2013 Salmon Handbook 27-04-13

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Salmon Farming Industry

Handbook 2013

The Marine Harvest Salmon Industry Handbook The purpose of this document is to give financial analysts andinvestors a better insight into the salmon farming industry, and what

Marine Harvest considers to be the most important value drivers.

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Contents

1. Introduc tion 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 62.4 Supply of wild and farmed salmonids 72.5 Salmonids harvest 2012 8

3. The attribu tes of salmon 9

3.1 A healthy product 93.2 Resource efficient production 10

4. World market of farmed Atlanti c salmon 12

4.1 Estimates of the market for farmed Atlantic salmon 124.2 Historic total harvest of Atlantic salmon 134.3 Trade and product flow - Atlantic salmon 144.4 Projecting future harvest quantities 154.5 Yield per smolt 16

4.6 Development in standing biomass 174.7 Supply and demand – historic prices for Atlantic salmon 184.8 Historic price development by local reference prices 194.9 Different sizes – different prices (Norway) 204.10 Price indexes vs. FOB packing plant 214.11 Price neutral demand growth - historically 6-7% 224.12 Price of Atlantic salmon relative to other protein sources23

5. Industry structure 24

5.1 Top 5-10 players in main producing regions 245.2 Number of players producing 80% of Atlantic salmon 25

6. Producti on of salmon 26

6.1 Establishing a salmon farm 27

6.2 Access to licenses – Norway 296.3 Access to licenses – Scotland 326.4 Access to licenses – Chile 336.5 Access to licenses – Canada 356.6 The Atlantic salmon life/production cycle 366.7 Production inputs 386.8 Factor influencing the pace of production 40

7. Cost dynamics 41

7.1 Economy in salmon farming 41

7.2 Production costs 427.3 Cost component – disease and mortality 437.4 Salmon feed 447.5 Salmon feed producers 457.6 Raw material market 467.7 Price, cost and EBIT development – Norway 477.8 Salmon farming is a capital intensive industry 487.9 Capital needs when building biomass 497.10 Accounting principles for biological assets 507.11 Investments and payback time for new entries 51

8. Salmon health and R&D 53

8.1 Salmon disease prevention and treatment 538.2 Most important health risks 54

8.3 Fish health and vaccination (Norway) 558.4 Research and development areas 56

9. Secondary Processing (VAP) 57

9.1 European value-added processing (VAP) industry 589.2 Market segment (2012) 59

9.3 The European market for smoked salmon 60

Appendix 61

Weight conversion ratios and key words 62Some historic acquisitions and divestments 63Marine raw materials in salmon feed 65Sustainability of fish feed 66Atlantic salmon production cycle 67

Marine Harvest history 68Marine Harvest worldwide 69Marine Harvest downstream (VAP) 70Marine Harvest sales channels (2012) 71Sources 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 resultingfrom the use of the information contained herein.

The information contained in this document is believed to be accurate. However, noguarantee 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. browntrout, seawater trout). Although several of these species are available from both wild andfarmed sources, all commercially available Atlantic salmon is farmed. Salmon live in theAtlantic 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, thenreturn to fresh water to reproduce.

Atlantic salmon farming started on an experimental level in the 1960s but became an industryin 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 insheltered quiet waters such as fjords or bays, or in tanks on land. Most of the culturedsalmon come from Norway, Chile, Scotland and Canada.

Salmon is a popular food. Salmon consumption is considered to be healthy because of thefish's high content of protein and Omega-3 fatty acids.

The quantity figures in this industry handbook are mainly expressed in HOG (head ongutted). For a weight conversion table, see appendix.

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2. Definition of segment2.1 Seafood as part of the larger protein space

Source: FAO, Population Division of the Department of Economic and Social Affairs of the United NationsSecretariat, World Population Prospects: The 2010 Revision

Although 70% of the Earth’s surface is covered by water, only 6% of the protein sources forhuman consumption is produced in this element today. The global population is expected togrow by 2 billion, to more than 9 billion, by 2050. Assuming consumption per capita staysconstant, this implies a 40% increase in demand for protein.

The estimates for population growth, however, assume that the growth will mainly occur inAsia 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 by2050. Knowing that resources for increased land based protein production will be scarce, akey 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 pastfew decades. Aquaculture is the fastest growing animal food producing sector, and in 2012the 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 dietarycontribution of fish is more significant in terms of proteins - it provides the world’s populationwith 6% of their intake of protein.

While global human population is growing at a rate of 1.7% annually, aquaculture outpacesthis 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 totalof 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 2030taking population growth into account, an additional 23 million tonnes of fish production isneeded.

With the stagnating wild catch, the growth in fish production (and protein supply) is expectedto come from the fast growing aquaculture industry. Food and Agriculture Organization of theUnited Nations (FAO) estimates that in 2030, aquaculture will have increased from 45 milliontonnes 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, totalglobal 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 salmonwas less than half the quantity harvested.

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5,0

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30,0

M i l l i o n t o n n e s L W

Selected seafood species 2011

Wild

Farmed

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M i l l i o n t o n n e s L W

Fish species ‐ harvest/catch quantities 2011Wild

Farmed

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2.4 Supply of farmed and wi ld 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 supplyfrom wild catch is stagnating in several regions and for many important species. Wild catch ofsalmonids is varying between 700 000 and 1 000 000 tonnes HOG, whereas farmedsalmonids 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 hasbecome the dominant source. The total supply of all farmed salmonids was over 2.1 milliontonnes (HOG) in 2012. The same year, the total catch quantity of wild salmonids was about824 000 tonnes, with pink, chum and sockeye being most common species.

Origin and markets for wild salmonids

Source: Kontali AnalyseThe 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, Russiaand Japan), and later been re-exported as frozen fillets. Once re-exported from China, onecannot distinguish between the different origins.

