The source of concern is obvious. Aurora has a CAD$360 million loan covenant that comes due in August 2021.
“With balance sheet risks to remain a core investment thesis in 2020 in our view, and lingering uncertainty especially on financial covenants, we struggle to envision a scenario where shares have sustainable support,” Bank of America analyst Christopher Carey said in a note published Friday.
The stock has slipped below $2 on the NYSE based on these latest reports. This has taken Aurora’s market cap below US$2 billion.
Current projections on revenues would not allow Aurora to meet this debt obligation, meaning some form of new financing or restructuring is required.
Ultimately, Carey “expects Aurora will be able to restructure the covenants”. Supporting that view is the Canadian cannabis market itself.
Overall cannabis revenues in 2019 fell below expectations for one primary reason: a shocking lack of retail cannabis stores in Ontario, Canada’s largest province.
Ontario has now begun a new licensing system that could result in the total number of licensed cannabis stores multiplying by a factor of ten. Adding further steam to the Canadian market is Cannabis 2.0: edibles, concentrates and tinctures.
It is these derivative cannabis products that have powered most revenue growth in U.S. cannabis-legal states. Cannabis 2.0 is expected to increase the overall consumer base in Canada by 3 million people, roughly a 50% jump.
Canadian cannabis revenues in 2020 should (if anything) surprise to the upside.
Times have certainly changed for this Canadian cannabis giant. Aurora’s stock is off more than 80% from its March 2019 high.
For cannabis investors with a high risk tolerance, this may be a time to consider buying in. Other cannabis investors will view Aurora stock as catching a falling knife.
While a number of Canadian cannabis companies are poised to turn the corner in 2020, Aurora’s management team will simply be focused on stopping the bleeding and shoring up its balance sheet.