Bank Of America Downgrades Aurora Cannabis, Concerned About Cash Burn

Aurora Cannabis Inc ACB deserves credit for building industry leading scale and strong margins, but Bank of America thinks the company is burning fast at a concerning pace.

The Analyst

Bank of America's Christopher Carey downgraded Aurora's U.S.-listed stock from Buy to Neutral with a price target lowered from $10 to $8.

The Thesis

Aurora could be considered "among the best" cannabis companies and similar to its peers, Aurora is bleeding out cash, Carey wrote in the note. Aurora's cash position is "less robust" compared to its peers and is on track to turn negative as early as the first quarter 2020.

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Aurora faces a large convertible debenture of CA$230 million at a price of CA$13.05 (versus CA$9.68 at the time of the analyst's note), which is "well out of the money" and may need to be settled in cash. Aurora's cash burn stems from its investments in four production facilities that consists of around 1.35 million new square feet of facility space across Canada, Denmark and Portugal. Based on current estimates, Aurora will have a "paltry" CA$70 million of cash on hand in the first quarter, but the out-of-money convert would bring the cash position in the red.

Ultimately, Aurora's premier status in the cannabis space should help it secure any necessary financing gaps, which implies concerns of solvency are unjustified. It's "less ideal" to seek out new capital from a defensive position compared to other companies who raise capital for "larger untapped growth opportunities," including U.S. CBD-focused companies.

Price Action

Shares of Aurora Cannabis were trading lower by more than 6.6% at $6.92 Thursday morning.

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