Village Farms International Prepares for a Big Production Boost

Village Farms International, Inc. (TSX:VFF), one of the Canadian marijuana stocks, said Pure Sunfarms has exercised its option on the Delta 2 greenhouse facility

SmallCapPower | April 8, 2019: Village Farms International, Inc. (TSX:VFF), one of the Canadian cannabis stocks, announced recently that its 50%-owned joint venture, Pure Sunfarms, has exercised its option on the existing 1.1 million sq.ft. Delta 2 greenhouse facility, currently owned by Village Farms in Delta, British Columbia. Delta 2 facility is located just adjacent to Pure Sunfarms’ existing 1.1 million sq.ft. Delta 3 greenhouse facility with an estimated annual production of ~75,000kg of dried cannabis. The move would double Pure Sunfarms’ total production area to 2.2 million sq.ft., bringing its targeted annual production of dried cannabis to ~150,000kg.

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Pure Sunfarms should benefit from economies of scale with these production facilities, which are on single location, and thus support its goal of becoming a high-quality, low-cost cannabis producer in Canada. Delta 3 facility’s existing automated propagation operation will provide propagation for the Delta 2 facility, enabling more of the footprint of the Delta 2 facility to be allocated to flower rooms than in Delta 3, which would generate further cost efficiencies.

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Village Farms International Chief Executive Officer and Co-Chair of Pure Sunfarms Michael DeGiglio said, “With an ongoing shortage of supply from Canadian cannabis producers, Village Farms is thrilled that Pure Sunfarms’ has made the decision to more than double its production capacity with the addition of Delta 2 – just three weeks after the option became exercisable. Exceptional growing operations are the foundation of great agricultural brands. Pure Sunfarms is already one of the largest and most capable producers in the Canadian cannabis industry and more than doubling its production capacity will further leverage this crucial competitive advantage as it establishes itself as a premier vertically integrated supplier. I look forward to reporting on the continued progress at Pure Sunfarms, and the significant contribution of that progress to Village Farms’ financial results and value for our shareholders.”

Pure Sunfarms expects to expedite the procedure for conversion of the Delta 2 facility for cannabis production. Conversion of the external infrastructure, including that for the electrical distribution system, is expected to begin in summer 2019. Pure Sunfarms anticipates its first harvest at the Delta 2 facility by mid-2020 and to achieve full run-rate production in Q4 2020.

Under the terms of the joint venture agreement with Emerald Health Therapeutics, Inc. (TSXV:EMH) for Pure Sunfarms, Village Farms contributes the Delta 2 facility to the joint venture while Emerald will contribute an aggregate of C$25 million in cash. Emerald’s cash contribution will fund a portion of the conversion of the Delta 2 facility to cannabis production, which is estimated to cost ~C$60 million, consistent with the cost of conversion of the Delta 3 facility. The remainder of the conversion costs will be funded entirely by Pure Sunfarms. Moreover, Pure Sunfarms continues to have an option on the 2.6 million sq.ft. Delta 1 greenhouse facility (immediately adjacent to the Delta 2 and Delta 3 facilities), which continues to be owned and operated by Village Farms. The Delta 1 option expires on September 28, 2021. If the Delta 1 option is exercised, Pure Sunfarms would have a total production area of 4.8 million sq.ft., which is conservatively estimated to yield a total of 330,000kg of cannabis production annually.

Pure Sunfarms has signed a subsequent supply agreement with Emerald Health Therapeutics, which will commence upon the expiry of the current supply agreement at the end of 2019. Under the new agreement, Emerald will purchase up to 25% of Pure Sunfarms’ production in 2020, 2021 and 2022 at prevailing wholesale market prices.

Village Farms International is a vertically-integrated greenhouse grower in North America, engaged in producing and distributing fresh, premium-quality produce throughout the year to national grocers in the U.S. and Canada. Leveraging this vertically-integrated model, the Company aims to grab the opportunities in the cannabis industry through its 50% ownership of British Columbia-based Pure Sunfarms Corp.

Village Farms International stock currently trades at a market capitalization of C$1.0 billion with a price-to-book multiple of 7.5x.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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