Fisheries and Aquaculture
December 21, 2012

New Agreements with OCI Revitalize Fortune Fish Plant Operation

The Provincial Government has finalized agreements with Ocean Choice International Limited (OCI) that will ensure the continued operation of the Fortune fish plant and secure over 110 processing jobs in that community. Upon execution of the agreement, the fish plant will re-open in January to process cod, and yellowtail flounder processing will commence within six months.

The announcement was made today by the Honourable Derrick Dalley, Minister of Fisheries and Aquaculture. Minister Dalley was joined by the Honourable Darin King, Minister of Justice and MHA for Grand Bank, Martin Sullivan and Blaine Sullivan of OCI, and the Mayor of Fortune, Charles Penwell.

“We are pleased that after months of intense negotiation, a deal to keep the Fortune fish plant open, which will employ 110 people in processing and result in jobs offshore, has been reached,” said Minister Dalley. “Our government sought to achieve an agreement that represents the best possible outcome for Newfoundlanders and Labradorians. We are forging a new partnership here today that, as is the case in all successful partnerships, each party needs the other. I thank OCI, the workers at the Fortune fish plant, and the community of Fortune for their hard work and dedication in ensuring a future for this fish plant.”

The yellowtail flounder agreement provides a framework for maximizing the use of OCI’s yellowtail flounder quota. A minimum of 25 per cent of all yellowtail flounder landings will be processed in Fortune. A separate agreement has been reached on redfish.

The redfish agreement provides a framework for the maximum utilization of OCI’s redfish quotas. To achieve this goal, a 100 per cent exemption to provincial Minimum Processing Requirements for the export of redfish will be provided. Redfish in particular is not economical to process in the province. A number of processing companies have been granted exemptions to export redfish in whole form in recent years.

Highlights of other requirements of OCI under the agreements include:

• A minimum investment of $1 million in capital improvements at the Fortune fish plant within six months of the execution of the agreement;
• A minimum of 110 full time processing positions for a minimum of five years;
• Access to unused yellowtail quota to other licensed harvesters and processors throughout the province;
• Opportunity for other provincial processors to purchase by-catch at competitive prices;
• A top-up of $2.50 per hour to a maximum of 560 hours to the Fish Plant Worker Employment Support Program for each qualifying worker displaced by the closure of OCI facilities at Marystown and Port Union; and,
• The company has committed to using a Canadian crew for harvesting of quota under this agreement, subject to availability and to the satisfaction of the Minister of Fisheries and Aquaculture.

As part of the agreements, OCI will initially charter an additional vessel (over and above the two groundfish vessels it currently operates) for harvesting of redfish and yellowtail flounder, with a goal to purchase a new vessel within a year. In the case of redfish, the company would, upon the purchase of a vessel for the identified fisheries herein, be granted a redfish exemption for the debt amortization period, expected to be 10-15 years. In addition, OCI must live up to their commitment to Fortune for five years as a condition of the redfish exemption. In the case of yellowtail flounder, the exemption to export up to 75 per cent of the yellowtail flounder harvested will only remain in place as long as OCI’s obligations to Fortune are honoured. However, this exemption will be reviewed by the Minister of Fisheries and Aquaculture at the end of 15 years to determine its continued necessity. More information in respect to the exemptions and the conditions surrounding them is provided in the backgrounder below.

“The Burin Peninsula has had a long-standing connection to the groundfish industry in this province,” said the Honourable Darin King, Minister of Justice and MHA for Grand Bank. “People are the most important aspect of these agreements, and I am thoroughly pleased to see 236 jobs secured today. The agreements have been a long time coming; however, based on what we see today, a significant amount of work was required to meet the needs of all involved and to find a solution that is balanced and appropriate for all stakeholders. This is certainly a great day for the Burin Peninsula and the province, and I am glad I have been a part of it.”

The total Gross Domestic Product impact of OCI’s commitment to the provincial economy is estimated between $30 -$35 million annually and will result in 236 jobs, with direct labour income projected at $14 million annually.

