Aphria Inc. Is Cutting Down on Production Costs and Expanding its Capacity

Aphria Inc. (TSX:APH), a medical marijuana producer, released on July 12 its 2017 fourth-quarter results, which were very strong.

Indeed, revenue for the fourth quarter was $5.7 million, which is more than twice the revenue it earned in the same quarter a year ago. This rise has been driven by the reduction of the cannabis per-gram production cost.

The per-gram production cost was reduced by 36% to $1.11 per gram compared to a cost of $1.73 in 2017 third quarter. Without including indirect labour or quality control costs, Aphria was able to reach a per-gram cash cost of $0.79 compared to $1.42 a quarter earlier.

The marijuana producer realized economies of scale by using greenhouses to grow cannabis and by improving its growing techniques.

Aphria revealed a $2.6 million loss compared to a $1.3 million profit a year ago. However, that loss resulted in large part from positive operating income being offset by investment losses.

For the full year ending May 31, 2017, its profit was $4.2 million — up 955% from a year ago. This profit includes a $3.6 million gain on the company’s investment portfolio and a $3.5 million write-off related to limits that were imposed on veterans’ medical cannabis reimbursement allowances.

Aphria’s quarterly EBITDA — which includes share-based compensation and adjustments related to biological assets, among other adjustments — was $2.8 million; that’s up 443% from the same quarter in 2016. This was the seventh consecutive quarter where Aphria has had a positive EBITDA.

Aphria’s competitors are looking to increase their production in expectation of Canada’s legalization of recreational marijuana on July 1, 2018.

Aphria is more focused on shorter-term strategies to improve its performance for investors, like reducing production costs, improving products quality, and increasing its presence on the medical market.

A lot happened to Aphria during the fourth quarter. It moved from the Venture Exchange to the Toronto Stock Exchange; it expanded its presence in the U.S. by investing $25 million in Florida; and it received approval from Health Canada to increase its production space as part of its Part II expansion at its facility in Leamington, Ontario. It was also able to raise more than $105 million through a bought deal and debt financing round to fund working capital and further planned expansion.

With its most recent expansion, the company expects it can produce 9,000 kilograms of dried cannabis annually in Leamington. Aphria is planning to expand further by November, which would increase its production capacity to 30,000 kilograms.

A year from then, a final planned expansion phase could be in full crop rotation if everything goes well with the construction and approvals. This final expansion would give the company the capacity to produce 100,000 kilograms of cannabis each year.

This means that on July 1, 2018, Aphria will be producing 30,000 kilograms of cannabis a year. According to chief executive Vic Neufeld, this is more than what Aphria identifies as necessary for its medical distribution model, so there will be product available for recreational users at the time of legalization.

At full capacity, and given a $5 per gram wholesale price, this would give Aphria a potential revenue of $500 million a year.

With all that planned expansion and rise in revenue, I think it’s time to load up on this promising marijuana stock.

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Fool contributor Stephanie Bedard-Chateauneuf has no position in any stocks mentioned.

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