Whether you realize it or not, the marijuana industry could very well be this generation's once-in-a-lifetime investment opportunity.
Although many of the biggest brand-name companies have already appreciated by quadruple-digit percentages, the opportunity that legal cannabis presents is undeniable. Having produced less than $10 billion in global sales in 2017, this is an industry that analyst Christopher Carey at Bank of America could see hitting $166 billion in peak worldwide sales someday, as well as disrupting industries capable of $2.6 trillion in aggregate annual sales.
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Aurora Cannabis has an irritating problem with its biggest grow farms
Chief among these brand-name pot stocks is Aurora Cannabis (NYSE: ACB). Aurora, which is easily the most popular and polarizing pot stock, is expected to lead all growers in terms of peak production across its 14 growing facilities. According to the company, it's on track for more than 625,000 kilos of peak annual output by the midpoint of 2020, though yours truly foresees well over 700,000 kilos, inclusive of expansion opportunities derived from its ICC Labs acquisition in South America, which brings a combination of cannabis and hemp production to the table.
Aurora Cannabis also has some of the largest licensed production facilities in existence. With the exception of Canopy Growth's 1.7 million-square-foot Delta grow facility in British Columbia, the 1.62 million-square-foot Aurora Sun grow farm in Medicine Hat, Alberta, is unrivaled in size. Then again, the more than 230,000 kilos that the company expects annually from Aurora Sun -- a healthy 142 grams per square foot, which is over 40% higher than the industry average -- looks to be highest output from any single facility in the industry.
Beyond just Aurora Sun, the most popular pot stock also has MedReleaf's 1 million-square-foot Exeter facility in its portfolio, which is capable of at least 105,000 kilos of cannabis production once it's been retrofit, and the Aurora Nordic 2 grow farm, which is a joint venture with Alfred Pedersen & Son that'll work to retrofit 1 million square feet of vegetable-growing greenhouse space to produce 120,000 kilos of marijuana annually when operating at full capacity.
Together, Aurora Sun, Exeter, and Aurora Nordic 2, span 3.62 million square feet, and are expected to yield at least 455,000 kilos of peak production (which is more than every other Canadian producer, except Canopy Growth). And yet, these three facilities all have one thing in common: They're all still awaiting a cultivation license from Health Canada.
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Health Canada is holding back Aurora Cannabis (and its peers)
Interestingly enough, this isn't just an Aurora Cannabis problem. Aphria, which has three grow farms, has been waiting for more than a year to receive an approval for its cultivation license at Aurora Diamond, a joint venture that'll produce more than half of its 255,000 kilos of peak output each year.
The issue at the heart of Aurora's (and the entire industry's) cultivation licensing woes stems from a backlog of cultivation, processing, and sale applications with Health Canada. In January, the regulatory agency tasked with overseeing the legal marijuana industry in Canada had close to 840 applications in backlog, many of which are for cannabis cultivation. These applications often take months to years to sort through, with Marijuana Business Daily noting in May 2018 that the average length of time between submitting a sales application to getting approval was 341 days, or more than 11 months.
Perhaps, then, it's no surprise that Health Canada announced a change in policy last week. Rather than allowing marijuana growers to submit their applications well in advance of beginning construction on a greenhouse project, Health Canada is requiring that all growers complete their grow facilities and have them ready for inspection prior to submitting cultivation license applications. The regulatory agency points out that more than 70% of the approved cultivation license applications over the past three years didn't have a facility that met Health Canada's standards (in some cases because it wasn't even built).
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For a cash-rich company like Aurora Cannabis, this change couldn't be any better. It'll remove a number of the smaller players that don't have the capital to complete their grow farms prior to submitting a cultivation application, while at the same time moving itself toward the front of the list since Aurora Sun construction is well underway, and the other two projects are simply retrofits.
Then again, maybe we shouldn't feel all that sorry for Aurora Cannabis and the licensing hold-ups it's contending with at its largest grow farms. That's because the company was already producing more than 150,000 kilos per year at an annual run rate as of the end of March, which is head and shoulders above its competition. Regardless of whether Health Canada changed its licensing tactics or not, Aurora Cannabis offered clear competitive advantages. With these now-known changes going into effect, Aurora is truly in the driver's seat when it comes to marijuana production.
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