Aurora Cannabis Is Boosting Its Capacity Even More: Crazy, or Crazy Like a Fox? – Motley Fool

Aurora Cannabis Is Boosting Its Capacity Even More: Crazy, or Crazy Like a Fox? - Motley Fool
Aurora Cannabis: Why Wont They Stop
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You might not think that Aurora Cannabis (NYSE:ACB) would need additional production capacity. After all, the company is already on track to have an annualized production run rate of well over 500,000 kilograms by the middle of next year. With its funded capacity of over 625,000 kilograms per year, Aurora ranks in a strong first-place position among Canadian marijuana growers.

But thats apparently not enough for Aurora Cannabis. The company announced on Wednesday that its increasing capacity at its biggest facility even more than planned. What in the world was Aurora thinking?

Aurora is in the process of constructing its facility, dubbed Aurora Sun, in Medicine Hat, Alberta. The facility is expected to be ready for cultivation by the middle of 2020. 

Its probably an understatement to refer to Aurora Sun as an advanced cannabis-growing facility. Aurora Sun will have a glass roof along with a system to recapture rainwater and melted snow to irrigate cannabis plants. It will have sophisticated automation systems that allow total control over environmental conditions. 

Originally, Aurora planned for Aurora Sun to have 1.2 million square feet of growing space. That would have enabled at least 150,000 kilograms of cannabis to be produced at the facility annually. 

Now, though, Aurora intends for Aurora Sun to have 33% more growing space — a whopping 1.62 million square feet. Instead of 150,000 kilograms per year, the facility will be able to produce more than 230,000 kilograms.

If youre keeping score at home, Aurora currently has only one facility, Aurora Sky, that can grow more than 100,000 kilograms of cannabis per year. The company is constructing the Aurora Nordic 2 facility in Denmark, which when complete in 2020 should be able to produce over 120,000 kilograms. In addition, Aurora has bought land and a building in Exeter, Ontario, that will have an annual production capacity of 105,000 kilograms.

But Aurora Sun will be in a league of its own. It will nearly double the capacity of Auroras next-largest facility. At full operation, the facilitys 37 different growing rooms will house more than 1 million cannabis plants at varying stages of growth.

You can ask pretty much any observer of the Canadian marijuana market and theyll tell you that a major supply glut is inevitable. Some might think that glut will arrive sooner than others do, but hardly anyone would argue that supply isnt going to surpass demand in the not-too-distant future.

The obvious question is: Why is Aurora increasing its capacity in Canada? It provided a straightforward answer to this question. The company said that additional growing space is being added at the Aurora Sun facility “to support rapidly growing global demand for high-quality medical cannabis in Canada and abroad.”

CEO Terry Booth provided a little more color on the decision: “Particularly in newly opened markets, establishing first-mover position and embedding Auroras market share and brand requires a stable and reliable supply of high-quality cannabis for these markets. The increased scale of Aurora Sun reflects our expectations for the long-term growth in global demand, especially the higher margin international medical markets, which will be faced with significant supply shortages for the foreseeable future.”

Although Aurora Sun is in Canada, it appears that the real target for the additional capacity is the international market. And Aurora clearly thinks that these markets arent in jeopardy of having a supply glut anytime soon.

Does Auroras plan to boost capacity at the Aurora Sun facility make sense? I suspect some will think its a bad decision. After all, most international medical-cannabis markets are still in their infancy. Theres no guarantee that these markets will grow as quickly as projected.  

But Aurora could very well be right that there will be supply shortages for quite a few years in international medical markets. And the company is absolutely correct that these markets provide higher profit margins than the Canadian adult-use recreational market does.

I also think that Aurora is prioritizing production costs and flexibility. Aurora Suns advanced technology should enable Aurora to drive down costs per gram compared with older facilities. In addition, Booth noted that the facility is “designed with flexibility in mind to enable us to quickly meet changing market demands, particularly as breeding and cultivation technologies evolve and as customer preferences and requirements change.” The bottom line is that capacity at Aurora Sun will be more valuable to Aurora than capacity at many of its other facilities. 

Its possible that a few years from now, well look back and be able to say that Auroras move to boost capacity was crazy. However, I wont be surprised at all if, in retrospect, the decision instead will appear to be crazy like a fox.

Cannabis stocks are in a holding pattern right now — consider that the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) has barely budged in the last month. Markets are waiting on the bipartisan legislation proposed in both the House and Senate to create protections for the states legalizing cannabis to play out. If the sector wins a favorable decision, it could start rallying again as it did for much of 2019. That is due to a boost in liquidity, as banks become permitted to offer services to companies in the sector.

Aurora Cannabis (NYSE:ACB) announced on Apr. 4 that it appointed Carey Squires as its executive vice president of Corporate Development and Strategy. Carey’s experience in capital markets signals that Aurora will seek global growth and partnerships with other firms. ACB shares are up over 70% year-to-date already. The stock could see profit-taking if markets weaken overall. But with such an event impossible to predict, investors are hoping for a favorable vote on the States bill to facilitate the financing of any big deals.

On Apr. 2, Aurora filed a preliminary prospectus that will allow the company to raise $750 million over a 25-month period.

On Apr. 5, the CEO of Constellation Brands (NYSE:STZ) told CNBC that Canopy Growth (NYSEQ:CGC) could make more than $1 billion in revenue by the end of its fiscal year. Constellation reasoned that Canopy can sell $5 billion to $6 billion worth of goods in Canada alone. Beverages and other edibles would add to the company’s addressable market potential.

Marijuana is illegal federally, but state governments have legalized it in some form in 33 states across the U.S. If more states legalize the substance, then Canopy, Constellation Brands and Aurora Cannabis could all, in turn, reward shareholders with good results.

On Mar. 25, Health Canada granted Canopy Growth a cultivation license for its facility in Fredericton, New Brunswick. The facility will start production of over 5,000kg of cannabis annually. Such positive benefits to the economy and job market are something for states to look forward to from cannabis legalization.

CannTrust (NYSE:CTST) could trade in a wide range after the company reported weak fourth-quarter results in the end of March. Revenue grew to 132% from last year to CAD $16.17 million. The company lost CAD $0.26 a share.

CannTrust is optimistic that its revenue growth will continue in 2019, thanks to additional capacity coming online. Its Phase 2 expansion, crop yield optimization and staff training will all drive output higher. By 2020, it estimates it will add between 100,000 kg to 200,000 kg of production. Looking ahead, the company will continue developing innovative products in anticipation of the expected legalization of the edibles market in Canada in late 2019.

Cronos Group (NASDAQ:CRON) has been one of the stocks to add to the “avoid list” due to its weak quarterly report. The company benefited from a CAD $2.4 billion Altria (NYSE:MO) investment, which closed in March 2019. The bad news is that the company’s average selling price fell from $6.43 in full-year 2017 to $5.74 for 2018. It blamed the falling ASP on an excise task. Operating expenses also ballooned from $9.3 million in full-year 2017 to $29.4 million.

Cronos has research and development activities that will take time before they pay off. Its big focus is on making sure that it has the technologies for leveraging on the rare cannabinoids and formulations to tailor them to devices. This requires the company collecting data to share with regulators so they are comfortable with it.

In the end, cannabis stocks have already staged a nice rally in 2019, which increases the risk of a pull-back if investors decide to book profits. Yet any positive developments on the legalization side of the equation could re-ignite another rally in the sector.

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