(Author based on company filings; some figures are estimates as, e.g., Canopy Growth does not provide production estimates in kg/year)
Aurora Cannabis (ACB.TO) (OTCQX:ACBFF) is the third-largest Canadian cannabis company by enterprise value and the second-largest by production capacity and supply agreements.
Aurora has grown aggressively through acquisitions. Aurora took an 18% stake in The Green Organic Dutchman (OTCQX:TGODF) in January, acquired CanniMed in March, and MedReleaf in July. The latter two deals were the largest of their kind when they were made. These acquisitions are double-edged: They allow Aurora to expand rapidly, but they present a risk that Aurora may overpay and destroy shareholder value.
Aurora rose heavily on September 17 on rumors of a deal with Coca-Cola (KO). In the short term, that deal – and whether it happens or not – is likely to have a big impact on Auroras share prices. Shares gained 17% on the rumor and could fall just as far if KO makes a deal elsewhere. Shares could also rise further if the right deal is announced: Canopy Growth (CGC) rose over 30% on August 15th after the Constellation (STZ) deal.
In terms of value, Aurora occupies a middle ground in between the inexpensive Aphria (OTCQB:APHQF) and HEXO (OTCPK:HYYDF) and the premium valuations of Canopy Growth, Tilray (TLRY), and Cronos (CRON). Perhaps Aurora is the Goldilocks of Canadian cannabis stocks – a “just right” combination of the value of HEXO with the size and execution (deals in the top four provinces and with large pharmacies) of Canopy Growth.
Overall, I view Aurora as a buy but have some concerns over Auroras pace of acquisitions. Partly because of those concerns, Aurora will continue to be a relatively small holding in my Model Cannabis Portfolio on The Growth Operation.
Unlike other deals between alcohol makers and cannabis producers aimed at making drinks that will give consumers a buzz similar to inhaling marijuana, Coca-Cola and Aurora would likely develop beverages that will ease inflammation, pain and cramping.
Aurora is a large Canadian cannabis company based in Vancouver, British Columbia. Acquisitions and deal-marking are one of Auroras defining characteristics: Aurora seems to make a more deals – and larger deals – than nearly any other company in cannabis.
Aurora has been an aggressive acquirer in the Canadian market, with large acquisitions including the March 2018 acquisition of CanniMed for $1.23 billion and the even-larger May 2018 acquisition of MedReleaf for $3.2 billion. Both of those deals were the largest ever cannabis deals at the time they were made.
Then came Constellation Brands (NYSE:STZ) head-turning equity investment in Canopy Growth Corp. (NYSE:CGC) in mid-August. Having already taken a 9.9% equity stake worth approximately $190 million at the time in October 2017, and then acquiring a third of Canopy Growths 600 million Canadian dollar convertible note offering in June, Constellation Brands announced its intent to invest $3.8 billion in the company. If approved by regulators, the producer of the Corona and Modelo beer brands will hold a 38% stake in Canopy, with the option of increasing that stake to north of 50%, inclusive of its already-held convertible notes and 139.7 million warrants that are part of the equity investment. The duo are expected to work together on infused beverages, among other products.
Aurora Cannabis Says Not in Deal With a Beverage Company
Aurora also has a strategic investment in The Green Organic Dutchman (“TGOD”) (OTCQX:TGODF) (TGOD.TO) with an ownership stake of ~18% and options to increase that stake past 50%. This deal also gives Aurora the right to purchase 20% of TGODs production or ~23,000 kg/year.
Coca-Cola Hints at Move Towards Cannabis Market
In my view, this focus on acquisitions is double-edged. The easiest way to destroy shareholder value is to overpay for large acquisitions – but these acquisitions can benefit Aurora if done well. These acquisitions can allow Aurora to rapidly expand in the cannabis market but if Aurora is overpaying, shareholders will suffer.
Aurora Cannabis says it currently has no partnership with a beverage company
First, Coca-Cola has been rumored to be in talks with Aurora to develop CBD-based cannabis drinks. BNN Bloomberg says:
“The Coca-Cola Co. is in serious talks with Aurora Cannabis Inc. to develop cannabis-infused beverages, a groundbreaking move that would signal a significant foray into the marijuana sector by one of the worlds most iconic consumer brands, multiple sources familiar with the matter told BNN Bloomberg.
