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Under a new agreement, Cann Group (ASX: CAN) will construct a state-of-the-art large-scale greenhouse in north-west Victoria’s Mildura’s region to produce medicinal cannabis for domestic and international markets.

The company has signed a non-binding heads of agreement to purchase the site for $10.75 million (plus GST) and expects produce about 50,000 kilograms of dry cannabis flower per annum from the new facility.

Cann estimates the facility will cost about $130 million to construct, which it plans to fund through a mix of debt and equity.

In addition to the proposed Mildura facility, Cann currently operates two medicinal cannabis facilities in Melbourne and has completed more than 25 harvests.

The proposed new site replaces Cann’s previous strategy to develop its stage three expansion facilities at Melbourne’s Tullamarine Airport.

Cann evaluated both the Tullamarine and Mildura sites for construction timescale, services and build costs and has locked-in Mildura as its preferred place. However, Cann has not ruled out using Tullamarine as a potential future site.

“The Mildura site offers other important advantages, including a lower total build cost and lower ongoing operating costs, due to the dryer climate and higher sunlight hours resulting in reduced power use,” Cann chief executive officer Peter Crock explained.

Specialised components and materials for the new facility are in transit to Australia, with Cann to begin site works immediately and commissioning targeted for the end of 2020.

“This puts us on the same build start timing as was originally envisaged for Tullamarine and is consistent with our strategy to develop a hub and node model of regional cultivation facilities and a central manufacturing hub,” Mr Crock said.

Once the facility has been completed, it will comprise a 34,000 square metre greenhouse, which will be Australia’s largest purpose-built medical cannabis production facility.

Cann’s manufacturing contractor IDT Australia (ASX: IDT) will process the dry flower into downstream products for Australian patients and export.

IDT is a Melbourne-based pharmaceutical manufacturing company with extensive experience in producing high potency and containment pharmaceutical products. The company undergoes regular audits with the US Food and Drug Administration and Australia’s Therapeutic Goods Administration and remains fully compliant.

Offtake agreement with Aurora Cannabis

In addition to securing the Mildura site, Cann has locked-in a five-year offtake agreement with one of the world’s fastest growing and largest cannabis companies Aurora Cannabis.

Under the agreement, Cann will supply GMP processed dry flower, extracted resin and medicinal cannabis products to Aurora until 2024.

According to Cann, the agreement covers Cann’s current and future production capacity in excess of Australian domestic demand.

Commercial terms of the agreement remain confidential, but Cann noted the agreement includes a price review mechanism and allows for the inclusion of new products that Cann develops.

Aurora has a 22.9% stake in Cann and has 500,000kg per annum in capacity, with operations in 24 countries around the world.

“Securing offtake with Aurora is a key milestone for the company that is expected to both underpin the anticipated value generated with our expansion program and mitigate the risk associated with that investment,” Mr Crock said.

“We remain firmly committed to satisfying the domestic market as a priority and the agreement with Aurora should enable us to meet this commitment.”

“Setting up scale is an important focus of Cann and developing export pathways such as this are vital to enabling us to achieve that scale,” Mr Crock added.

Once operational, Cann expects the Mildura facility will generate between $160 million and $200 million in annual revenues.

Cann aims to secure itself a slice of the surging medicinal cannabis market which is expected to be worth US$100 billion by 2025.

Investors reacted positively to the news pushing Cann’s share price up almost 20% to reach $1.98 by early afternoon.

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