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Ontario's Cannabis Plans May Favor Small Producers

J Cooper profile picture
J Cooper
10.66K Followers

Summary

  • Ontario's lack of large MOUs could favor smaller cannabis producers that weren't able to land MOUs from other provinces.
  • Canopy Growth jumped on news that it seeks listing on the NASDAQ.
  • The first Canadian cannabis stock listed on the NASDAQ, Cronos, jumped on its US listing, but I will be cautious about the stock.

** Most of the companies described herein - except Cronos (CRON) - trade primarily on Canadian exchanges. There are OTC versions listed for most of them, but the Canadian-traded equities will have better liquidity.

Recreational cannabis will be legal in Canada shortly after July 1, 2018 (perhaps in August). This has caused a gold rush of sorts into the industry as companies enter the space, rapidly expand production, and prepare for the beginning of what could be an $8 billion market, according to my own estimate.

"There's no exact date but, if you do the math, you'll see it won't be July 2018," [Canadian Health Minister Ginette] Petitpas Taylor told reporters Thursday. "Cannabis legalization is not about a date, it's about a process ... We want this process done as seamlessly as possible."

Cannabis will be legal nationally perhaps in August. However, distribution and retail will be handled at the provincial level rather than the national level. In most provinces, cannabis will fall under jurisdictional and distribution rules, similar to the rules currently in place for alcohol. Trina Fraser, a partner at an Ottawa law firm, maintains a very convenient summary chart of the rules in place in each particular province and territory.

Source: Trina Fraser's Twitter (link to PDF)

In four provinces so far, the government organization responsible for cannabis has ordered a large amount of cannabis from a small number of cannabis producers.

(Orders in kg/year) NFLD PEI NB QC Total
Total Orders 8,000 3,000 15,500 62,000 88,500
Canopy Growth (WEED.TO, OTCPK:TWMJF) 8,000 1,000 4,000 12,000 25,000
Hydropothecary (THCX.TO, OTC:HYYDF) 20,000 20,000
Aphria (APH.TO, OTCQB:APHQF) 12,000 12,000
MedReleaf (LEAF.TO, OTCPK:MEDFF) 8,000 8,000
Organigram (OGI.V, OTCQB:OGRMF) 1,000 5,000 6,000
Tillray (private) 5,000 5,000
Aurora (ACB.TO, OTCQX:ACBFF) 5,000 5,000
Zenabis (private)

This article was written by

J Cooper profile picture
10.66K Followers
I used to run a Marketplace service called The Growth Operation.  That service has subsequently been moved to Julian Lin, who is highly-skilled in analyzing and evaluating the cannabis investing marketplace.Julian has renamed the service to The Weed Investors, and it promises to continue to be a great resource and community for investors interested in this growing sector.  I am a contributor to Julian's The Weed Investors community.Thank you to each and everyone who previously subscribed to The Growth Operation.  I appreciate all of your support.-J. Cooper

Analyst’s Disclosure: I am/we are long NINE.V, THCX.V, HMMJ.TO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (17)

d
Hydro scored big in Quebec & may get a small piece in Ontario so I like HYYDF fundamentally & technically, needs blue sky breakout above 4.22 on heavy volume soon. Another sleeper is CNTTF which has good fundamentals but not grt technicals yet: needsxto vreak out above 7.35 on heavy vol. OGRMF looks just fine, may see blue sky breakout above 4.60 on gd vol in June..
d
glad Ontario plans to incl lotsa cos instead of jusr the big boys...
m
C'mon delta 9
k
Will Mrrcf become a player their plans aren’t in question their execution appears to have some doubts
Your thoughts
sambam1 profile picture
Why are you not long on Canopy growth
hawkeyestocks profile picture
Ontario is the big prize in Canada and those companies with branding will take a lead. Organigram and Trailer Park Boys will dominate with their branding and once they up-list to TSE, they will easily be a 10X bagger.
Chris Damas profile picture
'the the big will buy them out'

I disagree.

The "bigs" don't need or want to bail out the little guys at huge premiums to what they can get late stage apps, bankrupt apps, or greenhouses at.

I would argue Aurora's takeover of CanniMed was caused by a frothy market and Aurora got carried away. Plus it was doable with 4 shareholders already locked up.

Aphria also got carried away by the frothy market and bought Nuuvera and Broken Coast.
The Nuuvera is a play on international - which most of the little guys don't have.

MedReleaf bought a greenhouse for $26/ft2 rather than pay hundreds/ft2 if they bought a public grower such Supreme which valued at $200/ft2.

Notice there have been no big public deals for smaller domestic producers since Aphria's Nuuvera deal Jan 29.

Better to buy out late stage and/or bankrupt applicants (Aurora's buy of H2 Biopharma and Pelaton) or in the case of Canopy get them to join the Craftgrow program (Sunniva, Invictus, etc) or in case of Cannabis Wheaton do a streaming deal (many).

Canopy bidding on Spanish Alcaliber - that's where the bigs are doing their deals. International.

Small domestic producers are just gambling chips - you can make money on buying the oversold ones - ABcann, Harvest Newstrike, etc. But buyouts? Forget about it.

Not a lot of synergies because each grow needs a RPIC, SPIC, Q&A, security, etc etc.
O
I agree with everything you’ve said, except Newstrike oversold? I know it has dropped, but no one is paying attention to how small they actually are. They should trading at $100M market cam max. It’s still a strong short.
Chris Damas profile picture
Being oversold has nothing to do with valuation. I don't even like Newstrike. But the stock was beaten up after a two month bear trend. I also put out an overbought note on Newstrike when it hit $3. Now that WAS onv valuation.

Newstrike went from 81 cents February 28 to $1.25 on Tuesday. You can trade oversold stocks for the dead cat bounce.
m
what are your thoughts on sunniva, do you think the stick is undervalued? How night do you think Omnigram can go up?
j
I've got a bunch of them. Big companies and little companies. If the little ones don't make it to big, the the big will buy them out. Case in point PURA.
m
Didn't really get that...i am in the us and I am able to buy Canadian cannabis stock.
G
I like HYYDF.
j
What would generally happen to the OTC shares of Canopy if they are listed on the NASDAQ?
PJ-Garden Lady profile picture
I guess I don’t quite understand why you say that American investors are hungry to buy shares in the cannabis companies. Perhaps we cannot buy directly on the Canadian Stock Exchange but we are currently able to buy ADRs.
I already own shares in ACBFF, TWMJF, HYYDF, & MEDFF. Will Canopy listing on the Nasdaq affect my current ownership, other than perhaps making the share price rise?
P
No...it will no longer be on OTC.
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