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Africa Is Becoming An Essential Part of Several Cannabis Producers Global Growth Strategies

Feb 4, 2020 • 6:53 AM EST
6 MIN READ  •  By Michael Berger
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During the last year, we have seen a considerable increase in the number of countries that have jumped on the legal cannabis bandwagon and legislation favorable to the industry.

One of the best examples of this trend is related to the activity that is taking place in Africa, a market that is not even in the first inning of a major growth cycle. Several companies have reported plans to enter Africa and this is a long-term opportunity that we are bullish on. It will take several years (if not longer) for this market to scale and today, we have highlighted 3 companies that are focused on it.

Spectrum Therapeutics: An Attractive Part of the Canopy Growth Story

Canopy Growth Corporation (WEED.TO) (CGC) was an early mover on the African cannabis opportunity (through its wholly owned subsidiary, Spectrum Therapeutics) and we believe that the market does not fully appreciate the growth prospects associated with it. When compared to its peers, the Canadian cannabis producer has some of the most attractive leverage to burgeoning international cannabis markets and we are favorable on this aspect of the story.

When it comes to Canopy Growth, Spectrum Therapeutics is an important aspect of the business. Spectrum operates in Australia, South America, Africa, and across Europe, and its products are available in a wide range of potencies and formats that are designed to simplify the dialogue around strength and dosage by applying a color-coded spectrum to categorize medical cannabis.

In Africa, Spectrum Therapeutics has been granted a medical production license that covers two facilities in Lesotho. The facilities have 21 million sq. ft. of outdoor grow space and 322,000 sq. ft. of indoor, outdoor and greenhouse space combined, respectively. We are bullish on the growth prospects associated with the licensed areas and will monitor how the team continues to execute. Spectrum Therapeutics owns one of the largest legal outdoor CBD cultivation sites in Africa and we are favorable on the amount of value that can be generated through it.

Spectrum Therapeutics also has leverage to the cannabis market in South Africa and previously acquired 12 hectares of land located in the Atlantis Economic Zone in Cape Town. The company has submitted the necessary applications for a cultivation and post-harvest processing facility license, which is expected to complement its current production capabilities in Lesotho. We believe that Spectrum has visible growth prospects and are favorable on how this asset supports the growth of the entire business.

Last year, Canopy Growth issued an update on the opportunity in Africa and we expect to receive another update on it in the near future. We believe that the market has discounted this aspect of Canopy Growth’s business and are bullish on its long-term growth prospects. Going forward, we expect the international side of the business to play a more important role in growth and will keep an eye on how the story evolves from here.

Stem Holdings Has Attractive Leverage To South Africa

Last year, Stem Holdings Inc. (STEM.CN) (STMH) joined Halo Labs on a short list of companies that have leverage the cannabis opportunity in Africa. Through a definitive agreement to acquire South African Ventures Inc. (SAV), the US cannabis company became levered to the emerging cannabis market through a joint venture with Profile Solutions Inc.

One of the reasons we are excited about this opportunity is related to the preliminary approval that the joint venture has received to become the only licensed cultivation and processing facility for medical cannabis and industrial hemp in The Kingdom of Eswatini for a minimum of 10 years. SAV has an $11 million working capital surplus and it was acquired for 8,250,000 common shares of Stem Holdings.

When analyzing the growth prospects associated with the joint venture there is a lot to be excited about. According to the agreement, the joint venture will:

  1. Operate an advanced hemp and medical cannabis manufacturing facility to grow and cultivate cannabis in accordance with strict Good Manufacturing Practices (GMP) global health standards
  2. Distribute hemp and medical cannabis within Eswatini
  3. Be the exclusive exporter within Eswatini for hemp and medical cannabis worldwide
  4. Operate a medical cannabis research and development lab
  5. Build a training facility to create jobs for local Eswatini citizens.

Following the signing of the definitive agreement, Stem Holdings has come under pressure and we continue to follow the opportunity. The company has attractive leverage to burgeoning markets in the US and we are bullish on the focus on international opportunities. We believe that the market does not fully appreciate the growth prospects associated with Stem Holdings and this is an opportunity that we will continue to closely follow.

Halo Labs: A Domestic and International Growth Story

Halo Labs (HALO: NEO) (AGEEF) has also been an early mover on the cannabis opportunity in Africa. The business has been highly focused on the cannabis oil side of the business and has been executing on a series of organic and inorganic growth initiatives. Halo Labs is one of the few US cannabis businesses to be focused on international markets and we want to highlight the work the management team has accomplished in Africa.

In late January, Halo Labs issued an update on Bophelo Biosciences & Wellness which is highly levered to the opportunity in Lesotho, Africa. By the end of February, the company expects to harvest to first 350 plans which is ahead of schedule. In the near future, Halo Labs expects to receive the necessary approvals from the government to complete the acquisition of Bophelo and this is expected to be a catalyst for the business.

Bophelo and Halo have also launched the Phase 1 expansion (consists of 8 hoop houses and 1 Cravo greenhouse) to grow multiple strains of potential medical cannabis exports from Lesotho. Halo expects to complete the 1.2 hectare build by the end of March and anticipates harvesting half an acre of canopy from it in 2020. At full utilization, Phase 1 houses 3 acres of total canopy (or approximately 120,000 square feet) and this is an opportunity that we are excited about.

The expansion will significantly increase the amount of potential production capacity and we find this to be significant. In the second half of the year, Halo Labs plans to further expand Bophelo’s production infrastructure and we are favorable on the growth prospects associated with these plans.

Halo recently started the formal European Union Good Agricultural and Collection Practices (EU GACP) certification process for growing medical cannabis in Lesotho that can be distributed to the United Kingdom (UK). Upon receipt of the EU GACP certification, Halo expects to utilize Canmart Limited, a holder of wholesale distribution and special cannabis licenses in the UK, to import medical cannabis products into the market. Halo is in the process of acquiring Canmart to gain a foothold in the UK which is expected to be the start of its plan to gain more distribution channels into European markets.

2020 has already proven to be a tough year for Halo Labs and the recent trend has been to the downside. Momentum has been pointing lower and we expect the closing of the acquisition to help reverse the current trend. We believe that Halo Labs has an attractive risk-reward profile and are favorable on the markets it is levered to in the US. Once the company has leverage to the cannabis opportunity in the EU, we expect it to be in a league of its own and we will continue to closely monitor it.

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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