The recent announcement by Aurora Cannabis (ACB) that it won a two-year medical supply contract in Italy, reinforces the fact it's becoming the most reliable supplier to end markets. I believe this is going to continue to be a widening moat for the company as a number of its competitors are in disarray on either the future direction of the company, as in the case of Canopy Growth, or ongoing ethical failures; most recently in regard to CannTrust.
Markets are looking for reliability, consistency, and availability, and Aurora Cannabis, far more than any of its competitors, has the capacity to provide all of them and more.
The deal with Italy
The deal with Italy includes a two-year contract to supply a minimum of 400 kilograms of medical cannabis to the Italian government. Italy is among the most strict regulators of pot in the world, so this isn't a small accomplishment.
Also, the 400 kilograms, which is the equivalent of 400,000 grams, isn't as small as it looks on the surface. And with the European market commanding higher prices, margins and earnings, this will have an impact on the performance of the company, taking into account it's production capacity will reach 625,000 grams within about 6 months or so.
The deal is expected to be signed in September, and product will be sourced from its Canadian EU GMP certified facilities, where it'll be distributed via Aurora Deutschland, a wholly-owned subsidiary based in Europe.
This will be above the existing tender Aurora won in January 2018, which the company is still delivering on.
Importance beyond the deal itself
With some of the chaos surrounding the cannabis industry causing more caution in the market and toward potential partners, Aurora Cannabis has been the most consistent and reliable producer in the global cannabis market.
Its huge and growing capacity, coupled with its world-class facilities and low-cost production costs, makes it the preferred company to go to when markets are looking for the ability of a cannabis company to reliably deliver on its promises. This is especially important for medical cannabis which is increasingly important for treatment of specific symptoms.
Unless Aurora Cannabis drops the ball, it has a growing global reputation of doing what it says it'll do, and that will go a long way toward separating itself from the rest of the pack.
That coupled with the discipline of its management to carefully analyze potential deals before taking the plunge, has allowed it to decrease the types of mistakes many of its major competitors have been making.
Even foregoing the acceptance of a huge cash infusion in order to prop up its share price has proven to be the right move. I wonder how Canopy Growth management feels about their deal with Constellation Brands now?
The deal with Italy, while being a profitable one, is more important to understand at the macro level, as it once again proves the market wants what Aurora Cannabis offers, and wants it at a consistent basis.
Aurora's huge production capacity and solid distribution network make it a favorite among discerning markets, and that bodes well for its long-term future.
The company has clearly stated it considers itself primarily a medical cannabis company, and over time, as recreational pot supply reaches the point of meeting demand, other companies will be scrambling to find outlets for its cannabis, while Aurora will have had them in place for at least a couple of years.
For these reasons and others, I continue to regard Aurora Cannabis as the top cannabis producer in the world, and expect that to be further confirmed over its next several earnings reports, as its production capacity skyrockets.
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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