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Staff work in a grow room at the Canopy Growth facility in Smiths Falls, Ont., in 2018.

Sean Kilpatrick/The Canadian Press

Canopy Growth Corp. plans to close two massive greenhouses in British Columbia and lay off 500 employees, as the cannabis grower seeks to slow its cash burn and bring its production in line with lower-than-expected demand for legal marijuana.

The moves, announced on Wednesday, are expected to result in a pretax charge of between $700-million and $800-million, the company said.

Canopy acquired a stake in the two greenhouses, in Aldergrove and Delta, B.C., in 2017, as part of a joint venture with an established agricultural company. The greenhouses, which were originally built for vegetable cultivation, have a combined growing space of roughly three million square feet.

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Canopy agreed to pay $374-million in 2018 to buy out its partner and acquire full control of the greenhouses. The transaction was part of a flurry of activity in the leadup to the legalization of recreational marijuana in the fall of 2018, as licensed producers raced to buy and retrofit greenhouses and warehouses in an attempt to boost their “licensed capacity."

Many of these facilities have since been shuttered, as legal cannabis sales in Canada failed to live up to expectations, due to thriving black-market competition and a slow rollout of retail stores. Canopy also said on Wednesday that it no longer plans to bring an additional greenhouse into production at its facility in Niagara-on-the-Lake, Ont.

“We believe this highlights the undisciplined capital spending by previous management, but we believe this should meaningfully reduce the company’s cost structure and quarterly cash burn,” Bank of Montreal analyst Tamy Chen wrote in a note on Wednesday about the announcement.

Canopy’s layoff announcement was made less than three weeks after competitor Aurora Cannabis Inc. laid off 500 employees and reported $1-billion worth of writedowns, mostly on international assets. In November, Aurora halted construction on a 1.6-million-square-foot growing operation in Medicine Hat.

“Nearly 17 months after the creation of the legal adult-use market, the Canadian recreational market has developed slower than anticipated, creating working capital and profitability challenges across the industry,” Canopy said in a news release. It added that it can now also produce cannabis more cheaply outdoors than in a greenhouse.

Shares of Canopy were down more than 2 per cent in after-hours trading on the New York Stock Exchange after the news.

“Removing the around three-million-square-feet footprint is likely beneficial for the industry in what we see as an oversupply situation,” RBC analyst Douglas Miehm wrote in a note.

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