‐

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

2 200

2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

T h o u s a n d t o n n e s H O G

Wild salmon

Farmed salmon

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2.5 Salmonids harvest 2012 –Farmed Atlantic salmon dominates


At lant ic 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 asready-made meals. The product is present in most geographies and segments. Due tobiological 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. Qualityis lower than the other species and is therefore a less valued salmonid. The fish is small insize (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 Japanand 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 traditionaldish as hot smoked or portion fish. Small trout is not in direct competition with Atlanticsalmon. Chum: Caught in Japan and Alaska. Most is consumed in Japan and China. In Japan, it isavailable as fresh, while in China it is processed for local consumption and re-exported. Littlechum is found in the EU market. Varied quality and part of the catch is not for humanconsumption. Coho: Produced in Chile and is mostly used for salted products. It is in competition with troutand sockeye in the red fish market. Although Russia has increased its import of this speciethe last years, Japan remains the largest market.Sockeye: Caught in Russia and Alaska. It is mostly exported frozen to Japan, but some isconsumed locally in Russia and some canned in Alaska. Sockeye is seen as a high qualitysalmonid and is used as salted products, sashimi and some smoked in EU. Chinook/King: Low quantity species, but highly valued. Alaska, Canada and New Zealandare 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 Salmon3.1 A healthy product

Farmed salmon is a good source for the marineomega-3 polyunsaturated fatty acidseicosapentaenoic acid (EPA) and docosahexaenoicacid (DHA) that reduce the risk for cardiovasculardisease. Data also indicates that EPA and DHAreduce the risk for a large number of other healthissues.

Salmon is viewed upon as a very versatile product,which can be used in numerous dishes in mostculinary tradtions. It is popular with retailers as it isproduced in a controlled environment and is stablein supply throughout the year (not subject toseasons).

Source: FAO, Marine Harvest

Salmon is nutritious, rich in micronutrients, minerals, marine omega-3 fatty acids, very highquality protein and several vitamins, and represents an important part of a varied and healthydiet. FAO highlights “Fish is a food of excellent nutritional value, providing high quality proteinand 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 seafoodindicates that including salmon in your diet will improve your overall nutritional status, andmay even yield significant health benefits. In the face of increasing obesity and decreasinghealth standards, governments and food and health advisory bodies in Europe and the USAare 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 andseafood. The first three are farmed, and now also more and more ofthe available seafood is farmed.

One method to measure how productive the different proteinproductions are, is by using the representative feed conversion ratio(FCR). In short, this tells us the kilograms of feed needed toincrease the animal’s bodyweight by one kg. If we compare farmedsalmon with the other three species, we find a variation in the FCRbetween 1.2 and 8.0, where salmon is the most efficient inproduction 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 theirbodies.

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 product ion

As well as a low FCR, Atlanticsalmon has a significantly higheredible yield in comparison with otherprotein sources. As much as 68% ofAtlantic salmon is edible meat.

Source: Norwegian University and Life Sciences (2002)

Most of the fish is edible meat, whileother sources of meat have a higherlevel of waste or non edible meat.The combination of the FCR ratioand edible yield, gives salmon afavourably high quantity of ediblemeat per kg of feed fed, as the graphto the left shows.

Source: Norwegian University and Life Sciences (2002)

Freshwater consumpt ion in product ion

Freshwater is a renewable but limited natural resource, which can only be renewed throughthe process of the water cycle. If more freshwater is consumed through human activities thanis 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 thesurrounding environment.

Farmed Atlantic salmon requires only 1,500 litres per kg of fresh water in production whereasproducing 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 Salmon4.1 Estimates of the market for farmed Atlantic salmon


Supply of Atlantic salmon has more than doubled since 2000 (annual growth of 7%). Due tovarious constraints, Kontali Analyse expects annual supply growth of Atlantic salmon to dropto 3% in the period 2013-2020. The EU and the US are by far the largest markets for Atlanticsalmon. 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 demandbeyond 2013 is assumed equal to supply (estimated by Kontali Analyse). As can be seenfrom the graph below, salmon is one of the food categories that grow at a significantly higherrate than the world’s human population.

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

0

500

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F a r m e d A t l a n t i c

s a l m o n b y m a r k e t

( t h o u s a n d t o n n e s H O G )

North America South America Europe (incl. Russia)

Asia Oceania Africa

All markets World

population

rebased

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4.2 Historic total harvest of Atlantic salmon


Farming of Atlantic salmon has always been dominated by a few producing countries asthere are several natural conditions that need to be in place for optimal production, likeseawater temperature range (see chapter 6), a sheltered coast line and certain biologicalconditions.

In the beginning of the 2000s, Chile started to increase production sharply. However, in 2007there 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 potentialfor future growth. Other regions have generally been growing, but from rather marginalquantities.

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4.3 Trade and product f low – 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 thebeginning of this millennium has been that Norwegian fresh salmon meet more competitionfrom Chilean frozen salmon in the European market. This, together with strong competitionbetween mainly Norwegian and Chilean salmon in the Japanese market, and the increase inexport 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 regionalmarkets 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 lowcosts. It is generally expected that the market will continue to have a preference for freshsalmon, going forward.

Global trade flows of farmed Atlantic salmon - 2012 (HOG)


Norway, Iceland,

Faroe Islands:

Harvest: 1 130 000

Market: 33 000

Russia:

Harvest: 6 000

Market: 155 000

Japan:Harvest: 0

Market: 57 000

Other Asia:

Harvest: 0

Market: 137 000

Australia &

New Zealand:

Harvest: 33 000

Market: 36 000

North America:

Harvest: 129 000

Market: 347 000

Latin America:

Harvest (CL)

: 328

000

Market: 105 000

EU:

Harvest : 156 000

Market: 823

000

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4.4 Projecting future harvest quant ities

The three most important indicators on future harvest quantities are standing biomass, feedsales and smolt release. These three are good indicators on medium term and long termharvest, while the best short term indicator is standing biomass categorized by size. Asharvested size is normally above 4 kg, the available quantity of this size class is therefore thebest estimate of short term supply.

If no actual numbers on smolt releases are available, vaccine sales could be a good indicatorof number of smolt releases and when the smolt is put to sea. This is a good indicator onlong 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. Awarmer winter can for example increase harvest quantities for the relevant year, partly at theexpense of the subsequent year.

Disease outbreaks can also impact the harvest quantity due to mortality and slowdown ofgrowth.

