Marijuana Stocks: Aurora Cannabis Preps For This Next Phase Of Legalization

Canadian pot producer Aurora Cannabis (ACB) on Wednesday said it would be able to meet demand for cannabis derivative products like vaping pens and edibles when Canada allows them this fall, even as the company’s facilities strain to pump out more cannabis oil. Aurora Cannabis stock rallied Wednesday, while other marijuana stocks advanced.

“It’s all in place,” Chief Corporate Officer Cam Battley said of the company’s resources during its fiscal Q3 earnings conference call. Aurora reported fiscal third-quarter earnings Tuesday.

He added that Aurora wouldn’t need to wait for the opening of its Aurora Polaris facility — dedicated to churning out those products like vapes and cannabis-infused gummies, mints and chocolates — to provide adequate supply.

Aurora expects construction on Polaris to wrap up late this year. Canada legalized products like dry buds and oil for recreational use in October 2018. But it did not legalize edibles, beverages and vaping devices at that time. Those products are set to be legal by Oct. 17.

Maximum Capacity

But with the next phase of legal products coming to Canada in the months ahead, the company said it hadn’t had time to scale up derivatives production, something it said would change as it adds new production capacity. The company’s massive Aurora Sky facility, it said, would also help speed extraction. So would its partnership with extraction company Radient Technologies, Battley said in an interview after the call.

Management on Wednesday said the company’s oil extraction facilities had been operating at “maximum capacity” for the past two quarters. And on Tuesday, Aurora, in its earnings release, said its average selling price per gram fell, partly due to “extraction capacity constraints.”

Those constraints add to others reported by executives in Canada’s cannabis industry. Since recreational cannabis began selling legally in October of last year, the industry has struggled with shortages, approval delays in production centers and equipment, packaging costs and regulations. Supply could be stretched thinner as the new products become available in Canada and the nation’s producers try to barrel into markets abroad in a race to meet demand.

On Tuesday, rival Tilray (TLRY) said it could take another 18-24 months before the nation’s supply of weed evened out with demand.

Battley, on Wednesday, said that anyone who said they knew when supply would align with demand was “probably pulling your leg. We’ve seen a lot of predictions not be correct.”

Aurora also said that Aurora Sky helped bring down production costs. Battley added that the company was “still tracking for positive EBITDA” in the current quarter, referring to earnings before interest, taxes, depreciation and amortization. Meanwhile, the number of medical patients the company has served is up 7% to 8% so far this quarter, he said, despite concerns that recreational legalization would siphon away medical customers.

‘Not Rushing’ To Beverages

But after big beverage companies circled the cannabis industry for possible deals last year, Aurora said it’s “not rushing” to push out cannabis beverages. Rather, Aurora said, its immediate focus would be products like vapes, which have become more popular because they tend to be easy to use and more discreet.

Beverages, the company noted, also remain a small part of the cannabis market. Management said they wanted to take the time to get drinks right.

CEO Terry Booth, during Wednesday’s call, said consuming a cannabis beverage was not like consuming alcohol.

“The more you have, the less you want in a very short amount of time once it starts taking its effect,” he said.

“It’s just that, perhaps, it’s going to take a little bit of time and some marketing and some experience to change consumer tastes,” Battley said of beverages’ prospects.

In 2017, Constellation Brands (STZ) agreed to take a stake in Aurora’s rival producer, Canopy Growth (CGC), in hopes of developing cannabis beverages. Its $4 billion investment in Canopy last year superseded the 2017 investment. Constellation, in announcing the $4 billion investment, said it would support all of Canopy’s products.

Tilray has a cannabis-beverage research partnership with Anheuser-Busch InBev (BUD). Molson Coors‘ (TAP) Canadian business has a partnership with the cannabis company Hexo (HEXO).

Marlboro maker Altria (MO) has also taken a large stake in Cronos Group (CRON).

Nelson Peltz Also Says Don’t Rush

As Aurora’s rivals seek money and collaboration from bigger companies, Nelson Peltz, the activist investor who Aurora took aboard as a strategic advisor, has recommended patience.

“What Nelson has advised us to do, very wisely, is to take our time, measure twice and cut once,” Battley said during the interview. “And don’t rush, because the value of our company is increasing every quarter. And also: Do not go for a change-of-control scenario where we become owned by a single company in single mature industry.”

Peltz’s is the nonexexutive chairman of Wendy’s (WEN). He is also a director of Procter & Gamble (PG) and used to be one at Mondelez (MDLZ), which owns Oreo, and H.J. Heinz.

Peltz is the CEO of the hedge fund Trian Fund Management. Trian in the past has pressured General Electric (GE) to shake up leadership and slash costs.

Battley said that Peltz hadn’t recommended cuts in costs, staff or Aurora’s other investments.

Battley declined to comment on the cross-border acquisition Canopy Growth announced in April, under which it gets the rights to buy U.S. cannabis company Acreage Holdings upon federal marijuana legalization in the U.S.. But he said the deal potentially opened up another path into the U.S.

Aurora Cannabis Stock, Other Marijuana Stocks

Aurora Cannabis stock jumped 3.6% to 8.68 in the stock market today. The stock has a mediocre Composite Rating of 67, according to MarketSmith. The EPS Rating of Aurora Cannabis stock, a measure of accelerating profitability, is worse, at 26. Aurora Cannabis stock was trying to reclaim its 50-day line.

Among other marijuana stocks, Tilray added 0.3%. Canopy Growth inched up 0.2%, finding support at its 50-day line. Aphria (APHA) climbed 1%. Cronos Group (CRON) fell 0.6%.

U.S. Prospects

As more Canadian cannabis companies try to find pathways into the U.S., Battley said that Aurora would eventually press toward its southern neighbor. But he said the company would do so in a way that complied with federal law.

Booth said that Nevada — where dispensaries can stay open around the clock in Las Vegas — appeared to be the best state for Canadian companies to enter. But he said that unless federal legalization removed state-to-state legal barriers, the U.S. would be a difficult place to do business.

He said he expected cannabis to be legalized in the U.S. in a handful of years to come. “It’s how it’s legalized, is the question,” Booth said.

Source: Investor


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