Aurora Cannabis Inc (TSE:ACB) CCO Cam Battley on Spin-out and Canopy Growth Corp – Constellation Brands Tie-up

James West
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Aurora Cannabis Inc (TSX:ACB) (OTCQB:ACBFF) (FRA:21P) CCO Cam Battley has nothing but praise for Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) CEO Bruce Linton and the recent combination (effectively) of Constellation Brands (NYSE:STZ) and Canopy. But he also suggests that, just as it always has been, Aurora will be close on Canopy’s heels with its own value catalysts.

Transcript:

James West:    Cam Battley. What are you doing here?

Cam Battley:   James West. Hi.

James West:    You know, it’s so funny that you’re here right now.

Cam Battley:   Tell me, why is it so funny?

James West:    I just bought $10,000 worth of your stock. Do you know why I just upped my position by another $10,000?

Cam Battley:   Please, tell me.

James West:    Because you reminded me that I’m actually going to get a share and a warrant of Australis if I’m a shareholder of record on the date of record that is not yet announced, but you’re comfortable in telling me that.

Cam Battley:   Subject to the ratio that we have yet to determine and will announce, but yes.

James West:    Anyways, there’s a gift there.

Cam Battley:   There is a gift. It really, truly is a gift; it’s a gift to our shareholders, and we’re giving them something of significant value that we hope to turn into an awful lot more value in a very short period of time.

James West:    Right. There’s been some incredible developments in the cannabis space in the last 24 hours, so let’s tackle that first, and then we’re going to tackle it in the context of what that means for Aurora. Constellation Brands just agreed to invest $4 billion US –

Cam Battley:   With a “B”.

James West:    $5 billion CDN, into Canopy Growth Corp., effectively taking control of the company but without replacing management.

Cam Battley:   Right. It takes them to 38 percent, I think, but with warrants they have the option to acquire a majority control of Canopy, if I’m correct about that. And congratulations to Bruce and Canopy for that; that’s a very exciting development.

James West:    Right, you bet. It gives them a $25 billion valuation, because the purchase price was essentially a 37 percent premium to the closing price of the last 20 days, which was remarkable not just for Canopy, not just for Constellation, but for the entire industry.

Cam Battley:   For the sector.

James West:    Boats were lifted by this tidal event.

Cam Battley:   Well, it’s not just about the boats being lifted. I mean, obviously that’s nice, because the sector’s been kind of soft through the summer, so it’s nice that everybody’s gotten green based on this big bull from Constellation. But more importantly, it’s validation. And we keep using that word, but the validation is that this is indeed going to be a big, grown-up, powerful and wealthy industry on a global basis. And let’s emphasize: Constellation is not putting billions, with a B, into a cannabis company based on the Canadian market. And this is what you and I have been talking about for some time; that everybody is excited about consumer legalization, as we should be – it’s a big deal in Canada – but it’s just the start. And the real story is much, much bigger.

But it’s also validation that who are going to be the global leaders? And this is something else that you and I have been talking about for some time: the leading Canadian companies are going to be the global leaders. We have built up an expertise, a capacity, plus the capitalization to be able to take this worldwide. So this is just the first of what I suspect will be a number of very positive developments. There are going to be a lot of catalysts coming our way shortly.

James West:    Yeah. So the big question that everybody out there who’s watching this wants me to ask you is…

Cam Battley:   Oh, I might not be able to answer it.

James West:    Well, this is the thing: there’s no doubt there’s an answer – is it the answer that everybody wants? We shall see. But, where is Aurora’s giant $5 billion transaction on the timeline in the future, and with what kind of an entity? So everybody is thinking that Aurora is the next logical partner for a major brand in adult consumables, whether it’s in the pharma side, whether it’s in the alcohol side, the tobacco side…there are so many different areas where people are, you know, sharpening their pencils and figuring out how do we get exposure to this nascent industry that is transforming economies, not just individuals.

Cam Battley:   Yeah, it is.

James West:    So what would you say to that?

Cam Battley:   First of all, it’s a very logical question. We have the second-largest market cap, we probably have the largest international footprint, certainly in Europe. So it’s a very logical question to ask.

