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A worker sorts marijuana plants at Aurora Cannabis' Aurora Sky facility in Edmonton on May 23, 2018.JASON FRANSON/The Globe and Mail

Shares of Aurora Cannabis Inc., ACB-T a former star of Canada’s legal weed sector, plummeted another 40 per cent on Friday morning after the company announced an unusual share sale.

Aurora sold US$125-million worth of new shares priced at US$2.45 each, amounting to a 10-per-cent discount compared to the price at which the company’s shares had last traded. Aurora and its lead underwriters, Canaccord Genuity and BMO Nesbitt Burns, added a warrant to the offering to entice buyers, and its inclusion made the discount even more extreme.

Each warrant, which is similar to a stock option, allows someone who participates in the financing to purchase an additional Aurora share at some point over the next 36 months at an exercise price of US$3.20. After accounting for the value of this benefit, the new shares were likely sold at a discount of 30 per cent or more.

Some investors seemed to like the deal terms. The financing had excess demand, and early on Friday the underwriters increased the deal size by US$25-million to US$150-million.

But when Aurora’s shares opened for trading shortly afterward, the stock price plummeted 40 per cent. The shares closed down 38 per cent.

Before the financing, Aurora’s shares had already fallen 97 per cent from their peak in October, 2018, the same month Canada legalized recreational marijuana use.

A similar – albeit less severe – collapse was also seen in shares of Canopy Growth Corp. on Friday, after the company reported yet another round of disappointing earnings. Canopy’s stock price dropped 14 per cent, bringing its total market collapse from its peak to 91 per cent.

One possible explanation for the disconnect between the investor demand for Aurora’s share sale and its ensuing share-price collapse is the likely composition of buyers in the financing.

During the cannabis boom, hedge funds used such share sales to make short-term bets, The Globe and Mail has previously reported. In one strategy, hedge funds would short the stock of a cannabis company because they expected that a financing was coming at a discounted price. (Short sellers make money when a share’s price falls.) To cover the short, they would buy back the shares by purchasing stock through the financing at the lower new-issue price.

With Aurora’s latest offering, it is possible hedge funds saw value in the accompanying warrant. Warrants and stock options derive a good portion of their worth from volatility, because the more volatile a stock is, the more likely it is to hit the strike price.

Aurora’s shares have been very volatile, with the stock trading near the strike price as recently as three weeks ago.

Aurora declined to comment. It, like many Canadian cannabis companies, has been struggling for years because there is now an oversupply of recreational cannabis. Aurora has never made money, and analysts have struggled to predict when it will start to do so.

Earlier this month, Aurora announced a severe cost-cutting plan aimed at allowing it to turn a profit in the near term. The strategy included shutting down a flagship production facility in Edmonton, known as Aurora Sky. The decision marked a major retreat for Aurora, killing the company’s once-lofty expansion plans.

When announcing the decision to close the facility, Aurora chief executive officer Miguel Martin said the site was designed to produce mid-quality cannabis flower. But, he added, that type of product has been largely unsellable in the current environment because there is too much cheap cannabis on the market. Many producers are now chasing premium flower in order to grab market share.

Aurora continues to have a strong market share in Canadian medical marijuana sales, but it has virtually disappeared from the recreational market.

Analysts at Canaccord Genuity recently estimated that Aurora’s recreational market share is now only 2 per cent. The company’s revenue from this segment last quarter, $10-million, was down 80 per cent from its all-time high.

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