Forgive the pun, but the marijuana industry is blazing forward at an incredible pace, which has certainly been reflected in the underlying valuations of marijuana stocks. Since the beginning of 2016, many of the largest pot stocks by market cap have gained more than 1,000%.
Central to these gains has been a rapid increase in North American legal weed sales. Research firm ArcView notes that legal cannabis sales in North America grew by a whopping 33% to $9.7 billion in 2017, and they appear to be on track to hit almost $25 billion by 2021.
Meanwhile, Gallup’s annual surveys have shown that there’s a notable shift in how the American public views marijuana. Prior to California becoming the first state to legalize medicinal cannabis back in 1996, support for nationwide legalization stood at a mere 25%. As of October 2017, nearly two out of three respondents favor legalization.
More recently, the buzz has shifted to Canada, which is expected to do something this June that no other developed country has done before: legalize recreational cannabis. With practically all obstacles dealt with, Canada is likely to sign the Cannabis Act into law, allowing adults aged 18 and over to buy legal weed products beginning in either August or September. We could be looking at the addition of $5 billion or more in added annual sales.
As a result, Canadian cannabis growers have been expanding their capacity as quickly as their balance sheets will allow. Arguably, none has been more aggressive than Aurora Cannabis (NASDAQOTH:ACBFF).
Go big, or go home
Initially, Aurora Cannabis was working with just one flagship project: Aurora Sky. Spanning 800,000 square feet, Aurora Sky is expected to be complete by mid-2018 and should produce in excess of 100,000 kilograms of dried cannabis a year. The company has touted Aurora Sky as the most technologically advanced greenhouse in the world, which is sure to aid in lowering its growing costs.
Of course, Aurora has been quite the busy bee, and its portfolio has moved well beyond just the Aurora Sky project. In early January, the company announced that it was teaming up with Danish tomato and pepper producer Alfred Pedersen & Son to sell cannabis. The Aurora majority-owned joint venture will see the Aurora Nordic facility come to life, which is capable of producing 120,000 kilograms a year. Most of this production will likely wind up being marketed in Europe at countries that’ve legalized medicinal cannabis.
Aurora also recently completed the acquisition of Saskatchewan-based CanniMed Therapeutics in the priciest pot deal to date. The acquisition added about 19,000 kilograms in fully-funded capacity to Aurora’s coffers, as well as broadened the company’s product portfolio.
Then, last week, Aurora Cannabis announced yet another blockbuster move: It would be building a massive growing facility in Medicine Hat, Alberta, to be known as Aurora Sun. The company acquired 71 acres of land in Medicine Hat, which will eventually house the 1.2-million-square-foot facility that could, according to the press release, be expanded to 1.5 million square feet. When complete, it’ll house 850,000 square feet in dedicated growing space, which is bigger than Aurora Sky, and it will be capable of producing in excess of 150,000 kilograms a year.
Add this all together, and Aurora Cannabis could be producing in excess of 430,000 kilograms of marijuana per year.
Interesting omissions in the Aurora Sun press release
On the surface, this might look fantastic for investors. The thinking here is that the more production a grower can bring to market, the higher that grower’s chance is of securing long-term supply deals, gobbling up market share, and forging emotional attachments with consumers.
But the company’s press release on its latest expansion project failed to include two very important pieces of information.
First, there was absolutely no mention as to how much Aurora paid for the 71 acres it’s acquiring in Medicine Hat, Alberta. Chances are it wasn’t a considerable amount given that MedReleaf recently gobbled up 164 acres of land in Ontario for what amounted to less than $21 million. Still, not noting how much was paid, and how that payment was made, is a bit odd.
More important is the fact that Aurora completely sidestepped any discussion about how much it’s going to cost to build a 1.2-million-square-foot facility in Medicine Hat, Alberta. That’s not a cost you simply overlook. Given the extensive work that’s gone into its other greenhouse facilities, it wouldn’t be in any way surprising if construction costs were $80 million to $100 million, in my view.
To be clear, I’m not in any way saying that Aurora purposefully withheld this information from investors. However, the company’s decision not to disclose what it paid for the land, or what this project will set the company back from a cost perspective, is a real headscratcher.
More dilution likely on the way
And yes, you guessed it, dilution seems very likely to follow.
Marijuana is still illegal in all but one country (Uruguay). This means banks usually want nothing to do with marijuana-based businesses for fear of being fined or facing criminal repercussions. This leaves pot stocks to turn to bought-deal offerings in Canada in order to raise capital. A bought-deal offering is nothing more than an offering of common stock, convertible debentures, warrants, and/or stock options to an investor or institution prior to the release of a prospectus. The good news is that these bought-deal offerings haven’t struggled in raising cash for cannabis growers. The downside is they’re diluting the heck out of existing shareholders by ballooning the outstanding share count.
As of the end of fiscal 2014, Aurora Cannabis had just 16.2 million shares outstanding. But according to its latest earnings report, it now has almost 490 million outstanding shares. That’s an increase of more than 2,900% in less than four years.
Worse yet, this figure isn’t done moving higher. There are still outstanding convertible debentures, stock options, and warrants that aren’t yet factored into the company’s outstanding share count. Furthermore, its acquisition of CanniMed Therapeutics was a cash-and-stock deal that was completed after its most recently reported quarter ended. That, too, is going to increase its outstanding share count.
Assuming Aurora Cannabis sticks with its theme of utilizing bought-deal offerings to pay for its projects, additional dilution should be expected. That could be a long-term downer for shareholders.
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