Aphria – The "Highest" Lowest Cost Weed Producer

There are currently 29 countries that have legalised cannabis for medicinal usage. Aphria now operates in 14 of them. 14 countries, across 5 continents, and now covering all 11 Provinces in Canada for their recreational needs, Aphria is a company pioneering the global marijuana boom.

Aphria is a well-run machine. They have consistently been the most profitable (11 out of the past 12 quarters they posted positive EBITDA) and the company that can boast the lowest cost of production.

Rumours continue to swirl of "acquisition talks" with industry leaders such as Coke, Diageo and now, Altea. Aphria has also made a massive investment in their coverage of both North and South America and coupled this with a partnership with the United State's top liquor distribution company.

And by May 2019, they should be at peak production capacity of just over 20,000 kilograms of cannabis per month. That makes them the third largest producer in the Industry behind Canopy Growth and Aurora.

Run by a seasoned professional CEO in Vic Neufeld, and with a strong management team with years of experience in highly-regulated, quality-focussed industries, Aphria is one of the best ways to play the oncoming Canadian recreational boom.


"Since the Aphria journey began in early 2014, a key pillar to the Aphria success story has been our unwavering commitment to "powered by the sun", and nowhere is that more effective than in Leamington, Ontario, where average daily sunlight hours, intensity of optimum lighting and moderate climate provides for ideal greenhouse growing," Vic Neufeld, Chief Executive Officer.

And it's here, in "sunny Leamington" where they operate Aphria One, their primary cultivation facility, from.  It's currently the final two phases of its growth.

The 700,000 square foot Phase IV facility, which cost $140 million, will be complete in late 2018. It boasts the highest levels of technology in the industry. The level of automation and robotics mean that Aphria could continue to lower their cost of production. Amazing, when you think they are already the industry leader when it comes to this benchmark.

The facility is so big, that Aphria has gone ahead and built their own on-site power plant, called Hydro One. This would make Aphria's production both energy efficient and lower the input costs even further.

Even with this size, the technology-driven operation is so good, that the only human intervention required, is to prune the plants. That's it. This level of automation is industry leading.

The 200,000 square foot greenhouse that completes Phase V at a cost of $8.5m, will be dedicated to young plant cultivation and would bring full capacity at Aphria One to just over 100,000 kilograms of cannabis per annum. They are on track to be operating at full capacity by Mid 2019.

Aphria always knew that this was a race and a very fast one at that too. That's what makes their JV with Double Diamond Farms so clever. Aphria owns 51% of GrowCo, which owns and operates the 1.4m square foot  Aphria Diamond Greenhouse. The deal means that once retrofitted for Cannabis, the greenhouse has the capacity to produce almost 140,000 kilograms per annum, making it one of the largest facilities on the planet.

And it's so clever. By partnering with Double Diamond, they gain access to generations of knowledge in greenhouse growing, and they shave at least 12 months off the time to harvest through a retrofit, and not a start-to-finish build.

This means they can be at full capacity of 255,000 kgs per annum by June 2019, and with it, a real market moving advantage in tackling the shortage of supply that will exist for at least the next two years.

And finally, we cannot talk to cultivation without talking to manufacturing. Extracts are where the money is. The fastest growing sector of the industry is extracts (oils and edibles etc.) and it also comes with a higher per gram retail price tag and a bigger gross margin.

This is where the real money is being made. And Aphria is doubling down on it.

In June, the board of directors approved a plan to spend $55 million on building Aphria's Extraction Centre of Excellence. The facility is will be equipped to complete a wide range of extractions, utilising multiple extraction technologies, and will be capable of processing more than 200,000 kilograms of premium-grade extracts per annum.

The constriction of the faculty should be complete in February 2019, with the first batch of extracts scheduled for release in March. The facility will include both production and packaging to handle their entire range of medicinal and recreational brands.

Broken Coast

In January, Aphria acquired Broken Coast for $230 million ($10 million in cash and the rest in stock). In doing so they bought a premium-grade producer based out of British Columbia and their range of award-winning BC Brands. Shareholders, however, were not so happy.

Remember "sunny Leamington"? Broken Coast does not grow in greenhouses. They are an indoor grow company only. Indoor growing allows for full control over every element that touches the plant (light, water, temperature) and in what dosage. What you get is a far more premium product, but…at a much higher per gram cost.

Aphria had always been about greenhouse, greenhouse, greenhouse (getting the picture yet?). Now, suddenly, seemingly a change of strategy, as the company paid (a premium mind you) for an indoor grower.

Aphria was slow to realise that this always was the right play. There is a market for premium-grade, and in addition, they also gained access to an extensive genetic library and 1000's of strains of cannabis that can be commercialised. 

It also provided Aphria with geographic diversification, a cross-Canada distribution platform, and access to an additional 10,000 medical patients. Broken Coast's production facility (immediately approved for upgrade post the sale) will be complete in November and has a capacity for 10,500 kilograms of annual production.

