Canada’s legal cannabis market passed another hurdle when the Senate passed Bill C-45, the Cannabis Act, and its various proposed amendments, through its third reading in its June 7 vote.

Bill C-45 now awaits final approval on the amendments from the House of Commons. While analysts and policymakers alike had initially anticipated the adult-use market to open up in the summer of 2018, it looks like marijuana investors will have to wait until early fall to see the first fruits of what’s expected to be a C$6.5-billion retail industry by 2020.


As a recent Canadian Imperial Bank of Commerce (CIBC) study points out, that figure is close to the C$7 billion Canadians spend on wine each year.

 

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In the lead up to legalization, there have been a few uncertainties on how well Canadian marijuana stocks will fare in this transition to a fully legal cannabis landscape — specifically around banking and supply. Now that the final legislative hurdle is near, those potential obstacles are quickly fading.

What about the banks?

As with any other business sector, not only do companies in the cannabis industry need access to and help raising capital, they also often need mortgage and debt financing as well as other more sophisticated banking products. One of the biggest hurdles faced by the cannabis industry in both the US and Canada has been the understandable reluctance of both nations’ banks to finance cannabis companies. That reluctance has a lot to do with uncertainty over the present and future legal risks associated with the industry itself, especially in the US where cannabis remains federally illegal.

Now that marijuana consumption and sales are close to being entirely legal across the whole of Canada, the banking system is beginning to open up. Once the bastion of smaller investment firms like Canaccord Genuity Group, major Canadian banks like the Bank of Montreal (BMO) and CIBC are now directly involved in cannabis financing.

BMO Capital Markets recently served as the financial advisor to Aurora Cannabis (TSX:ACB) on its $3.2-billion buyout of MedReleaf as well as Hiku Brands Company (CSE:HIKU) on its $287.7-million bid to buy WeedMD (TSXV:WMD). These transactions follow the $200.7-million equity financing for Canopy Growth (TSX:WEED) and the arranging of a $100-million share sale for Cronos Group (TSX:CRON) earlier in 2018.

CIBC World Markets is working alongside a handful of smaller investment firms to secure a $60-million private placement for Canopy Rivers, a partially owned subsidiary of Canopy Growth, in its bid to go public through a reverse takeover.

The entrance of the big banks into Canada’s cannabis industry is a clear indication of increasing confidence in the sector as the fully legalized Canadian market opens up later this year. The maturation of an industry from small penny stocks to a more blue-chip market is “usually driven by big banks coming in; it’s driven by institutional-style investors,” Aaron Salz, CEO of Stoic Advisory, told INN at the Lift & Co. Cannabis Expo in Toronto.

Salz added that he sees two huge positives for the cannabis market from the involvement of the big banks. First, it “legitimizes” the sector, which “should really bring a flow of funds from larger institutional funds and larger mutual funds.” Second, it brings more trading liquidity and efficiency. “Everyone talks about how potentially overvalued cannabis stocks are, maybe they’re undervalued, and it’s usually institutional investors that ride that efficiency to what is fair value.”

What about supply? Shortfall or surplus

The CIBC study shows that there is strong demand for cannabis in Canada, especially from recreational users. Since the early 1960s, the percentage of cannabis users in the country has grown by 5 percent each year, the study’s authors point out. In 2017, close to 5 million Canadians paid about C$5.7 billion for both legal medical and black-market cannabis — and that’s with marijuana still illegal for recreational use. While demand for medical cannabis averages 60,000 kilograms each year, CIBC projects that demand from the combined recreational market will reach 800,000 kilograms in 2020.

That figure is far higher than what can currently be produced by Canada’s 109 licensed producers, which underscores a long-held concern in the industry — will there be enough supply to meet demand?

Supply is expected to lag behind soaring demand initially. But once some of the more than 500 potential producers in the pipeline begin to reach full capacity, CIBC expects supply will overtake domestic demand in year three or four of full legalization.