I’m going to choose my words carefully, as I’ve done in the past when asked questions like this, because first of all they’re hypothetical; second of all, they’re forward-looking, and third, I don’t think you should be talking about business development until it’s fully baked. The other way can get people into serious troubles and companies into serious troubles.

James West:    Elon Musk, as an example?

Cam Battley:   Without further comment and not wanting to throw a shade on anybody, actually, that’s an individual for whom I have a great deal of admiration in some ways. But it is safe to say, repeating what I’ve said before, that we have talked to absolutely everybody who’s interested in this space. So some of it is technologies and companies that we might be interested in; others would be prospective or potential partners who are approaching us based on our presence, our footprint, our technology and our expertise. And we spend a very great deal of our time every week having those conversations.

That’s about what I can say now, safely, without ending up incarcerated, which is something I do like avoiding.

James West:    Okay. So let’s continue the hypothetical discussion before we go into the actual.

Cam Battley:   Oh great, I love those.

James West:    But so, is the adult beverage space a place that Aurora has ambitions?

Cam Battley:   Huge. Absolutely. It’s an extremely attractive market segment, and you need a few things. You have to have the emulsification technology to create a stable in solution cannabis product; you want that technology, that formulation technology, to deliver rapid onset of action, so that you don’t have the typical delayed onset of action associated with the ingestion of cannabis products. And you also want that formulated to have a shorter duration of action, so that you’re not making a 6 to 10 hour commitment to being intoxicated, which is a hell of a commitment.

James West:    Right.

Cam Battley:   So you have to have that in place. You’ve got to have the capacity to produce your raw material at low cost, and this is one of the elements that not everybody in the space is going to be able to deliver: is to produce a large amount of cannabis, economically. And we’ve even seen some struggles by some of the larger producers to be able to produce cannabis economically. And no matter what you plan to do with the value-added products, you still have to be able to access, one way or another – whether you produce it yourself or find other people to produce it for you – you’ve got to be able to access that raw material, economically.

James West:    Sure.

Cam Battley:   And that’s one of the areas where I think Aurora has distinguished itself and continues to, and we’ll be doing even more of that with the Sky class facilities.

James West:    Right. I wanted to reflect on a moment, because our next guest in the segment is going to be James Burns, the CEO of Alcanna.

Cam Battley:   Yes. Very strong executive.

James West:    And I was shocked to learn that you’re actually one of the largest shareholders of the company, at 25 –

Cam Battley:   You were shocked?

James West:    Well, I was. Because you mentioned that you made an investment, but then through the interview with James, we’re going to hear how he’s actually already got 245 stores in prime locations across western Canada; he’s obviously looking at the opportunity on Ontario. He’s the largest private vendor of alcohol in Canada right now.

Cam Battley:   In Canada. And we own a quarter of them.

James West:    Exactly.

Cam Battley:   And that is an excellent partnership.

James West:    But then he told me he’s changing the name of his stores, in some cases, to Aurora stores.

Cam Battley:   Yes, but that’s our exclusive arrangement with them, is that we’re together as partners; we’re going to be opening up Aurora branded and Alcanna-operated private cannabis retail stores wherever provincial regulations allow it. And the nice thing about working with Alcanna is, they’re so good at this. And they have the experience that we don’t have – that’s what makes it complementary, that partnership. So they have all of the knowledge, all of the relationships, for example, with the major landlords. And they were moving, actually together with us, immediately after the Ontario election, when it was clear that there was a change in government coming, and they’ve already scoped out locations, a very large number of locations, across Ontario. They’ve already had discussions with respect to leases; I can’t be more specific than that, but I think we’ll have something to say fairly soon.

And also, they’ve got the expertise and the capitalization to move very, very rapidly. So together, once the framework is clear in Ontario, we’re going to be able to move in, assuming that the framework allows for it, we’re going to be able to move in and establish very, very good stores in very, very good locations, and do so in a way that gives the government confidence. And that’s critically important, too: that the provincial government, and also the municipal governments, have confidence that we’re going to do this right, in a responsible way. And nobody in Canada has more experience, and nobody is better at managing the sales of a controlled substance, than Alcanna, who’ve been doing it for 25 years.

So if you want confidence, if you want a true retail partner, if you want to know that it’s going to be able to be done right, it’s Alcanna plus Aurora.