“Today marks a positive step in securing the future of flatfish and groundfish production in Newfoundland and Labrador,” said Martin Sullivan, Chief Executive Officer of Ocean Choice International. “Our family has been part of the fishery for over a century, and we want to keep our business here at home. This agreement is extensive and all encompassing, and we believe is in the best interest of all those involved, including our company. We sincerely look forward to working with the Provincial Government, our employees and the people of Fortune to make this arrangement work for the long-term. Our commitment has never been stronger, and we commit to working tirelessly to make this business work. We acknowledge the Provincial Government for their due diligence in structuring this deal and ensuring the best possible economic benefit from our fishery for the people of Newfoundland and Labrador.”

The yellowtail flounder and redfish resource will be harvested for the benefit of the province, communities, and people who rely on OCI for their livelihood – harvesters, plant workers, and supply and service workers. Exemptions for both species have been permitted under Provincial Government regulations on many occasions in previous years.

“Given the economic difficulties OCI has experienced with processing yellowtail flounder and the associated market challenges, which were confirmed by Deloitte last year, the province is confident it has negotiated the best possible agreement that optimizes the value of the yellowtail resource for the benefit of the province,” said Minister Dalley. “We had always maintained the position that any agreement by government to relax the province’s minimum processing requirements would need to take into consideration OCI’s level of commitment in relation to employment and production, and would have to respect a Newfoundland and Labrador-first policy for the raw materials harvested. The agreement provides provincial harvesters and processors the first option to attain unutilized resource and thus offers further opportunities for employment and economic benefits as a result.”

The legal agreements between the Provincial Government and OCI will not be released publicly to respect the business interests of the company. However, details of the agreements and further information on yellowtail flounder and other groundfish is provided in the backgrounder below.

- 30 -

• New Fisheries Opportunity for Yellowtail Flounder Announced
• Video of News Conference

Media contacts:

Bradley Power Director of Communications Department of Fisheries and Aquaculture 709-729-3733, 699-5707 bradleypower@gov.nl.ca	Corey T. Parsons Constituency Assistant to the Honourable Darin King MHA for Grand Bank 709-832-2531 coreyparsons@gov.nl.ca
Paula Kieley Ocean Choice International 709-782-7122, 693-2099 pkieley@oceanchoice.com

