Aurora Cannabis (NYSE:ACB) is Canada's second-largest marijuana company by revenue behind Canopy Growth (NYSE:CGC), but expansion projects could catapult it into first place someday. Aurora Cannabis went into this week with funded expansion projects targeting over 550,000 kilograms annually and exiting this week, its plans are targeting over 630,000 kilograms of peak marijuana production per year.

What's going on

Marijuana has been used medically or recreationally for thousands of years, however, its use became illegal in the U.S. in the 1930s and broadly prohibited worldwide in the 1960s because of treaties. Momentum to end marijuana prohibition has been growing since the 1990s, though. Last year, Canada became the first G7 nation with legal, medical and recreational, adult-use markets nationwide. In Germany and Australia, national medical marijuana markets have been created, and 33 states have passed pro-pot laws in America, including 10 states with legal, adult-use laws.

A hand holding a marijuana leaf in a field of marijuana.

IMAGE SOURCE: GETTY IMAGES.

The shift in how marijuana is regulated is creating a massive opportunity for cannabis companies. In Canada, spending on marijuana totals about 6 billion Canadian dollars per year and in the U.S., the marijuana market is estimated to be worth about US$50 billion. Globally, the United Nations values the marijuana market at about $150 billion.

The transition of these massive, established markets to regulated marketplaces is only in its infancy. Canada's recreational market only recently opened, and as a result, 80% of its market is still conducted illegally. In the U.S., legal medical and recreational sales were just $8.4 billion in 2018, according to Matt Karnes of GreenWave Advisors. Legal sales in Germany, Australia, and elsewhere are even smaller.

Overcoming bottlenecks

After opening on Oct. 17, Canada's legal recreational market sales were CA$152 million in the fourth quarter, and that was without the availability of vapes, edibles, or beverages. Medical marijuana sales were about CA$155 million in Q4, bringing total legal sales to CA$307 million in Canada.

Of that, Canopy Growth captured 27% market share, delivering CA$83 million in net sales last quarter, including CA$58 million in adult-use sales, while Aurora Cannabis captured about 17% market share, delivering CA$54 million in net sales, including CA$21.6 million in adult-use sales.

Industrywide, legal adult-use sales would've been higher if not for supply shortages. Despite planning, inventories at many dispensaries were limited and delivery times were longer than expected for online purchases. The supply shortage won't be a problem forever, though, because cannabis growers, including Aurora Cannabis, are plowing big money back into cultivation. 

Aurora Cannabis produced 7,822 kilograms of marijuana in Q4, but it said it will reach annualized production capacity of 150,000 kilograms this quarter because of ramping production at its recently completed Aurora Sky indoor facility. Thanks to projects and the acquisitions of CanniMed and MedReleaf in 2018, Aurora Cannabis' came into 2019 with a goal of eclipsing 550,000 kilos of annual production someday.

A lot of that increase will come courtesy of three massive indoor facilities: Aurora Sky, Aurora Nordic 2, and Aurora Sun. Incorporating the latest technology, including automation, to boost yields at a lower cost, Edmonton-based Aurora Sky began producing marijuana this year. Construction is expected to be complete at Nordic 2 in middle of 2020 and Aurora Sun's production should begin later this year and then ramp up after construction finishes next year. 

Initially, Aurora was targeting Aurora Sun to add 150,000 kilos of annual production, but this week, it upped that forecast to 230,000 kilos. As a result, the company's announced projects exceed 630,000 in peak marijuana production capacity.

Aurora Cannabis Production Plans Size (sq. ft.) Planned Capacity (kg) Operating
Aurora Mountain 55,200 4,800 *
Aurora Vie 40,000 4,000 *
Aurora Eau 48,000 4,500 *
Aurora Sky 800,000 100,000 *
Aurora Sun 1,620,000 230,000  
Aurora Nordic 1 100,000 8,000 *
Aurora Nordic 2 1,000,000 120,000  
CanniMed 97,000 19,000 *
MedReleaf Markham 55,000 7,000 *
MedReleaf Bradford 210,000 28,000 *
MedReleaf Exeter 1,000,000 105,000  
Totals 5,025,200 630,300  

Data: Aurora Cannabis. Operating = at least some cultivation/sales already.

The increased production outlook for Aurora Sun is particularly interesting because it may hint at how Aurora may be able to increase production down the road at other facilities. According to management, Aurora Sun won't include space for processing marijuana, which will occur elsewhere. That's a shift from its approach at Aurora Sky, which includes processing space. The biggest benefit, however, is coming from a 33% increase in the expected size of the facility. Originally, Aurora Sun was going to be about 1.2 million square feet. Now, it will be over 1.6 million square feet. 

When it's complete, it will have 37 grow rooms 32,500 square feet in size that are capable of handling over 1 million marijuana plants. To reduce labor and utility costs, it will use robotics and mobile benches, automated cloning and production systems, and a climate management system that incorporates a glass roof and a rainwater and snow melt recapture system.

Ultimately, growing marijuana at scale in large facilities like Aurora Sun has Aurora Cannabis predicting its cost per gram will decline below $1. If so, that could make it one of the lowest-cost marijuana producers in Canada, putting it in a better position to make the eventual jump to profitability. 

Importantly, the increased size of Aurora Sun should help the company deliver on anticipated demand not only in Canada, but in other markets as they shift away from prohibition. According to CEO Terry Booth, "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."

If Booth is right in expecting shortages in new markets, then having excess capacity in Canada to meet that demand could give it an edge in winning market share worldwide, making it an even stiffer competitor to Canopy Growth.