Salmar

2005 Follalaks - Sold to Cermaq

2005 Aqua Farms - Sold to PanFish

2005 Aurora Salmon (Part of company) - Sold from DNB Nor to Lerøy Seafood Group

2005 Marine Harvest Bolga - Sold to Seafarm Invest

2005 Aurora Salmon (Part of company) - Sold from DNB Nor to Polarlaks

2005 Sjølaks - Sold from Marine Farms to Northern Lights Salmon

2005 Bolstad Fjordbruk - Sold to Haugland Group

2005 Skjervøyfisk - Sold to Nordlaks

2006 Fossen AS - Sold to Lerøy Seafood Group

2006 Marine Harvest N.V. - Acquired by Pan Fish ASA

2006 Fjord Seafood ASA. - Acquired by Pan Fish ASA

2006 Marine Harvest Finnmark - Sold from Marine Harvest to Volden Group

2006 Troika Seafarms/North Salmon - Sold to Villa Gruppen

2006 Aakvik - Sold to Hydrotech

2006 Hydrotech - Sold to Lerøy Seafood Group

2006 Senja Sjøfarm - Sold to Salmar ASA

2006 Halsa Fiskeoppdrett - Sold to Salmar ASA

2006 Langfjordlaks - Sold to Mainstream

2006 Polarlaks - Sold to Mainstream

2007 Veststar - Sold to Lerøy Seafood Group

2007 Volden Group - Sold to Grieg Seafood

2007 Artic Seafood Troms - Sold to Salmar ASA

2007 Arctic Seafood - Sold to Mainstream

2007 Fiskekultur - Sold to Haugland Group

2007 UFO Laks - Sold to Haugland Group

2007 Anton Misund - Sold to Rauma Gruppen

2007 Mico Fiskeoppdrett - Sold to Rauma Gruppen

2008 Hamneidet - Sold to Eidsfjord Sjøfarm

2008 Misundfisk - Sold to Lerøy Seafood Group

2008 Henden Fiskeoppdrett - Sold to Salmar ASA

2008 AS Tri - Sold to Norway Royal Salmon (NRS)

2008 Feøy Fiskeopprett - Sold to Norway Royal Salmon

2008 Salmo Arctica - Sold to Norway Royal Salmon

2008 Åmøy Fiskeoppdrett - Sold to Norway Royal Salmon

2008 Nor Seafood - Sold to Norway Royal Salmon

2008 Altafjord Laks - Sold to Norway Royal Salmon

2008 Lerøy Seafood Group - Purchased by Austevoll Seafood

2009 Skjærgårdsfisk - Sold to Lingalaks

2009 Brilliant Fiskeoppdrett - Sold to Norway Royal Salmon

2009 Polarlaks II - Sold to Nova Sea

2009 Fjordfarm - Sold to Blom Fiskeoppdrett

2009 Fyllingsnes Fisk - Sold to Eide Fjordbruk

2009 Salaks merged with Rølaks

2009 65 new licenses granted

2010 Espevær Fiskeoppdrett - Sold to Bremnes Fryseri

2010 AL Nordsjø - Sold to Alsaker Fjordbruk

2010 Nord Senja Fiskeindustri - Sold to Norway Royal Salmon

2010 Marøy Salmon - Sold to Blom Fiskeoppdrett

2010 Fjord Drift - Sold to Tombre Fiskeanlegg

2010 Hennco Laks - Sold to Haugland Group

2010 Raumagruppen - Sold to Salmar

2010 Stettefisk / Marius Eikremsvik - Sold to Salmar

2010 Lund Fiskeoppdrett - Sold to Vikna Sjøfarm (Salmonor)

2011 R. Lernes - Sold to Måsøval Fiskeoppdrett

2011 Erfjord Stamfisk - Sold to Grieg Seafood

2011 Jøkelfjord Laks - Sold to Morpol

2011 Krifo Havbruk - Sold to Salmar

2011 Straume Fiskeoppdrett - Sold to Marine Harvest Norway

2011 Bringsvor Laks - Sold to Salmar

2011 Nordfjord Havbruk - Changed name to Nordfjord Laks

2011 Villa Miljølaks - Sold to Salmar

2011 Karma Havbruk - Sold to E. Karstensen Fiskeoppdrett (50 %) and Marø Havbruk (50 %)

2012 Skottneslaks - Sold to Eidsfjord Laks

2012 Villa Arctic - 10 licenses, etc. sold to Salmar

2012 Salmon Brands - Sold to Bremnes Fryseri

2012 Pundslett Laks - Sold to Nordlaks Holding

2012 Strømsnes Akvakultur – Sold to Blom Fiskeoppdrett

2012 Ilsvåg Matfisk – Sold to Bremnes Seashore

2012 The granting of 45 new green licenses announced

2013 Morpol – 85% of shares sold to Marine Harvest

2013 Villa Organic – 39,7% of shares sold to Lerøy Seafood Group

2013 Villa Organic – 49,7% of shares sold to SalMar

64