BACKGROUNDER
Information Related to the OCI Agreement and Yellowtail Flounder

Details of the Agreements

• OCI will invest a minimum of $1 million into capital improvements at the Fortune fish plant and commence production of yellowtail flounder and/or other flatfish within six months of signing the agreement. Cod production will begin in January 2013, with approximately 60 jobs being created.
• For five years commencing when the Fortune fish plant is fully operational, OCI will employ a minimum of 110 full time positions at the facility. OCI agrees to consider all applicants for employment, including those formerly employed at OCI facilities in Marystown and Port Union.
• Where OCI demonstrates that it cannot catch its entire yellowtail flounder quota by December 31, 2015, it will make surplus quota available to other processors and/or harvesters licensed in Newfoundland and Labrador to harvest and process that species where the potential buyer has agreed to pay market value.
• OCI will offer to sell by-catch to processors licensed in Newfoundland and Labrador at least on a quarterly basis provided that the offer meets or exceeds market prices. If OCI does not receive any such offers, it may process and/or market 100 per cent of by-catch harvested in a form the market demands. This will be monitored by the Provincial Government.
• Once the Fortune fish plant is fully operational, a minimum of 25 per cent of all yellowtail flounder and/or other flatfish will be processed at the plant. In addition, OCI will process an amount equivalent to 25 per cent of the fish harvested by OCI prior to the reopening of the plant, at the Fortune plant or another Newfoundland and Labrador fish plant within three years.
• Other than its commitments to Fortune, OCI may process and/or market its yellowtail flounder and/or other flatfish in a form the market demands, unless it receives an offer from a processor licensed in Newfoundland and Labrador, to purchase this fish for a price that meets or exceeds market prices. The processor must demonstrate however that it will process this fish in the province in accordance with the Minimum Processing Requirements. This will also be monitored by the Provincial Government.
• OCI will continue to have access to the yellowtail flounder exemption subject to proceeding with the purchase of a new vessel within one year.
• OCI may operate a bareboat charter for the purpose of harvesting yellowtail flounder and redfish, and will retain access to yellowtail exemptions if their commitment to Fortune is upheld. The Federal Government will only allow OCI to utilize a foreign replacement vessel for a maximum of 18 months from now (December 2012).
• After 12 months from the commencement of the agreement, if OCI has not purchased a new vessel and opts to continue using a bareboat charter, redfish exemptions will cease and be assessed the same as any other request for an exemption from any other company.
• If a new vessel is purchased within the 12-month period following the commencement of the agreement, OCI will retain the redfish exemption for the amortization period of the new vessel, to a maximum of 15 years. In this case, the yellowtail flounder exemption will remain in effect if the company’s commitment to Fortune is upheld.
• If Fortune commitments are not upheld for a five-year period, all exemptions will cease. OCI’s eligibility for redfish exemptions will be considered in the same manner and with terms and conditions comparable to existing redfish exemptions that have been issued in the province.
• Whether OCI purchases a new vessel or uses a bareboat charter to harvest its yellowtail flounder and redfish quotas, OCI will make best efforts to have vessel 100 per cent crewed by persons from Newfoundland and Labrador or other Canadians, to the satisfaction of the Minister of Fisheries and Aquaculture.
• From the date the agreement is signed, if OCI decides to permanently close or sell the Fortune fish plant, they must provide the province with six months notice.
• OCI will also immediately contribute a top-up of $2.50 per hour to a maximum of 560 hours per worker to the Fish Plant Worker Employment Support Program for each qualifying worker displaced by the closure of Ocean Choice International facilities at Marystown and Port Union.
• In addition, the Provincial Government will assist OCI with the sale of its assets in Marystown and Port Union in accordance with existing policies and programs.

Minimum Processing Requirements

• Minimum Processing Requirements are intended to maximize both economic and employment benefits from fishery resources. They have been in place, to some degree, since the 1970s and have evolved over time to reflect changes in market specifications for certain product forms. From 2001 to 2011, 194 Minimum Processing Requirement exemptions were granted, of which nine were issued for yellowtail flounder and 33 for redfish.
• The minister has the legislative authority to exempt processors from the Minimum Processing Requirements.
• Species-specific exemptions have been granted on a case-by-case basis when it can be demonstrated that the requested product form meets a final market specification and is usually not subject to further processing outside the province. Such decisions are for a specific volume over a specified period of time, are subject to a number of conditions, and actively monitored by Provincial Government inspection staff to ensure compliance.
• In 2007, the Minimum Processing Requirements were reviewed by an independent consulting firm, Burke Consulting Inc., and the report concluded that the province should maintain its Minimum Processing Requirements, but should be guided by final market demands and economic feasibility.

Market Overview of Yellowtail Flounder, Redfish and Other Groundfish

• In December 2011, the Provincial Government contracted the McDowell Group of Alaska to provide a market report on Newfoundland and Labrador yellowtail flounder and redfish. It was received January 5, 2012 with an update on flatfish markets provided in November 2012. Independent market research was also conducted by Provincial Government officials. The McDowell report can be found at www.fishaq.gov.nl.ca/publications/nl_flounder_and_redfish_report.pdf. 
  