The sources said that Coca-Cola, the worlds largest beverage company, is interested in developing beverages that are infused with cannabidiol, commonly referred to as CBD, the non-psychoactive chemical found in marijuana plants.”
This would be a massive partnership for Aurora. While HEXO has a joint venture with Molson Coors (TAP) and Canopy Growth has an investment from Constellation (STZ), Aurora has yet to find a partner on this scale. Such a partnership could infuse a large amount of cash into Aurora, provide an outlet for a significant portion of Auroras 570,000 kg/year production, and would give Aurora access to a partner with deep pockets, one of the best marketing departments in the world, and a world-class global distribution network. In short, if Aurora secures such a deal, it would be enormous.
Secondly, whereas quite a few Canadian producers are angling to be major players in the recreational weed market when Oct. 17 hits, Aurora Cannabis is almost exclusively focused on the medical side of the equation. This means handling medical marijuana needs domestically in Canada, but even more so meeting the demand needs of the more than two dozen foreign countries thatve legalized medical cannabis in some capacity.
On the other hand, this remains just a rumor. Shares rose 17% based on this rumor, which means shares could fall significantly if the deal does not happen. As an Aurora shareholder, I hope that they land this deal. But purchasing Aurora shares after the rise of 9/17 is, in part, a bet on whether Aurora will secure a partnership with Coca-Cola.
We have no interest in marijuana or cannabis. Along with many others in the beverage industry, we are closely watching the growth of non-psychoactive CBD as an ingredient in functional wellness beverages around the world. The space is evolving quickly. No decisions have been made at this time.
Coke in talks to make cannabis-infused drinks: Report
Second, Aurora has spun off its US assets into Australis Capital (CSE:AUSA), with shares in that company going to Aurora shareholders of record on August 24. Spinning off these assets is likely to allow Aurora to receive investments from publicly-traded American companies and to allow Aurora to pursue a listing on a US exchange.
“The news that Coca-Cola is seeking a way to participate in the cannabis beverage market is not surprising at all,” Jon Trauben, a partner at the New York City-based Altitude Investment Management, told Business Insider. “I think the bigger question is the extent to which all of the major global beverage companies are planning to participate.”
Today, the three US-listed Canadian cannabis companies (CGC, TLRY, CRON) are the three most costly cannabis companies on my enterprise value ratios. (See “Comparison with Peers” below.) While it is likely that this US-traded premium will fade as more companies become dual-listed, it would be a short-term tailwind to shareholders if Aurora could obtain a US listing. Removing Auroras US assets could also open the door for investment from a US company – like Coca-Cola – which may not be willing or able to invest in a company with US-based cannabis operations.
Rumors have been swirling about a potential US listing for months, and spinning off Australis is a step in that direction.
Aurora has cultivation facilities across Canada and two in Denmark. Auroras four largest facilities are Aurora Sky (Alberta), Aurora Nordic (Denmark), Aurora Sun (Alberta), and MedReleafs Exeter (Ontario). The slide above also lists Valleyfield (Quebec), which is a TGOD property. Aurora has a large investment in TGOD, with the option to take a >50% stake.
Overall, Auroras combined facilities total 4.5 million square feet and production capacity by the end of 2019 should be over 570,000 kg/year. These figures include the option to purchase 20% of TGODs production as well.
For a company its size, Aurora has relatively few supply agreements. However, the supply agreements it does have are disproportionately with the largest provinces. Aurora has supply agreements with each of the four largest Canadian provinces by population as well as with Nova Scotia:
Through MedReleaf, Aurora has two additional supply agreements, both in provinces in which Aurora itself already had supply agreements:
Annualizing the Alberta figures (which carries some risk of over-estimating) and including the Quebec supply agreement from MedReleaf, Aurora has 63,000 kg/year of supply agreements in deals which cover 34% of Canadians. In total, Auroras five deals cover 89% of Canadians.
