As the legal North American cannabis market develops, watch for key inflection points for company share prices
For the legal cannabis industry, 2018 is shaping up to be a banner year across Canada and the United States. California’s legal recreational marijuana industry is now open for business and by 2019 the world’s largest cannabis market is expected to rake in more than $5 billion in sales. The same figure is being suggested for retail sales of recreational marijuana in Canada which will begin later in the year.
There are several market movers up ahead that have the potential to spike the share price of cannabis companies in these markets—including consolidation, legislation in the US allowing banks to provide services to cannabis businesses, efforts at the federal level to protect cannabis businesses operating in legal states, and the opening up of more international markets for Canadian medical marijuana.
These catalysts, however, aren’t the only milestones for which investors should be on the lookout. The cannabis market is still rather young, yet analysts have identified several key inflection points that can add value to a cannabis company’s stock price, whether it is early-stage, near-production or an established producer.
“There are many potential milestones, from the zoning approval to the license to planting seeds/clones to harvest and then revenue. Raising capital is another important milestone. Another potential catalyst is the signing of distribution or retail partners,” Alan Brochstein, Founder of 420 Investor, told INN.
Property acquisition: location is key
As they say in real estate—it’s all about location, location, location. And this is a critical truth for any legal cannabis company as well. When hunting for an ideal property, a well-managed company will first look to municipalities with cannabis-friendly policies, straightforward permitting processes and local support for cannabis-related businesses.
In Canada and cannabis legal states like California and Massachusetts, individual municipalities have the right to pass their own bylaws and regulations concerning cannabis businesses. So, each city or town will a different set of zoning and planning requirements. Navigating the political landscape can be a difficult hurdle for both new cannabis companies as well as established brands looking to expand their production and market reach.
“Depending on the state or city, getting local permission can be a big challenge. For instance, in Massachusetts, this has been difficult for several of the registered marijuana dispensaries. Very few have been able to get it in Boston,” said Brochstein. In Massachusetts, sales of recreational marijuana will be greenlighted July 2018. However, there are a reportedly 40 communities that have banned all cannabis companies and another 70 who have placed a moratorium on cannabis businesses until the end of 2018.
Under California’s new regulatory framework, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), cannabis growers must first obtain a license at the local level before applying for a state license. The vast size of the state and the differing levels of public acceptance when it comes to cannabis consumption can make choosing a location a complex endeavor.
Smart management looks for pro-cannabis cities or counties with delineated agricultural or industrial land use zones that allow for cannabis cultivation and have transparent permitting programs.
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Completing local permitting and facility design critical pre-market step
After acquiring real estate, the next steps involve designing your facility—whether indoor or greenhouse—and obtaining the proper permits to build. Under Canada’s Access to Cannabis for Medical Purposes Regulations (ACMPR), this step involves applying for Security Clearance; in California this stage includes obtaining a conditional use permit (CUP) from the municipality.
“Once the property acquisition is complete, the next step is to engage the services of an engineering company that can design a facility that will be both suited to production goals and in compliance with zoning bylaws. The engineers will also provide a rough estimate for the cost of the buildout,” Christian Scovenna, Vice President of Corporate Finance and Director for High Hampton Holdings (CSE:HC, FSE:0HCN) told INN. “Once complete, the plan is submitted along with the permit application, in our case in California, the CUP, to the city council or permit office; and likewise, in Canada you’re submitting Security Clearance application to Health Canada.”
High Hampton, through its wholly-owned CoachellaGro subsidiary, has secured a 10.8-acre land parcel within a proposed cannabis industrial park in Coachella, California. The city of Coachella has passed progressive ordinances that designate 90 acres within an industrial zone allowing for the cultivation, production, extraction and transportation of cannabis.
CoachellaGro has nearly completed its CUP application process for a 192,000-square foot greenhouse and 52,000-square-foot production, extraction and administration facility that will supply cannabis to state-licensed medical marijuana operators. Environmental approval is a must if a company is to be awarded a CUP for a cannabis cultivation operation by the local government and the California Environmental Quality Act (CEQA) environmental study is the last stage of the process. CoachellaGro received positive results of a third-party CEQA-compliant environmental study in December 2017.
“Once permitting is assured you can then go to market to raise money for the build out of your facilities,” said Scovenna. “In our case, we’re looking at C$35 million to C$45 million. Instead of raising the full amount and diluting the stock, you just want to raise a little bit to initiate construction and as you progress through phase one and the stock price rises you can then go back to market at a higher valuation.”
High Hampton expects to complete this final leg of the local licensing process and be awarded its CUP in early 2018. Positive feedback from city council prompted the company to initiate a first tranche phase one financing for C$19 million to begin construction on its planned greenhouse facility.
Cultivation and Sales Licensing
Obtaining cultivation and sales licenses are major milestones for a cannabis company and almost guaranteed to place upward pressure on its share price.
In Canada, cannabis companies are trying to move quickly to secure a foothold in a market that is set expand significantly once recreational cannabis becomes legal in the second half of 2018. Aurora Cannabis Inc. (TSX:ACB) is working to expand its total production capacity to more than 100,000 kilograms per year. After announcing the receipt of a cultivation license from Health Canada for its 40,000-square-foot indoor facility in Pointe-Claire, Quebec in November 2017, shares climbed more than 5 percent. The company is now the second licensed producer in Canada’s largest province.
Aurora also operates a 55,200-square-foot facility in Mountain View County, Alberta, and also constructing a 800,000-square-foot production facility at the Edmonton International Airport. Health Canada awarded a cultivation license to this third facility, known as Aurora Sky, in late January 2018.
“The licensing of Aurora Sky is a game changing milestone for the cannabis industry and an exciting inflection point in Aurora’s corporate development,” said Terry Booth, CEO of Aurora. “We now look forward to immediately scaling up production to meet the massive demand anticipated with the pending legalization of adult consumer use and the continued growth of Aurora’s international medical markets.”
Sales and distribution agreements
Once a company has completed the licensing and build-out phases of their cannabis operation, then the production phase can begin. The production stage is an important event in the life of any company, regardless of sector—when shareholders can begin to see a real return on their investment in the form of steady cash flow. It can typically take at least two to four months to complete the first harvest, and in that time cannabis companies are negotiating sales and distribution agreements which represent another significant set of milestones.
In September 2017, Supreme Cannabis Company (TSXV:FIRE) entered into two pivotal sales agreements with Aurora Cannabis and Emerald Health Therapeutics (TSXV:EMH) after which Supreme’s share price gained 20 percent. Supreme’s wholly-owned subsidiary 7ACRES is a federally licensed producer of medical cannabis under the ACMPR operating inside a 342,000 square-foot hybrid greenhouse facility.
According to Arcview Market Research and BDS Analytics, spending on legal cannabis in North America will grow from $9.2 billion in 2017 to $47.3 billion by 2027. As cannabis companies compete for a slice of that market, keep an eye on those nearing significant milestones including licensing awards, sales and distribution agreements, and acquisitions. North America’s burgeoning legal cannabis markets are still developing, but that only means a lot of blue sky opportunity for investors interested in early-stage companies in an emerging market with a strong growth forecast.