Aurora Cannabis (TSX:ACB) Reality Check: Can This Valuation Be Reasonable?

Ever Get So High You See A Light Show In The Sky?

Technically speaking, an Aurora Boreales isn’t a mirage. Those electrons are really there, really bouncing off of the ionosphere at just the right angle to make one hell of a show.

But it isn’t exactly a solid, terrestrial object, either. It’s dynamic, always in flux and never quite settles down to find its shape. And who cares? An aurora is the confluence of a unique set of circumstances all at the right time to make an event that everyone stops what they’re doing to watch.

Prior to their ongoing bid for Cannimed, Chris wrote the other day about Aurora’s recent run on the news that they were buying Hempco. He noted that the shorts piled in on the run, and that sustained buying in Aurora may well squeeze those shorts into covering and launch Aurora further into the magnetosphere. Chris also reasons that the shorts may be showing up because nobody saw this Hempco thing coming, and that’s sort of weird:

Like, as an example, putting news out that you’re going to buy a competitor, that you haven’t formally approached, and with none of your actual cash, for stocks with a maybe temporarily inflated value.

Leaving the shorts out of it, there are various strategic reasons a company might do something like that. Franco Nevada, sitting at the very top of the gold royalty game with a pile of cash both then and now, once issued a press release expressing interest in buying smaller competitor International Royalties, only to watch International be snapped up by Royal Gold a few weeks later, at a premium, without putting up too much of a fight. We’ll never know, but I have to wonder if Franco hadn’t already decided that they didn’t really want IR, and would rather sell the position they had into a bump that Royal Gold made in their aggressive takeover, but I digress.

Here’s the goods:

Aurora is producing out of a 55000 square foot facility right now, and is telling anyone who will listen that they’re building out an 800,000 square foot facility.


That size a facility will put Aurora up there with the big boys in terms of facility size. It’s worth looking at how efficient those facilities are, and we’re in the midst of doing just that so stay tuned for more to come, but I note here that Aurora is set to make the biggest jump of all producing pubcos we track.

Big or not, this market believes the promise. Here’s a look at the enterprise value (basically, the market cap with the cash stripped out) of the major producers, divided by the size of their active facilities.

And here’s their enterprise value divided by their proposed total square feet, after their build out:

These numbers are telling us that the market is willing to pay for square feet that Aurora doesn’t yet have. That isn’t crazy in pot-boom terms. And one can imagine Aurora backers wanting to believe.

They’re Sure Growing A Lot… Right?

In the process of our ongoing effort to bring our readers better information on the sector, we’re putting together operations information that allow us to compare these companies to each other in various ways including cost per gram, how many grams they get relative to their facility size, etc. The Aurora part of the exercise gave me a headache. When Aurora calculates how much it costs them to grow a gram of dope, they back out the cost of product that they bought from other producers and re-sold. There’s nothing wrong with that, because they’re trying to calculate the growing costs for their facility… the trouble is: they never tell us exactly how much of the product they sell in any given quarter is bought and re-sold. Meanwhile, their production numbers are greater than their sales numbers. For example, they report having produced 1,009,585 grams in their most recent quarter, and selling 889,965. (I think it’s crazy how these companies get it down to the gram. Have they got a guy in there with the triple beam you stole from grade 8 science class?)

Meanwhile, they’ve reported spending $1,090,000 on “products purchased from other producers,” but never put a per-gram number on that re-sold product.

There could certainly be sales and marketing reasons that Aurora’s sales numbers are lower than their production numbers, and that an unknown portion of the product sold (or possibly product in inventory?) wasn’t grown at their facility, but I had to get my imagination working and get some help from Chris to come up with them.

For Aurora’s part, they didn’t tell us much about how much product was re-sold. Their position is that they publish production numbers in their MD&A, and if we’d like to know how their greenhouses are doing, we should look there.

It should be made clear that we’re not alleging any malfeasance by Aurora or anyone else. There’s no reason to believe that Aurora’s disclosures aren’t the gospel truth, and the market is sure believing it. Aurora is a juggernaut. They’re giving an eager investing public exactly what they want, and by virtue of that alone, they deserve their valuation. Potentially, they’re well aware that the show doesn’t last forever. At this valuation, Aurora is using their stock to buy companies with three hands, most notably through the all stock bid for Cannimed.

Stay tuned for more valuation and ops data on Aurora and other Canadian pubco producers, only from EG.

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5 Comments

  1. These proposed numbers are wrong. Did you even read Canopy Growth’s earnings report when writing this article?

    They said “We have 2.4 million sq. ft. either in use or under development”. This was before the announcement of a 12,000 kg facility in Newfoundland and before the announcement of a 400,000 sq. ft. facility in Denmark. Canopy will likely be pushing 3 million sq. ft. by early 2019.

    • Thanks for reading, Ahmed.
      We do indeed read the MD&As of all of the companies that we research, and very carefully.
      Our Canopy number does not include Canopy’s 1.3 million square foot joint venture in BC. It was announced before the numbers were compiled, and we haven’t yet decided how to treat proposed JV square footage in our calculation. The deal is complicated, with Canopy leasing the facility from their JV partner, retaining an option to acquire it. I expect that as it settles we’ll get a clearer picture and be able to include it in our proposed square footage number, and then in the active once it’s licensed and producing.

  2. You need to include Hydropothecary in your comparison list as it is in same league as the others in terms of existing and anticipated production space and has one of the lowest cost of production.

    • Thanks for reading, Daniel.
      Poth’s recall and subsequent refusal to disclose the volume of the recall made them tough to calculate, so I excluded them at first. We’ve since done some more work on Poth, and I expect that we’ll have metrics on them as well very soon.

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