James West:    Interesting. So that led me to more research on what the company is doing, because we also had Jason Zandberg here yesterday, who enlightened –

Cam Battley:   [inaudible](0:09:13)

James West:    Yes, the analyst from PI Financial, who was very staunchly defending, and very compelling in this thesis of why he sees Aurora at $13 a share in no specific timeline per se, but he looks at the company as very much a buying opportunity. He convinced me – I just bought 10,000 shares. And I did so because –

Cam Battley:   Thank you for being an Aurora shareholder.

James West:    It’s my pleasure, believe me! It’s not the first time, and it won’t be the last. The scope of, and the range of things that are actually already in place and under development, and have already established their own momentum in, you know, across the universe – EU GMP facilities in Denmark, Germany, Australia, South America, Latin America, and then Cannabis RX Malta – I mean, these are all – I mean, the problem I find with Aurora is that it’s so hard to see the totality of it, because there’s such an embarrassment of riches when it comes to the assets that, no matter who you are in the investment space, there’s almost nobody who actually grasps it all and can articulate it in, you know, les than a day.

Cam Battley:   So I love to use that term, because that’s how I often characterize it myself at Aurora: It’s an embarrassment of riches. And one of the exciting things, but as you say, one of the challenges, is to communicate just how much we have going on, from the deep science of Anandia to the retail partnership with Alcanna and our distribution arrangements in Europe and with Shoppers Drug Mart and with provinces, to so many other things. To our strategic investments in 10-plus companies and the 10 acquisitions that we’ve completed in the last two years.

It’s a very big, very rich story, but that’s exactly where we want to be at this point. We set out very purposefully to establish this fully integrated company, and there are multiple advantages to that. First of all, we’re vertically integrated, and that’s extremely useful because we get to capture value through the chain. We’re also horizontally integrated into technologies that will be useful to us over time, and to our additional partners. But then the other thing, of course, is that we’ve been able to acquire, and this will circle back to our US strategy through Australis, as well – we’ve been able to acquire assets at relatively low valuations. So we buy something today, it’s worth more tomorrow, and then next week and next year.

And we don’t have to make decisions immediately as to which of these assets will be core. Some of these things, in the future, will be spun off, will be sold off, at higher valuations, but we don’t need to make those decisions right now, and that’s a very comfortable place to be. I like the optionality of it.

James West:    Optionality, that’s interesting. I happened to catch Bruce Linton’s conversation this morning, and he focuses on the optionality that they’re attempting to build. To see that you’ve actually accomplished that in large degree with this range of assets is, you know, it makes me comfortable as a shareholder, what can I say? And by way of disclosure, if you’re just tuning in, I am a shareholder of Aurora, so I am conflicted.

Now –

Cam Battley:   Don’t be conflicted. Be happy.

James West:    I mean, I’m not conflicted; the perception is one of conflict. But anyways, let’s quickly run through this list, Cam; I know you’ve got another meeting to go to. Denmark, Aurora Nordic: tell me about what’s happening there.

Cam Battley:   Plants! Denmark.

James West:    Plants! Mothers, fathers, no fathers! Fathers not welcome.

Cam Battley:   No, no, it’s ladies only.

James West:    Ladies only! [laughter]

Cam Battley:   Yes, so that we don’t have any seeds, just to be clear. That’s why we only use female plants. But yes, we’ve shipped our first plants over to Denmark, where we have two facilities that we’re developing. The first one, of course, is a retrofitted greenhouse so that we can hit the ground running. That’s only 100,000 square feet – only 100,000 square feet. And then beyond that, of course, we’re building Aurora Nordic, which is one of our Sky-class facilities. It’s a million square foot closed system with a glass roof, so it’s slightly larger than Aurora Sky at Edmonton International Airport, and a little bit smaller than Aurora Sun in Medicine Hat. And so that is a location, a country, a partnership that we’re very, very excited about, because it allows us to supply not just Denmark but Scandinavia, and also, any excess can go to the EU, of which Denmark, of course, is a member. And that’s a great place to do business. Denmark is an incredibly good place to do business.

James West:    Awesome. Germany?

Cam Battley:   Germany, yeah. So Germany, obviously, we love. We’re selling a ton of product there right now through our wholly-owned subsidiary previously known as Pedanios, and now known as Aurora Deutschland, which is German for Germany.

