As we barrel toward the end of the year, one thing is very clear: It was a game-changing year for the marijuana industry.
In the U.S., two new states (Utah and Missouri) legalized medical cannabis, bringing the number of states to have legalized in some capacity to 32, while Vermont and Michigan became the respective ninth and 10th states to green-light recreational pot. We also witnessed the U.S. Food and Drug Administration approve its very first cannabis-derived drug in June.
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To our north, Canada ended nine decades of recreational weed prohibition. By passing the Cannabis Act, Canada opened the door to billions of dollars in added annual sales when adult-use marijuana became officially legal on Oct. 17.
A look back at Aurora Cannabis' major themes this year
It's also been quite the year for marijuana stocks, which have been exceptionally volatile. Perhaps no pot stock has proven more polarizing than Aurora Cannabis (NYSE: ACB). As we prepare to turn the page on 2018, the following five things truly stand out as having defined Aurora's wild year.
1. Acquisitions! Acquisitions! Acquisitions!
The idea of a kid in a candy store was very apropos for Aurora Cannabis this year, as it was an active shopper. As the year winds down, Aurora will have announced or completed four notable acquisitions. These are:
- The $852 million buyout of Saskatchewan-based CanniMed Therapeutics, which closed in May. Aside from adding capacity, CanniMed had cannabis oil processing potential and alternative products in development at the time the deal was announced, which offered high-margin future returns for Aurora.
- The $2.5 billion purchase of Ontario-based MedReleaf, completed in July, which is the largest acquisition in history for the pot industry. MedReleaf brought 35,000 kilograms in combined peak annual production from its Markham and Bradford facilities, as well as 105,000 kilograms from the Exeter facility, which is being retrofitted from vegetable growing to cannabis production.
- The $221 million acquisition of South America's ICC Labs, completed last month. ICC has 92,000 square feet of existing production capacity, but was also working on approximately 1.1 million square feet of greenhouse expansion at the time of the deal.
- The newly announced purchase of its Mexican medical cannabis partner, Farmacias Magistrales. Farmacias is the only company in Mexico able to import, manufacture, store, and distribute medical cannabis products containing greater than 1% tetrahydrocannabinol (THC) in Mexico.
These acquisitions have likely propelled Aurora to the top spot in terms of peak annual production.
2. A big-time international partnership
It was also a big year on the partnership front. In early January, Aurora announced a joint venture with Alfred Pedersen & Son in Denmark that'll see about 1 million square feet of vegetable-growing greenhouses retrofitted to cannabis production. When complete, Aurora Nordic, as the joint venture is known, should be capable of 120,000 kilograms of peak annual output.
Given that domestic weed demand is expected to be roughly 1 million kilograms a year, according to Health Canada, growers are going to be reliant on foreign markets where medical pot is legal to gobble up excess supply. By partnering with Alfred Pedersen & Son, Aurora has created a supply stronghold in the Scandinavian region of Europe. Currently, Aurora has a presence in 22 countries on five continents.
3. A massive organic project
It's been a year for organic capacity expansion announcements, too. On top of working to complete the Aurora Sky project, which spans roughly 800,000 square feet and will yield in the neighborhood of 100,000 kilograms per year at its peak, the company also announced an aggressive project in Medicine Hat, Alberta, known as Aurora Sun.
On April 16, Aurora Cannabis announced its intention to construct a 1.2-million-square-foot facility, complete with 850,000 square feet of flowering space, that'll be capable of 150,000 kilograms (or more) per year when running on all cylinders. Aurora, which also owns Larssen, a company that specializes in constructing greenhouses, is leaning heavily on advanced technology within its greenhouses to increase yield. This is why the company's annual output on a square-foot basis tends to be considerably higher than most of its peers.
And, as icing on the cake, the facility could be expanded an additional 300,000 square feet in the future, should Aurora choose to do so.
4. The deal that almost was
Aurora's year will also be characterized by the deal that almost was with Coca-Cola (NYSE: KO). In mid-September, multiple news sources reported that beverage giant Coca-Cola and Aurora Cannabis were in discussions about either a partnership or perhaps Coca-Cola taking an equity stake in Aurora.
Among the big cannabis themes this year is the push by brand-name companies to either partner with marijuana stocks to develop alternative products, such as cannabis-infused beverages, or to buy into the legalized weed movement, hook, line, and sinker. That's what Constellation Brands and Altria have done with their respective equity investments in Canopy Growth and Cronos Group.
Unfortunately for Aurora's shareholders, a deal never materialized, with Coca-Cola choosing to instead observe the cannabis industry from the sidelines. Aurora has yet to find a brand-name beverage, tobacco, or pharmaceutical partner, but that could all change in 2019.
5. Ongoing share-based dilution
Finally, it was a year for continued share-based dilution. In the early going for the cannabis industry, growth comes at a cost -- and that cost is being paid for by investors.
Aurora Cannabis, like most pot stocks, isn't generating anywhere near enough cash flow to fund its aggressive capacity expansion projects or acquisitions. As a result, it's been funding its purchases by issuing new shares of its common stock. It's also turned to multiple bought-deal offerings to raise cash. A bought-deal offering involves the sale of common stock, convertible debentures, stock options, and/or warrants in order to raise capital. Ultimately, these acts have ballooned the company's outstanding shares count to nearly 962 million shares. By next year, Aurora will likely have well in excess of 1 billion shares outstanding.
The reason this is meaningful is twofold. First, it weighs down the value of existing shares, even if the company receives a lift in its market cap from Wall Street and investors. And secondly, it makes it incrementally harder for Aurora to generate a meaningful per-share profit if there are a growing number of shares outstanding. Fundamentally focused investors have been, and will likely continue to be, terrified of Aurora's fundamentals and near-term metrics.
This explains why Aurora, despite its advancements, has seen its share price decline by more than 20% in 2018.
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