It's a global boom

Aphria has been very strategic in their execution fo their international strategy.

In Africa, they have a 50% joint venture with Verve Dynamics, a phyo-extraction company with licenses to cultivate, manufacture and distribute medicinal-grade marijuana, starting in South Africa which has just recently decriminalised cannabis (you can grow it and consume it, just not sell it…yet).

In Denmark, they operate a joint venture with Schroll Medical.

As for the rest of Europe, well, in this case, Aphria went for the jugular when they bought Nuuvera, in January, for $670 million.

Nuuvera, based out of Ontario and branding itself as a global cannabis company, gives Aphria a very strong presence in countries that have legalised medicinal marijuana in Europe. In particular, however, Germany and Italy.

With a population of over 80 million and the first European country to have medical aid benefits covering the cost of medicinal marijuana, the German market is considered the biggest and most valuable in Europe.

In Germany, Nuuvera is positioning themselves to gain a local cultivation license from the government, whilst currently supplying the local market via an import licensed secured to supply one of the pharmaceutical distribution companies.

And in Italy, Nuuvera is currently one of only 7 producers that have been granted a license to import to a market estimated to be worth north of $9 billion. That's nearly double the size of Canada.

While it is Nuuvera that will be at the core of their European ambitions in the coming 2-3 years, it is LATAM that will look after their South American growth.

Latin America and Caribbean Assets Holdings (LATAM), is a wholly-owned subsidiary of Scythian Biosciences. The deal, announced in July and worth $193 million in Aphria shares and $1 million in debt, would make Scythian the single largest Aphria shareholder (at ~7%).

As a result of the Transaction, the Company has solidified an important foothold in Latin America and the Caribbean by acquiring industry-leading cannabis-related companies in Colombia, Argentina, and Jamaica as well as a right of first offer and refusal in respect of a majority interest in a Brazilian entity seeking a cannabis cultivation and sales license.

And with LATAM came a very experienced and highly-influential leadership team that will be instrumental in driving growth in the region for many years to come.

And finally, in Australia, Aphria has a 35% interest in recently ASX-listed, Althea. In addition to this, Aphria is also supplying cannabis medicinal R&D in areas of oncology pain (with MedLab) and animal pain (via CannPal).


Only Aphria and Canopy Growth can boast of having supply agreements with all 10 Provinces and the Yukon Territory.

The sum of their agreements (some of the provinces have not given order values yet) comes to 22,250 kilograms per annum, and are bringing to market 59 different SKU's of Flower and low-potency oils (only Canopy Growth have more SKU's in the market).

Aphria also owns a share of Fire and Flower, a chain of retail outlets that operate in Alberta and Saskatchewan. In addition to the supply agreements with the provinces, Aphria has also established a successful wholesale division, with two key supply agreements signed to date.

They secured a 5-year supply agreement with Emblem, to supply them with a total of 175,000kg, starting from May 2019. They also signed a 5-year supply agreement wit Auxly (ex Cannabis Wheaton) to supply them with up to 20,000 kgs per annum, also commencing mid-2019.

They are also one of five companies that have secured an agreement to supply the Shoppers Drug Mart chain with medicinal cannabis. The pharmacy chain, now numbering more than 1,300 locations, is the largest in Canada


In September, Aphria introduced their recreational brands to the market. In developing the brands, the company undertook 18 months of extensive market research, focus groups and influencer consultations. 5 distinct user types emerged from the research and Aphria developed a brand and strain for each.

The brands feature a range of price points and offer a variety of product formats and consumption options tailored to consumer preferences.

Solei Sungrown Cannabis ("Solei")

Solei is designed for current and novice users and pairs an assortment of carefully curated strains and product formats with different experiences.

RIFF is a community and cannabis brand that is co-created by the Co.LAB, a collective of creators and artists who love a good joint effort. The brand will have high potency offerings available for experienced users.

Good Supply is a value-priced brand without the frills, designed for the everyday cannabis user.

Goodfields is for current and new cannabis users interested in quality cannabis from a trusted source, cultivated with care.

And finally, Broken Coast Cannabis

Broken Coast's craft cannabis is grown on the shores of the Salish Sea in small batches by choice, using single-strain growing rooms. All flower is hand-trimmed and slow-cured ensuring the optimal cannabis experience. Premium-grade for the premium experience.

The Aphria range will be available in both flower and oil, while the Broken Coast range will offer a wider variety of flower, but very limited oils.

Products, Check.

Supply Agreements, Check.

And distribution?

In May, they signed a manufacturing deal with Great North Distributors to serve as the exclusive representative for Aphria's adult-use products throughout Canada.

As a wholly-owned subsidiary of Southern Glazer's Wines and Spirits, the United States' largest wine and spirits distributor, Great North Distributors has reach across every province across Canada, including established relationships and expertise in working with provincially owned and operated retailers and private retailers alike.

