At time of writing, the share price of Cann Group Limited [ASX:CAN] is up 18.56%, trading at $1.98.
It has been a difficult 12-month period for the stock, with a -32.88% return over this timeframe:
The latest news out of the company is that it has reached an agreement to purchase a site in the Mildura region as well as the announcement of a five-year offtake agreement with Aurora Cannabis.
Cann Group share price reacts, which bit of news was more important?
The Cann Group share price was quick out of the blocks and continued to make gains over the course of the day.
While both pieces of news are certainly positive for the company, the offtake agreement is arguably more important as it secures future revenue for the company. The offtake partner Aurora Cannabis holds a 22.9% equity interest in Cann Group.
Here’s a quick summary of the offtake agreement’s key features:
- Covers full production capacity beyond that which is produced for the domestic market
- Runs until 2024
- Will involve GMP (good manufacturing practice) grade dry processed flower
- Includes a price review mechanism
- Termination rights for both parties
- Specific terms to remain confidential
Cann Group CEO, Peter Crock, said:
‘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. We remain firmly committed to satisfying the domestic market as a priority and the agreement with Aurora should enable us to meet this commitment.’
Cann Group has also ‘reaffirmed previous guidance that, when fully operational, the expanded production capacity will generate annual revenues of approximately $160 million to $200 million based on the current wholesale price of cannabis dry flower.’
With regards to the new facility, here is a quick summary of its key details:
- Will be built in the Mildura region (not Tullamarine as previously planned)
- Site has been secured via a non-binding Heads of Agreement for $10.75 million plus GST
- Expected to produce 50,000 kgs of dry flower per year
- 34,000 square metre greenhouse
- Expected to be fully commissioned in Q3 calendar year 2020 at a cost of $130 million
- Will be funded by a mix of debt and equity
Assessing Cann Group’s plans for the future
There is no doubt that Cann Group has outlined ambitious plans for the future with this move, and to produce 50,000 kgs of dry flower is a significant quantity in the Australian context.
34,000 m2 is a massive facility.
So it’s important to look at Cann Group’s most recent balance sheet, given that it says it will be coming up with $130 million through debt and equity.
It’s got about $47.5 million in cash and cash equivalents and $25 million in investments in term deposits.
Combined with other smaller balance sheet items, it has got approximately $75.6 million in total current assets.
The term deposits are certainly helpful here, but by my back of the envelope (very rough) reckoning it will (depending on the length of its term deposits) need to come up with up to around $94.5 million ($130 million – facility costs – cash) to fund this mammoth facility, as it is not receiving much in the way of sales from the strictly regulated domestic medicinal market.
The method of capital raising will be particularly interesting and we will cover that should it eventuate.
For Money Morning