Village Farms Enters Commercial-Scale Production and Outlines Ambitious 2018 Plans
May 22nd, 2018
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Canada’s cannabis industry is projected to generate C$12 billion in gross sales by 2025, according to recent equity research by Cowen, driven by the legalization of adult-use cannabis nationwide as early as this summer. While there are many licensed producers that have been approved by Health Canada, few have the existing infrastructure and expertise needed to truly scale into the market as their operations are very young. Many will face growing pains.
Village Farms International Inc. (TSX: VFF) (OTCQX: VFFIF), which has been publicly traded for more than ten years on the TSX, is already generating about CAD$200 million in annual revenue as a large-scale, low-cost greenhouse grower — from its decades old fresh produce business. By leaning on this experience, the vertically-integrated company is now cultivating high-quality cannabis through its joint venture with Emerald Health Therapeutics Inc. (TSX-V: EMH) (OTCQX: EMHTF) called Pure Sunfarms, which has the potential to produce up to 300,000 kilograms of dried cannabis per year if it converts all of its existing Delta BC-based 4.8 million sq. ft. of greenhouse space to cannabis production.
Cannabis to “Transform” an Experienced Growing Operation
Many Canadian licensed producers’ facilities are either in development or the early stages of production. Most are burning through significant capital each quarter ramping up operations. A problem with this approach is that it’s difficult to scale up to an industrial size agricultural operation, with issues ranging from diseases that could wipe out an entire harvest, or severely impact the quality of a harvest, to finding sufficient personnel in a tight labor market.
Village Farms is unique in the Canadian cannabis landscape in that it already has fully scaled-up greenhouse operations that have been growing premium quality produce — and selling it to North America’s leading grocers — for decades. Last quarter, the company reported revenue of $29.5 million and $1.8 million in EBITDA from this business. With well-seasoned personnel and proven practices in place, the company is in prime position to enter the cannabis industry at scale and drive value through production of a considerably more profitable crop.
Village Farms’ CEO Michael DeGiglio calls cannabis production “truly transformational”. The company projects Pure Sunfarms will multiply revenue per square foot of growing capacity 10 to 15 times by switching from produce to cannabis. EBITDA margins should leap up from mid-single digits currently to 50% or more with cannabis. The company asserts these are conservative numbers, as are its production estimates. Its long-term revenue model is based on a cannabis flower sale price of $2/gram, which is currently well below market but reflects the strong belief by the company, as well as many experts, that cannabis flower will commoditize over the coming years.
Starting Commercial-Scale Production
One of 17 Grow Rooms at Pure Sunfarms’ Delta 3 Greenhouse
On May 14 Pure Sunfarms received an amendment to its cultivation license that enables it to begin commercial growing at scale. Village Farms plans to incrementally increase production throughout the year. The Delta 3 greenhouse covers 1.1 million square feet in total. Pending further expected amendments to its cultivation license, the company anticipates 250,000 sf to be planted by the end of July, another 250,000 sq. ft. to be in production in September, and the entire 1.1 million sq. ft. in production by the end of the year.
“The start of commercial-scale cannabis production at the Delta 3 facility is the most significant milestone for Pure Sunfarms to date,” said Village Farms CEO Michael DeGiglio. “We are thrilled to definitively move forward with the accelerated production plan, which significantly increases Pure Sunfarms conservative production targets to as much as 60,000 kilograms or more of dried cannabis through the end of 2019.”
Pure Sunfarms expects to be cultivating at full production of 75,000 kilograms per year at the Delta 3 facility in 2020.
Selling Into the Demand
Demand for cannabis product is ramping up quickly ahead of its coming legalization for adult use in Canada. Pure Sunfarms recently signed its first supply agreement — Emerald Health agreed to purchase 40 percent of Pure Sunfarm’s production in 2018 and 2019, or approximately 21,000 to 24,000 kilograms, based on current production targets. The company is also in discussions with numerous parties, including governments and other licensed producers, for additional supply agreements.
Village Farms’ Pure Sunfarms joint venture is in the process of applying for its sales license, recently having completed its initial cannabis harvest at the Delta 3 greenhouse. A portion of this harvest has been submitted for testing under Health Canada’s sales licensing process. This is a typical progression for licensed dealers: start with a small grow to get the initial license, amend it to cover more production space, submit product for inspection and sales license approval. Pure Sunfarms is on track.
“Pure Sunfarms’ first supply agreement provides a strong initial revenue stream, while allowing the flexibility to pursue opportunities with government purchasers, as well as the significant near-term demand we are seeing from other licensed producers,” added Mr. DeGiglio. “With the advantage of Village Farms’ decades of experience designing, building, and operating large-scale greenhouse facilities, I am more than confident in Pure Sunfarms’ ability to steadily ramp up production in the 17 grow rooms within the 1.1 million square foot Delta 3 facility.
Village Farms International Inc. (TSX: VFF) (OTCQX: VFFIF), through its Pure Sunfarms joint venture, represents a compelling investment opportunity within Canada’s burgeoning cannabis industry. With as much as 60,000 kilograms or more of dried cannabis production for sale through next year, and 75,000 kg/year at full production shortly thereafter, the joint venture Pure Sunfarms has the potential to become one of the leading players in the licensed producer space almost overnight. Should the company choose to convert the remaining 3.7 million square feet of existing greenhouses at the joint venture’s disposal, those numbers would obviously multiply. Investors may want to take note as production ramps up over the coming quarters.
This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.
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