Great North Distributors will establish a dedicated cannabis sales team that will be responsible for acting as the selling agent of Aphria's broad portfolio of adult-use cannabis brands and products to provincial retailers throughout Canada, from the most populated cities to the most remote locations.


David Ogilvy was quoted as saying that "the people with the best people, win". In this case, it's playing out that way. The team is led by Vic Neufeld. At a time when most people are heading to retirement, Neufeld is running a multi-billion-dollar marijuana enterprise, sitting on multiple boards of directors and traveling the world.

Neufeld was CEO and President of Jamieson Laboratories for just over 21years. During his time he grew their market share of vitamins and herbal products from 7% to 27% of the global market and launched the products in 44 countries.

Pharma is in their DNA. The Chief Science Officer, Gary Leong, was the former CSO at Jamieson and the rest of the leadership team bring years of experience in highly regulated industries to the table.


Aphria was always the undisputed lowest cost producer and boasted (until this last quarter) an 11-quarter winning streak of positive EBITDA earnings. But then this was a different quarter. This was the quarter before recreational when the name of the game was production readiness, no matter the cost.

Their Q1 2019 revenue increased to CAD$13.2m, a 117% increase over the corresponding period in 2018, but only 11% up on the previous quarter. This growth was lower than expected but was also related to the fact that they shut down organic medicinal patient growth, so as to be able to stockpile inventory in readiness for their recreational supply agreements.

Their results also showed a 35% increases in the number of grams sold over Q1 2018, and net income increased over 40% year on year. However, these numbers were offset against a higher increase in "all-in" cost per gram which came in at $1.83 (against $1.63 in Q1 2018).

Annual production capacity currently sits at around 30,000 kgs per annum at Aphria One and 5,000kgs at Broken Coast. Obviously, this now starts to ramp up significantly as Phase IV and V at Aphria One and Aphria Diamond come online in early 2019.

They closed a bought deal of more than $245 million during the quarter, bringing total cash on hand to around $14 million. A significant war chest, even without a strategic investment partner. And speaking of these, there doesn't seem to be a shortage of suitors.

In the past couple of weeks, Aphria has been linked with none other than Coca-Cola, Diageo, and now Altria (Marlboro, in case you're wondering). A deal with any of these puts Aphria in the upper echelons of the Layer Cake.

They're all looking at the space, and so they should be. You have to think past beverages here and look at the bigger picture. Here is a non-psychoactive compound, with efficacy-based results behind it, that demonstrate noticeable impacts on areas such as chronic pain, arthritis, and insomnia.

Vape pens in Canada alone are estimated to be a billion dollar black market. Imagine energy drinks that actually deliver health benefits and Powerade with pain relief, and you start to see the future size and potential of this market.

To date, Aphria has not landed a big hitter. But in this industry, where there's smoke, there's most definitely a fire of some sort.

Aphria announced on the 18th of October their intention to list on the NYSE. They will be joining an elite group and this should have some short-term impact on the stock price, as we have seen with Tilray, Cronos and Canopy Growth.

The bottom line

I believe Aphria to be on the best placed to take advantage of the booming Canadian market and the rapidly evolving global industry. I base this on the following

Recreational Positioning

Once they are at full capacity in May of 2019, they will be the third largest producer in the industry (behind Canopy Growth and Aurora). They have the best coverage and supply agreements and the second highest number of SKU's in the market. 

With this level of supply being delivered into a market that will have great shortages, it creates a unique short-term opportunity for Aphria to cement its brands in the recreational market. Consumer awareness will also be created through Broken Coast, whose premium-grade flower will be in high demand by the consumer base.

And, via its medicinal supply through Shoppers Drug Mart will not only boost revenues but also contribute to brand awareness

The Hemp market

If (more like when) the Hemp farming Bill of 2018 passes, it will open up the US to CBD producers. Aphria, with their war chest and call option on their Florida-based investment in Liberty Health Sciences, would be well positioned to enter the legal non-psychoactive CBD market in the US.

This would increase brand awareness and move the needle significantly on their total addressable market.

And finally, the international front.

They are very well placed with their Nuuvera and LATAM investments, giving them access to 14 countries, with a well-placed opportunity in the biggest European country, Germany, and a right of first refusal on a late-stage applicant in Brazil – the jewel in the South American crown.

With a proven management team, full coverage of Canada, well executed international strategy, and 3rd largest production on the planet, Aphria is well placed for growth. Aphria and Canopy were always pretty much in the same valuation ballpark.

However, since the turn of the year, this gap has widened, dramatically. Canopy's $14.1 billion valuation now dwarfs Aphria's on $4.85 billion. However, when it comes to actual production and execution (domestically and internationally) they are neck and neck. Aphria certainly has room to grow its valuation.

I am buying Aphria, and dollar averaging down, all the way up to $25.00 and consider the stock to have significant upside on that in the coming 12-24 months.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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