• Global whitefish supply is increasing, including farmed tilapia and pangasius from low-cost producing countries such as China and Vietnam. The global supply of wild whitefish (more than 10 different species; not including flatfish) increased 11 per cent in 2011 to approximately 7 million metric tons (MT) with similar volumes expected for 2012 and 2013.
• A key factor affecting the Newfoundland and Labrador industry’s ability to compete in global flatfish fillet markets is the increasing volumes of sole and flounder being processed in China and exported to traditional whitefish markets in North America and the European Union. This has not changed in 2012, despite reports of increased processing costs in China.
• Global harvests of sole and flounder have been generally between 650,000 to 750,000 MT over the past decade with the North American flatfish fisheries accounting for 35 to 40 per cent. American and Canadian yellowtail flounder harvests were down significantly in 2012 and remain a small percentage of the global flatfish supply.
• Alaska is the largest flatfish producer in North America with total harvests exceeding 200,000 MT in recent years. Over 80 per cent of the sole and flounder caught in Alaska are in a frozen, headed and gutted form and exported, mostly to China, for processing into skinless, boneless fillets. These products are then exported to traditional whitefish markets.
• The US has been the primary export market for yellowtail flounder fillets from Newfoundland and Labrador. Tariffs make it challenging to export fillets to other countries. In particular, tariffs on yellowtail flounder (depending on product form) are 15 to 18 per cent in the EU, 3.5 per cent in Japan, and 10 to 12 per cent in China. All fish going into China for reprocessing and export continues to enter China at zero tariff.
• China remains the dominant flatfish supplier to the US, accounting for over 90 per cent of import volumes. As of September 2012, US imports of Canadian flounder/sole are down 32 per cent by value and 36 per cent by volume from the same period in 2011, and Canada accounted for less than 13 per cent of the total value of flounder/sole imported. This trend also applied to other whitefish species. Prices for frozen flounder fillets in the Northeast US wholesale market have remained steady or decreased through 2012.
• The McDowell report cites that flatfish and redfish fisheries in the province have been negatively impacted by a strong Canadian dollar, rising costs (inflation), and increased supply from competing species, such as Alaska sole, tilapia and pangasius.
• Redfish is a low volume, niche product. There is not much published market information readily available.
• Annual global supply for redfish has been steady in recent years at approximately 160,000 MT. Iceland, Russia and EU/Greenland account for approximately 80 per cent of this volume. In contrast, OCI’s redfish quota is 7,154 MT (about four per cent of global redfish supply).
• Canadian redfish has been primarily processed into fresh or frozen, skin-on fillets for retail markets in the United States. There is a strong market for whole redfish in Japan and other Asia countries and Newfoundland and Labrador has sporadically exported whole redfish to these countries. Smaller redfish have also been exported to China for reprocessing because of the high cost of processing this fish in Canada.
• U.S. redfish imports have declined from 24,600 MT in 1990 to 4,900 MT in 2010. Canada has always been the dominant supplier to the U.S. market, but our share has declined from 90 per cent in 1990 to 54 per cent in 2010 (see Annex 10). This has been the result of declining consumption of redfish in the U.S. and increased imports of less-expensive frozen fillets (primarily Alaska pollock, tilapia and pangasius as well as frozen redfish fillets from China).
• Canadian redfish fillets are generally more expensive than Alaska pollock, tilapia and pangasius which are competing species according to import statistics. This is primarily because most fillets exported to the U.S. are fresh which are sold at slightly higher prices than frozen products.
• The global economy continues to play a major role in seafood markets. In the US, an economic recovery seems to be underway but the EU’s continuing debt and austerity problems are affecting seafood consumption. The stronger Canadian dollar against the US dollar, Euro and British Pound continues to negatively impact seafood producers. This is significant as the US and Eurozone remain the world’s largest markets for whitefish products.