Standing Biomass

Source: Kontali

Feed SalesSource: feed companies

Seawater Temperature

Source: Meteorological institutes

Disease

OutbreaksSource: Media

Smolt Release

Source:

Producing

companies

Vaccine

SalesSource: e.g.

ScanVacc

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4.5 Yield per smol t

Source: Kontali Analyse, Marine Harvest

Yield per smolt is an important indicator of production efficiency. Due to the falling cost curveand 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 bydiseases, 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 depletioncaused by the ISA crisis commencing in 2007. In 2010/11, the Chilean salmon industryshowed 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 havedeteriorated 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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5,0

K g f i s h ( H O G ) / s m o l t r e l e a s e d

Generation

Norway

Chile

UK

Faroe Islands

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4.6 Development in standing biomass


Because of the variation in sea water temperatures during the year, the totalstanding biomass in Europe has a S-curve, which is at its lowest in May andat its peak in October. The Norwegian industry is focused on minimizing thenatural fluctuations as license constraints put a limit to how much biomasscan be in sea at the peak of the year.

In Chile the situation is different due to more stable seawater temperaturesand opposite seasons (being in the Southern hemisphere). A more steady

water temperature gives the possibility to release smolt during the wholeyear and gives a more uniform utilization of the facilities. The reduction ofstanding biomass in Chile in 2008 and 2009 is due to the impact of the ISAdisease.

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4.7 Supply and demand – historic prices


Due to the long production cycle and the short shelf life of the fresh product (maximum 3weeks), the spot price clears on the basis of the overall price/quantity preference ofcustomers.

As most of the farmed salmon is perishable and therefore marketed fresh, all salmonproduced in one period has to be consumed in that same period. In the short term, theproduction level is difficult and expensive to adjust as the planning/production cycle is threeyears long. Therefore, the supplied quantity is very inelastic in the short term, while alsodemand is shifting with the season. This has a large effect on the price volatility in themarket.

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 globalmarket as the prices correlate to a high degree.

0,00

1,00

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45,00

2000 2001 2002 2003 2004 2004 2005 2006 2007 2008 2009 2010 2011 2012

U S D / l b

N O K / k g

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


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 muchvolatility in the price achieved for the product. The average price for Norwegian wholesalmon 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 Scottishand Faroese salmon is a derivate of the price of Norwegian salmon. The price of Scottishsalmon is normally at a premium of 3-5 NOK to Norwegian salmon, whereas the Faroese isnormally at a small discount.

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4.8 Different sizes – different prices (Norway)


The most normal market size for a salmon is 4/5 kg HOG. The reason for the different sizedfish is mainly because salmon farming is a biological production process, where the fish hasdifferent 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 processingindustry in Europe mainly uses 3-6 kg HOG but there are niche markets for small and largefish. As these markets are minor compared to the main market, they are easily disrupted ifquantities become too high. Generally, small fish sizes are discounted and large sized fishare sold at premium.

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4.10 Price indexes vs. FOB packing plant

* Average difference between SSB and return to packing plantSource: Fishpool, NOS/FHL, SSB, Norwegian Seafood Council, UrnerBarry, Kontali Analyse

Several price indices for salmon are publicly available. The two most important providers ofsuch statistics for Norwegian salmon are NOS/Fish Pool and Statistics Norway (SSB). UrnerBarry in the US provides a reference price for Chilean salmon in Miami and Canadian salmonin 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 toadjust for freight to border, duty and taxes, and also to adjust for quality and contract sales toget the achieved spot price back to producer. Average difference between SSB price andFCA Oslo is ~1 NOK, which gives the average difference between SSB price and back toplant at NOK 1.50**.

Calculating Urner Barry – Chilean fillets, back to HOG plant is more extensive. It is necessaryto use UB prices for both 2/3 lb and 3/4 lb and adjust for quantity share, market handling (4cent), market commission (4.5%), premium fish share (92%), reduced price on downgradedfish (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%


Combining the data gives a linear correlation between change in global supply and change inthe Norwegian FHL price. This relation had an explanatory power of almost 87% of theannual price development between 2000 and 2011. Including 2012, this figure decreases to66%.

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 Atlanticsalmon.

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 growthrates has been the main determinant for the variation in prices. Annual average prices havevaried between NOK 19.50 (2003) and NOK 37.45 (2010).

Y-o-Y

Global supply

change

Change in av. price

FHL price

2000‐01 13 % ‐25 %

2001‐02 7 % ‐10 %

2002‐03 8 % ‐3 %

2003‐04 5 % 11 %

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%

‐20%

‐10%

0%

10%

20%

30%

‐5% 0% 5% 10% 15% 20% 25%

C h a n g e i n a v e r a g e F H L p r i c e

Global supply change

2012

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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 o ther protein sources in selected major markets(snap-shot of consumer prices in selected retail stores, salmon fillet compared to beefsteak, pork fil let and chicken breast fi llet, Apri l 2013)

Salmon/Beef Salmon/Chicken Salmon/PorkUK 0.9 1.4 1.5US 1.3 2.3 1.9Belgium 1.3 1.7 1.9Japan 1.3 2.0 2.0

Despite salmon having become relatively cheaper over time, it is still a rather expensiveproduct in the shelves.

0

50

100

150

200

250

300

350

1980 1982 1985 1988 1991 1993 1996 1999 2002 2004 2007 2010 2013

I n d e x p r i c e s r e b a s e d

Relative price development 1980‐Q1 2013

Beef

Lamb

Pork

Chicken

Salmon

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


Historically, the salmon industry has been made up by many, small firms. This has been thecase 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 Norwegiangovernment’s priority to decentralised structures and local ownership. In Chile thegovernment put fewer demands on ownership structures in order to grow the new industryfaster.

During the last decade the salmon farming industry has been through a period ofconsolidation 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 explainedby 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.

0

10

20

30

40

50

60

70

NorwayChile

ScotlandCanada

AustraliaFaroe

Island

24

16

43

22

2012 2009 2006 2003 2000 1997

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6. Production of salmon

In all salmon producing regions, the relevant authorities have a licensing regime in place. Inorder to operate salmon farming, a license is the key prerequisite. The licenses constrain themaximum production for each company and the industry as a whole. The license regimevaries across jurisdictions.

