At the moment, there's simply no industry growing faster, or garnering more attention from Wall Street and investors, than marijuana. Following the legalization of recreational weed in Canada, and now having over 40 countries worldwide with some sort of medical cannabis legalization in place, the sky appears to be the limit for pot and marijuana stocks.
Because the opportunity is so huge, we've been witnessing an escalating capacity "war" among Canadian growers since the beginning of 2018. Pretty much every time Yours Truly has churned out a list of the peak production capacity of the top 10 or 11 growers in Canada (i.e., any grower with at least 100,000 kilos of peak annual production capacity), it's become obsolete because of a newly announced project, an acquisition, or an expansion, within a matter of days, or weeks if I'm lucky.
Aurora Cannabis increases production at its largest grow farm by more than 50%
Last week, my newest published production list once again became outdated, thanks to Aurora Cannabis (ACB 0.10%). Aurora is projected to be Canada's leading cannabis producer when operating at full capacity, and no other growers are particularly close to its production potential -- especially after its latest announcement.
On Wednesday, April 10, Aurora provided a construction update on its organically built Aurora Sun project in Medicine Hat, Alberta. For reference, this had been announced as a 1.2 million-square-foot build that'd yield more than 150,000 kilos last year. However, to support Aurora's push into overseas markets, Aurora is expanding the facility by 33% to 1.62 million square feet. This will increase output to at least 230,000 kilos, when complete. At approximately 142 grams per square foot, Aurora Sun looks to produce at more than 40% above the industry average of 100 grams per square foot. This output efficiency is also higher than the roughly 120 grams per square foot Aurora will achieve from its 1 million-square-foot Nordic 2 joint venture in Denmark, and its 800,000-square-foot Aurora Sky facility, which should yield 125 grams per square foot.
So what does this mean for Aurora Cannabis as a whole? Before this announcement, I'd detailed 700,000 kilos of peak annual production for the company, which assumed it would complete more than 1.1 million square feet of construction in South America that was acquired via the ICC Labs buyout. Now, that estimate can be bumped up by 80,000 kilos to about 780,000 kilos in annual output by perhaps 2021 or 2022. Keep in mind, though, Aurora tends to be conservative with its large grow farm production estimates -- i.e., Aurora Sun, Aurora Nordic 2, and Aurora Sky -- calling for at least 230,000 kilos, at least 120,000 kilos, and at least 100,000 kilos, respectively. This suggests that if these facilities are even slightly more efficient than Aurora Cannabis intimates, 800,000 kilos is a real possibility.
By comparison, Canopy Growth's (CGC -0.15%) 5.6 million square feet of production capacity is likely to yield more like 525,000 kilos. In fact, if not for Canopy Growth's 1.7 million-square-foot Delta campus, Aurora would have the largest grow farm among all publicly traded pot stocks. Canopy, which has more than 4.3 million square feet of production space already licensed, is the only real threat to Aurora's production lead, with CannTrust Holdings, Aphria, and The Green Organic Dutchman at somewhere between a quarter and third of Aurora's peak annual output.
A push to 1 million kilos a year is possible
Then again, if you've followed Aurora Cannabis, you're well aware that this is a management team incapable of sitting on its hands for any extensive length of time. They're aiming to capture global market share and believe that out-producing their competition is the best means to do so. If the company were to really get aggressive with its existing assets, it should have no problem pushing to 1 million kilos of peak annual output by 2022.
For starters, when Aurora Cannabis acquired MedReleaf in July 2018, it added a 164-acre plot of land to its portfolio of assets. On 69 acres sits the Exeter facility which, when fully retrofitted for marijuana production and licensed, will be capable of 105,000 kilos of annual yield. However, there are 95 acres of land adjacent to Exeter that's owned but unused. MedReleaf's press release following the land acquisition (when it was still an independent company) in February 2018 noted that a facility 1.5 times the size of Exeter could be constructed adjacent to the existing facility. Presumably, this would have led to more than 150,000 kilos of output. But utilizing Aurora's growing methods and the expertise of its wholly owned subsidiary Larssen, achieving 200,000 kilos spanning 95 acres of land shouldn't be a problem.
Furthermore, there's plenty of available acreage for expansion in South America. When Aurora acquired ICC Labs, it noted the potential for 450,000 kilos of cannabis and hemp production, albeit it didn't differentiate what percentage of output would be devoted to each plant. With 92,000 square feet of cannabis production in operation, and another 1.12 million under construction, it seems plausible that additional acreage is available if Aurora wanted to expand its South American presence.
In other words, 1 million kilos is not only possible at this point, but it's seeming likely based on the aggressive actions of management.
Will this production push pay off for shareholders?
Of course, the big question is whether Aurora's tactics are going to be a boon for shareholders or not. To this end, there's no clear answer.
On one hand, Aurora has done an excellent job of expanding into overseas markets. The 24 countries (including Canada) that it currently has operations in outpaces its peers. These external sales channels will prove especially important by 2021, which is when domestic Canadian production is expected to really ramp up, and the per-gram price of dried cannabis could begin to fall.
Another positive is Aurora's stated focus on medical marijuana patients. Medical pot patients tend to use cannabis more frequently, buy product more often, and are more likely to purchase alternative marijuana products, such as oils, which have considerably juicier margins than dried cannabis flower.
On the other hand, Aurora's aggressive production tactics likely mean higher expenditures. Already seeing its forward-year profit projections fall, Aurora could struggle to generate anything more than a marginal profit for years to come. Consider this the price to be paid to gobble up global market share.
In addition (and you knew this point was coming), Aurora has had a penchant for financing its acquisitions, expansion projects, and really any activity, by selling shares of its common stock. In less than five years, the company has issued more than 1 billion shares. This has reduced the earning potential of its shareholders and threatens to hold down earnings per share.
Suffice it to say, even as the nation's largest producer, Aurora Cannabis will have a lot to prove to investors in the years that lie ahead.