Expect Aurora Cannabis (NYSE:ACB) to sink much further this year. ACB stock has already sunk 47% this year and is 75% off of its peak 52-week stock price, but more deterioration is to come.
Aurora Cannabis can’t survive its free cash flow losses expected over the next three quarters. It will have to issue more debt or dilute shareholders with more equity issues.
Aurora more or less admitted this in its latest earnings release and conference call on Nov. 14. Despite ceasing construction of two major facilities, saving CAD$190 million in construction costs, Aurora will still be bleeding out deficits in its free cash flow.
In the conference call, Aurora also admitted that over the next three quarters it will still have CAD$228 million in capex costs. Given that operating cash flow available to finance this capex was just CAD$95 million in the September quarter, it will still be running FCF losses.
I estimate that ongoing FCF losses over the next three quarters will be CAD$140 million per quarter. It can’t afford this. Aurora only has CAD$152.5 million in unrestricted cash on its balance sheet.
Debt, Equity and ACB Stock
This past quarter Aurora had to finance CAD$204 million in FCF losses by raising debt, selling assets, and issuing more equity shares.
Debt increased CAD$141 million to CAD$282 million this past quarter. In addition, Aurora sold down a major portion of its marketable securities portfolio. It sold CAD 103.8 million in securities it owned. Now it only has CAD$39.4 million in securities on its balance sheet.
Aurora sold CAD$58.4 million in equity securities. I am not sure who bought that stock, but they likely now have losses. Even though Aurora has an “ATM” shelf registration to sell more equities, no one is going to be eager to buy more shares in Aurora stock.
Despite raising all this cash, Aurora’s cash balance fell CAD$20 million to CAD$152.5 million. With the marketable securities, Aurora will only have CAD$192 million in liquidity before incurring more losses.
That won’t last a little more than one quarter if my estimate of its ongoing cash burn of 140 million per quarter persists.
On Nov. 25, Aurora announced it had issued 69.1 million more shares. This came from CAD$227 million in convertible debentures that were allowed to convert at CAD$3.28 per share instead of CAD$13 per share.
This early amended conversion represents dilution to existing shareholders of about 6.7% since Aurora previously had 1,028.9 million shares outstanding.
Tangible Book Value of ACB Stock
In a previous article, I argued that Aurora stock is likely worth no more than its tangible book value per share. I calculated that Aurora’s tangible book value was only CAD 525 million. This was despite the fact that at the time its market value was CAD$4.62 billion. At the time there were 1,017.4 million shares outstanding. So Aurora stock’s tangible book value per share was CAD$51.6 cents per share.
As of Sept. 30, Aurora’s tangible book value was now CAD$610 million. But there more shares were issued and outstanding, and the convertible debentures also increased the shares outstanding. So now there are 1,098 million shares outstanding. That means Aurora’s tangible book value per share is CAD$55.6 cents per share.
Compare that with today’s stock price of CAD$3.46 per share ($2.62 U.S.). This means ACB stock is worth only 16% of its present price. Another way to explain this is to compare the value in dollars. The market value of the Canadian company Aurora Cannabis is CAD$3.700 billion (US$2.796 billion). But its tangible book value is only CAD$610 million (US$ 461 million).
The Bottom Line on ACB Stock
A number of analysts are openly talking about whether management can be believed for anything they say now. It is likely that ACB’s losses will continue to be high over the next three quarters. I have shown that its cash burn won’t last more than one quarter or so.
After that Aurora will have to issue more debt, sell its remaining marketable securities and/or issue more equity if anyone is willing to buy it.
Aurora’s tangible book value is only 16% of its present market value. That means that if the company were to be liquidated the remaining proceeds would be 84% less than the stock market price right now.
In other words, buyer beware. The next stop is 84% below today’s price if Aurora can’t stop its losses.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.