The salmon farming production cycle is about 3 years. During the first year of production theeggs are fertilised and the fish is grown into approx. 100 grams in controlled freshwaterenvironment.

Subsequently, the fish is transported into seawater cages where it is grown out to approx. 4-5kg during a period of 14-24 months. The growth of the fish is heavily dependent on theseawater temperatures, which varies by time of year and across regions.

Having reached harvestable size, the fish is transported to primary processing plants where itis slaughtered and gutted. Most salmon is sold gutted on ice in a box.

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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 givesthe 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 onesite may use several licenses at the same time. These licenses are awarded by the Ministryof Fisheries and are administered by the Directorate of Fisheries. It is also possible to applyto the Directorate of Fisheries to change the size of a site and licenses can be tradedbetween companies in the industry. Since 1982, new licenses have been awarded only inlimited numbers the years 1985, 1988, 1999, 2001, 2002 and 2009. At the end of 2012, therewere 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 siteshave 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 institutionsthat that have to give permission before one is allowed to make use of an area: PlanningPermission; SEPA and Marine Scotland.

Individual site biomass is governed by environmental concerns, namely the assimilativecapacity of the local marine environment. As a consequence, individual site biomass is notuniform but varies between 100 tonnes to 2 500 tonnes maximum depending on sitecharacteristics.

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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. TheMinistry cannot give the approval if it implies that the buyer gets control of more than 25% ofthe total biomass in the country. No owner can control more than 50% of the total biomass inany of the regions. In 1993, a salmon farming license was traded for NOK 200 000, while theprice today is normally about MNOK 20-70. In the last round of new licenses from thegovernment, the price was however heavily discounted (cost of MNOK 8 per license) andawarded to small players operating in rural areas. Many of these licenses have since beensold at large gains.

When assignment for a license is given, it has to be used within two years with a minimum ofone 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 totalbiomass in sea never exceeds 3,900 tonnes (LW).

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6.2 Access to licenses – Norway

2013 utilisation per l icense 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: 929o 2008: 916o 2009: 988o 2010: 991o 2011: 990o 2012: 963

Because of the regulation of standing biomass (maximum allowed biomass - MAB) perlicence (780 tonnes LW), the production capacity per licence is limited. Annual harvestquantity 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 theindustry is hence lower than the utilisation for the largest companies.

‐

200

400

600

800

1 000

1 200

1 400

Average

Norway

Marine

Harvest

Norway

Company A Company B Company C Company D

T

h o u s a n d t o n n e s H O G / G W

Average harvest per license 2013

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6.2 Access to licenses - Norway

Industry production is approaching its limit (Norway)

Estimated MAB-util isation in Norway 2009-2013E


Due to the fact that the two counties Troms and Finnmark, in Northern Norway, have a higherMAB 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 thelimit in terms of MAB, particularly in the second half of each year due to the seasonality offarming operations.

Norwegian authorities are planning to issue approximately 5% new licence capacity during2013. 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

J a n

M a y

S e p

J a n

M a y

S e p

J a n

M a y

S e p

J a n

M a y

S e p

J a n

M a y

S e p

J a n

M a y

S e p

J a n

M a y

S e p

J a n

M a y

S e p

J a n

M a y

S e p

2005 2006 2007 2008 2009 2010 2011 2012E 2013E

T o n n e s w h o l e f i s h e q u i v a l e n t ( W F E )

Total MAB Capacity incl. wellboat/holding cages

Total biomass ‐ Salmon and trout

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6.3 Access to licenses - Scotland

In Scotland it is legal to trade licenses and although no restriction on number is given, thereis 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 currentlyin a transitory state; all new applications require planning application for permission tooperate, as well as an environmental and Crown estate license. The granting of the planningpermission is aligned to the Crown estate lease for a 25 year period. All existing fish farmleases in Scotland are currently undergoing a review process which transfers them from theCrown estate to local regional councils. These grants are automatically given a 25 yearlease. 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 mostefficient route in terms of cost and time, whilst brand new sites will take longer and has to gothrough an Environmental Impact Assessment (EIA) process. The environmental license ischarged annually at GBP 5 338, whilst the standing rent is levied to the crown estate onproduction basis as follows: GBP 22.50 per tonne harvested for Mainland sites; GBP 20.50per tonne for Western Isles sites; GBP 1 000 annual charge if no harvesting; GBP 2 000annual charge if dormant. The applications are also charged at GBP 174 per 0.1 hectare offarm area, while the environmental license costs GBP 2 600 for a new site.

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6.4 Access to licenses - Chile

The trading of licenses in Chile is regulated by the General Law on Fisheries andAquaculture (LGPA), in charge of Ministry of Economy and Defense.

Licenses granted before April, 2010 are issued for an indefinite period of time. However, forcompanies 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 2010onwards and licenses that have been subject to modification have a defined horizon of 25years. This time horizon may also be extended under certain circumstances. Licenses can belost in case of specified violations to regulation, operation under the minimum limit duringcertain period, or voluntary resignation. It can be lost if e.g. the license is used for a differentpurpose than the one for which this was granted, or environmental/sanitary violations, amongothers.

Aquaculture licenses must operate within the terms established by LGPA in order to avoidexpiration. Aquaculture licenses operations must be performed within one year from the dateof 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 tothis effect must be met, which corresponds to 5% of production reported in the TechnicalProject 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 MarineFisheries Service.

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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 LicensesRegister (of Armed Forces) to be authorized to exercise aquaculture activities (all leasesand transfers must be registered).

It includes new events that may lead to revocation of licenses and it strengthens some ofthe rules regarding such revocation. In fact, as indicated above the untimely reporting andthe 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 seriousbreaches within 2 years) was amended to a stricter standard (now it is the accumulationof 3 serious breaches, but within 4 years).

It eliminates the different regimes that aquaculture concessions were subject to; two typesof 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 aquacultureconcessions without the need to wait a period). With this amendment, all aquacultureconcessions will be on equal conditions.

No impact on duration of current licenses.

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

o

Gradual opening of regions XII, XI and X after 12 months, in the firstcase, 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 newlicenses 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.

