Aurora Cannabis (ACB) continues to rollout production updates tied to its Canadian facilities. Yesterday, the cannabis maker announced that it has increased size at its grow facility from 1.2 million square feet to 1.6 million square feet, which will increase the size of Aurora Sun (name of the facility) by 33%. ACB also projected that Aurora Sun will produce 230,000 kg of high-quality cannabis per annum. This translates to 230M grams, which will be sold at an average price of $4 to $5 per gram depending on region, and pricing levels when production reaches the market. This seems fairly additive to the overall thesis of the company, as it increases overall annual production.

The stock has been a little range bound for the past month trading between $8 to $10 per share, but managed to climb nearly 3% on the back of the news.

Keep in mind, ACB has a portfolio of production facilities that is under construction/development, but assuming they’re able to start production by middle of 2019, the net contribution to revenue from just this one facility at 230 million grams/annually will be significant perhaps $800 million incremental revenue at full production (base case scenario).

A lot of the other facilities produce less than 5,000,000 grams/annually which were some of Aurora’s initial facilities, but production of cannabis has already commenced at Aurora Sky, which will produce 80M to 100M grams/annually with production having started in January of 2019, hence most of the upside estimates tied to Aurora Cannabis is based heavily on pre-existing production of Aurora Sky at 80M grams, and an anticipated 230M grams contribution from Aurora Sun (most analysts don’t expect much contribution to revenue from Aurora Sun until 2020).

Cowen estimates that ACB will generate $343 million in revenue by end of FY’19 (the fiscal year ends on June 30th, 2019), so there’s only 2 additional months until the end of the fiscal, which they will report in September.

Shareholder expectations have moved to 2020 results, where the additional of Aurora Sun will have a full-year impact, hence estimates suddenly jump to $843M from Cowen, and $724M from Jeffries translating to expectations of 156M total grams of production and sales at an average price of $5, which seems doable given the recent announcement of Aurora Sun production expansion, and the addition of Aurora Sky full-year results in FY’20, which will end in the middle or June of next year.

Much of the investment thesis is tied to cost of production. Management believes they can push the cost of production below $1 CAD, production cost per gram is anticipated among analysts at $1.50-$1.92 CAD or $1.12 – $1.44 USD based on today’s exchange rates. The margin thesis seems fairly predictable with very attractive gross margins, assuming management can actually deliver on cost at scale. But, there’s a lot more uncertainty in terms of anticipated production ranges and pricing in the next year.

For the most part, sell-side expectations do seem beatable in the next 12-month period, and even the immediate results with production contribution from Aurora Sky should lead to an expectation beat in the near-term. I come to this conclusion after carefully examining the production/price narrative currently. Even in an adverse pricing scenario due to overproduction, where the price per gram falls below $5 to perhaps something more severe like $4 per gram analyst expectations seem beatable next year as production of 300,000/Kg annually at $4 per gram would translate to revenue of $1.2B versus analyst expectations of 156,000/Kg next year at $5 per gram leads to revenue estimates of $780M.

It’s not yet clear whether the production targets should be treated like revenue outlook, not to mention the delays tied to production, and the timing of production starts when pertaining to Aurora Sun will have a big factor on next year results. The production capacity increase of an additional 300K sq. ft tied to the Aurora Sun facility will play a big role in whether or not AEtsy can hit its targets

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

Disclosure: The author has no position in ACB stock.

Read more on ACB: