Roughly a year and a half ago, Canadian marijuana stocks were expected to take the global lead in making cannabis a mainstream product. But despite having this pole position among developed countries, regulatory and operational issues have caused the Canadian pot industry to face-plant.
More specifically, Canadian cannabis growers have been stymied by Health Canada and provincial-level regulatory agencies. Health Canada has been slow to approve cultivation and sales licenses, thereby leaving some major growers waiting in the wings to bring product to market. Health Canada also pushed back the launch of high-margin derivatives by two months. Derivatives are alternative consumption cannabis products, such as edibles, vapes, and infused beverages.
Meanwhile, provincial regulators in Ontario ran with a lottery system to award retail licenses through the end of 2019, resulting in a menial 24 dispensaries being opened in a province with 14.5 million people, as of Oct. 17, 2019, the one-year anniversary of recreational weed sales commencing.
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Combined, these issues have caused most marijuana stocks to rethink their game plans. And that includes the largest cannabis stock in the world, Canopy Growth (CGC -0.66%), which announced major changes to its operations this past Wednesday, March 4.
Canopy Growth is gutting its greenhouse production and slashing jobs
With new CEO David Klein taking the reins in January, and Klein coming over from spirits giant Constellation Brands, where he was the company's chief financial officer, it was only a matter of time before he enacted some serious belt-tightening.
After the closing bell on Wednesday, Canopy Growth announced two significant cost-cutting initiatives, along with a pretty hefty charge that'll accompany these moves.
First, it'll be closing its Aldergrove and Delta cultivation facilities, both of which are in British Columbia. These two facilities account for approximately 3 million square feet of licensed greenhouse production. Canopy also announced that it won't bring its Niagara on the Lake facility in Ontario online later this year, as originally expected. This is a 350,000-square-foot cultivation farm. Altogether, Canopy Growth is scaling back between 3.3 million square feet and 3.4 million square feet of its roughly 7.5 million square feet in growing space. That's up to a 45% reduction!
In making this decision, the company's press release points out that "federal regulations permitting outdoor cultivation were introduced after the Company made significant investments in greenhouse production." Canopy Growth anticipates leaning on cheaper outdoor production to reduce its costs moving forward.
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Secondly, because the company has chosen to close Aldergrove and Delta, it means the loss of approximately 500 jobs. When combined with its facility closures, Canopy expects to record pre-tax charges of $700 million Canadian ($522.4 million) to CA$800 million in the fiscal fourth quarter, ended March 31, 2020.
While Canopy's management has never been particularly transparent about its peak production capacity, I'd guestimate that it just took 250,000 kilos (or more) in annual future weed output off the table.
Don't worry, Canopy Growth, you're far from alone
Though this is undoubtedly a big-time production cut for the largest pot stock in the world, Canopy Growth is far from alone when it comes to slashing output and jobs.
The company's primary competitor, Aurora Cannabis (ACB -2.96%), has been nothing short of a dumpster fire of late. In November, Aurora Cannabis announced that it would halt construction on two of its largest projects (Aurora Nordic 2 in Denmark and Aurora Sun in Alberta) to conserve capital, and more recently announced plans to put the 1-million-squre foot Exeter greenhouse up for sale. Exeter was forecast to produce as much as 105,000 kilos of cannabis per year if retrofit from vegetable production (which it never was). All told, this takes more than 400,000 kilos of peak annual output out of the equation for now. Not to mention, Aurora Cannabis also shed 500 jobs.
It's the same story with Quebec-based HEXO (HEXO), which announced plans in October to idle its 240,000-square-foot Niagara grow farm, as well as 200,000 square feet of cultivation space at its flagship Gatineau facility. I'd estimate this reduces HEXO's peak yearly production capacity by close to one-third. HEXO also wound up laying off 200 workers. Mind you, these cuts are being made despite signing the largest wholesale provincial agreement in history in April 2018.
Image source: Getty Images.
There's also CannTrust Holdings (CNTTQ), which has seen its operations come to a dead stop. That's because CannTrust was caught illegally growing cannabis in five unlicensed rooms at its flagship Niagara facility for a period of six months. As a result, Health Canada wound up suspending both the company's cultivation and sales licenses. CannTrust was allowed to process existing crops, but wasn't allowed to propagate any new cannabis plants. Given its midyear 2019 peak production forecast, this is another 200,000 kilos to 300,000 kilos that's been taken off the market indefinitely.
For an industry that was on pace for well over 3 million kilos of peak annual output as recently as midyear 2019, we've witnessed more than 1 million kilos of marijuana production taken offline in just the past six months -- and the grim reality is we're probably not done with the production cuts just yet.
There's no doubt that marijuana can be a viable industry and a moneymaker for pot stock investors over the long run. But it's plainly evident that too many cannabis stocks took a leap without properly assessing the situation. There will still be winners in this space, but there's no guarantee that the highly popular Canopy Growth will be one.
