All You Need to Know about Aphria’s Capacity Expansion

On November 4, Aphria (APHA) announced the receipt of a cultivation license from Health Canada for its Aphria Diamond cannabis greenhouse facility. This development has increased the company’s cannabis cultivation space by 1.3 million square feet to more than 2.4 million square feet. The license has also increased Aphria’s annual production capacity by 140,000 kg to around 255,000 kg.

The 100-acre Aphria Diamond facility has more than doubled the company’s cannabis production capacity in Canada. As reported by BNN Bloomberg, Canaccord Genuity expects a fully operational Aphria Diamond facility to increase Aphria’s recreational cannabis share from 10.9% in 2019 to 12.0% in 2020.

However, investors don’t seem impressed with this news considering concerns about oversupply in the cannabis sector. Yesterday, Aphria’s share price closed at 6.73 Canadian dollars on the TSE (Toronto Stock Exchange), 1.17% lower than the previous closing price. The company’s shares on the NYSE closed at $5.13, 1.16% lower than the previous day’s close.

How could the Aphria Diamond facility benefit the company?

In a phone interview with BNN Bloomberg, Aphria chairman and interim CEO Irwin Simon highlighted the company’s focus on making the Aphria Diamond facility fully operational in the next few weeks. The company plans to utilize this facility for leveraging opportunity in cannabis-infused vapes and edibles

Aphria Diamond facility involves large-scale automation of tasks to reduce costs. In the BMM Bloomberg interview, Simon also noted that Aphria Diamond might be one of the lowest-cost production facilities in the market. The company expects this facility to prove accretive to its gross margins in the coming years.

In its first quarter ended August 31, 2019, Aphria highlighted its focus on becoming a producer of high-quality products at a low cost. However, in the first quarter, Aphria’s all-in cost per gram was 2.52 Canadian dollars, a year-over-year increase of 7.23%. The company’s cash cost to produce dried cannabis was 1.43 Canadian dollars per gram, a year-over-year increase of 5.92%.

In the fourth quarter ended June 30, 2019, Aurora Cannabis (ACB) reported a cash cost to produce dried cannabis of 1.14 Canadian dollars per gram. This was a sequential decline of 20% and significantly lower than Aphria’s first-quarter costs.

Aphria expects these costs to continue to rise until it completes planting around 600,000 plants in the Aphria Diamond facility. According to its first-quarter earnings, Aphria aims to reduce its cash cost below 1.0 Canadian dollars per gram. In addition to automation at Aphria Diamond, the company also expects to benefit from economies of scale.

Aphria’s average selling price in the first quarter

During his interview with BNN Bloomberg, Simon downplayed the problem of oversupply in the cannabis industry. In the first quarter of fiscal 2020, Aphria reported an average selling price of 6.02 Canadian dollars for its recreational marijuana. This price excludes excise tax and indicates a sequential rise of 5.06%.

The company also reported an average retail selling price of $7.56 per gram for medical cannabis, excluding excise tax. This is a sequential decline of 1.3%.

Will oversupply be a problem?

In our view, investors need to consider the risk of oversupply, which can lead to increased pricing pressures in the industry. The slower-than-anticipated retail rollout in Canada can further exacerbate the pricing problem.

In its pre-earnings announcement, Hexo Corp. (HEXO) already highlighted the signs of pricing pressure in the industry. In the fourth quarter ended July 31, 2019, the company reported an average gross revenue of 4.74 Canadian dollars per gram and gram equivalents for recreational marijuana. This is a sequential decline of 10.4%.

The company also reported an average net revenue of 3.51 Canadian dollars per gram and gram equivalents for recreational marijuana. This is sequentially lower by 18.37%. Hexo Corp. reported gross revenue of 8.34 Canadian dollars per gram equivalent of medical marijuana. This was lower than the previous quarter by 8.45%.

Finally, Hexo reported net revenues of 6.99 Canadian dollars per gram equivalent of medical marijuana. This is a sequential decline of 7.05%.

Aurora Cannabis also seems to have faced some pricing pressure in the fourth quarter. The company reported an average net selling price of 8.51 Canadian dollars per gram of medical marijuana. The price was similar to that in the previous quarter.

Aurora Cannabis’s average net selling price for recreational marijuana was $5.14 per gram in the fourth quarter. This was a sequential decline of 6%. Finally, the company’s average net selling price for wholesale bulk cannabis was $3.61 per gram. This was a sequential rise of 3%.

Aphria’s other cultivation facilities

According to Aphria’s first-quarter call, the 87-acre Aphria One facility is fully operational with 600,000 marijuana plants. Located in Leamington, Ontario, Aphria One has a cultivation space of 1.1 million square feet of and an annual production capacity of 110,000 kg. This facility is GMP (Good Manufacturing Practices) certified according to USFDA standards.

Aphria’s subsidiary, Broken Coast, operates in Duncan, British Columbia. Broken Coast has an annual production capacity of 5,000 kg of premium cannabis.

Aside from Canada, Aphria also has a market presence in Europe, Africa, South America, and Oceania. The company has focused on expanding its medical cannabis production capacity in these markets.

In September 2018, Aphria partnered with Schroll Medical for cultivation and global distribution organic, EU GMP-certified medical cannabis. Danish Medicines Agency also granted a cultivation license to Schroll Medical, which has already commenced the cultivation of medical cannabis on its property.

In April 2019, the company secured a cultivation license for four of the nine lots from the German Federal Institute for Drugs and Medical Devices. According to Aphria, the company is currently working on the construction of R&D indoor growing facility Neumünster.

Plus, the company is constructing a state-of-the-art GMP certified cannabis vault in Bad Bramstedt. Aphria plans to use the latter to import flowers and oil from Canada and Denmark into Germany. The company’s subsidiary, FL-GROUP, has one of the only seven licenses in Italy required to import cannabis and cannabinoids.

In May 2018, Aphria formed a joint venture, CannInvest Africa Ltd., with Verve Group of Companies. CannInvest Africa has a 60% stake in Verve, which is a licensed producer of medical marijuana extracts.