For a company always pushing the premium indoor cannabis growing concept, Aurora Cannabis (ACB) threw the market a curve ball with the receipt of two outdoor cultivation licenses. The market generally saw this move as bullish, but the reality is that the large Canadian LP has just questioned the business model of shooting for the lowest cost producer with massive greenhouse facilities.
A few days ago, Aurora Cannabis announced the company got approval for a 207-acre operation in British Columbia called Aurora Valley and a 21,000 square foot space at the existing Aurora Eau facility. The two areas provide the company ability to test outdoor growing concepts in both Western and Eastern Canada to build best practices for the future.
The company doesn’t mention cultivation capacity, but the going rate has been at least 1,000 kg per acre. Aurora Cannabis could easily produce 200,000 kg from these grow spaces in 2020. A big problem is that the market doesn’t need additional capacity coming online in 2020.
The move is a shift from a company that has 15 indoor growing facilities with plans to reach 625,000 kg in production by next year. Aurora Cannabis promised a plan to reduce costs per gram to less than C$1.
In FQ3 ended March, the Canadian LP got the cash cost to per gram down to C$1.42. One can easily foresee that the costs will reach the target as the company ramps production from 15,590 kgs in FQ3 to over 150,000 kgs per quarter by the end of 2020.
The worrying part of the business model is that Aurora Cannabis and all of the other major Canadian players wrongfully assumed that Canadian pot smokers would automatically shift to premium cannabis taxed by the government. Statistics Canada has illegal cannabis selling for half the price of legal versions at only C$5.93 a gram with nearly 60% of consumers trying illegal cannabis.
Whether this is the reason or not, a company like CannTrust (CTST) is promising the ability to grow outdoor cannabis at a cash cost of C$0.15 per gram. In addition, the company has greenhouse plans for only C$0.75 per gram. Of course, this company has credibility issues now, but the plans do question the business model of a high cost greenhouse in Edmonton developed by Aurora Cannabis.
Analyst Owen Bennett makes a clear case that the indoor greenhouse quality is needed for vapes and other derivative products, but one has to wonder why Aurora Cannabis didn’t flip the grow schedules to start with outdoor facilities to meet the recreational legalization last October. The logical move was to follow with the premium facilities needed to meet the Cannabis 2.0 products that won’t hit the market until mid-December at the earliest.
The ability for companies like Aurora Cannabis to quickly startup 200+ acre outdoor grow facilities that can produce 200,000 kg in annual production is a game changer in the industry.
The key investor takeaway is that Aurora Cannabis is in a precarious position of building the business on having low cost greenhouse growing facilities and suddenly the market is shifting outdoors where costs are far lower than greenhouses. The details are still limited, but the implications for the company reaching EBITDA positive in the June quarter are questioned and the longer term business model has several holes now.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: No position.