Appendix: Some historic acquisitions and divestments Year UK

1996 Shetland Salmon products - Sold to HSF GSP

1996 Straithaird Salmon to MH

1996 Gigha, Mainland, Tayinlaoan, Mull Salmon - All sold to Aquascot

1997 Summer Isles Salmon - Sold to HSF GSP

1997 Atlantic West - Sold to West Minch

1998 Marine Harvest Scotland - Sold from BP Nutrition ?? to Nutreco

1998 Gaelic Seafood UK - Sold to Stolt Seafarms

1998 Mainland Salmon - Sold to Aquascot

1999 Hydro Seafood GSP - Initially sold to Nutreco as part of Hydro Seafood deal

1999 Joseph Johnston & Sons - Sold to Loch Duart

2000 Aquascot Farming - Sold from Aquascot to Cermaq

2000 Shetland Norse - Sold to EWOS

2000 Hydro Seafood GSP - Sold to Norskott Havbruk (Salmar & Lerøy Seafood Group) from Nutreco

2001 Laschinger UK - Sold to Hjaltland

2001 Wisco - Sold to Fjord Seafood

2002 Wester Sound / Hoganess - Sold to Lakeland Marine

2004 Ardvar Salmon - Sold to Loch Duart

2004 Hennover Salmon - Sold to Johnson Seafarms Ltd.

2004 Bressay Salmon - Sold to Foraness Fish (from adm. Receivership)

2004 Johnson Seafarms sold to city investors

2005 Unst Salmon Company - Sold from Biomar to Marine Farms

2005 Kinloch Damph - Sold to Scottish Seafarms

2005 Murray Seafood Ltd. - Sold from Austevoll Havfiske to PanFish

2005 Corrie Mohr - Sold to PanFish

2006 Wester Ross Salmon - MBO

2006 Hjaltland Seafarm - Sold to Grieg Seafood ASA

2006 Orkney Seafarms - Sold to Scottish Seafarms

2007 Lighthouse Caledonia - Spin-off from Marine Harvest

2010 Northern Aquaculture Ltd - Sold to Grieg Seafood

2010 Lighthouse Caledonia - changed name to Scottish Salmon Company

2010 West Minch Salmon - Sold to Scottish Salmon Company

2010 Meridian Salmon Group - Sold to Morpol

2011 Skelda Salmon Farms Limited - Sold to Grieg Seafood

2011 Duncan Salmon Limited - Sold to Grieg Seafood

2012 Uyesound Salmon Comp – Sold to Lakeland Unst (Morpol)

2013 Lewis Salmon – Sold to Marine Harvest Scotland

Year1999

Chile Chisal - Sold to Salmones Multiexport

2000 Salmo America - Sold to Fjord Seafood

2000 Salmones Tecmar - Sold to Fjord Seafood

2000 Salmones Mainstream - Sold to Cermaq

2001 Pesquera Eicosal - Sold to Stolt Nielsen

2003 Marine Farms - Sold to Salmones Mainstream

2004 Salmones Andes - Sold to Salmones Mainstream

2004 Stolt Seafarm - Merged with Marine Harvest

2004 Pesquera Chillehue - Sold to GM Tornegaleones

2005 Aguas Claras - Sold to Acua Chile

2005 Salmones Chiloè - Sold to Aqua Chile

2005 Robinson Crusoe - Sold to Aqua Chile

2006 GM Tornegaleones - change name to Marine Farm GMT

2006 Merger Pan Fish - Marine Harvest - Fjord Seafood

2007 Pacific Star - Sold to Andrè Navarro

2007 Salmones Cupquelan - Sold to Cooke Aqua

2009 Patagonia Salmon Farm - Sold to Marine Farm GMT

2010 Camanchaca (salmon division) - Sold to Luksic Group

2011 Salmones Humboldt - Sold to Mitsubishi

2011 Pesquera Itata+Pesquero El Golfo - merged into Blumar

2011 Landcatch Chile - Sold to Australis Mar

2012 Landes Fish Farming – Sold to Salmones Friosur

2012 Cultivos Marinos Chilé – Sold to Cermaq

2013Pacific Seafood Aquaculture – Prod rights&permits for 20 licenses sold to Salmone Friosur

2013Salmones Multiexport divest parts of coho and trout prod. Into joint venture with Mitsui

2013 Merger in pricess – Trusala nd Salmones Pacific Star

Year North America

1989 Cale Bay Hatchery - Sold to Kelly Cove Salmon

1994

Anchor Seafarms Ltd., Saga Seafarms Ltd., 387106 British Columbia Ltd., and United hatcheries merged into Omega Salmon Group (PanFish)

