Longreach Oil (ASX: LGO) is turning to dairy farming to revive its flagging fortunes.
The company announced a conditional share purchase agreement (SPA) to acquire the entirety of Happy Valley Milk Limited (HVM), with the company likely to undergo a complete rebranding over the coming months that includes a likely change of name.
The buyout intends to bring together farmer suppliers, strategic local shareholders, off-take partners and key personnel to deliver a sustainable and differentiated independent milk processing company.
HVM is a NZ based company that’s been given the go-ahead by the Otorohanga District Council to establish and operate a fully integrated milk processing, blending and packaging plant on a site near Hamilton.
The permission effectively allows the company to build a large-scale production line of dairy products that could generate strong commercial returns serving the Asian and Pacific markets.
One of the most highly anticipated target markets is the daigou market that has seen several Australian/NZ-made goods being bought up by Chinese consumers, given the superior quality when compared to domestic Chinese alternatives.
Once built, HVM intends to specialise in consumer-ready infant milk formula and other nutritional milk powder formulas using A2 and organic milk.
With the deal provisionally agreed, Longreach says the next step is to obtain Waikato Regional Council water use and water discharge consents, a condition stipulated in the terms of the agreement between Longreach and HVM.
As per the agreement, Longreach is set to acquire the equity of HVM from its current shareholders and will issue LGO shares as consideration.
On completion of the acquisition and excluding the A$3 million capital raising under the prospectus, HVM shareholders will hold 77.8% of Longreach, with current Longreach shareholders retaining a 22.2% stake.
The prospective terms of the deal indicate that the facility will take around 12 months to build with an additional three months required for commissioning. At this stage, construction has been pencilled in to begin in March 2019.
Once constructed, HVM’s plant will specialise in processing A2 milk and organic milk into consumer-ready infant milk formula and other nutritional milk powder products. The plant will also produce anhydrous milk fat.
Given current estimates, Longreach predicts the consented design includes an integrated high-speed blending and canning plant capable of a production rate of 120 cans (900g in size) per minute.
The proposed milk processing plant won’t come cheap. The capital cost of the facility will be approximately NZ$230 million (A$218 million) with at least 50% likely to be debt financed.
Longreach is unlikely to be on the hook for the entire project and says it expects “major off-take partners for the China market will be both customers and shareholders”.