Aurora halts construction of two cannabis facilities to conserve cash – CBC.ca

Aurora halts construction of two cannabis facilities to conserve cash - CBC.ca
Aurora Cannabis shares sink on weak results; construction halted at 2 plants in southern Alberta, Denmark
Aurora Cannabis Inc. is halting construction of two production facilities to save over $190 million as part of a plan to strengthen its balance sheet.

The Edmonton-based cannabis producer says it will immediately cease construction of its Aurora Nordic 2 facility in Denmark to save about $80 million over the next year.

“It’s high-tech agriculture, it’s innovative, there’s no question. We’ve actually established at Aurora Sky, hands down the most technologically advanced agricultural facility of any kind in the world and so we’re very, very proud of what we’ve done,” he said.

The company will also indefinitely defer completion of construction and commissioning at its Aurora Sun facility in Medicine Hat, Alberta to conserve $110 million.

“That is something that we’ve seen across licensed producers and it seems to be associated with the fact that province’s loaded up on inventory and they have to work through that,” said Cam Battley, Aurora Cannabis’ chief corporate officer, on Friday.

Once completed, the Aurora Sun facility will be the size of 21 football fields and 50 per cent larger than its "Aurora Sky" operation at Edmonton International Airport.

“I think this is an opportunity to discuss this with the provincial government and I think it would be a friendly discussion but we certainly hope there will be an opportunity to revisit that decision because we absolutely are in the business of agriculture.”

The first planting in Medicine Hat was expected to take place in the first half of 2019, with completion intially slated for the second half of the year.

Once in operation, Aurora said the new facility would boost its total capacity to more than 430,000 kilograms per year.

The construction halts come as the company reported net income of $10.4 million for the quarter ending Sept. 30, compared with net income of $104.2 million for the same quarter last year.

Aurora Cannabis Inc.’s latest financial results show the company’s revenue has declined nearly $20 million compared to the previous quarter and in an effort to limit costs, it is hitting the pause button on a facility in southern Alberta.

It says net revenue was $75.3 million for its first quarter of fiscal 2020, up from $29.7 million for the same quarter last year, but down from the $94.6 million in the fourth quarter ended in June.

An employee at Edmonton's Aurora Sky facility checks on marijuana plants, in Friday July 26, 2019. Aurora and the UFC have announced the launch of a clinical research study on the use of CBD by MMA athletes. David Bloom / Postmedia

Aurora says it produced 41,436 kilograms in the quarter, up from 29,034 in the last quarter. It will consider restarting development at the two facilities as demand develops.

"With the work completed to date, both the Aurora Nordic 2 and Aurora Sun facilities are now fully enclosed," reads a company news release.  

"The Company expects to have at least six flower rooms completed and in operation at Aurora Sun in 2020, for a total of 238,000 square feet.

"As global demand develops, or as Aurora's market share in the global cannabis market increases, we will reactivate these projects."

The company, headquartered in Edmonton, released its financial results late Thursday, reporting net revenue of $75.6 million for the quarter ending Sept. 30, compared to $94.6 million in the previous quarter.

The company currently operates facilities in Mountain View County, Alta., and in Pointe-Claire on Montreal's West Island. It is also completing a facility in Lachute, Que.

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In what Battley describes as an “intelligent and rational move,” the company is “pressing pause” on the construction of its Aurora Sun facility in Medicine Hat.

Aurora Cannabis Inc. shares sank to a two-year low Friday after its revenues missed expectations and the pot producer announced it was halting construction of two production facilities to save over $190 million in planned expenses.

“That is telling the story of a long-term sustainable business model and that’s what everyone in the sector is striving for,” Battley said.

The Edmonton-based company’s shares fell to a low of $3.59 and were down 51 cents or 11.6 per cent at $3.87 in afternoon trading on the Toronto Stock Exchange.

The introduction of edibles and vapes into the market will also play a role in that decision. Those products will be available for shipping after Dec. 17.

Aurora announced after markets closed on Thursday that it will immediately cease construction of its Aurora Nordic 2 facility in Denmark to save about $80 million over the next year.

It is also indefinitely deferring completion of construction and commissioning at its 1.6-million square foot Aurora Sun facility in Medicine Hat, Alta. to conserve $110 million.

“We’re making sound decisions in reducing capex based on global demand,” founder and CEO Terry Booth said during a conference call.

