Aurora shares sink on weak results and halting construction of cannabis plants – Global News

Aurora shares sink on weak results and halting construction of cannabis plants - Global News
Aurora halts construction of two cannabis facilities to conserve cash
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 at one production facility and pausing work at another to save more than $190 million in planned expenses.

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.

At full production, Aurora Sun was slated to have a capacity of about 260,000 kilograms of dried cannabis per year. The company currently operates another huge facility known as Aurora Sky, near Leduc. The firm’s current production capacity is stated as 150,000 kilograms per year combined between Sky and a number of smaller facilities.

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, as well as indefinitely defer completion of construction and commissioning at its Aurora Sun facility in Alberta to conserve $110 million.

Despite “headwinds” in the Canadian marketplace, Aurora states in the release, it believes the potential in the global sector is “immense … as global demand develops, or as Aurora’s market share in the global cannabis market increases, we will reactivate these projects.”

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

That building in the Box Springs Business Park, which has been under construction for 18 months, is “fully enclosed,” meaning interior work can proceed. The company’s stated plan is to licence and commission sections of the interior as they are completed.

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.

“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.

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

Aurora states that such debentures due in March 2020 have conversion prices above $13 per share. The stock was trading at about $5 this week prior to Thursday’s announcement, meaning debt holders are unlikely to takes shares in place of payment.

“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.”

Originally to be a 1.2 million square foot growing and processing facility, the company announced on a media tour last spring that it had grown to 1.6 million-square feet to benefit from scaling up production.

“Aurora Sun remains an important part of our future outlook for the production of high-quality cannabis,” Michelle Lefler, vice president of communications, said. “There has been no halt to construction at the facility. We are continuing to build with adjusted timelines that are more closely aligned with how cannabis markets develop.

“We expect to have at least six flower rooms completed and in operation in 2020, for a total of 238,000 square feet, which includes the mother room. As was done with Aurora Sky and is the case with all Sky-Class facilities, we will pursue a phased approach to bringing additional grow rooms online, and still intend to build 30 grow rooms at Sun.

That announcement came late Thursday as the company released a new strategy to investors to deal with lower revenue than expected and a need to save cash ahead of debt financing coming due next year.

“Additional operations at the facility will be activated as global demand develops, with a target date for full operations in 2021. Previously, we had intended to build at an accelerated speed. This is a more normalized pace for a project of this size and is aligned with how markets are growing.

In Medicine Hat, the decision means the company expects that of the planned 1.6-million-square-foot facility, only 238,000 square feet (described as six growing rooms) would be commissioned in 2020.

“We remain committed to investment in the Medicine Hat community as planned. At this time, we still intend to hire a final staff complement of around 800 people upon facility completion. We want to make sure that all local and government partners continue to work with us to support our commitments to significant investment in Alberta’s economy.”

There was no initial indication of how employment needs, stated to be 450 workers at full operation, might be affected by the news that was released after the stock market closed on Thursday.

The construction decisions 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 is putting the brakes on finishing the entire Aurora Sun complex in Medicine Hat and now says only one-sixth of the massive cannabis greenhouse will be operating next year.

Aurora missed expectations as its adjusted earnings before interest, depreciation and amortization (EBITDA) was negative $39.7 million for its first quarter of fiscal 2020. That compared with a loss of $67.6 million a year earlier and a loss of $11.7 million the fourth quarter ended in June.

That amount is close to the initial estimates to build the the highly automated greenhouse when it was headline-bursting news in April 2018 when it was announced at city council meeting.

Revenues were $75.3 million in the first quarter, up from $29.7 million for the same quarter last year, but down from the $94.6 million in the prior quarter.

Senior officials at the City of Medicine Hat, which sought out cannabis producers in an economic development program, did not return calls for comment late Thursday.

Analysts had expected adjusted EBITDA loss of $18.6 million and revenue of $93.31 million, according to financial markets data firm Refinitiv.

The company again this week touted its position as a low-cost producer with a global network ready to scale up and assume a large share of market demand.

While medical marijuana sales grew three per cent from the fourth quarter as the number of patients hit a record 91,000, consumer cannabis sales dropped 33 per cent on slowing demand from provinces as they work through high inventory levels.

“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.

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.

“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.

“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.

“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.”

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

Aurora Cannabis is also hitting the brakes on the construction of its Nordic 2 facility in Denmark. Battley said it will be more clear in the new year on when they might flip the switch to start construction again, once they see what the retail landscape looks like.

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.”

But other key performance indicators are in the green, Battley notes. The company’s gross margin on cannabis net revenue was steady at 58 per cent and the cost of production came down 25 per cent to 85 cents per gram, a milestone the company long predicted.

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.

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

“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.”

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.

“Until the retail infrastructure expands and until the demand increases, it’s very valuable for us to have that flexibility to be able to hit pause on some of our production capacity,” said Battley.

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.

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

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.

“We’re timing it correctly. To be able to hit that pause button and then switch it back on the minute the demand justifies it is a very, very valuable element of flexibility for us.”

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

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.

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

“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 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.

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.

Aurora is very much an agricultural business and hopes there will be an opportunity to discuss the decision with the province, said Battley.

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 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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