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Why this ASX cannabis share is surging higher today

The Cann Group Ltd (ASX: CAN) share price is surging higher in morning trade.

At the time of writing the cannabis company’s shares are up 6% to 83 cents.

Why is the Cann Group share price surging higher?

This gains appears to have been driven by a late announcement on Thursday in relation to its medicinal cannabis production facilities near Mildura.

According to the release, Cann now plans to complete the construction of its new medicinal cannabis production facilities in stages.

Previously, the company was planning to complete the Mildura facility in a single stage development. This would give it a total capacity of 70,000 kgs and an estimated project cost of $184 million.

Management believes that constructing the facilities in a staged basis will allow the company to initially build capacity on a timetable that provides more certainty around capacity utilisation. It will also reduce its initial capital investment requirements.

This appears to be a smart move. As I have mentioned previously, demand for cannabis products globally has not been as strong as many expected, leading to an oversupply.

So much so, cannabis giant and Cann Group partner Aurora Cannabis recently announced that it plans to halt construction at one of its cannabis-growing facilities in Denmark. It will also delay completing the final construction and activation of its Aurora Sun facility in Canada.

This sparked concerns that Aurora Cannabis would have little need for the offtake agreement signed with Cann for its excess medicinal cannabis.

What now?

Cann Group CEO, Peter Crock, said: “Staging the commissioning of the Mildura facility over time will help ensure that our production capacity more closely matches anticipated growth in demand for medicinal cannabis. We will continue to liaise closely with our strategic partner Aurora Cannabis Inc (Canada) in relation to future offtake requirements while also continuing to develop our further market opportunities overseas and in Australia.”

A review of the revised construction plan is now underway, but management estimates that first stage production will be around 25,000 kgs of dry flower per annum. The company continues to target commissioning in late 2020. After which, the timetable for stages 2 and 3 will be determined based on an ongoing assessment of product demand.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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