In short, Aurora Cannabis (NYSE:ACB) is running out of cash — and Aurora stock is taking the hits.
At the end of its fiscal first quarter ending Sept. 30, 2019, Aurora had just 152.5 million CAD.
That said, the company is bleeding cash, and I expect that by now Aurora has more or less used up most of its remaining cash. Last quarter, Aurora burned 94 million in cash from operating activities and had an additional 108 million in capital expenses (capex).
If those trends continued by the end of the year and into the beginning of this calendar year (its fiscal third quarter), the total amount of cash remaining may be little — if any. Overall, it depends on how fast the company spends cash and how much is spent on capex.
Liquidity Options for Aurora Cannabis
We won’t know the cash balance until the morning of Feb. 11 when the company releases its calendar year-end results.
However, it seems Aurora likely has two options: It can raise equity from new share sales to existing or potential new investors, or sell remaining assets. It may also have to shut down operations in order to conserve its cash.
I have already written about the company’s potential asset sales, and its options in that regard. Cornerstone Investments recently wrote an article where they estimate that the total realizable amount from asset sales is just 75 million CAD.
But, that will not be enough to cover the ongoing losses at Aurora Cannabis if last quarter’s cash burn continued to the end of the year and into 2020.
Equity Raise Options for Aurora Stock
It seems more likely that Aurora will devise a plan to raise equity either in a rights issue with existing investors or from a potential third party.
Most of the larger third-party investments in the Canadian cannabis space are from beverage companies. For example, Constellation Brands (NYSE:STZ) invested 5 billion CAD in Canopy Growth (NYSE:CGC) in 2018. Furthermore, Molson Coors (NYSE:TAP) started a joint venture with Hexo (NYSE:HEXO) — and both beverage companies are looking to start cannabis-infused drinks with their Canadian partners.
An exception to this is the U.S. tobacco company Altria (NYSE:MO), which invested $1.8 billion USD in Cronos (NASDAQ:CRON).
With all of that in mind, it seems more likely that another beverage company would potentially choose Aurora. According to Cornerstone Investments, though, the investor is not likely to be a pharma or consumer beverage company.
Cantor Fitzgerald Thinks Aurora Stock Is a Buy
Despite all the bad noise surrounding Aurora stock, Cantor Fitzgerald analyst Pablo Zuanic believes that the shares are a buy. Zuanic wrote that Aurora will have positive EBITDA to the tune of 132 million CAD by mid-year, while consensus estimates are much lower at around 77 million CAD.
Additionally, Zuanic believes that Aurora’s sales in the second half of 2020 will be greatly increased due to derivative products like cannabis edibles and vapes. In turn, operating expenses will come down as a percentage of sales.
So, maybe this contrarian analyst will be right. Maybe Aurora can basically raise the cash it needs from its own internal sources.
Keep in mind, however, that many other analysts believe that Aurora will continue to fall to below $1 per share — as I discussed last month.
What Should Investors in Aurora Stock Do?
Collectively, I would suggest that investors might want to wait until earnings for the year-end quarter are released next week.
At that time, Aurora will have to detail just how much cash it has left. Then, it will then have to face analysts’ questions about its ongoing liquidity and related issues.
If the company can come up with plausible financing options, then Aurora stock might be worth investing in. This would be a potential turnaround play for investors who are willing to take on speculative and risky investments.
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.