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6.5 Access to licenses - Canada

In Canada, the Provincial and Federal licenses can be assigned to a different operatorthrough a Government Assignment Process. The provision enables a company to transferthe 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 processinvolves 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 estimateof cost to acquire a new license/site can range from CAD 300,000 - 500,000. Since 2007 onlyone new license has been issued.

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6.6 The Atlantic salmon life/production cycle

Source: Marine Harvest

The total production cycle takes approximately 10-16 months in freshwater plus 14-24months 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 tosea

Growth phasein sea

Secondary processing Primary processing (to HOG)

1 4 - 2 4 m o n t h s

1 0 - 1 6 m o n t h s

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6.6 The Atlantic salmon life/production cycle

Norway (3 generations)


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 calledS1s.

In Norway, smolt is mainly released into seawater twice a year. S0s are released inautumn/spring within 12 months after ova inlay, and S1s in the autumn about 18 months afterova inlay. A very small part of the production is produced as S1½, which are only put to sea 2years after the ova inlay. The harvest is spread all around the year. In Norway, typicalharvest is the beginning of the year for S0s and second half of the year for S1s. Duringsummer, 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 nextgeneration is put to sea at the same location. Smolt may be released in the same locationwith a two year cycle. In the example above, Generation 1 (G1) is put to Location 1 (L1), G2put to L2, and then G3 is put in L1 again as the fish from G1 have been harvested and thelocation 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 someearly S1½s could also be harvested in this period.

G1

G2

G3

L1

L2

L1

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6.7 Product ion inputs

Eggs

There are several suppliers of eggs to theindustry. Aquagen AS, Fanad Fisheries Ltd,Lakeland and Salmobreed AS are some ofthe most significant by quantities. Eggsuppliers can tailor their production todemand by obtaining more or less fish forbreeding during the preceding season.Production can easily be scaled. The eggmarket is international.

Smolt

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

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6.7 Product ion inputs

Source: Marine Harvest, Kontali Analyse, SSPO

Labour

In 2011, just under 5 900 people in Norway were directly employed in aquaculture, of whichmore than half was employed in salmon and trout production.

According to Scotland Salmon Producers Organisation (SSPO), over 2 100 people areemployed 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 insalmon farming industry.

In Chile, employment has been significantly reduced as a consequence of the ISA situationthat 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 casein 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 producea good quality smolt, production normally takes place in tanks on land where the water istemperature regulated and/or recirculated which requires energy (8-10% of smolt cost inNorway). When the salmon is processed energy is consumed. However, this depends on thelevel of automation (3-5% of harvest cost in Norway).

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6.8 Factor influencing the pace of product ion

Sea Water Temperature

Source: Marine Harvest, racerocks.com

The sea water temperatures vary much throughout the year in all production regions. Whilethe production countries on the Northern hemisphere see low temperatures during thebeginning of the year, and high temperatures in autumn varying with as much as 10oC, thetemperature in Chile is more stable varying between 10oC and 14oC. Chile has the highestaverage temperature of 12oC, while Ireland has 11oC and the three other regions have anaverage temperature of about 10oC.

As the salmon is a cold-blooded animal (ectotherm), the temperature plays an important rolefor its growth rate. The optimal temperature range for Atlantic salmon is 8-14oC, illustrated bythe shaded area on the graph. Temperature is one of the most important natural competitiveadvantages that Chile has compared to the other production regions as the production timehistorically 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.

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7. Cost Dynamics7.1 Economics of salmon farming

The salmon farming industry is capital intensive

and volatile. This is a result of a long productioncycle, a fragmented industry, market conditionsand a biological production process, which isaffected by many external factors.

Over time, production costs have been reducedand productivity has increased as new technologyand new competence has been achieved. This isbelieved to continue in the future as commercialaquaculture 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. Reportedrevenues can also include revenues from trading activity, sales of by-products, insurancecompensation, gain/loss on sale of assets etc.

Price

Reported prices are normally stated in the terms of a specific reference price e.g. theNOS/FHL price for Norway (FCA Oslo) and UB price for Chile (FCA Miami). Reference pricesare not reflecting freight, and other sales reducing items mentioned above. Reference pricesare for one specific product (FHL = per kg head on gutted fish packed fresh in a standardbox). Sales of other products (frozen products, fresh fillets and portions) will cause deviationin the achieved prices vs. reference price. Reference prices are for superior quality fish, whileachieved prices are for a mix of qualities, including downgrades. Reference prices are spotprices, 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 specificperiod in a standardized term; e.g. head on gutted (HOG) or whole fish equivalent (WFE), thedifference 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.

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7.2 Product ion costs

The figures below illustrate the main cost components and their relative importance in thefarming of salmon in the three biggest regions. The cost level is chosen for illustrationpurposes.

*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. Thevariation 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 100gwhen the salmon through its smoltification phase gets ready to be put in sea water. UK hasthe highest costs as there has been low scale production in both land based systems andtanks. Chile has used lakes for this production and has had cheap labour, while in Norwaythere has been a transfer from production in lakes to large scale production in land-basedsystems.

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 andpacking 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 lowerweight 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 putinto seawater, while subsequent stages of the production cycle normally has a lower mortalityrate.

Elevated mortality in later months of the cycle is normally related to outbreaks of disease orpredator attacks.

There is no strict standard for how to account for mortality in the books, and there is nounified 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 themortality cost, the cost of harvested fish will therefore reflect the total cost for the biomassthat can be harvested from one production cycle.

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7.4 Salmon feed

Development in use of ingredients in salmon feed receipts

Source: Marine HarvestGrowth intervals 0.1 – 0.2 kg 0.2 – 1 kg 1 – 2 kg 2 – 3 kg 3 – 4 kg 4 – 5 kgFeed consume* 0.08 kg 0.75 kg 1.00 kg 1.05 kg 1.10 kg 1.20 kgTime, 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 andreplaced 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 profilecompared to protein of vegetable origin and have generally a higher protein concentration. Itis 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 highlevels of marine protein (60%) and low levels of fat/oil (10%). The industry then went througha development of pellet feeds with focus on protein and fat content. A typical recipe in theearly 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 ingredientsused in fish feed today are different from country to country, giving higher raw materialflexibility in certain regions as e.g. Chile and Canada. This will have an impact on the feedprice.

