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Licensed producers are fetching between $7 and $15 a gram in the current medical market, but that is expected to fall in the consumer market. If the product is not affordable, the fear is, users will stick to the black market where costs are lower.

Capital spending is necessary to increase the supply, but Neufeld said his competitors have to find ways to bring their cost per gram down.

“Sooner or later, investors are going to say, ‘Wow, these guys can never make a profit,’” he said.

Neufeld speaks from a position of relative authority on the matter. Aphria, which grows product in greenhouses rather than in warehouses, is the lowest-cost producer in Canada and the first to report positive cash flows.

Aphria reported cash costs of $1.11 per gram in its most recent quarter, down from $1.73 in the prior quarter.

Reporting standards

However, reporting standards vary greatly in the nascent marijuana industry. Aphria said its cash costs are just 79 cents per gram according to its “competitor’s definition,” which doesn’t include indirect labour or quality control costs.

By contrast, Canopy Growth Corp., Aphria’s biggest competitor, reported costs of $2.90 per gram in its most recent quarter, while MedReleaf Corp., a big producer that recently went public, reported cash costs of $1.53 per gram. Most other companies don’t disclose such a metric.

Aphria sold 738,000 grams equivalent of product in the quarter at an average price of $7.75 per gram, with an adjusted gross margin of 85 per cent. Revenue increased to $5.7 million from $5.1 million in the previous quarter.

However, the company swung to a loss of $2.6 million during the quarter, largely due to a number of expansions and strategic investments. Still, the results beat average analyst estimates and Aphria’s share price rose 14 per cent to close at $5.94 per share on Wednesday.

“We view these results very positively,” said Haywood Securities analyst Neal Gilmer. “We believe it demonstrates the leverage Aphria has in low-cost production that can drive meaningful earnings versus some of the other LPs in the sector.”