LSG Lake Shore Gold Corp Ordinary Shares (Canada) (delisted)

STRONG EARNINGS FOR THE FIRST HALF OF THE YEAR

In Q2 2018, Lerøy Seafood Group (LSG) reported revenue of NOK 5,042 million, compared with NOK 4,224 million in the same period in 2017. Operating profit before fair value adjustment related to biological assets was NOK 1,000 million in Q2 2018, compared with NOK 801 million in Q2 2017. The increase in profit in Q2 2018 when compared with the same quarter in 2017 is mainly attributed to a higher harvest volume for salmon and trout. Exclusive of earnings from the Wild Catch segment, this corresponds to an EBIT per kilo before value adjustment related to biological asset in Q2 2018 of NOK 23.4 compared to NOK 27.3 for the same period in 2017.

The Group reports revenue of NOK 10,042 million for the first half of 2018, up 4% on the equivalent period last year. This is the highest turnover ever reported by the Group for a first half year. The operating profit before fair value adjustment related to biological assets for the first half of 2018 was NOK 1,960 million compared with NOK 2,078 million for the first half of 2017. The profit before tax and fair value adjustment related to biological assets for the first half of 2018 was NOK 2,038 million compared with NOK 2,134 million for the first half of 2017.

"The salmon and trout prices in Q2 2018 were extremely volatile and remain at a high level. The high prices and increased harvest volume in the quarter are the main factors behind the highest second quarter operating profit in the Lerøy Seafood Group's history," explains CEO Henning Beltestad. "However, the prices realised in total by the Group have been impaired by a number of aspects: the realised prices for trout are lower than those for salmon; the Group had a harvesting profile in June with high release from stock at lower prices; and the downgrading of quality in one of the Group's regions," continues Henning Beltestad.

"The Group's release from stock costs are up from Q1 2018 to Q2 2018, with a significant difference in costs between the different regions," explains CEO Henning Beltestad. "Despite this, the Group expects to see a positive development in release from stock costs in the second half of the year."

At 30 June 2018, net interest-bearing debt was NOK 3,013 million and the equity ratio was 59%.

The Group currently expects to harvest 166,000 tonnes in 2018 in Norway, compared with 158,000 tonnes in 2017.

THE WILD CATCH SEGMENT 

Havfisk's primary business is wild catches of whitefish. After delivery of the new trawler, Nordtind, in January 2018, Havfisk had a fleet of 10 trawlers in operation up to May, when Kongsfjord was handed over to a new owner. The sale of Kongsfjord generated an accounting gain for the Group of NOK 35 million in the quarter. In April 2018, the Group signed an agreement with Vard for the construction of a new vessel. This will be based on the same design as Nordtind and is a combination trawler (fresh and frozen fish) with unique equipment installed for handling catches that will provide optimal quality and utilisation of the whole fish. The vessel is scheduled for delivery in Q1 2020.

Havfisk's total catch volume in Q2 2018 was 18,190 tonnes, compared with 16,769 tonnes in Q2 2017. Catch volumes for the main species in Q2 2018 were 3,817 tonnes of cod, 5,401 tonnes of saithe and 441 tonnes of haddock. The catch distribution in Q2 2017 was 4,067 tonnes of cod, 6,585 tonnes of saithe and 2,050 tonnes of haddock. Moreover, catches of shrimp increased from 996 tonnes in Q2 2017 to 3,279 tonnes in Q2 2018.  In comparison with Q2 2017, the average price for all species increased by 8% in Q2 2018. The prices for cod and haddock increased by 15% and 48% respectively in the quarter, while prices for saithe fell by 6%.

LNWS's primary business is processing wild-caught whitefish. The company has use of 12 processing and purchasing plants in Norway, five of which are leased from Havfisk. The processing of whitefish in Norway has been extremely challenging for many years. As a result of high demand for seafood and lower quotas, the raw material prices increased throughout the first half of 2018, representing a challenge for processing operations.

In total, the segment reported operating profit of NOK 116 million in Q2 2018, compared with NOK 86 million in the same period of 2017.

"There is also strong and rising demand for whitefish, and the Wild Catch and Whitefish segment can report a positive development with increased catch volumes and higher average prices for catches. The situation is challenging for shore-based industrial operations, but the Group has implemented a number of initiatives and is investing in both production and marketing to boost earnings. These are, however, long-term initiatives and it will take time before significant improvements are evident," explains Henning Beltestad.