As Canada is the first developed country this close to legalizing recreational cannabis, it’s difficult to forecast supply and demand given the lack of historical market evidence; however, developments in the full-fledged legal cannabis industries in the US states of Washington and Colorado may hold some insight for investors. Both states experienced supply problems in their nascent cannabis markets, but within a few years sales grew by an annual rate of at least 30 percent, says CIBC.

What’s out there other than cultivation?

Canadian cannabis companies have a few avenues for dealing with oversupply, including diversifying beyond cultivation into other verticals.

Salz told INN that the successful companies will be those “looking to expand their verticals past just cultivation” into other highly profitable sectors of the cannabis market. In fact, this is why investors have seen a plethora of M&A and joint venture activity in this sector as cultivators ink deals with cannabis companies offering industry-related services such as distribution and extraction, or manufacturing cannabis-infused products including beverages, chocolates and even pet therapeutics.

Another option for cultivators needing to offload supply is expanding their reach outside of Canada and onto the global cannabis stage.

Are there opportunities outside of Canada?

“Federal legalization allows Canadian cannabis companies to be first to market with the full support of the public, government and banking institutions. Canadian companies will enjoy the freedom to conduct business openly without the burden of existing in a grey area,” Erick Factor, executive chairman of MYM Nutraceuticals (CSE:MYM) and a well-known expert in the cannabis industry, told INN.

“This will allow Canada to trailblaze good manufacturing practises (GMP) and intellectual property that we can scale to a global market. More and more companies are seeking GMP status, which will be important if they want to export cannabis products internationally,” he added.

Unlike the US, Canada allows for the importation and, most importantly, the exportation of cannabis — giving Canada-based cannabis companies a hefty leg up on their US competitors. “Even with the export market still in its infancy, the US is ceding the international market to Canada,” says New Frontier Data in a recent report.

In fact, Canadian firms are already inking international cannabis deals for export to emerging markets such as Germany, where supply of domestic medical-grade cannabis can’t keep up with demand. Delta 9 Cannabis (TSX:NINE), one of Canada’s oldest medical cannabis companies, recently signed a letter of intent (LOI) with CanPharma and Global Group Kalapa to export medical cannabis to Germany. ICC Labs (TSXV:ICC) also has a LOI with CanPharma to export medical CBD and THC products to Germany.

Emerging cannabis markets such as Australia also offer Canadian companies significant growth opportunities on the global stage. MYM Nutraceuticals has a partnership with Solaris Nutraceuticals for the construction of a 1.2-million-square-foot greenhouse, manufacturing and processing facility in New South Wales, Australia. At full scale, the facility will have the capacity to support annual production of 100,000 kilograms.

Next big catalyst for cannabis stocks?

When can investors expect Canada’s move to full legalization to start having a meaningful impact on the market? Don’t expect to see stock prices shooting up right after the official launch date, especially since we are heading into the summer doldrums — traditionally a period of slow market activity for most sectors, including cannabis.

Salz told INN that investors should look to the fall to see real action in the cannabis space. The most notable catalysts will be reports of the first sales coming from soon-to-be legal cannabis retail stores. “In terms of flow of funds, I think the institutional investors as well are waiting to see that happen before they really commit their own funds to investing in these companies.”

This INNspired article was written according to INN editorial standards to educate investors.

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Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis market update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.

 

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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the US federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, working in the lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now undergoing a return to form as excitement about the US opening up increases.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes in US cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.

“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

 

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As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed for the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be.

 

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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance. In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

“We’ve seen the Canadian licensed producers be really hot stock performance-wise, outpacing the US (MSOs), and I’ll say it’s rather nonsensical to me,” said Ahrens, who oversees the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

While for the Canadian companies waiting on the sidelines, this development may feel like a major necessity to address current financial struggles, for US-based operators, the heat around the corner could represent future positivity for already thriving operations.

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All interested parties can join the conference call by dialing 1-888-231-8191 or 1-647-427-7450, conference ID: 4880609. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until May 20, 2021 . To access the archived conference call, please dial 1-855-859-2056 and enter the encore code 4880609.

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