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Aurora Cannabis (ACB): Investors Seem to Be Missing the Latin American Opportunity

support@smarteranalyst.com (Ben Mahaney)

By Gary Bourgeault

Much of the focus on Aurora Cannabis (ACB) is its world class facilities in Canada, its market-leading international presence, and its focus on higher-margin medical cannabis.

In regard to the international reach of the company, which now has climbed to 24 countries, the market has largely looked at the potential it has in Europe, somewhat ignoring or in some cases, even unaware of the potential the Latin American market has for the company over the long term, which represents a gigantic 650 million people.

To that end Aurora acquired Uruguay-based ICC Labs as a foothold into the Latin American market, making the announcement in September 2018, which initially gave the company a boost, but since then hasn't attracted much attention. Even in its recent earnings report the company didn't mention it.

The primary reason I think the market has ignored it is because the European market will have more of an impact on the company in the near term. It's also why I believe Aurora Cannabis management hasn't been talking about it much, which has resulted in little media coverage.

Latin American cannabis

Aurora paid C$290 million for ICC Labs, and in my view it was well worth it; although I believe the Latin American market will take more time to develop than some of its European counterparts, even though the continent is more liberal in its outlook concerning cannabis than other regions of the world.

Part of that comes from the need to build up various aspects of infrastructure associated with the industry, as well as boost the amount of production capacity to meet demand in the market, along with competing in other markets.

In 2018 the Latin American market was valued at $125 million, and is projected to grow to $12.7 billion by 2028. I think it could be far larger than that.

Medical cannabis has been considered to be the largest segment of that market, but the rapid increase in production capacity in Columbia will probably change the product mix going forward, as it boosts low-cost  recreational pot exports over time.

ICC Labs

Uruguay was the first country in the world to legalize recreational pot, and at the time Aurora acquired ICC Labs, it accounted for 70 percent of that market in the country.

Also included with ICC Labs was licenses it held in Columbia for the production of medical cannabis. Aurora can also grow cannabidiol rich hemp for the purpose of developing CBD-based products. This should allow Aurora to produce at a low-cost, potentially winning more share in a market that generates wider margins and better earnings.

As for production capacity, ICC Labs has the capacity to process up to 150,000 kilograms of CBD annually.

Including a 124,000 greenhouse in Colombia and another 1 million sq. ft. facility in Uruguay, it'll have the potential to increase production capacity by another 100,000 kilograms a year.

Taking into account all its existing capacity and facilities under construction, the company could produce up to 450,000 kilograms annually when fully operational. That's a little under 1 million pounds a year.

Last, the company has an agreement in place with Mexico to export cannabidiol products. That represents a market of about 125 million.

Conclusion

Even though ICC Labs has extraordinary potential, I think that it's going to move forward at an incremental pace in contrast to other markets Aurora Cannabis competes in.

While the Latin American market is projected to grow to $12.7 billion by 2028, the actual number, if including exports, is probably going to be much larger. In other words, internal sales may be $12.7 billion, but if including all sales to global markets, it's probably going to be much higher than that.

As for the additional production capacity that accompanies ICC Labs, it's probably going to push Aurora Cannabis to significantly higher than the 625,000 kilograms a year guided for to come in mid-2020.

If, over time, it does in fact approach the 450,000 kilograms a year level, it'll push Aurora Cannabis far beyond its closest competitor on the production side. That's only valuable as global cannabis demand rises. For now, Aurora should have more than enough supply to meet its commitments.

The good news is can expand its production capacity a lot more with existing facilities if it chooses to.

Taking the overall company into account, I think ICC Labs may be the most neglected of its holdings, and the Latin American market not really on the radar of many investors and analysts.

For that reason I believe once production ramps up and exports reach a meaningful level, it could be a major catalyst to the overall performance of Aurora Cannabis.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

 

Disclosure: The author is Long Aurora stock.

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