What happened
Stocks in the cannabis sector have been bid up in recent weeks thanks to some political news surrounding marijuana's legal status in the United States. Aurora Cannabis (ACB -0.15%) has been one of them with a 50% gain over the last month.
Today, however, Aurora stock is getting hit hard. As of 10:12 a.m. ET, its shares were down by 9.3%.
So what
Shares plunged because the company just announced it was selling stock to raise new capital. The good news is that it will use the $25 million raised to pay down some debt. The company could also gain another almost $4 million if an over-allotment option is exercised.
The bad news is that it will be costly for shareholders in two ways. The more than 46 million shares being sold to financial services firm Canaccord Genuity will dilute existing shareholders. Perhaps more importantly, the shares are priced at $0.54 after Aurora's shares closed at about $0.67 yesterday. That represents a 19% difference.
Investors aren't hitting the stock by that same amount perhaps because the company is putting the new capital to good use. Management will pay off a $25 million outstanding balance from existing convertible senior notes.
Now what
The stock is taking a hit mainly due to the pricing today, but it still makes sense for Aurora to take advantage of the recent jump in the stock price. That jump came after the Biden administration asked the Drug Enforcement Agency (DEA) to reclassify marijuana as a Schedule III drug from its current Schedule I status. Separately, legislation is pending in the U.S. to ease bank restrictions related to marijuana businesses.
Those potential tailwinds for the U.S. business helped Aurora and other Canadian cannabis stocks to soar recently. Aurora jumped at the chance to erase some debt. There is no free lunch, though, and investors are reacting to the associated costs today.