In addition to recreational supply agreements, Aurora Cannabis also boasts relationships with some of the largest pharmacies in Canada, including Shoppers Drug Mart (1,300 locations) and Pharmasave (650 locations). Thanks in part to these relationships, Aurora had over 45,000 registered patients as of March 31, 2018 (excluding MedReleaf).
Where Are Coca-Cola Shares Headed After Big News?
Frequent readers will know that I place little value on income statements prior to legalization. An investment in Aurora is not an investment in its past medical cannabis business (and these figures dont include MedReleaf, at that) but instead an investment in Auroras future recreational cannabis business.
That said, Aurora shows strong revenue growth. Aurora generated $16.1 million in revenue in Q3/18, much more than last year. A lot of this gain is based on the CanniMed acquisition, but Aurora is gaining even without that acquisition. For example, sequential medical patients, ex-CanniMed, jumped 13% from Q2 to Q3 (21,718 to 24,449). These increases show some promise for Aurora – a combination of good management to grow sales and good products to not lose customers. That said, I would not read too much into medical sales on a future recreational market.
I have also highlighted Auroras very high share-based payments compared to operating expenses. Using share-based payments is not problematic – it is good cash management for a money-losing company – but it means we will need to compensate for this dilution later when determining Auroras market cap and enterprise value.
Coca-Cola wants to make weed-infused drinks
Auroras balance sheet is a bit more complex than usual, given Auroras history of making deals. In sum, Aurora has $197 million in convertible debt and $220 million in net cash ex-convertible debt as of March 31. I have also highlighted Auroras $27 million inventory, discussed in “Comparison to Peers” below.
Aurora also has $137 million in investments. The bulk of these investments are, as described in Note 11 of the Q3/18 FS, in Cann Group Limited ($32 million, for an Australian cultivator) and in Liquor Stores N.A. Ltd. ($104 million, for a company that will operate cannabis stores).
During the three months ended March 31, 2018, Aurora had an operating cash flow loss of $27 million and spent $44 million on capital expenditures. This totals to a net negative free cash flow of -$71 million.
Given that this quarter ended March 31, 2018 – with nearly seven months until legalization – Aurora could not sustain this cash flow on ~$147 million in net cash. However, Aurora also secured a $250 million loan with the Bank of Montreal (BMO). That loan will allow Aurora to continue operating well into legalization of recreational cannabis in Canada without needing to raise additional capital.
Auroras November 2017 debt converts at $6.50 and is subject to a forced conversion if the VWAP exceeds $9 for ten consecutive trading days. It is fair to treat this $1 million of debt as equity. Auroras March 2018 convertible debt converts at $13.05/share and is subject to a forced conversion at $17/share after ten days.
Based on calculation the equity-value of this debt, I estimate the debt portion of this convertible debt at ~$134 million and the equity portion at ~$64 million. (Using Black Scholes with the 30-day volatility of 107% and a risk-free rate of 2.35%.)
Coca-Cola denies reports they are looking at making cannabis-based drinks
Calculating Auroras share structure and dilution figures is quite a bit more work than usual, since Aurora has made numerous deals since their more recent financial statements. These figures should therefore be taken as only approximate.
As of March 31, 2018, Aurora had 561,006,914 shares outstanding. Since then, Aurora has done the following deals which impact share count:
In sum, this would result in Aurora having ~926 million shares outstanding. For their part, Bloomberg estimates 951 million shares, Reuters uses 951.85 million shares, and YCharts reports 945 million shares.
Coca-Cola May Add a Cannabis Component to Drinks
Including convertible debt, Aurora has ~48 million shares of options/warrants outstanding. Given Auroras 30-day rolling volatility of 107% (YCharts) and a 2.35% risk-free rate, these options are worth ~$335 million.
Coca-Cola considering cannabis beverages
We can use this figure – and adjustments from subsequent events and the value of Auroras TGOD investment to find an enterprise value:
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In total, Aurora Cannabis has a market cap of ~$9.6 billion and an enterprise value of ~$9.2 billion using the above methods. Given the high number of subsequent events here, this should be viewed as merely a ballpark estimate. This makes Aurora the third most valuable cannabis company, behind Canopy Growth and Tilray.
