Oil, The Green Kind
"Cannabis oils" refers to the wide array of valuable compounds that can be extracted from the cannabis plant. Such compounds include THC, CBD and a host of other cannabinoids, as well as terpenes (organic compounds that give the cannabis its aroma and flavor). Cannabis companies can combine these oils into a variety of formulations, depending on the desired effect they wish to achieve. A THC-heavy formulation will give consumers the psychoactive "high" associated with cannabis use, while a CBD-heavy formulation won't get users high, but it might provide relief from epilepsy, pain and other ailments.
Cannabis Oils Are The Future
For many of the same reasons that cigarettes are losing business to vaping, cannabis flower is giving way to cannabis oils. Health concerns related to smoke inhalation, offensive odors and lack of discretion are the primary motivators behind marijuana consumers seeking alternatives to blunts and bongs.
Increasingly, consumers are moving toward products derived from cannabis oils, such as topical creams, cannabis-infused food and drink (AKA "edibles"), and concentrated oils used for vaping or sublingual dosing. The numbers are bearing out this industry trend.
In the state of Colorado, cannabis flower made up 67% of all dispensary sales in 2014; that number fell to 44% in 2018. Throughout the United States, CBD (the medicinal, non-psychoactive part of the cannabis plant) sales increased from $108 million in 2014 to $512 million in 2018.
The demand for cannabis oils should only continue to grow as less-traditional and more health-conscious consumers become a larger part of the market. This industry trend and the impending legalization of edibles throughout Canada is creating a huge demand for access to high-quality cannabis oils. The companies that can produce such oils most cost effectively stand to command a sizable portion of the market. Aurora Cannabis (ACB) and Radient Technologies (OTC:RDDTF) are teaming up to tackle this challenge head on.
A Better Extractor
Although there are a variety of methods for extracting the oils from the cannabis plant, the current industry favorite is known as supercritical CO2 extraction. Basically, pressurized CO2 is passed through the cannabis biomass and draws out the oils. While supercritical CO2 extraction is an improvement over other extraction processes, Radient Technologies believes it has a superior method: Microwave Assisted Processing (MAP).
As the name indicates, MAP relies on microwaves to extract the precious oils from the cannabis plant. The technology allows for the precise application of microwaves, heating the biomass in such a way as to extract the maximum amount of oil with as little solvent and waste as possible, leading to higher purity and throughput. MAP technology also lends itself well to scaling up to industrial size. These attributes suggest that MAP can provide not only a higher quality product, but also increased efficiencies and lowered costs.
Source: Radient Technologies
A Blossoming Partnership
Aurora Cannabis is one of the leading cannabis companies in the world. It is primarily active in Canada, but also has operations in South America and Europe. One of its largest projects to date has been its Aurora Sky growing facility in Edmonton, Alberta. The 800,000-square foot growhouse, which recently received its license to begin production, is highly automated and is expected to produce over 100,000 kg of cannabis annually, at costs well below $1/gram.
Aurora's management team anticipated the industry trend toward cannabis oils when planning for the construction of Aurora Sky. This led it to seek out a partnership with Radient, which resulted in Aurora purchasing 17% of Radient in December 2017, as well as an agreement between the two where Radient would provide Aurora with extraction as a service. Radient Technologies used the funds generated, as well as funds raised elsewhere, to construct new facilities with additional extraction capacity.
The first of these facilities, standing at 23,000 square feet and able to process 73,000 kg of cannabis (or over 400,000 kg of hemp) per year, was recently licensed from Health Canada and began production in early March. The facility is less than 10 miles from Aurora Sky and is currently processing cannabis sourced from there. Radient's CEO has stated that Aurora is its sole customer for now, as the production from Aurora Sky is expected to take up the entirety of Radient's current capacity.
Radient expects to bring its next facility, also in Edmonton and measuring in at over 100,000 square feet and able to process over 350,000 kg of cannabis (or 3.7 million kg of hemp) annually, online in 2020. This facility is expected to accommodate additional throughput from Aurora Sky, as well as any other customers in the Edmonton area that Radient is able to contract with. There's also the possibility of processing cannabis from Aurora's upcoming Aurora Sun facility in Medicine Hat, Alberta, which is about 200 miles from Edmonton.
Meanwhile, Radient is constructing another 100,000+ square foot sized facility in Germany, where Aurora just so happens to have been granted permission to produce and distribute cannabis. Should the extraction for Aurora Sky prove to be as fruitful for both companies as expected, there's little reason why they would not come to a similar arrangement for their German operations.
The major risk for investors is that both Radient and Aurora have been mum on the financials behind their arrangement. Neither company has released any guidance on how much Aurora will be paying Radient to process its cannabis, nor exact figures on how much cannabis Radient will be extracting for Aurora. With production at Radient's facility now underway, expect some of this information to be available when either Radient or Aurora next reports earnings, if not before.
The Aurora/Radient partnership relies on Radient's MAP technology. If MAP does not perform as advertised, or if a superior extraction technology is developed, the partnership, as well as both companies overall, will be significantly impacted in a negative way.
Both Radient Technologies and Aurora Cannabis have recognized the need for large amounts of high-quality cannabis oils and are executing on plans to meet this need. With Aurora's high-tech growing facilities and Radient Technologies' superior extraction process, the two companies combined stand to emerge as leaders in the cannabis oils segment.
Disclosure: I am/we are long ACB, RDDTF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.