While competitors move towards an asset-light model, Cann used its FY20 financial results to extol the virtues of its cultivation facility in Mildura. Steve Jones reports.
Building vast and expensive facilities may be unfashionable for some, but Cann Group was having none of it.
“I want to make it clear,” chief executive Peter Crock emphasised on an investor call. “The Mildura expansion is still core to our future growth.”
The support was unequivocal, the statement designed to put any industry concerns to bed.
Never mind that some competitors are shying away from large-scale projects requiring high capital expenditure, Cann Group is committed to its strategy, convinced it will reap dividends over the coming years.
The company’s renewed commitment to Mildura emerged at its FY2020 presentation during which Crock and chief operating officer Shane Duncan outlined the group’s plans.
The Mildura facility was originally intended as a single-stage $184 million development with capacity for 70,000kg of dry flower.
That changed following an imbalance between supply and demand – in Canada mainly – with Cann Group concerned there was insufficient need for such significant supply in one hit.
To that end, it is now being constructed in stages to ensure production is more closely and carefully aligned with demand. Stage 1 is being sub-divided even further, with phase 1A providing capacity for 12,500kg, rising to 25,000kg in stage 1B.
Additionally, the company believes the staged approach will provide more certainty around capital utilisation while “reducing the company’s initial capital investment requirements”.
If there is nervousness about the project, Crock didn’t show it as he talked up the advantage of controlling cultivation and Cann’s intention to move to large-scale production.
While Cann already cultivates its own crops and has completed 70 harvests, its current facilities in north and south Melbourne only have capacity for 1200kg per year, small beer in comparison to the Mildura base. Both are running at full throttle, Crock said.
In Australia alone, Crock pointed out, demand for dried flower will rise from an estimated 7300kg today to 40,000kg by the middle of the decade. Supplying overseas markets will also be imperative.
“As always, our focus is on supplying Australian customers first, and under legislation we are required to do so, but setting up at scale and being able to service international markets is the other part of that,” he said.
A further benefit of the Mildura project is that margins from owning the cultivation process will be far superior than importing biomass.
The overarching plan is to serve business to business contracts that Cann believes will generate a stable and growing revenue stream.
Cann’s revenue fell 72% to $647,000 in FY20, a result largely attributed to the cancellation of a Victoria Government/DHHS contract. Losses increased 55% to almost $17m.
In the current financial year, the company is forecasting revenue of $15m, a figure described as ‘conservative’ by Duncan.
That will be generated from its seven supply agreements currently in place – both domestic and international and ranging in duration from one to five years – and new deals it expects to strike over the coming months. Five further potential contracts are in negotiation.
Speaking to Cannabiz shortly before the results announcement, Duncan said it was hard to impose minimum quantities on customers operating in nascent markets. While that comes with risk, Cann is grappling with the “other problem”, he said.
“As you scale up the business there is definitely a risk in that you might not have enough customers, but at the moment we have the other problem which is working out how we supplement our raw material production to meet future demand into 2021,” Duncan explained.
Based on supply discussions, he estimated Cann will require 300-500kg of additional material, and possibly up to a ton “if all the business development cards fall in the right spot”.
The Aurora connection
Cann’s revenue forecasts for FY21 assume no sales from its 12.3% shareholder Aurora, which has a first right of refusal agreement for Cann’s raw material.
While in regular contact with Aurora, Crock conceded its Canadian investor is preoccupied with “getting its house in order”, particularly in its home market.
Such an inward-looking focus is unlikely to change any time soon.
“The oversupply of recreational cannabis continues to impact the North America market and will take some time to work through and put demand supply dynamics back into balance,” Crock said.
Nevertheless, he insisted Cann will be set up to supply GMP-grade products to Aurora “when they are ready”.
A different path
Cann’s commitment to a large-scale, capital-intensive project is increasingly at odds with competitors who have veered away from such a strategy.
Crock acknowledged the different path, noting the preference among other industry players to become asset light and serve parts of the value chain “where they can effectively compete”.
Yet according to Crock, Cann’s strength will be its presence across the value chain.
“From this we are seeing more opportunities present and it’s a clear differentiator between Cann and our competitors,” he said. “Our integrated model ensures we can participate in and control the key activities that drive quality, innovation and value in the medicinal cannabis sector.”
As for funding the Mildura vision, Cann acknowledged a financing plan is taking longer than anticipated to finalise.
It raised $40 million from existing shareholders in late August but Crock said in a Q&A with investors that it will not cover the full funding requirements to complete stage 1A.
Nevertheless, Crock contended that such a positive response to the capital raising from its retail investors placed it in a strong position to seek external funding. Whether that involves debt facilities or non-debt funding is still being explored.
Mergers and acquisitions
As Cann moves into what it described as the next stage of growth, and the hoped-for creation of meaningful revenue, shareholders were told merger and acquisition opportunities were on the table.
Crock has previously suggested consolidation is likely in the sector, pointing to Covid as an enabler of M&A. But shifting business models in an emerging industry will also create opportunities, he said.
Asked about M&A, he told investors it was “on our radar”.
“We’re keeping a close watch on what’s happening in the space,” Crock said. “There’s a number of areas where we’re seeing companies that have pivoted their business models. As that occurs, and the industry changes, there’s going to be opportunities… and that relates to international markets as well as Australia.
“There’s a lot of moving parts but we’re keeping a close watch on what’s happening, and where we might play in that.”
Be that as it may, there is no little doubt where the Cann priority lies: a town in rural Victoria 500km from Melbourne.