One of the more compelling statistics that highlights how much the Canadian cannabis industry has been impacted the recent closures of production facilities. For an industry that was once valued on funded capacity, this represents a significant a change in strategy and believe that our readers needed to aware of this trend.
For those who do not know what funded capacity means, it refers to the amount of cannabis that can be produced with the amount of cash on the balance sheet. This metric assumed that there would no issues during the licensing or construction process and we found humor in the companies and the bankers that were touting this metric.
2020 has been a challenging year for the global economy and the cannabis industry has been impacted as well. Capital markets appear considerably more reluctant to lend to Canadian cannabis producers and several industry leaders (as well as smaller operators) have shut down facilities to conserve cash.
Today, we have highlighted 3 leading Canadian cannabis producers that have recently closed production and manufacturing facilities as they work to improve margins and operate in a way that is profitable. We believe that these companies need to conserve cash and will keep an eye on how they execute from here.
Aurora Cannabis Closes Five Facilities
Although Aurora Cannabis Inc. (ACB.TO) (ACB) was previously considered to be a leader in the global cannabis industry, the last two years have been challenging for the Canadian cannabis producer.
Last week, Aurora Cannabis reported to have initiated a plan to close operations at five facilities over the next two quarters. The company is executing on a strategy that is focused on production and manufacturing at its large scale and highly efficient facilities. Aurora Cannabis expects to leave one of the smaller facilities operational for the manufacturing of higher margin products and we will monitor how the management team is able to execute on this strategy.
As part of the transition, Aurora Cannabis plans to immediately ramp up cannabis production at its European-based Nordic facility and believes that it can adequately service the European market with EU-GMP certified product. We are bullish on the European cannabis market due to the legalization trends and the size of the market (has a population of 445+ million).
Aurora Cannabis’ plan to close these production and manufacturing facilities will significantly lower its expenses. The company’s balance sheet is not as strong as it once was and the capital markets do not seem inclined to lend it equity financing. This strategy will help conserve resources as the cannabis producer attempts to generate positive free cash flow and we will monitor how the story evolves from here.
Canopy Growth Closes 3+ Million Square Feet of Production Space
Canopy Growth Corporation (WEED.TO) (CGC) was one of the first Canadian cannabis producers to close facilities and is an opportunity that we continue to closely follow. In March, the Canadian cannabis producer announced plans to close its facilities in Aldergrove and in Delta, British Columbia. Concurrent with the announcement, Canopy Growth reported that it no longer plans to bring a third greenhouse facility online in Ontario.
The decision by Canopy Growth was part of its effort to align supply and demand while also improving production efficiencies. The greenhouses in British Columbia account for approximately 3 million square feet of licensed production space and this decision represents a major development for the entire sector.
One month after announcing these closures, Canopy Growth announced a series of global operational changes designed to further optimize production and improve efficiencies in its global operations. From Latin America to Africa, the company closed several facilities, and this is a trend to be aware of.
Over the long-term, Canopy Growth plans to bring on additional outdoor production capacity and this should have a positive affect on margins. The company has the strongest balance sheet in the cannabis sector and we will monitor how the management team is able to bring the business down a path to profitability.
Will HEXO Conduct a Reverse Split or be Delisted from the NYSE?
Last year, HEXO Corporation (HEXO.TO) (HEXO) announced plans to shut down several facilities that it operates in Ontario and this is an opportunity that has been unable to execute on previously announced initiatives.
Last year, the Canadian cannabis producer acquired Newstrike Brands for a massive premium and we greeted this transaction with concern. The Ontario facilities were once operated by Newstrike and the closing of the facilities did not come as a surprise.
The last few months have been very volatile for the Canadian cannabis producer and the shares are trading well below the $1 level on the New York Stock Exchange (NYSE). If HEXO does not conduct a reverse split (like Aurora Cannabis did), it will most likely be delisted from the exchange and this is an opportunity that we continue monitor from the sidelines.