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 areavailable in most countries and are being used in certain situations where extra growth rate isprofitable. Feeding control systems shall prevent feed waste and assure that the fish getenough feed to grow to its potential. Normally the fastest growing fish show the lowest feedconversion rate.

24%

17%59%

Global 1990

8%

49%11%

18%

12%

Norway 2012

7%

32%

10%15%

22%

12%

Chile 2012

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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 salmonfeed output, and the companies are all subsidiaries of listed companies BioMar (Schouw),Ewos (Cermaq) and Skretting (Nutreco), and are all operating globally. Additionally, there aresome producers who are only present in their regional market.

The major cost elements when producing salmonid feed are the raw materials required andproduction costs.

The feed producers have historically operated on cost-plus contracts, leaving the exposure ofraw material prices with the aquaculture companies.

One major issue in the salmon feed industry is the future supplies of the raw materials goinginto feed (see next page).

Feed producers' market share 1998

Skretting

EWOS

BioMar

NorAqua

Biomaster

Other

Feed producers' market share 2013E

Skretting

EWOS

BioMar

Other

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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 steadilyincreased and we expect fish oil prices to become uncorrelated with vegetable oil prices inthe future.

Rape seed oil: Rape seed oil prices have very much the same price trend as fish oil. Asthere 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 tocontinue.

Soy: After having seen the soy prices climb to the highest level in 34 years in mid-2008, theprices fell slightly and has remained stable the last couple of years. The main reason for2008’s price increase was because of less soy was planted due to a shift from soy to corn inmany regions, and a high demand for vegetable oil in general. Corn is planted in higherquantities due to increased demand for ethanol produced from corn, i.e. former soy areas areused for corn production.

Vegetable protein: Soy and corn have traditionally been very important vegetable proteinsources in fish feed. As a consequence of less planting of soy and more corn used for energypurposes, the price for these raw materials increases. Parallel to this there has been anincrease in genetic modified (GM) production of soy and corn. To be able to get non-GMproduction, a premium has been put on price, i.e. non-GM products are more expensive thanGM products.

Wheat: Wheat price has been rather stable since late 2010.

‐

200

400

600

800

1 000

1 200

1 400 1 600

1 800

2 000

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

U S D / t o n n e s Fish meal

Soy meal

Wheat

Rapeseed oil

Fish oil

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7.7 Price, cost and EBIT development (Norway)


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 beenbroken due to the collapse of the Chilean industry, combined with effects of consolidation inthe 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 costcurve has also had a falling trend.

The average EBIT per kg for the Norwegian industry has hence been positive with theexception 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

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

N O K

EBIT/kg Price/kg Cost/kg

Adjusted according to CPI (2012 = 100)

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7.8 Salmon farming is a capital intensive industry

Cost of building biomass


For illustration purposes, the farming process has been divided into three stages of 12months. The first 12 months is production from egg to finished smolt. After this, 24 months ofon-growing in sea follows. After the on-growing phase is over, harvest takes placeimmediately thereafter (illustrated as “Month 37”). In a steady state there will at all times bethree 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 36months, where some costs were incurred to produce the smolt two years ago, further costsincurred to grow the fish in seawater and some costs incurred related to harvest (”Month37”). Sales price should cover the costs and provide a profit margin (represented by thegreen 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 samepattern, most of the cash flow will be reinvested into salmon at various growth stages. If thecompany wishes to grow its future output, the following generations need to be largerrequiring 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.

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7.9 Capital needs when building biomass


The illustration above shows how capital needs develop when one is buildingproduction/biomass from ”scratch”. In phase 1, there is only one generation (G) of fishproduced 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, rapidlyincreasing 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 nextgenerations are building up their cost base. If each generation is equally large and everythingelse is in a steady state, the capital needed would have peaked at the end of phase 3. With agrowing production, the capital needed will also increase after phase 3 as long as the nextgeneration is larger than the previous (if not, capital base is reduced). We see that salmonfarming is a capital intensive industry.

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7.10 Account ing pr inciples for biological assets

Biological assets are measured at fair value less cost to sell, unless the fair value cannot bemeasured reliably.

Effective markets for sale of live fish do not exist so the valuation of live fish impliesestablishment 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 forestimated differences. The prices are reduced for harvesting costs and freight costs tomarket, to arrive at a net value back to farm. The valuation reflects the expected qualitygrading and size distribution. The change in estimated fair value is recognised in profit or losson a continuous basis, and is classified separately (not included in the cost of the harvestedbiomass). 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 beaccumulated cost. The valuation is completed for each business unit and is based onbiomass in sea for each sea water site. The fair value reflects the expected market price. Themarket price is derived from a variety of sources, normally a combination of achieved priceslast month and the most recent contract entered into. For Marine Harvest Norway, quotedforward prices (Fish Pool) are also included in the calculation.

Operational EBIT

Operational EBIT and other operational results are reported based on the realised costs ofharvested salmon and do not include the fair value adjustments on biomass.

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7.11 Investments and payback t ime for new entries (Norway)

Assumptions

Normal site consisting of 4 licenses:

Equipment investment NOK 30-35mNumber of licenses 4Licence cost (second hand market) NOK 120-200m (~NOK 30-50m per licence)Output per generation: ~4000 tonnes HOGNumber of smolt released: 1m

Smolt cost per unit: NOK 8Feed price per kg: NOK 9Economic feed conversion ratio (FCR): 1.17 (to live weight)

Conversion rate from Live Weight to HOG: 0.83Harvest and processing incl. well boat cost per kg (HOG): NOK 3.25

Average harvest weight (HOG): 4.5 kgMortality 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 anew 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 lesscostly.

To simplify, smolt is bought externally. Smolt is usually less costly to produce internally, butthis depends on production quantity.

The performance of the fish is affected by numerous factors as feeding regime, sea watertemperature, disease, oxygen level in water, smolt quality, etc.

Sales price chosen is the average sales price from Norway the last decade.

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7.11 Investments and payback t ime 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 capitalneeds and falling production costs with quantity, new companies in salmon production willexperience higher average production costs. During the production of each harvest theworking 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).


