The marijuana industry is growing like a weed. According to various Wall Street prognostications, the global cannabis industry could be generating upwards of $50 billion to $75 billion in annual sales roughly one decade from now. That's a boatload of cash, and all the more reason for pot growers to double down on capacity expansion.
Although there are 11 growers that are currently on pace for more than 100,000 kilograms in peak annual output, according to their respective management teams, none stands out more than Alberta-based Aurora Cannabis (ACB 3.87%).
The leader of the pack
Aurora has been aggressively expanding its production potential in an effort to secure lucrative long-term supply deals, and perhaps attract a brand-name partner in the beverage, snack, tobacco, or pharmaceutical industry. Plus, with the legal cannabis market still nascent, Aurora projects to have a good chance of grabbing market share in the early stages of legal marijuana sales.
In the company's press release highlighting its fiscal second-quarter operating results, which ended Dec. 31, 2018, it was noted that 20% of all cannabis sold in Canada between the beginning of October and the end of the year was attributed to Aurora. At its expected annual run-rate of more than 150,000 kilos by the end of this month, none of its peers are even close to keeping pace.
According to Aurora's management team, the company is on track for more than 500,000 kilos in annual run-rate production by mid-2020. However, yours truly expects the company to come in at 700,000 kilos per year once its facilities are fully licensed, permitted for sale, and operating at peak efficiency. How exactly does Aurora get to 700,000 kilos? Let me walk you through the step-by-step process.
Here's how Aurora Cannabis gets to 700,000 kilos of production a year
Following the purchases of ICC Labs in South America and Whistler Medical Marijuana in British Columbia, the company has more than a dozen facilities from which to generate cannabis. Here's a brief rundown of the 11 facilities (not including ICC Labs and Whistler) mentioned in Aurora's most recent investor presentation:
- Aurora Mountain (4,800 kilos a year): This 55,200-square-foot facility is Aurora's longest-running, and has been in operation since 2015.
- Aurora Vie (4,000 kilos a year): Located in Quebec, Aurora Vie has been in operation since 2018, and spans 40,000 square feet.
- Aurora Eau (4,500 kilos a year): Officially opened in November 2018, Aurora Eau spans 48,000 square feet in Lachute, Quebec.
- Aurora Sky (more than 100,000 kilos a year): Once the company's largest organic project at 800,000 square feet of cultivation space, Aurora Sky is fully operational in the company's home province of Alberta.
- Aurora Sun (more than 150,000 kilos a year): Currently the largest organic project to date, Aurora Sun spans 1.2 million square feet, with initial planting expected in late 2019, and construction completed by mid-2020.
- Aurora Nordic 1 (8,000 kilos a year): Partnering with Alfred Pedersen & Son, Denmark's Aurora Nordic 1 facility, spanning 100,000 square feet, is fully operational and set to make its first sale during the first quarter of 2019.
- Aurora Nordic 2 (more than 120,000 kilos a year): This facility features 1 million square feet of growing space in Denmark, with construction expected to be complete by mid-2020.
- CanniMed (19,000 kilos a year): Acquired for the tidy sum of $852 million, Saskatchewan-based CanniMed brought with it 19,000 kilos of fully operational capacity spanning 97,000 square feet.
- Markham (7,000 kilos a year): Acquired through its $2 billion purchase of MedReleaf, the 55,000 square foot Markham facility was MedReleaf's oldest, with operations beginning in 2014.
- Bradford (28,000 kilos a year): Also acquired through the MedReleaf deal, Bradford was a 210,000 square foot organic expansion that's now fully operational.
- Exeter (105,000 kilos a year): Once again, acquired through the MedReleaf deal. Exeter was itself purchased in a land deal by MedReleaf, with the 1 million square foot vegetable-growing facility expected to be retrofit to grow cannabis.
Added up, that's a minimum projected annual run-rate of 550,300 kilograms by mid-2020, directly from the company's management team.
But wait -- there's more
However, this projection doesn't include its relatively new acquisitions of ICC Labs or Whistler Medical Marijuana.
Whistler's Pemberton facility in British Columbia is expected to yield more than 5,000 kilos yearly when operating at peak capacity, which will likely occur within the next 12 months. That brings the total output up to at least 555,300 kilos per year.
Then there's ICC Labs, which had 92,000 square feet of already operational cultivation facilities when it was acquired, along with 124,000 square feet being developed in Colombia, and a 1 million square foot facility being constructed in Uruguay, the only other country besides Canada to have legalized recreational weed. Assuming Aurora utilizes its higher-yield growing techniques in the ongoing construction projects, my personal expectation would be around 8,000 kilos from the existing 92,000 square feet, another 10,000 kilos from the Colombia facility, and north of 120,000 kilos annually from the 1 million square foot facility in Uruguay. Altogether, this increases the company's run-rate to 693,300 kilos per year.
Of course, note above that Aurora conservatively expects its largest facilities to produce 100,000 kilos, 120,000 kilos, or 150,000 kilos, per year. That's more than enough margin of error to expect yields to be 1% higher than existing estimates, pushing peak production to 700,200 kilos a year.
1 million kilograms isn't out of the question
At 700,000 kilos of annual output, Aurora should easily lead the pack. But even then it may not be done. Should global demand prove overwhelming, the company has ample opportunity to expand its cultivation base.
When MedReleaf was acquired for $2 billion, Aurora gained hold of MedReleaf's 164-acre land purchase. This land features the Exeter facility on 69 acres, as well as 95 acres that are currently unused. At the time of the purchase, MedReleaf opined that it could build a facility that was 1.5 times the size of Exeter if demand merited such a move. With Aurora's superior greenhouse construction knowledge and growing techniques, it wouldn't be out of the question that an up to 1.5 million square foot facility could yield up to 200,000 kilos of additional output per year.
Then there's ICC Labs in South America which, according to Aurora, has 450,000 kilos of peak capacity between hemp and cannabis. The only thing we don't know is just how much of this grow space (on paper) is specifically devoted to hemp relative to cannabis. Presumably, with the company able to yield in the neighborhood of 140,000 kilos from existing projects in South America, there would be ample room for production expansion.
Even smaller grow sites offer hope for expansion. For example, Whistler Medical's Pemberton site could be expanded to provide up to 15,000 kilos of annual output, according to Aurora. Additionally, expansion at CanniMed should be able to push peak production north of 30,000 kilos a year.
In other words, it would not be out of the question for Aurora Cannabis to one day produce 1 million kilograms per year.
The only question left to ask is, what project is next?