Aurora Sun was supposed to be the size of 21 football fields and 50 per cent larger than its Aurora Sky operation at Edmonton International Airport. As of last month, the company said construction was nearing completion.

But a slow rollout of storefronts in Canadas newly legal recreational market, particularly in the province of Ontario, has weighed on the entire sector. On Thursday, Canopy Growth Corp. reported revenue that missed the lowest analyst estimate and booked a large restructuring charge.

The company said it is adjusting the construction timeline for both facilities to more closely align with its expectations for the timing of increasing Canadian and international demand.

Aurora took steps to shore up its balance sheet in the quarter, including suspending construction at two facilities and giving holders of its convertible debentures due in March the option to convert early.

“The past few months have been challenging for the broader cannabis industry between issues of governance, evolving consumer demand and provincial retail bottlenecks, there’s been no shortage of negative news,” added chief corporate officer Cameron Battley.

It cost Aurora 85 cents to produce a gram of pot in the quarter, and the company reported cannabis gross margins of 58 per cent. Both metrics are among the best in the industry.

“That said, I want to reiterate that our view of the opportunity in the Canadian and global cannabis industry is still extremely robust.

The market was concerned about where we would get the cash to settle that liability, Singer said. I think thats gone a long way to strengthen our balance sheet.

It’s important to remind ourselves that the Canadian consumer market is just over a year old. These issues will take a little time to resolve. But in the end, we’ll be a stronger business because of it.”

The construction halts come as the company reported net income of $10.4 million for the quarter ending Sept. 30, compared with net income of $104.2 million for the same quarter last year.

Aurora continues to negotiate with potential partners for the U.S. market and expects to make an announcement sometime in calendar 2020, he added.

At that time, chief financial officer Glen Ibbott pointed to the slow growth of cannabis retail stores, particularly in Ontario.

3h ago Aurora chairman sees profitability before peers, doesnt say when Kristine Owram, Bloomberg News

Its been more then a year since Canada legalized cannabis for recreational use, starting with flower, seeds, plants and oils. However, the footprint of legal pot stores has been slower to develop in some provinces than others.

Aurora says it produced 41,436 kilograms in the quarter, up from 29,034 in the last quarter. It will consider restarting development at the two facilities as demand develops.

Analyst John Chu of Desjardins Capital Markets slashed his target price for Aurora by more than half to $6.50 per share after cutting his sales and EBITDA forecasts following Aurora’s release of its first-quarter results.

“We still believe there remains tremendous growth in the sector and have maintained similar year-over-year sales growth rate estimates for our fiscal year 2021-2023 forecast periods, but operating off a lower base following the soft first quarter results,” he wrote in a report, adding that he’s maintaining his buy rating.

“Aurora is generating industry-leading gross margins, improving cost per gram and has award-winning strains that should continue to resonate with consumers.”

Despite some of the negative results, Battley said its cash cost to produce fell 25 per cent to 85 cents per gram, the average net selling price per gram was up seven per cent, kilograms produced climbed 43 per cent to 41,436 kilograms and its gross margin was stable at 58 per cent “which is head and shoulders above our peers.”

Based on these returns, Aurora says it would need to generate $130 million of revenue to become profitable, less than half the total that would be required by a comparable company earning lower margins.

The company said it is preparing to supply new products, referred to as Cannabis 2.0, that have recently become legal that it says will help to reduce the illegal market.

“I’m excited as hell about 2.0,” said Booth. “I know I’m supposed to be told be conservative, Terry, but I really am pumped about how Aurora has done its job and getting ready for 2.0.

“And all indicators from our retailers, from our provinces, from Health Canada and all the little hints that you hear says that Aurora is at the top of that pack as well. So we’re pretty pumped.”

This week, Alberta Municipal Affairs Minister Kaycee Madu said cannabis growers will no longer be classified as agricultural businesses and so won’t qualify for a tax exemption.

The change is to come into effect in the 2020 tax year, but does not apply to greenhouse operations or industrial hemp cultivation.

The company currently operates Aurora Sky at EIA in Leduc County and Aurora Mountain in Mountain View County, Alta., and Aurora Vie and Aurora Eau in Quebec.

It also operates Aurora Valley — an outdoor growing facility in Westwold, B.C. — as well as Aurora Ridge (formerly MedReleaf Markham), in Markham, Ont. and Aurora River (formerly MedReleaf Bradford), in Bradford, Ont.