With a sales price at the historic average level, payback time for the original investmentswould be about 15 years. This result is very sensitive to sales price and economic feedconversion 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 ofproduction 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

Y e a r s p a y b a c k t i m e o n i n v e s t m

e n t s

NOK/kg

FCR=1.0 FCR=1.2

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8. Salmon health and R&D8.1 Salmon disease prevention and treatment

Maximising survival and maintaining healthy fish stocks are primarily achieved through goodhusbandry and health management practices and policies. Such practices, in addition,

reduce exposure to pathogens and the risk of health challenges. The success of good healthmanagement practices have been demonstrated on many occasions and have contributed toan overall improvement in the survival of farmed salmonids.

Fish health management plans, veterinary health plans, bio security plans, risk mitigationplans, contingency plans, disinfection procedures, surveillance schemes as well ascoordinated and synchronised zone/area management approaches, all support healthystocks with emphasis on disease prevention.

For the majority of salmonid health conditions, prevention is achieved through vaccination atan early stage in production. Vaccines are widely used commercially to reduce the risk ofhealth challenges. With the introduction of vaccines a considerable number of bacterialhealth challenges have been effectively controlled, with the additional benefit that the quantityof medicine prescribed in the industry has been minimised.

In some situations however medicinal treatment is still required to maximise survival andeven the best managed farms may use medicines from time to time. For several of the viraldiseases, no effective vaccines are currently available.

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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 causemortality 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 obtainedby optimizing husbandry and biosecurity measures. In addition, promising results are nowseen 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 virusthat can cause reduced appetite, muscle and pancreas lesions, lethargy, and if notappropriately managed, elevated mortality. PD only affects Atlantic salmon in seawater andcontrol is achieved mainly by management and mitigation practices. Combined with thesemeasures, vaccination is used where PD represents a risk and which provides an additionallevel of protection.

Heart and Skeletal Muscle Inf lammation (HSMI) HSMI is currently reported in Norway and Scotland. Symptoms of HSMI are reducedappetite, abnormal behaviour and in most cases low mortality. HSMI generally affects fish thefirst year in seawater and control is achieved mainly by good husbandry and managementpractices.

Infectious Salmon Anaemia (ISA) ISA is caused by the ISA virus and is widely reported. It is a contagious disease that causeslethargy, anaemia and may lead to significant mortality in seawater, if not appropriatelymanaged. 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 usewhere 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, toa much lesser extent, in Norway and the UK. It causes lethargy, less appetite and can resultin elevated mortality. SRS is controlled by vaccination, but medicinal intervention (licensedantibiotics) 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 asenvironmental factors including algae or jelly-fish blooms. Little is known about the cause ofmany of the gill conditions and to what extent infectious or environmental factors are primaryor secondary causes of disease.

Sea lice Sea lice, of which there are several species, are natural occurring seawater parasites. Theycan infect the salmon skin and if not controlled, they can cause lesions, secondary infectionand mortality. Sea lice are controlled through good husbandry and management practicesand the use of licensed medicines and cleaner fish (different wrasse species, eatingparasites off the salmon skin)

.

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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 anincreased incidence of disease outbreaks. In the absence of effective vaccines, the use ofantibiotics reached a maximum of almost 50 tonnes in 1987. With the introduction of effectivevaccines against the main health challenges at that time, the quantities of antibiotic used inthe industry declined significantly to less than 1.4 tonnes by 1994 and has since thencontinued to be very low. These developments, along with the introduction of biosecurity andhealth management strategies, allowed for further expansion of the industry and respectiveproduction 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 inChile after rebuilding the industry following the ISA epidemic.

‐100

100

300

500

700

900

1 100

0

10

20

30

40

50

60

' 0 0 0 t o n n e s H O G

T o n n e s a c t i v e s u b s t a n c e

Antibiotics use HQ ‐ Atlantic Salmon

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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 commercialproduction 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 nutrit ion• 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

TechnologyMost of the technology used in modern salmon farming around the world today isstandardised. Technological development and knowledge exchanges continue at a constantpace.

According to Zacco (Norwegian patenting office), patenting intensity in the salmon farmingindustry has grown rapidly in the last two decades. Considerable R&D is undertaken inseveral areas and the most important developments have been seen in the feed andvaccines sector, done by large global players. In this industry the majority of producers aresmall and have neither had the capital nor the competence to undertake and supervise majorR&D activities. This is expected to change as consolidation of the industry continues.

Smolt, on-growing production and processingThe technology used in these phases can be bought ”off the shelf”. Very few patents aregranted. Technology and respective operators are becoming increasingly more advancedand skilled.

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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 standardprice 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).

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Others

19%

Shellfish

and

mussels

15%

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 20employees

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 fragmentedwith more than 4,000 players. Most of the companiesare fairly small, but there are also several companies ofsignificant size involved in the secondary processingindustry: Marine Harvest, Morpol, Icelandic Group, TheSeafood Company, Deutsche See, Caladero, RoyalGreenland, Labeyrie, and Lerøy Seafood.

Most of the largest players are basing their processingon Atlantic salmon, producing smoked salmon, portionsor ready meals with different packing as vacuum ormodified atmosphere (MAP).

Consumers are willing to pay for quality and valueadded. This means that we are expecting to see anincrease in demand for convenience products such asready-to-cook fish, together with a packing trendtowards MAP as this maintains the freshness of theproduct longer than fish sold in bulk.

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9.2 Market segment in the EU (2012)


In the EU in 2009, more than half of the Atlantic salmon went to retailers, while 45% went tohotels, 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, whilewhole fish has about 19%. In this graph, other VAP consists of all value added processedproducts, 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

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9.3 The European market for smoked salmon (2012)


The most common secondary processed product based on Atlantic salmon, is smokedsalmon. The European market for this product was 160,000 tonnes product weight (PW) in2012, where France and Germany were the largest markets. The amount of raw materialneeded 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)


The ten largest producers of smoked salmon in Europe are estimated to have a joint marketshare of more 60%. The production is mainly done in Poland, France, UK, Baltic states andthe Netherlands.