1997 ScanAm / NorAm - Sold to Pan Fish

2001 Scandic - Sold to Grieg Seafoods

2004 Stolt Sea Farm - merged with Marine Harvest

2004Atlantic salmon of Maine (Fjord Seafood)- Sold to Cooke Aquaculture

2004 Golden Sea Products (Pan Fish) - Sold to Smokey Foods

2005 Heritage (East) - Sold to Cooke Aqua

2005 Heritage (West) - Sold to EWOS/Mainstream

2006 Marine Harvest - Sold to Pan Fish

2007 Target Marine - Sold to Grieg Seafoods

2007 Shur-Gain (feed plant in Truro)- Sold to Cooke Aqua culture

2008 Smokey Foods - Sold to Icicle Seafoods

2011Vernon Watkins' Salmon Farming (NFL - Canada East) - Sold to Cooke Aquaculture

2012Ocean Legacy/Atlantic Sea Smolt (NS - Canada East) - Sold to Loch Duart

In Norway there has been ’countless’ mergers between companies the last decade. The list above only shows some of the larger ones (in transaction value). In Scotland the consolidation has also been very strong. In Chile, there has been limited transaction activity over the last two years. However, several companies have been listed on the Santiago Stock Exchange. Canada’s industry has been extensively consolidated with a few large players and some small companies.

65

Appendix: Marine raw materials in salmon feed A major challenge for the fast growing global fish farming industry is to secure adequate supply of feed raw materials at acceptable prices. In salmon feed, fish meal and fish oil have traditionally been the main ingredients, but due to reduced availability and increased prices, substitution with cheaper and sustainable non-marine raw materials have become common practice. Although this trend started 20 years ago, the biggest changes in feed composition have been introduced during the past 7-8 years. Fish meal protein is being substituted with plant proteins, such as soya concentrates and sunflower meal or with poultry by-products*, such as feather meal. Fish meal levels in some commercial feeds are now as low as 7-8% (was 50-60% in the 1980/90) and nutritionists believe that there is room for further reduction. At these low levels, salmon farming is a net producer of marine protein, in others words more fish protein is produced than what is used to make the feed. The level of fish oil substitution varies from region to region, but in the range of 50-70% (0% in 1980/90) of the oil in salmon diets now comes from plant sources, mainly rape/canola or poultry by-products*. Substitution of marine raw materials has not been found to have any negative effect on growth, susceptibility to disease, or quality of the fish. Over the last 50 years the use of fish meal and fish oil has changed dramatically, with aquaculture now being the main consumer (see charts). (* Not used in Europe) Changing use of fish oil

Changing use of fishmeal

Source: IFFO

80%

20%

1960

59%16%

20%

5%

19902%

71%

3%

24%

2010

Hardened edible

Aquafeed

Industrial

Refined edible

48,4 %

50,1 %

1,5 %

1960

10 %

49,8 %

36,1 %

4,1 %

1980

73%

5%

20%

2%2010

Aquaculture

Chicken

Pig

Other

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Appendix: Sustainability of fish feed Fish meal was originally a by-product from fish oil production at the time when fish oil was cheap oil for hardening fat (margarine production). This situation has changed and both fish meal and fish oil are moving from being “bulk“ raw materials to “speciality” raw materials. There are considerable environmental challenges related to the use of raw materials derived from wild fish. A reduction in “feed fisheries” in the coming years is therefore not unlikely. The global catches of wild fish in the oceans are relatively stable, at around 90 million tonnes, and about one third of this is currently converted to fish meal and fish oil. During the last 30 years fish meal production has varied between 5 and 7 million tonnes, while fish oil is stable around 1 million tonnes. Fish oil is a limited resource and due to its high content of healthy omega -3 fatty acids, more of the fish oil now goes directly to human nutrition. Competition for this valuable raw material is therefore increasing and the omega-3 market today takes around 150 000 out of the 6-700 000 tonnes of fish oil that satisfies the sustainability and quality requirements for salmon feed and the omega-3 market. Pelagic fish caught off the coast of Peru and Chile and in the North East Atlantic, are the main stocks used for fish meal and fish oil. Peruvian anchovy is the biggest of these fisheries. According to the UN's FAO, 90% of the fish used for fish meal and oil, is presently unmarketable in large quantities as human food. The reason for this is that some of the species are either unknown to people or unpalatable, or that the fish in question are too small or turn rancid too quickly for economic storage and subsequent processing. Although the FAO encourages using more fish directly to human consumption, they are of the opinion that it is more efficient, in a protein-hungry world, to harvest the unmarketable species for feeding to animals, subsequently consumed by man, than to not harvest the fish at all. Around 24% (IFFO 2009) of the global fish meal production is based on trimmings and discards from processing of food fish. This proportion has the potential to grow if more fish in the future goes directly to human consumption and more efficient collection systems/logistics for trimmings and discards are established. According to UN, 7 million tonnes of wild catch are destroyed/discarded as non-commercial harvest annually by commercial fisheries. This figure could have been converted into an annual fish oil quantity of 0.5 million ton, i.e. close to 80% of the tonnage used for salmon and trout farming (2010). Salmon are superior to poultry and pork in converting fish meal to edible meat. This is due to significantly better FCR and protein retention. Salmon are cold-blooded and therefore use hardly any energy to maintain body temperature. Also in an aquatic environment, less energy is used for movement than on land. The dependency on wild fish in salmon feed has been significantly reduced over the last 10 -15 years due to changes in recipes. A recent report from Nofima (Sørensen et. al., 2011) shows that the average Norwegian salmon diet in 2000 contained 37% fish meal and 31% fish oil and that it had come down to 25% and 17% respectively in 2010. The downward trend in the use of marine ingredients continues and with the ability of Atlantic salmon to utilise alternative feed ingredients, lack of feed raw materials should not be a threat to the growth of the industry. However, there will be increased competition for the best raw materials and feed prices may therefore be affected.

