Aurora's Margins Shrink as Pot Producer Fetches Lower Prices

(Bloomberg) -- Aurora Cannabis Inc. said its cost to produce cannabis jumped in the second quarter while prices fell, leading to a reduction in gross margins of 16 percentage points.

The Edmonton, Alberta-based company’s stock lost as much as 2.6 percent after hours in New York, before recovering to trade little changed. Aurora reported rising costs and a lower selling price per gram for its fiscal second quarter but reiterated that it expects to achieve sustained positive earnings before interest, taxes, depreciation and amortization beginning in the second quarter of calendar 2019.

Key Insights

  • Aurora’s cash cost of sales per gram produced, a key measure of profitability in the sector, was C$1.92, up 33 percent from the previous quarter. The company said this “temporary” increase was the result of costs related to the scale-up of its Aurora Sky growing facility and the metric will “trend significantly lower” in coming quarters
  • Average net selling price per gram of dried cannabis fell 26 percent to C$6.23 quarter-over-quarter, while the average net selling price of cannabis extracts fell 18 percent to C$10. Aurora said the drop in prices resulted from the introduction of excise taxes on all Canadian cannabis products, as well as lower prices for recreational pot versus medical pot. The company said it will prioritize medical sales, with their higher margins, in Canada and globally
  • Aurora captured approximately 20 percent of the Canadian market in the quarter, which included two and a half months of legal sales
  • The company reported a net loss of C$238 million, which it attributed to mark-to-market adjustments on its derivative investments. Revenue was C$54.2 million, up 363 percent year-over-year. Aurora said last month that it expected to report revenue of C$50 million to C$55 million

Management Commentary

  • Canada’s recreational pot market has been plagued by supply shortages, but Aurora Chief Executive Officer Terry Booth said he’s more worried about keeping up with international medical demand. “If I lose sleep over anything, I lose sleep over our ability to supply the global cannabis market,” Booth said on Aurora’s conference call. He said it will be at least five years before the industry can meet demand for high-quality pot exports
  • Aurora doesn’t foresee further declines in Canadian recreational pot prices in 2019 and expects more flexibility from the provinces on pricing, especially when it comes to premium products. “The high-quality cannabis pricing will go up, without a doubt,” Booth said. “High-quality products will drive this market and the provinces I believe will be paying up for that before too long”
  • France is likely to follow the U.K. in legalizing medical pot within 10 to 12 months, said Chief Corporate Officer Cam Battley, who was in Paris last week for the Cannabis Europa conference. “One of the things we’re doing in Europe is making a very clear argument that Europe should move forward in harmonization, country to country, so as not to disturb the common market,” Battley said

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