Beston lifts cheese and lactoferrin goals after $40m farm sale

The move coincides with the company's plans to become a bigger cheese in the mozzarella market, more than doubling current production to 20,000 tonnes annually in the next two years.

Beston recently signed a deal to sell 1000 tonnes of mozzarella a year to the pizza retailers in China, adding to total exports of $14m forecast for 2019-20.

Busy Canadian-based agricultural investor Public Sector Pension Investment Board and local fund manager Warakirri Asset Management will pay roughly a third as much more for the dairy farms as Beston previously spent buying them almost five years ago.

The Mount Gambier district holdings, which have a combined area of about 1500 hectares and run about 3600 milkers worth $5.7m, are being acquired by the Canadian-Australian farming partnership's Aurora Dairies.

Aurora already runs 18 dairy farms in south eastern Australia overseen by Warakirri which also manages the 75,000ha cropping partnership Daybreak Cropping, another joint venture between the two investment groups with seven farms from Western Australia to Queensland.

Beston bought the Mt Gambier dairy farms Kurleah and Ashwood, Landour Park and Kingsley Estate (the Pedra Branca aggregation) and their herds for about $26.5m when the company was launched in 2015.

Although it has expanded the operations, lifting production to about 17m litres a year, the company said Aurora was paying more than the book value for the assets, including irrigation water entitlements.

However, the sale is still dependent on approval from the Foreign Investment Review Board which is scrutinising all overseas purchases of local businesses during the COVID-19 emergency.

FIRB's assessment processing times have subsequently blown out from 30 days to as long as six months.

Beston, which also owns the Victorian-based meat processor Provincial Food Group, has secured a 10-year milk supply contract with Aurora and is expecting volumes from the SA farms to keep rising.

The company already absorbs about 20 per cent of SA's processed milk at its Jervois mozzarella and Murray Bridge cheddar plants.

It wants to increase its total contracted milk annual intake from 111m litres to about 135m litres in 2020-21.

It initially planned to lease back the Mt Gambier properties, but considered the Aurora contract a better option to help it fast track sustainable cash flow, improve business efficiencies and ensure its milk supply continuity.

Cash from the sale will be used initially to trim Beston's borrowings and reset its balance sheet gearing to about 10pc so it has room to move on other growth or investment opportunities.

The remaining funds, backed by capital raised from shareholders, will go towards upgrading the Jervois plant to lift high value lactoferrin production by 300pc to 12 tonnes this year, then 20t/year by about 2023.

The dairy protein ingredient, a by-product of cheese production, is used in infant formula and pharmaceutical products because it has anti-viral and anti-fungal bioactive properties which mimic breast milk.

Its popularity and price have soared recently.

Five years ago lactoferrin was worth about $550 a kilogram, but it now fetches between $1500/kg and $3000/kg, with global demand tipped to jump from about 350t a year to 500t by 2023.

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Beston, one of only four Australian lactoferrin makers and one of only about 10 worldwide, wants to capture about 5pc of the global market.

Its lactoferrin expansion is set to cost about $12 this year and a further $9m for stages two and three, but revenue is forecast to treble to $18m in 2021 and exceed $30m in 2022.

Crucial to the plan will be a 50pc rise in milk intake at Beston's plants to about 180m litres/year.

That would still only fill about 90pc of the mozzarella cheese making capacity at Jervois which was upgraded in 2018 with a $28m investment.

If milk receivals could almost double their current levels to 200m litres Beston chief executive Jonathan Hicks said the company would lift current mozzarella production from 9100t to about 20,000t/year.

"Each additional 20m litres of milk supply is expected to generate additional gross margin of about $5m," he said.

"We are pleased to be forging this relationship with Aurora which shares Beston's desire to invest in growing the milk pool in SA," said chief executive Jonathan Hicks.

"Notwithstanding some changes in product mix sales brought about by the closure of restaurants and other food service outlets during the COVID-19 pandemic, the demand for Beston's mozzarella products has been steadily increasing.

"First half sales for 2019-20 grew 59pc to 4290t and since then our mozzarella produced for a major retailer received the converted Canstar Blue five star award."

Domestic customers include Woolworths and Metcash, however Beston has growing Asian sales, too.

Aurora Dairies CEO Ben James said his company was pleased with the chance to expand into a "very good dairy region" and secure Beston's high quality farms.

Aurora also looked forward to building a strong commercial relationship with the processor.