PharmaCielo is getting it done in cannabis extraction, says Stifel GMP

It’s all systems go for PharmaCielo (PharmaCielo Stock Quote, Chart, News TSXV:PCLO), says Stifel GMP analyst Robert Fagan, who delivered an update to clients on Tuesday, saying PharmaCielo’s steady cost reductions are a good sign of things to come.

Headquartered in Toronto, PharmaCielo’s operations are in Colombia where it has a cultivation and processing centre, producing medicinal-grade cannabis oil extracts. The company is currently expanding its production to centre on THC-free and broad-spectrum CBD oil production with a focus on European sales.

PharmaCielo released its first quarter results on Monday for the period ended March 31, 2020, and featuring revenue of $514,000 compared to $787,000 for all of 2019.

In the company’s press release, CEO David Attard said, “While this is nowhere near the potential of our market platform, in 2020 it represents the beginning of our transition from building, to operating and selling. We have continued to make progress against the key priorities I outlined last quarter, and we expect continued revenue growth, particularly in the second half of the year.”

PCLO ended up with an adjusted EBITDA loss for the Q1 of $4.5 million compared to a loss of $7.1 million the quarter before and a loss of $3.6 million a year earlier. All-in operating costs to produce dried cannabis were $0.04 per gram over the quarter and the company finished the quarter with cash and equivalents of $6.1 million, which was pro-forma $12.7 million at April 15 due to a $7.3-million private placement closed on that date.

Fagan called the quarterly results largely in line with estimates and not entirely material at this early stage in the game for PCLO, with about 275 kg of CBD isolate sold over the quarter at about US$1.40 per gram. The adjusted EBITDA loss of $4.5 million ended up better than Fagan’s estimate at $5.8 million owing to the company’s better cost control at both production and SG&A. (All figures in Cdn dollars unless where noted otherwise.)

The analyst noted the production costs which were down to about $0.75 per gram of extract, a drop of 70 per cent from the previous quarter and the lowest on record for the company.

Fagan wrote, “For context, this is akin to PCLO producing cannabis distillates for less than 0.1¢/mg, which sell at ~2¢/mg at wholesale in Canada now. While these metrics are from a small sample, we view this data positively given PCLO’s still early development stage (3rd quarter of revenue), and while volumes are still well below scale providing potential for further efficiencies as capacity grows.”

“While we await material sales (Q3/20), we note recent results highlight PCLO has made solid steps forward in its evolution towards becoming a global low-cost supplier of cannabis extracts, supporting our overall investment thesis,” Fagan said.

The analyst expects PCLO to generate fiscal 2020 revenue and EBITDA of $8.2 million and negative $11.2 million, respectively, and fiscal 2021 revenue and EBITDA of $93.2 million and $53.0 million, respectively.

With the update, Fagan has reiterated his “Buy” rating and $4.00 target, which at press time represented a projected return of 376.2 per cent.