Aurora Cannabis and the $ 2.17 billion magic trick

While it has been a wild trip for the North American marijuana industry, cannabis may be one of the fastest growing industries this decade. A green wave on election night pushed the number of states legalized for medical marijuana to 36, 15 of which also allow the consumption and / or retail sale of weed for adult use. Meanwhile, Canada hit its two-year anniversary since the legalization of recreational marijuana in October.

The table is set for the maturation of the North American legal pot industry and for a handful of outstanding marijuana stocks to shine.

How Aurora became the retail investor’s marijuana treasure

In one run, Aurora Cannabis (NYSE: ACB) it was the most desirable of all North American weed stocks. As of mid-2019, he owned 15 grow plants which, if fully built, could have produced more than 650,000 pounds of cannabis annually on a combined basis. Such massive production was expected to make Aurora a logical reference point for supply agreements, as well as reducing production costs per gram well below the industry average.

Aurora Cannabis was also seen as a clear expected winner due to its international presence. Between agricultural crops abroad, research projects, partnerships and export agreements, the company was present in two dozen markets outside of Canada. The ability to export to international markets was seen as critical to protecting Aurora’s margins if the oversupply of dried flowers became rampant in Canada.

The company even got billionaire Nelson Peltz as its strategic advisor in March 2019. Peltz’s track record included numerous relationships with consumer goods and beverage companies, making him the logical choice to potentially broker an equity investment or partnership with a company. of drinks.

He simply couldn’t fail … until he did.

Everything went wrong for the most popular cookware

Rather than being the model for other marijuana stocks to follow, Aurora Cannabis was a certifiable mess. In retrospect, the company’s decision to accumulate capacity made no sense. Canadians were expected to consume only about 800,000 pounds of weed annually, and Aurora was well on its way to producing more than half that amount, nationwide, alone. This does not take into account the half-dozen other licensed Canadian producers who, at one time, would have had to tip the scales at more than 100,000 pounds of annual production.

To make matters worse, regulatory issues have hindered the sales potential of licensed manufacturers. Ontario, Canada’s most populous province, maintained an ineffective lottery system for dispensary licensing until January 1, 2020. As a result, only 24 outlets opened a year after sales began. recreational. For some context, Ontario could reasonably house 1,000 dispensaries in the neighborhood.

Aurora also had problems on the international front. Approval of export licenses has been slower than expected and most European countries where medical marijuana is legal are still changing their import / export regulations and clauses. Some of these overseas markets are also considering domestic production, which could hinder Aurora’s export potential.

Even Nelson Peltz has abandoned ship. After failing to broker a stock deal or brand partnership, Peltz stepped down from his role in late September to pursue other interests.

But perhaps Aurora’s biggest failure is the $ 2.17 billion it made disappear in 12 months.

Aurora Cannabis’s greatest magic trick

A year ago, Aurora Cannabis released its fiscal first quarter operating results for the year 2020. Putting its operational performance aside for now, I want to focus on a key figure in its Q1 2020 report: $ 5,606,799,000 Canadian. in total assets (US $ 4.26 billion).

This CA $ 5.61 billion represents all of the company’s current assets, such as cash, liens, cash, trade receivables, negotiable securities and inventory, as well as non-current assets such as real estate, plant and equipment, intangible assets, joint venture investments and good will. This is not a complete list of all current and non-current assets, but it does include many of the largest contributors to the company’s total assets of CA $ 5.61 billion.

This figure should be a number that the investment community can trust as one of the many pieces of the puzzle needed to value a publicly traded company. But this has not been the case in the last year.

After posting fiscal first quarter operating results for 2021 last week, we see that Aurora’s total assets now stand at CA $ 2,757,272,000 ($ 2.09 billion). Over the past 12 months, Aurora Cannabis has waved her magic wand and made $ 2.17 billion (aka the United States), or 51%, of her total assets disappear.

How is it possible that a company is so bad at evaluating its assets? The big problem was Aurora’s over a dozen grossly overrated acquisitions. In many cases, the company has recognized at least half the value of its acquisitions as goodwill. In a perfect world, the buying company eventually recovers the premium paid. But the cannabis industry has been far from perfect, and Aurora has paid too much for some of the companies she has acquired.

For example, Aurora Cannabis completed an all stock deal to buy licensed manufacturer MedReleaf in July 2018. The final cost of this deal was a whopping CA $ 2.64 billion, with approximately CA $ 2 billion classified as goodwill. . After finally selling the 1 million square foot Exeter greenhouse for peanuts (CA $ 8.6 million) and closing the Markham plant (7,000kg annual production) to cut costs, the 2, CA $ 64 billion offset Aurora’s 28,000kg annual weed production and a handful of brand name products. For some context here, companies capable of producing 50,000 pounds of production can be bought for less than CA $ 65 million today.

Aurora’s expansion plans, willy-nilly, also required the company to take significant impairment charges on both current and non-current assets. We have seen substantial inventory writedowns as supply problems have created bottlenecks in major Canadian provinces and we have also seen the company reduce the value of its properties, plant and equipment to account for permanently closed facilities.

The biggest fear I have for Aurora’s shareholders is that this company isn’t done waving its magic wand yet.