Canadian Marijuana Market And The Prospectors

 |  Includes: CANN, CVSI, ENRT, NGBL
by: Matthew Finston


Note this article appeared earlier on under title "There Will Be Weed".

Canadian Health Department estimates that there will be $1.3 billion marijuana sales in 2014.

Enertopia (ENRT) seeks to become a MMPR licensed grower and distributor for the Canadian market.

(Editors' Note: This article covers micro-cap stocks. Please be aware of the risks associated with these stocks.)

The Rush

There is no question that this is an exciting time for investors, marijuana enthusiasts, and legal reformists. Major steps towards North American legalization of Marijuana has unleashed the proverbial "Green Rush." Spectators and prospectors have come out of the woodwork to capitalize on this trend.

Many companies in the US have benefited from this rush. The three largest American players, Cannavest Corp (CANV), Advanced Cannabis Solutions (OTCQB:CANN), and Medbox Inc (MDBX), have a combined market cap of $5 billion (note: figure considers share price multiplied by total outstanding shares diluted). That amount is not based on net income but on investor enthusiasm. In fact, these companies are still operating at a loss. Still, that is to be expected from companies still in development stages.

These dollars have definitely turned heads. The rush is on. And everyone wants a piece.

Location, Location, Location

But one sector of this burgeoning industry that has not had its fair share of the limelight is Canada. Medical Marijuana has been legal to grow and consume since 2001 under the Medical Marihuana Access Regulations (MMAR). The MMAR created special provisions to allow individuals who demonstrated medicinal needs the ability to obtain marijuana under the Medical Marihauna Access Program (MMAP). Individuals with a MMAR license would be able to obtain dried marijuana from Health Canada, a designated individual grower, or from their own grown supply.

In 2012, concerns regarding public health and inefficiency led the Canadian government to end its MMAP program and repeal MMAR, replacing it with the Medical Marihuana Purposes Regulations (MMPR). By April 1st, 2014, it will no longer be legal to grow and sell marijuana with a MMAR license. Producers will need to procure a MMPR license in order to grow, ship, sell, ship, or destroy marijuana.

Canada Matters

The change in Canada's regulation of marijuana is about one thing: commercializing pot. Under MMPR, a corporation has the right to grow and sell marijuana. This is a watershed for private interests. MMPR has essentially paved the way for businesses to profit off of pot.

The department of Canadian health conservatively estimates that there will be 57,799 patients receiving medicinal marijuana in 2014. This figure is projected to have a 40% annualized growth rate with 438,000 patients receiving medicinal marijuana by 2024. Under MMPR, sales from marijuana are expected to grow $1.3 billion annually.

In my opinion, these estimates are highly conservative. The MMPR law also enables small businesses the ability to export marijuana. As the world progressively embraces deregulation, Canadian companies will be ahead of the curve, ready to supply the world with dried marijuana.

Here Come the Prospectors

The prospect for profiting off of marijuana proves promising. Small businesses in Canada have already stepped up to provide a new generation with medically grade marijuana. One Canadian company, Enertopia Corp. (OTCQB:ENRT), plans on obtaining a MMPR license through a joint venture agreement with Green Canvas ltd. Like many of the companies in this sector, limited coverage and legitimation has left investors speculating as to which pot-stock will be able to capitalize off marijuana.

Enertopia before entering the marijuana industry was in the business of exploration of oil and natural gas. In 2013, Enertopia decided that a more profitable direction for its company was marijuana through Canada's MMPR program. Businesses normally don't change their going concern without good reason. The reason? As an oil and gas company, Enertopia has accumulated $6,274,067 in losses as of November 30, 2013. Losses are to be expected as a company takes on risky speculations.

CEO of Robert McAlister believes Enertopia will be more successful prospecting weed rather than oil and gas. There are reasons to think he might be right. The joint venture with Green Canvas ltd. is a smart move. Tim Selenski, head of Green Canvas, was one 77 licensed growers in Canada under the MMAP program. Based in Regina, Saskatchewan with a population of 134,000, Mr. Selenski has had thirteen years of experience providing medical marijuana for his community. His knowledge and experience of the Canadian market will give Enertopia the edge to fast track their joint venture.

Enertopia has also secured a 60,000 sq. ft. production space where it can grow medical grade marijuana. Of course, this joint venture with Green Canvas is conditioned upon Mr. Selenski obtaining a MMPR license for Green Canvas.

As the adage goes, location is everything. Even though the picture isn't perfect, Enertopia might be positioned to profit from Canada's privatization of pot.

And Along Came Prospectors

On March 5, 2014, Lexaria (OTCQB:LXRP) announced that it too was abandoning its going concern to capitalize off the marijuana industry by signing a joint venture agreement with Enertopia. Lexaria also used to be in the oil business. Up until March 5, Lexaria's had a marginally profitable producing well in Amite and Wilkinson Counties, Mississippi. Based on the joint-venture agreement it is unclear whether gas and oil will continue to be a going concern of Lexaria's.

There are concerns with the number of publicly traded companies that have changed direction this year to get in on the 'Green Rush.'

Investors might feel more at ease knowing that Lexaria and Enertopia have had a partnership since 2010. Chris Bunka, CEO of Lexaria, has held a major stake in Enertopia. Furthermore, the companies share the same CFO, Ms. Bal Bhullar.

As part of the joint venture, Lexaria is giving Mr. McAllister 500,000 restricted shares and 500,000 stock options. In addition, Enertopia is also receiving 1,000,000 restricted shares of Lexaria.

Will There Be Weed?

With green gold expected to spurt out of the ground, investors have rushed in to profit. My concern is that instead of building sustainable business to capitalize on this industry, businesses are looking to hit it big on this investor enthusiasm.

As oilmen, Mr. Bunka and Mr. McAllister know that many prospects don't produce. You may think you have found a profitable tract of land, but after you start drilling, you find that it's dry. In the same way, Green Canvas might be able to produce. But if doesn't, it'll be written off as just another loss. But in the meantime, Mr. Bunka and Mr. McAllister will profit plenty from eager investors through joint incentivizing stock options.

Mr. McAllister and Mr. Bunka did not fare too well as oilmen. Although Lexaria did a bit better than Enertopia, this sudden change in direction suggests a lack of confidence in the companies' ability to actualize profits in their original industry. Why should we expect them to do well in marijuana?

At this point, I'd caution investors from overestimating the potential of this company. The prospect of Enertopia successfully capitalizing on this industry depends on Green Canvas obtaining the MMPR license. Without it, Enertopia will be left with just another failed prospect.

That being said, I believe investors are still undervaluing the Canadian market. When MMPR takes effect, investors should expect to see a lot of upward momentum for Canadian pot-stocks. Perhaps Enertopia will profit too. It is too early to tell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.