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Aurora Cannabis Slashing Weed Capacity in Profitability Push

Aurora is slashing its production capacity as it builds a runway toward positive Ebitda a year from now.
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Aurora Cannabis  (ACB) - Get Aurora Cannabis Inc. Report needs to cut costs after going on a spending spree, and the company is willing to seriously reduce capacity to do so. 

Two weeks after announcing the close of its nearly $40 million acquisition of Thrive Cannabis, the company said that it would close its Aurora Sky facility.

Thanks to a tough macro environment for recreational cannabis in Canada, the cannabis producer won't need all the capacity it has. 

"Simply put, our business is bigger than what we need, and we must position ourselves to better secure our path to profitability and ultimately be successful in this industry in the long term,” Chief Executive Miguel Martin said in a video message to employees.

The company says the sale is part of a plan to save Aurora between C$150 million and C$170 million (US$118 million to US$133 million) in annualized costs by the first half of next year. 

Aurora says the closure is part of its plan to transform its business. For the third quarter ended March 31 the company reported a loss of C$1 billion (US$780 million). 

Still, it's surprising to some that Aurora is putting its flagship grow facility in Edmonton, Alberta, on the chopping block.

Aurora's Capacity Problem

The Sky facility was part of a business that had a total production capacity of 150,000 kilograms annually, Aurora said in 2020. 

The company sold just 9,722 kilograms of cannabis in the third quarter. 

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"This decision is in keeping with our strategy in the Canadian adult [recreational] market to focus on higher-margin premium categories and to move away from purposefully producing for the low- to no-margin categories," Chief Financial Officer Glen Ibbott said. 

The company also recently confirmed that it was closing its 200-acre outdoor cannabis farm in Westwold, British Columbia, which Aurora once touted as one of the largest in the world. 

Aurora told MJBizDaily that it "no longer had a commercial need for the Valley site."

Medical-Cannabis Margins

The margins for Aurora's global medical cannabis business are above 60%.

International medical revenue in the third quarter rose 55% year over year with the company now operating in seven European countries including Germany, the U.K., and France. 

In the third quarter medical represented nearly 80% of Aurora's revenue and nearly 90% of its gross profit.

The company still has $480 million of cash and no-term debt, Ibbott said.  

Aurora said it expected to post a positive adjusted Ebitda run rate by the end of the first half of fiscal 2023.

Aurora shares dropped more than 40% on May 27 after the company said that it was raising the size of a financing to $150 million from $125 million. 

The loan is being financed by a group led by Canaccord Genuity and BMO Capital Markets. Aurora will use the funds for general purposes.