James West:    Right, right. So are you –

Cam Battley:   And through them, also in Italy and Malta and soon, a whole host of other EU countries.

James West:    Sure. Are you in fact the largest distributor of medical cannabis in Germany?

Cam Battley:   We believe we are, clearly. Pedanios has been operating for some time, and they also distribute product not just from us but also from Bedrocan BV in the Netherlands. And soon, we’ll be adding additional producers as well, we anticipate.

James West:    Excellent.

Cam Battley:   And there’s more than that, because we have additional channels into Europe as well.

James West:    Right. So last I heard, Germany had about 20,000 registered patients using medical cannabis. They’ve got a population of almost 80 million.

Cam Battley:   82, 83 million, yeah.

James West:    82, 83 million.

Cam Battley:   Yeah, so about two and a half times the population of Canada. And that system is growing fast; it will grow faster than Canada’s has. Remember, Canada already has well over 300,000 patients in the medical system. It will grow faster in Germany, mark my words, because most patients are getting insurance reimbursement. And can you imagine how rapidly the Canadian system would have expanded if it had been reimbursed?

James West:    What is the catalyst that is going to see wider and rapid adoption in Germany?

Cam Battley:   Availability of product.

James West:    Is that really?

Cam Battley:   It really is. Can I tell you how often I hear from our people managing Aurora Deutschland, who were the partners behind Pedanios, “please ship us more product”. Just more product, more product, more product. And for now, it’s just dried cannabis, and very shortly we’re going to have approval to sell our cannabis oils, so our value added products. And then after that, our capsules. So we’re working on all of that, and increasing dramatically our sales in Germany. That becomes easier now that we have a couple of things in place. One, we’ve received our license to sell out of our Aurora V facility, which in capacity is only a little bit smaller than our first facility, Aurora Mountain. And also, we’re going to be – we hope, touch wood – very, very shortly, announcing that we have our sales license from Health Canada from Aurora Sky, where we’ve already had harvests and now, we have product that is stockpiling. And it will be ready to go.

So we’re going to be able to pivot increasingly to Europe, where we get a premium price on our dried cannabis, and we will get a premium price on our value-added products as well. This is a very, very exciting time. This Fall is going to be wicked busy.

James West:    No kidding. Okay, well, and finally, let’s talk about Australia and South Africa, down there in that lower corner of the world. What’s, you got 22 percent of the largest cannabis grower in Australia?

Cam Battley:   Yeah.

James West:    And that’s going to translate into what kind of market share of that entire market? What’s the size of the market in Australia?

Cam Battley:   So it’s fairly small right now; they really need to kick that market into high gear. But there’s pressure building to move in that direction. But it’s a reasonably well-capitalized market, if you compare it to the rest of the world; it’s really only the second market after Canada where you have publicly listed companies. So you’ve got some fairly large ones like our partners, Cann Group, of which we own 22.9 percent, and AusCann, which of course is Canopy’s partner down there, and then a few others. And we also have another channel into Australia, and that comes via our acquisition of MedReleaf, and this is MedReleaf Australia, which is a private company that has multiple licenses, and that is also a very promising asset down there.

James West:    Sure. Okay, and –

Cam Battley:   We also skipped one. One of the things that I think is really important, and that is that MedReleaf, our MedReleaf facility in Markham, Ontario, actually received its EU GMP certification, its Good Manufacturing Practices certification, from the European Union. So that allows us once again, through a new channel, to ship additional product into Europe, and Europe is going to be a fantastic market.

James West:    Sure, okay, so this would explain why your – the quantity of short position against Aurora has halved in the last reporting period.

Cam Battley:   It’s come way down.

James West:    And is now at just less than 7 percent of the float.

Cam Battley:   And that’s significantly lower than some of the other producers.

James West:    Yeah. There’s going to be a lot of short covering coming up for short strategists, don’t you think, in this space?

Cam Battley:   I do think so. If last year is any guide, what we’re likely to see this Fall is, perhaps, something like what we saw last year, which is kind of a run up in the cannabis stocks, in the whole sector, in the Fall. And of course, there are multiple catalysts driving us in that direction.

James West:    All right, Cam, we’re going to leave it there for now. We’re going to come back to you in due course. Thank you once again for your participation.

Cam Battley:   Always a pleasure, James.

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James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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