Valens GroWorks Achieves 425,000 KG of Annual Capacity: But Is It Too Much?

Valens GroWorks (CSE: VGW) announced after hours yesterday that it had increased its capacity for cannabis and hemp extraction to that of 425,000 KG of dried biomass annually. The announcement makes Valens the largest third party extractor within the Canadian market.

Further to this, the company announced that they currently have construction underway to more than double their extraction capacity. After acquiring an adjoining facility in Kelowna, Valens has commenced construction at the purpose-built facility which will see its annual capacity increase to a mammoth 1,000,000 KG of dried cannabis and hemp biomass per annum. Construction is estimated to be completed in the first half of 2020.

“This increase in scale together with our unique and comprehensive offering of CO2, ethanol, hydrocarbon, solvent-less, and terpene extraction methodologies as well as our consumer product development and manufacturing capabilities position us to be the partner of choice for leading cannabis brands both in Canada and internationally.”

Tyler Robson, CEO of Valens GroWorks

While the newly expanded space will allow for Valens to white label products such as vapes, capsules, topicals, edibles, and concentrates, there is one looming question. Is the additional capacity needed in the Canadian marketplace?

While 425,000 KG or more of annual extraction capacity is excellent, a hard look at the numbers is first required. As per Health Canada’s last figures, all dried cannabis currently in production (both finished and unfinished) as well as inventories, between producers and distributors, amounts to 237,174 KG of product. Yes, this is in a single months snapshot, and yes this is only dried product. However, inventories are stacking and growing at a faster pace than sales themselves.

Cannabis oil products aren’t fairing much better, with 123,912 L of product currently in the various stages of production or inventory. The demand curve is not looking much stronger at the moment, with recreational demand actually decreasing over the last several months. Medical product in this segment still hasn’t topped the high set in November either.

When looking specifically at the producers of cannabis, its easy to see that a capacity problem may be arising. Most growers are not outputting the amount of cannabis that they expected to be by this time. Canopy Growth, one of the largest growers in the sector, has only produced 32,458 KG of cannabis for the last three reported quarters. Thursday we’ll see the total annual capacity for the previous fiscal year. Likewise, Aurora Cannabis produced 28,408 KG of cannabis during the last three quarters, which is the latest data we have on the firm.

Valens has done their part when it comes to supply agreements. The company currently has 10 such agreements in place, with minimum capacities being 120,000 KG per annum based on publicly available information. This minimum capacity is only amongst three licensed producers as well, so its likely they have outstanding orders for much, much more. However, if the product doesn’t grow as expected it can’t be supplied.

With new legislation coming in the fall to allow for a vastly expanded suite of products, Valens is currently in an excellent position to capitalize on whats being called legalization 2.0. It’s now up to their suppliers to provide the material required for the company to execute.

Valens GroWorks closed yesterdays session at $3.87, up $0.42 or 12.17% on the day.

Information for this briefing was found via Sedar and Valens GroWorks. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.