Why Does Aurora Cannabis Keep Screwing its Shareholders?

On the surface, Aurora Cannabis looks like a surefire success story. Market share is incredibly important in the early going, and no grower is expected to generate as much weed annually as Aurora Cannabis.

Already producing at an annual run rate of 100,000 kilograms, Aurora claims that it'll eventually deliver in excess of 500,000 kilograms per year, although it may be closer to 700,000 kilograms annually following its recent acquisitions.

Being able to deliver so much marijuana annually means it'll likely be a beacon for long-term supply deals, and it could become an attractive partner for brand-name beverage, tobacco, and/or pharmaceutical companies.

Aurora should also, presumably, benefit from economies of scale. Growing costs on a per-gram basis tend to be high at the moment, but they're expected to decline over time as the company's infrastructure is put into place. Essentially, the more cannabis Aurora produces, the higher its margins could go as a result of falling production costs.

The company has also done a pretty good job of differentiating its product portfolio and revenue streams. For instance, Aurora has placed an emphasis on high margin cannabis oils with the launch of softgel capsules.

Also, its acquisition of Larssen, a consulting, engineering, and construction firm for greenhouses, internalizes some of its construction costs while providing an ancillary stream of revenue.

In many ways Aurora Cannabis has the makings of a cannabis giant... if not for its ongoing dilution.

When the year began, Aurora Cannabis was working on its flagship property, known as Aurora Sky. When complete, the 850,000-square-foot greenhouse was expected to be the most state of the art in the world, according to management, with around 100,000 kilograms of peak annual yield. When combined with existing assets (Aurora Mountain and Aurora Vie), the company looked to be on track for a little over 100,000 kilograms of peak annual production.

Then, Aurora Cannabis got hungry.

In addition to announcing a new organic project in Medicine Hat, Alberta, known as Aurora Sun, and partnering with Alfred Pedersen & Son in Denmark to retrofit vegetable-growing greenhouses for cannabis production, the company has made quite a few notable acquisitions.

In May, it finally closed on its $852 million purchase of Saskatchewan-based CanniMed Therapeutics. On top of added production capacity, CanniMed was working on a number of alternative weed products, including oils and softgel capsules. These alternative products generate significantly better margins than dried cannabis flower.

In July, Aurora Cannabis closed on a $2.5 billion acquisition of Ontario-based MedReleaf -- the largest buyout to date in the marijuana space. MedReleaf had about 35,000 kilograms in combined annual capacity from its Markham and Bradford facilities, but purchased 164 acres of land in 2018, complete with the Exeter facility. This facility is being retrofitted for 105,000 kilograms of annual peak cannabis yield. All told, MedReleaf adds 140,000 kilograms of potential output.

In November, Aurora Cannabis closed its ICC Labs acquisition in South America. ICC Labs has 92,000 square feet of active production capacity, with roughly 1.1 million under construction. Like MedReleaf, ICC Labs also comes with plenty of adjacent land for expansion, should Aurora choose.

On Monday, Dec. 10, Aurora announced that it was acquiring its Mexican medical cannabis partner, Farmacias Magistrales.

Why the purchase? Aside from the fact that Mexico has around 130 million potential customers, Farmacias holds the unique distinction of being the only company (for now) that's able to import, manufacture, store, and distribute medical cannabis that contains over 1% tetrahydrocannabinol (THC).

As the only company to possess this license, Farmacias opens the door for Aurora to provide Mexico's consumers with non-flower medical cannabis products containing THC, and do so without any competition.

Furthermore, by purchasing Farmacias, Aurora Cannabis will be able to recognize all of the margin benefits of selling these non-flower THC products in Mexico, rather than just garnering a percentage of sales as a partner. Since more than half of all marijuana sales from Canadian growers are eventually expected to occur beyond Canada's borders, consider this another attempt by Aurora to diversify its sales channels.

The press release notes that Farmacias will also be broadening its product line to include capsules, topical solutions, sprays, and other delivery options.

The price for the deal is still up to some interpretation, with the press release noting only that it'll be conducted in shares of Aurora Cannabis' stock "based on a valuation of the proforma distribution revenue projections of Farmacias."

Aurora's expansion could aptly be described as "growth at any cost" in an effort to secure its spot as the clear production leader. With Aurora's presence in 22 countries on five continents, its output and breadth should give the company a good chance at securing long-term supply deals and possible beverage/tobacco industry partnerships.

But this "growth at any cost" mantra is really costing shareholders in the near term, and potentially over the long run.

While not oblivious to the importance of cash for cannabis companies -- most financial institutions are still leery about lending to pot-based businesses -- Aurora has made a habit of financing its acquisitions with its common stock. The Farmacias deal is the fourth time this year Aurora will be issuing common stock to aid in the purchase of another company.

These share issuances -- along with bought-deal offerings that see the company sell common stock, convertible debentures, stock options, and/or warrants -- are a negative for shareholders for two reasons. First, it weighs down the value of existing shares, even if added value is being assigned by Wall Street for the acquisition in question.

Second, and most importantly, a higher number of outstanding shares makes it that much harder for Aurora to generate meaningful earnings per share. With Canada having legalized recreational weed, Wall Street and investors are going to be looking for tangible top- and bottom-line results.

Following its ICC Labs acquisition, and now Farmacias, it's almost a certainty that the company's outstanding share count will surpass 1 billion. For context, it was just 16.2 million less than five years ago.

Aurora's management team may have all the right intentions, but it's absolutely destroying shareholder value with its buying spree.