THE FARMING SEGMENT

The Farming segment reported operating profit before fair value adjustment related to biological assets of NOK 833 million in Q2 2018, up from NOK 613 million in Q2 2017. The Farming segment harvested a total of 38,000 tonnes gutted weight of salmon and trout in Q2 2018, up 45% from the same period in 2017. EBIT/kg fell from NOK 23.4 per kg in Q2 2017 to NOK 22.0 per kg in Q2 2018.

In Q2 2018, Lerøy Aurora achieved operational EBIT per kg of NOK 32.1. Lerøy Midt and Lerøy Sjøtroll are reporting EBIT per kg of NOK 26.4 and NOK 12.7 respectively for the same period.

"The Group achieved a 9% increase in harvest volume when comparing the first half of 2017 with the first half of 2018," confirms CEO Henning Beltestad. "Release from stock costs in Q2 2018 were marginally lower than in Q2 2017. For the Farming segment, the lower prices realised caused the decline in EBIT/kg from Q2 2017 to Q2 2018," explains Henning Beltestad.

"The Farming segment is currently making substantial investments in new industrial facilities to improve productivity throughout the value chain, including investments in several regions to gain access to larger high-quality smolt," confirms Henning Beltestad. "We are very confident that the new facilities will produce more robust smolt that will in turn gradually allow substantial organic growth in our annual harvest volume," he continues.

THE VAP, SALES & DISTRIBUTION SEGMENT (VAPS&D)

The VAPS&D segment reported revenue in Q2 2018 of NOK 4,807 million, up 19% when compared with the same period last year. Operating profit for the quarter has been impaired by the extremely volatile spot prices for salmon, which have made marketing difficult, and the start-up costs for the new plants in the Netherlands and Spain. Operating profit before fair value adjustment related to biological assets was down from NOK 115 million in Q2 2017 to NOK 62 million in Q2 2018.

"The fall in earnings for the VAPS&D segment when comparing Q2 2018 against Q2 2017 can principally be explained by the extremely volatile spot prices for salmon and the start-up of several new factories," confirms CEO Henning Beltestad. "However, thanks to the Group's wide product range, delivery reliability, product development, traceability and efficient logistics, we are increasingly a preferred supplier, and this will produce a positive development in earnings in the long term".

MARKED AND OUTLOOK

The development in prices for Atlantic salmon to date in 2018 has been extremely volatile. This obstructs industrial development and has an impact on the willingness among market actors to assume positions and take risk. At the same time, the Group has close links with the end market and observes a very positive underlying growth in demand for both Atlantic salmon and other seafood.

The Group is not satisfied with the developments reported by Lerøy Sjøtroll in 2018 but feels confident that the initiatives taken will generate substantial improvements in the next few years. In this context, the investment in the RAS facility is important. The Group expects the facility to produce larger smolt of higher quality, in turn improving productivity when the smolt are released to sea. The current estimate for harvest volume in 2018, including the share of LSG's volume from associates, is 179,000 GWT. The harvest volume may, for numerous reasons including biology and market evaluations, differ from estimates. The Group does not expect the difference to be major in 2018. 

Developments within whitefish in 2018 have been positive, even though industrial development and processing of fish in Norway remain difficult. This situation is impacted by political framework conditions, but the Group has a clear ambition to increase competitiveness and earnings for whitefish, with the prevailing conditions and by means of improved marketing and improvements to operational efficiency in this part of the organisation also. The process of industrial development of whitefish requires patience, a long-term perspective and considerable investments. Such investments require framework conditions that are predictable, and the Group and its employees fervently hope to be able to carry out such work without any obstacles in the years to come. The Group can report a positive development in catches to date in 2018, and its best estimate remains a catch volume of whitefish and shrimp in 2018 of approximately 65,000 tonnes.

The Board of Directors has not changed its estimates for strong earnings in 2018 as a whole, but currently expects a weaker result in Q3 than that reported in Q2.

Questions and comments may be addressed to the company's CEO, Henning Beltestad, or to the CFO, Sjur S. Malm.

Lake Shore Gold Corp Ordinary Shares (Canada) (delisted) (AMEX:LSG)
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