Aurora Cannabis (ACB) shares took a dip today as Bank of America analysts downgraded Aurora’s U.S.-listed stock from Buy to Neutral with a price target lowered from $10 to $8, or about 15% above its current trading level.

Aurora’s U.S.-listed shares ACB, -5.74% ACB, -5.68% dropped 7% in early trade, afterward.

“Aurora has emerged as one of the best operators in the cannabis sector, with industry leading scale and margins even versus other large peers, and global optionality,” BAML analyst Christopher Carey wrote in a note to clients.

“However, despite this, and a focus on profit, (positive EBITDA target for the second quarter), it is burning cash and by our estimates could be cash negative by first quarter 2020 (absent financing), namely if a large convertible debenture due in the first quarter stays out of the money.”

How Aurora’s cash went up in smoke

Aurora is up against a convertible debenture of CA$230 million. Historically, Aurora has been able to settle its debentures using shares rather than cash. But this debenture has a conversion price of $13.05 per share, which is much higher than where Aurora stock currently trades.

Paying back the $230 million could cost Aurora precious cash, and if the company replaces it with additional share offerings, then the resulting dilution could put more downward pressure on their stock.

Even if Aurora slows its burn rate, they’ll likely need funding sometime in the next few quarters, said the analyst.

The company has access to about C$100 million ($76 million) in a credit facility, but convertible debt of C$230 million that matures in the first quarter of 2020 will probably need to be paid in cash, dimming hopes of sharp stock rally, he wrote.

Aurora’s cash burn began with its investments in four production facilities, totaling approximately 1.35 million square feet of new facility space across Canada, Denmark and Portugal.

Based on current estimates, Aurora will have a slim CA$70 million of cash available in the first quarter, but the out-of-money convert would put their cash position in the red.

How Aurora can reel it in

Aurora filed a shelf registration in April that would enable them to raise up to $750 million, but that was intended to help attract a partner or expedite any potential investment opportunities.

Nonetheless, the concern isn’t that Aurora won’t be able to plug funding gaps. “At this early stage of industry development, when first mover advantage is key (be early, be big), raising capital from a defensive position rather than for untapped opportunities (like US CBD) is less ideal,” said Carey.

Aurora management has said that U.S. expansion a core strategy, but if they add debt without bringing on any new partnership agreements, the company may be compelled to raise equity capital, which would conflict with Aurora’s other goal of slowing the pace of equity dilution, he wrote.

“Upside risk to our call is if Aurora can ink a partnership that brings with it capital,” Carey said.

About the Author 

Eric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.

ACB shares were trading at $7.00 per share on Thursday afternoon, down $0.41 (-5.53%). Year-to-date, ACB has gained 41.13%, versus a 20.66% rise in the benchmark S&P 500 index during the same period.

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