(Author based on company filings; some figures are estimates as, e.g., Canopy Growth does not provide production estimates in kg/year)
Aurora is the second-largest cannabis producer in Canada, after Canopy Growth, in both production space and production capacity. As shown, Aurora is much larger than many of the other produces, especially Tilray and Cronos.
Aurora Cannabis Inc.s (TSX:ACB) Rumoured Deal With The Coca-Cola Co (NYSE:KO) Is Likely Real
Auroras six supply agreement is not a particularly inspiring number – many smaller producers have more supply agreements. However, by percentage of Canadians covered, Aurora ranks third behind only Aphria (OTCQB:APHQF) and Canopy Growth (CGC). While Aurora has not received deals in the smaller provinces, they have been very successful at getting deals with large provinces.
Aurora has ~$27 million in inventory, which places the company second among leading cannabis companies. I have written previously that cannabis may be in short supply until ~2020, so this inventory could potentially be sold more easily and for higher prices than later production.
Canopys Linton takes shot at Aurora: People have to learn to run their businesses – Article
(Authors estimates based on 2019 production and supply agreements. Tilray extends far off this chart on both metrics – ~$1,800 and ~$300 – please see my article “Avoid Tilray And Buy Literally Anything Else Instead.”)
Tilray, the worlds most valuable pot company, envisions $100 billion future
Aurora costs ~$150/gram of sales agreement and ~$20/gram of production. Both costs are ~mid-range compared to peers: US-traded peers (CGC, TLRY, CRON) are mostly more costly and Canadian-traded peers are less costly.
In the figure above, the italicized percentage is the percentage of Canadians who live in provinces where a company has a supply agreement without a disclosed quantity. So, for example, Aurora has supply agreements with undisclosed quantities in BC, ON, and NS. Those three provinces included 54.4% of Canadians. From the comparable figures between all companies except Canopy Growth, we can see that the EV/Supplied grams is quite apples-to-apples in the sense that each figure excludes about the same number of Canadians.
In my view, the more important of these two metrics is the EV/produced gram. I expect that most companies – by late-2019 or 2020 – will be able to produce enough cannabis to satisfy demand for their product. Thus, cannabis revenue will be more limited by demand than by supply.
However, a deal with Coca-Cola could introduce a wild card into the demand story: Such a deal has the potential to spawn new beverages or edible products (once legalized in 2019) that can open new markets for Aurora. If Coca-Cola developed a successful recovery product using Auroras CBD, Aurora could find a worldwide audience for its products outside of Auroras provincial supply agreements – dramatically increasing potential demand.
No pot drink deal, yet – Business News
As with any cannabis investment, Aurora is a risky investment. Share prices are volatile in both directions. As cannabis becomes legal and the recreational market explodes, expect significant re-pricing of Aurora and other cannabis producers on a regular basis. Prices may be especially volatile as rumors about KO swirl in the short-term – prices should rise if a deal is announced but fall if one is not.
I expect long-term gains in the cannabis market. However, those gains may take years to materialize as this nascent market matures and as international markets open. Thus, I recommend that new investors:
(Authors estimates based on 2019 production and supply agreements. Tilray extends far off this chart on both metrics – ~$1,800 and ~$300.)
Coca-Cola eyes cannabis market as demand for products grows
I do not think shares are as good a value as certain other producers, like HEXO. Similarly, I do not like Auroras execution as much as I like Canopy Growths. However, Aurora perhaps represents a “just right” medium between the two – the Goldilocks of Canadian cannabis stocks. Similarly, Aurora ranks second or third in most metrics: enterprise value (3rd), production space (2nd), production capacity (2nd), inventory (2nd), supply agreements by Canadians included (3rd).
I am a bit skeptical of Auroras acquisition spree and would like to see the pace of large acquisitions slow down. I would also love to see the Coca-Cola deal finalized and a potential US listing could also give a boost to share prices. Both may have become more likely after the Australis spin-off.
Coca-Cola Looks to Marijuana-Derived CBD for its Drinks
Aurora Cannabis remains a smaller holding in my Model Cannabis Portfolio on The Growth Operation. I will also continue to hold my OTCQX:ACBFF shares.
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.
Editors Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.