After the acquisition of the German company Laschinger, Morpol is the largest producer ofsmoked salmon in Europe. Morpol is based in Poland and is selling most of its production tothe German market.

Labeyrie is the second largest and sells most of its products to France, but are also found inUK, 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. MarineHarvest has acquired about 87% of the shares in Morpol and is awaiting the outcome of acompetition 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

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Appendix

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

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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%


Net weight: Weight of a product at any stage (HOG, fillet, portions). Only theweight of the fish part of the product (excl. ice or packaging), butincl. 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 withan average weight

Ensilage: Salmon waste from processing added acid

FCR = IB feed stock + feed purchase – UB feed stockKg produced – weight on smolt release

Price FOB Seattle (whole fish from Canada)Notifications FOB Miami (fillets from Chile)

FCA Oslo

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Appendix: Some historic acquisit ions 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 Invest2001 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 Farms2002 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 Gruppen2008 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 Sea2009 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

2011Karma 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

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Appendix: Some historic acquisit ions 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

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

2001 Laschinger UK - Sold to Hjaltland

2001 Wisco - Sold to Fjord Seafood2002 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

2010Lighthouse Caledonia - changed name to ScottishSalmon 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

Year 1999

ChileChisal - 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 Aqua2009 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 toSalmone Friosur

2013Salmones Multiexport divest parts of coho and trout prod. Into joint venturewith 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 BritishColumbia Ltd., and United hatcheries merged into OmegaSalmon 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 CookeAquaculture

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 Seafoods2007 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 listabove only shows some of the larger ones (in transaction value). In Scotland theconsolidation has also been very strong. In Chile, there has been limited transactionactivity 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 fewlarge players and some small companies.

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Appendix: Marine raw materials in salmon feed

A major challenge for the fast growing global fish farming industry is to secure adequatesupply 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 commonpractice. Although this trend started 20 years ago, the biggest changes in feed compositionhave been introduced during the past 7-8 years. Fish meal protein is being substituted withplant 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 morefish protein is produced than what is used to make the feed. The level of fish oil substitutionvaries from region to region, but in the range of 50-70% (0% in 1980/90) of the oil in salmondiets 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, withaquaculture 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%

1990

2%

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: Sustainabil it y of fish feed

Fish meal was originally a by-product from fish oil production at the time when fish oil wascheap oil for hardening fat (margarine production). This situation has changed and both fishmeal 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 derivedfrom wild fish. A reduction in “feed fisheries” in the coming years is therefore not unlikely. Theglobal catches of wild fish in the oceans are relatively stable, at around 90 million tonnes, andabout one third of this is currently converted to fish meal and fish oil. During the last 30 yearsfish meal production has varied between 5 and 7 million tonnes, while fish oil is stable around1 million tonnes. Fish oil is a limited resource and due to its high content of healthy omega -3fatty acids, more of the fish oil now goes directly to human nutrition. Competition for thisvaluable raw material is therefore increasing and the omega-3 market today takes around150 000 out of the 6-700 000 tonnes of fish oil that satisfies the sustainability and qualityrequirements 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 fishoil. 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 presentlyunmarketable in large quantities as human food. The reason for this is that some of thespecies are either unknown to people or unpalatable, or that the fish in question are too smallor turn rancid too quickly for economic storage and subsequent processing. Although theFAO encourages using more fish directly to human consumption, they are of the opinion thatit is more efficient, in a protein-hungry world, to harvest the unmarketable species for feedingto 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 anddiscards from processing of food fish. This proportion has the potential to grow if more fish inthe future goes directly to human consumption and more efficient collection systems/logisticsfor trimmings and discards are established.

According to UN, 7 million tonnes of wild catch are destroyed/discarded as non-commercialharvest annually by commercial fisheries. This figure could have been converted into anannual fish oil quantity of 0.5 million ton, i.e. close to 80% of the tonnage used for salmonand 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 usehardly any energy to maintain body temperature. Also in an aquatic environment, less energyis 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 trendin the use of marine ingredients continues and with the ability of Atlantic salmon to utilisealternative feed ingredients, lack of feed raw materials should not be a threat to the growth ofthe industry. However, there will be increased competition for the best raw materials and feedprices may therefore be affected.

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Appendix: At lantic salmon production cycle

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Appendix: Marine Harvest history

The Marine Harvest Group was formally established on 29 December 2006 after a mergerbetween the two Norwegian companies, Pan Fish ASA and Fjord Seafood ASA, and theDutch company Marine Harvest N.V.

The Marine Harvest Group is the dominant leader within farming of Atlantic salmon. In 2012the 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 basedon salmon, but also based on other species sourced from strategic partners or externalsuppliers. We are one of the top producers of smoked salmon in Europe, and also do somesmoked 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, thecompany is present in 22 countries and sell to more than 50 countries in the world. MarineHarvest 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 employeesworldwide, including temporary employees.

Total turnover for Marine Harvest in 2012 was MNOK 15 463 and Atlantic salmon harvestquantity 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 threecountries France, Belgium and the Netherlands. Other countries where we have significantsales are Germany, UK, Italy and Spain. Operating revenues for Marine Harvest VAP Europein 2012 was NOK 3 944 million.

Marine Harvest’s main secondary processed product is smoked salmon, which is done inFrance and Belgium. We also process several other species as whitefish and flatfish to readymeals or packed in modified atmosphere (MAP).

In addition to our European processing plants, we have two salmon smokeries on theAmerican continent - one in Chile (Delifish) and one in the US (Ducktrap).

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Appendix: Marine Harvest sales channels (2012)


Marine Harvest sells its products to several categories of purchasers. We divide them into;Retail, Food Service (hotels, restaurants, catering), Industry, Distributors and others. Eachbusiness unit has their own sales profile. MH Canada and MH Chile sell most of theirproduction 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 intoother 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 theproduction to final sales points met by end consumer (retail + food service).

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Appendix: Sources for industry and market informat ion

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 statisticsFish Pool Index: www.fishpool.eu Kontali Analyse (subscription needed): www.kontali.no Statistics Norway (SSB): www.ssb.no/laks_en/

2013 Salmon Handbook 27-04-13

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