While the stock market is excited about the growth rates in global cannabis sales, the biggest concern has to be a market that becomes flooded in the next year. The announced production increase of Aurora Cannabis (ACB), a leading Canadian cannabis producer, has to make investors take a pause in the future realities of market supplies.
More Production Expansion
Aurora Cannabis already had an aggressive cannabis production ramp schedule. The company had existing plans to increase annual cannabis production in excess of 550,000 kg.
Source: Aurora Cannabis March 2019 presentation
The notable part of the ramp story is that Aurora Cannabis only produced 7,822 kg during the December quarter and expects to currently be on an annual 120,000 kg pace. The June quarter was forecast to have 25,000 kg available for sale to consumers. This 3 fold increase was already a concerning dynamic for the market.
Today, the Canadian cannabis company announced the intent to expand the cultivation capacity of the Aurora Sun facility by 33% to 1.62 million square feet. The larger facility will now have capacity in excess of 230,000 kg per annum in comparison to the previous estimate for 150,000 kg. Investors seem to be pleased with the news, bidding up the stock nearly 3% to $9.10.
Aurora Cannabis now places the funded capacity in excess of 625,000 kg of cannabis per annum. In addition, the amount only includes the Canadian and Denmark facilities that exclude the announced large plans in Latin America via ICC Labs. At the time of the acquisition, ICC Labs had plans for production capacity in excess of 450.000 kg per annum placing the total company plans at production in excess of 1 million kg per annum.
Illicit Market
The move for Aurora Cannabis to further expand capacity in Canada comes at a time where the illegal market continues to thrive and a competitor questioned the value of investing in the country.
According to High Times, the illicit market remains strong in areas like California due to high sales taxes and operating costs related to legal requirements. According to data presented, consumers are able to get an ounce of weed for $218 on the street versus $299 in a dispensary, or the equivalent of a 27% discount.
Other data points have suggested similar issues in Canada with the opening of the adult-use market last October. The lack of initial supply from leading cannabis companies like Aurora Cannabis has made the early analysis of the Canadian market too early to analyze, but a lot of research suggest the excise tax initiated in Canada has caused a similar outcome to be likely.
In addition to this added risk of the illicit market still functioning, Tilray (TLRY) CEO Brendan Kennedy said on the Q4 earnings call recently that investments in Canada were no longer worthwhile due to expected oversupply conditions in the next 18 months. His view questions why Aurora Cannabis continues going forward with not only the existing huge ramp in production, but also the desire to add another 15% to their production plans.
Takeaway
The key investor takeaway is that Aurora Cannabis appears headed down a tough road of oversupplying the Canadian and potentially global markets due to aggressive expansion plans. Investors are likely to become turned off on never ending expansion plans without any actual prove of concept that won’t occur until the next couple of quarters as production finally reaches minimal amounts while issues clearly still exist with illicit markets under cutting pricing.
The stock is still trading higher on production expansion news so investors should carefully watch for the end of this trend.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no position in ACB.
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