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Appendix: Atlantic salmon production cycle

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Appendix: Marine Harvest history

The Marine Harvest Group was formally established on 29 December 2006 after a merger between the two Norwegian companies, Pan Fish ASA and Fjord Seafood ASA, and the Dutch company Marine Harvest N.V. The Marine Harvest Group is the dominant leader within farming of Atlantic salmon. In 2012 the output was 392,300 tonnes HOG, which made out 22% of the industry output. The group’s production is located in all the major production regions in the world; Norway, Chile, Canada, Scotland, Ireland and the Faeroes. In addition to farming salmonids, there is also production of Atlantic white halibut in Norway. Downstream; the company has significant production of value-added products, mainly based on salmon, but also based on other species sourced from strategic partners or external suppliers. We are one of the top producers of smoked salmon in Europe, and also do some smoked salmon production in Chile and the US.

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Appendix: Marine Harvest worldwide Marine Harvest worldwide

Marine Harvest operations Marine Harvest produces in six countries and process in a further six countries. In total, the company is present in 22 countries and sell to more than 50 countries in the world. Marine Harvest is listed on Oslo Stock Exchange (:MHG) and has more than 15 500 shareholders. The head office is located in Norway. At the end of 2012, the group had 6 389 employees worldwide, including temporary employees. Total turnover for Marine Harvest in 2012 was MNOK 15 463 and Atlantic salmon harvest quantity was 392 306 tons (HOG).

2012 Sales breakdown 2012 Harvest quantity (HOG)

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Appendix: Marine Harvest downstream (VAP) Marine Harvest downstream (VAP)

From our European downstream operations, about 75% of revenues are made in the three countries France, Belgium and the Netherlands. Other countries where we have significant sales are Germany, UK, Italy and Spain. Operating revenues for Marine Harvest VAP Europe in 2012 was NOK 3 944 million. Marine Harvest’s main secondary processed product is smoked salmon, which is done in France and Belgium. We also process several other species as whitefish and flatfish to ready meals or packed in modified atmosphere (MAP). In addition to our European processing plants, we have two salmon smokeries on the American continent - one in Chile (Delifish) and one in the US (Ducktrap).

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Appendix: Marine Harvest sales channels (2012)

Source: Marine Harvest Marine Harvest sells its products to several categories of purchasers. We divide them into; Retail, Food Service (hotels, restaurants, catering), Industry, Distributors and others. Each business unit has their own sales profile. MH Canada and MH Chile sell most of their production to distributors. In Norway and Scotland, most of the production is head-on-gutted (HOG) and is therefore sold to industrial customers, who further process the salmon into other products as filet, portions, smoked salmon or ready meal products. MH VAP is processing fish from raw material to value-added products and sells 84% of the production to final sales points met by end consumer (retail + food service).

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Appendix: Sources for industry and market information

Marine Harvest: www.marineharvest.com Kontali Analyse: www.kontali.no Intrafish: www.intrafish.no Norwegian directorate of Fisheries: www.fiskeridirektoratet.no Norwegian Ministry of Fisheries and Coastal Affairs: www.fkd.no Norwegian Seafood Council: www.seafood.no Norwegian Seafood Federation: www.fhl.no Chilean Fish Directorate www.sernaperca.cl FAO: www.fao.org International fishmeal and fish oil org.: www.iffo.net Price statistics Fish Pool Index: www.fishpool.eu Kontali Analyse (subscription needed): www.kontali.no Statistics Norway (SSB): www.ssb.no/laks_en/