The marijuana industry has truly been something to marvel at this year. Although we've witnessed plenty of highlights, including Vermont's legalization of recreational cannabis entirely through the legislative process and the first cannabis-derived drug getting the thumbs-up from the U.S. Food and Drug Administration, it's the legalization of recreational marijuana in Canada that's stolen the show.
Following years of promises from Prime Minister Justin Trudeau and months of debate in the Senate, Canada officially legalized adult-use weed via the Cannabis Act on Oct. 17, 2018. Now that Canada has become the first industrialized country in the world to do so, Wall Street is expecting its pot industry to eventually generate $5 billion or more in added annual sales atop what it was already bringing in via medical cannabis sales and exports to foreign countries. It's this major opportunity that's enticed marijuana growers to expand their production capacity as quickly as possible.
Aurora's ascent to the top of the cannabis mountain
Perhaps no marijuana stock has taken this to heart more than Aurora Cannabis (ACB -4.70%). Aurora, which recently uplisted to the New York Stock Exchange from the over-the-counter exchange, began the calendar year with the expectation of growing just over 100,000 kilograms of cannabis at peak capacity. This was to include its state-of-the-art Aurora Sky facility, with its projections for around 100,000 kilograms, along with Aurora Vie and other smaller facilities adding icing on the cake, so to speak.
Then, beginning in January, Aurora Cannabis got very aggressive on the partnership, organic construction, and acquisition fronts, and it hasn't looked back since. Listed in no particular order, the company:
- Partnered with Alfred Pedersen & Son in Denmark to retrofit 1 million square feet of vegetable-growing greenhouses that will be capable of producing 120,000 kilograms of cannabis per year.
- Acquired Saskatchewan-based CanniMed Therapeutics in May.
- Acquired Ontario-based MedReleaf, with its projected 140,000 kilograms of peak annual production, in July.
- Announced the construction of the Aurora Sun facility in Medicine Hat, Alberta, which will span 1.2 million square feet and yield 150,000 kilograms per year.
According to the company's most recent quarterly operating results, this combination of organic builds, partnerships, and acquisitions is expected to yield 570,000 kilograms of production when running on all cylinders. By comparison, Canopy Growth Corp. and Aphria are the next-closest competitors, with estimated annual output of around 500,000 kilograms and 255,000 kilograms, respectively. This means that Aurora Cannabis is currently in the driver's seat in terms of peak annual production.
What will Aurora Cannabis look like following its ICC Labs acquisition?
Of course, the company isn't done just yet. On Sept. 10, it announced plans to acquire all outstanding shares of South America's ICC Labs (NASDAQOTH: ICCLF) for 1.95 Canadian dollars, or CA$290 million. While far from the largest transaction in the cannabis space, it'll possibly border on being the third deal for Aurora in the top 10 largest deals in the cannabis space by market cap in history. This past Tuesday, Nov. 6, ICC's shareholders voted in favor of the buyout, paving the way for closure of the deal.
What is Aurora Cannabis buying exactly? First off, it gives the company a uniquely large presence in a handful of key South American markets. ICC Labs currently has approximately 70% market share in Uruguay, the only other country in the world where recreational marijuana is legal. It also holds licenses in Colombia for medical cannabis production.
ICC Labs also brings product diversification to the table. Uruguay is the only country in the world at present that allows licensed producers like ICC to grow cannabidiol- (CBD-) rich hemp at large scale. CBD is the nonpsychoactive component of the cannabis plant best known for its perceived medical benefits. Cannabidiol is traditionally targeted at medical patients and, as such, usually boasts better pricing power and margins than dried cannabis flower.
Aurora's acquisition of ICC Labs also introduces much needed infrastructure. ICC has been in the process of constructing a large-scale extraction facility for some time now that'll be able to process 150,000 kilograms of CBD feed per year when complete. It's expected to be fully operational by the end of this calendar year.
And, most importantly, ICC Labs brings a lot of added capacity. It already has 92,000 square feet of existing cultivation space, with two additional facilities under construction: a 124,000-square-foot greenhouse in Colombia and a 1 million-square-foot facility in Uruguay. Combined, that's 1.2 million square feet that could, conservatively, add 100,000 kilograms of extra production potential each year.
Altogether, by 2021, assuming its projects remain on track and the company is able to receive all necessary cultivation and sales permits, Aurora Cannabis may be nearing 700,000 kilograms of annual production. Taking into account the economies of scale that come into play with an operation this size, Aurora could be a dominant force within the cannabis space.
Two reasons to be leery of Aurora Cannabis
Of course, there's more to being a successful marijuana stock than simply outproducing your peers. Investors would be wise not to be overly enamored with Aurora's peak production estimates for two particular reasons.
First, you'll have to understand that Aurora is still a long way away from hitting its peak production target. During the company's fiscal fourth-quarter report, released on Sept. 24, it suggests that it'll only be producing at an annual run rate of 100,000 kilograms by the end of calendar year 2018 and perhaps 150,000 kilograms a year by the end of fiscal 2019 (June 30, 2019). That's a far cry from its peak potential.
In the meantime, this is a company that'll be spending a lot of money constructing greenhouse facilities, building up its brands, and laying its international infrastructure. In other words, it's a recipe for exceptionally high near-term costs, which should translate into unwelcome losses, even with surging sales.
The second concern with Aurora -- which has been a problem for some time with most pot stocks -- is the company's ballooning outstanding share count. In order to fund its numerous acquisitions and construction projects, Aurora has almost exclusively turned to bought-deal offerings. A bought-deal offering involves the sale of common stock, convertible debentures, stock options, and/or warrants in order to raise capital. These offerings could very well push its outstanding share count to north of 1 billion shares from 16 million just over four years ago. This weighs on the value of existing shares of the stock, as well as makes it that much tougher for Aurora Cannabis to produce a meaningful per-share profit.
Make no mistake about it: Aurora Cannabis has intrigue. But it's best left on the sidelines by investors until its bottom line matches already-lofty expectations.