Yellowtail Flounder Historical Production

• An international fishery for yellowtail flounder began in the 1960s.
• In Newfoundland and Labrador, yellowtail flounder is most notably harvested on the Grand Banks in Northwest Atlantic Fisheries Organization (NAFO) Divisions 3LNO and is an offshore directed fishery, with Ocean Choice International Limited (OCI) as the major stakeholder.
• This fishery was primarily exploited as part of a mixed fishery with cod and American plaice. From 1974 to 1991, American plaice was the dominant species caught in the flatfish fishery on the Grand Banks. American plaice is currently under a moratorium.
• Yellowtail flounder landings peaked in 1973 at just below 28,500 tonnes; however, have not exceeded 20,000 tonnes since that time.
• The average Canadian catch of NAFO Division 3LNO yellowtail flounder averaged about 12,000 tonnes. Over the same time period, the average Canadian catch of NAFO Division 3LNO American plaice was nearly 38,000 tonnes.
• During the mid-1980s and the early 1990s, there was a significant decline in the stock of yellowtail flounder mainly due to overfishing and large removals of juvenile fish.
• A moratorium was declared in 1994, and the Total Allowable Catch (TAC) was set at zero for the period of 1995 to 1997. The fishery reopened in 1998 as the stock showed signs of recovery.
• The biomass has continued to increase since 1998, and so has the TAC. The TAC for yellowtail flounder has been set at 17,000 tonnes annually since 2009; however, scientific advice could support a larger harvest.
• Canada is allocated 97.5 per cent of this TAC, which means the Canadian allocation since 2009 has been 16,575 tonnes, annually. Approximately 91 per cent of the Canadian quota for 3LNO yellowtail flounder is allocated to OCI. Average yellowtail flounder landings have been about 38 per cent of the quota over the last several years, (2009-2011).

Economic Challenges Associated with Yellowtail Flounder Production

• There are notable challenges faced by Newfoundland and Labrador’s yellowtail flounder product in the global marketplace, including the inflated Canadian dollar, increasing operating costs, competition from low-cost processing firms in Asia, as well as increased supply from competing whitefish species.
• An appreciation of the Canadian dollar against other currencies results in lower market returns for Newfoundland and Labrador seafood exports. The Canadian dollar is expected to remain high relative to the US dollar for the remainder of 2012 and into 2013. The Canadian dollar has also appreciated in relation to other currencies around the world.
• Operating costs related to labour, insurance, utilities and transportation have also increased. Fuel costs, in particular, have increased significantly.
• The tariffs on yellowtail flounder (depending on product form) are 15 to 18 per cent in the European Union, 3.5 per cent in Japan and 10 to 12 per cent in China. Tariffs have limited market access into these markets.
• These economic challenges associated with processing of yellowtail flounder have been well noted:
• Fisheries Products International Limited (FPI) claimed it could not fillet yellowtail flounder that weighed less than 450 grams without losing money.
• In 2004, FPI was authorized to export approximately 1.5 million pounds of yellowtail flounder that was deemed too small to be economically processed.
• The results from Deloitte’s report on FPI in 2006 concluded that the company was experiencing dramatic losses on groundfish production, primarily yellowtail flounder.
• Deloitte’s report on OCI in 2011 concluded that the fish plant in Marystown was a non-profitable venture that continued to lose a significant amount of money as well. (//www.gov.nl.ca/releases/2011/fishaq/1125n04execsumm.pdf)
• Both Deloitte reports confirmed that a strengthening Canadian dollar, increasing fuel prices, underutilization of the plant, an increased presence from China in the marketplace, and labour costs were all contributing factors to losses in Marystown.
• The department engaged Deloitte in 2011 to not only review the financial status of the company, but to also perform an analysis of various scenarios, using historical data, to ascertain whether there was any situation in which the company might have a positive Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) while processing at either the Marystown plant or the Fortune plant. Deloitte also verified financial information on the company’s Fortune and redfish operations.
• Deloitte’s analysis determined that under the current economic conditions, any substantial improvements to the operations or increased plant efficiency would not result in a profitable EBITDA for the Marystown plant. A profitable EBITDA at Marystown would require over 20 per cent improvement in labour efficiency and a considerable reduction in fixed overhead costs, which are both very difficult to achieve in the industry.
• Again, according to Deloitte, processing at the Fortune fish plant would produce an improved EBITDA, but one that is still negative. The improved EBITDA results from lower fixed costs and lower labour costs.
• Under the current forecasted conditions, no break-even point would be possible for any mix of frozen-at-sea versus processed in-plant production. The only situation that produced a positive EBITDA was frozen-at-sea production with 100 per cent export of that production.
 

2012 12 21                 7:40 p.m.