As the recreational cannabis industry continues growing, particularly as a result of the legalization that occurred in the space in Canada last year, companies are stepping up their investments geared at growing their market presence. Due to savvy business decisions and investor optimism that has allowed the firms in question to raise obscene amounts of capital solely by virtue of the perceived upside in this space; a few major players, once obscure, have risen to the top.
*Taken from Aurora Cannabis
One of these, Aurora Cannabis (ACB), has done particularly well at growing its business, and while I have been critical of some of management’s decisions in the past, some of their moves have been truly accretive (so long as industry forecasts are correct) for the business. In its latest move, for instance, Aurora has decided that instead of building yet another growing facility, it will be shifting its energy toward expanding one already in production. So long as industry pricing holds up, this move will create the opportunity for significant additional revenue generation and further cement Aurora as one of the biggest players in its industry today.
A look at the news
In a press release made public on April 10th, the management team at Aurora announced plans to expand its Aurora Sun facility. With construction currently in progress, the plan initially was for the facility to consist of 1.2 million square feet. Of this, an estimated 850 thousand square feet of space was set aside for ‘flowering space’. Upon completion, the facility was expected to produce around 150 thousand kg (kilograms) of cannabis and cannabis equivalents per annum.
Aurora Sun is special because, like the company’s new Aurora Sky facility, it will use state-of-the-art growing methods, will benefit from significant sunlight exposure and an inventory system that will optimize growing space, and will be EU GMP certified, meaning that its output will meet the legal criteria necessary to allow the firm to ship it to any nation where it is currently legal. What’s really interesting about Aurora Sun, though, is that it is located on 71 acres of land in Medicine Hat, Alberta. This is the sunniest city, according to management, in all of Canada, with the area receiving over 2,500 hours of sunshine annually.
This is noteworthy because the extra exposure to sunlight, about 12.5% more throughout the year than what is seen in the Niagara region of Ontario, will be instrumental in helping to drive costs down and achieve faster growing. In short, the company believes that this facility, like Aurora Sky, will be able to result in production costs, in time, that will be below the $1 per gram mark. Last quarter, the cash costs associated with production for the company as a whole was $1.92 per gram, so this would imply a drop in those costs by nearly half.
Given the company’s strategic priorities, it was probably a no-brainer to management then that the firm should make its operations at Aurora Sun as big as possible. The firm even alluded to this possibility in April of last year when it said that the facility would be ‘readily expandable’ to 1.5 million square feet if it so desired. It might be a surprise to investors, though, to know that management took this opportunity a bit further and, instead of growing the facility’s footprint to 1.5 million square feet, decided instead to increase it to 1.62 million square feet.
As a result of this expansion announcement, Aurora Sun will now have 37 growing rooms, each one 32.5 thousand square feet in size. In all, that translates to about 1.20 million square feet that will be dedicated to growing space. In addition, likely, to reducing costs for the facility compared to what the cost would be to add another new facility with the extra space, this move should directly improve economies of scale for the firm.
This has major implications for Aurora
Due to management’s decision to expand the physical footprint of Aurora Sun, Aurora as a whole will now be capable of producing more than 625 thousand kg of cannabis annually. Of this, over 230 thousand kg per annum will come from Aurora Sun, an increase over the firm’s initial plan by around 80 thousand kg per annum. At first glance, a change of that size may not look all that significant, but it quickly becomes that when you look at the sales data associated with Aurora.
You see, in the second quarter of the business’s 2019 fiscal year, its recreational cannabis sales resulted in the firm selling around 306,270 cannabis extract gram equivalents, on top of 3.50 million dried cannabis grams. Since most of the market’s upside (at least in Canada) is on the recreational side at the moment, I will use these figures and ignore the medical side of the equation. In all, the cannabis extract effectively sold at a price (net of excise taxes) of $10 per gram, while the dried flower sold at a price of $5.37 per gram. Although it might be tempting to rely on the higher price point for the next part of my analysis, that might be a mistake since cannabis extract only accounted for around 8% of the firm’s output during the quarter.
If we rely solely on the lower price point, this expansion decision by management alone will generate extra revenue for Aurora and its shareholders of around $429.6 million annually upon completion. If, instead, we look at the picture including the more than 8% cannabis extract, this figure could rise to as much as $453.6 million. No doubt, such extra sales would be valuable to a firm desperately in search of growth opportunities.
At this time, we don’t know the full impact of all of Aurora’s decisions on the company or its shareholders, but unless there is something really big that management is overlooking or glossing over, the picture for bulls in this space just got a little more attractive. On the whole, investors in Aurora in particular should be ecstatic because while additional expansion costs were not relayed to them regarding this facility, the increase in revenue should prove advantageous in the long run, so long as industry data is appealing.
Provided by Daniel Jones
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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