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Stocks Rally on Canadian Task Force Recreational Cannabis Recommendations

Dec 14, 2016 • 11:33 AM EST
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8 MIN READ  •  By Michael Berger
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Canadian cannabis stocks rallied after a federal task force released its long-awaited recommendations relating to the legalization of recreational marijuana.

The report was delivered to Jody Wilson-Raybould, Minister of Justice and Attorney General of Canada, Jane Philpott, Minister of Health, and Ralph Goodale, Minister of Public Safety and Emergency Preparedness.

The report was prepared by a committee comprised of nine members who have worked together since June. The task force received online submissions from almost 30,000 Canadians as well as input from countries, including Uruguay and the United States.

Task Force Recommends Using the System for Medical Cannabis

The task force recommends that the system currently in place for medical cannabis be applied to the regulation but recreational cannabis. They also recommended the allowance of personal cultivation (up to four plants per residence). Health Canada is responsible for overseeing medical cannabis and the agency has developed a heavily regulated system.

The task force suggested a minimum age of 18, limitations on packaging, increased caution with edibles and the use of taxes to fund administration, education, research and enforcement.

The task force also said that Canadian adults over the age of 18 will be able to carry up to 30 grams of recreational cannabis, with some exceptions as to quantity. They also recommended using the same tax system for both medical and recreational cannabis and placing heavier taxes on high potency products to discourage their use by the general public.

Companies that will Benefit from Recreational Cannabis

When looking at growth catalysts for Canadian licensed producers, none is more significant than the legalization of recreational cannabis at the federal level. At the United Nations meeting earlier this year, Health Minister Jane Philpott said Canada’s Liberal Party government will introduce a law in the spring to legalize recreational cannabis.

Although legal recreational cannabis will benefit all licensed producers that are approved to sell it, some will benefit more than others. Many licensed producers have been expanding and constructing new facilities to prepare for the increased demand. Investors should focus on companies that are well capitalized, well positioned and well managed.

We want to highlight the licensed producers that we believe are best positioned to capitalize on the recreational cannabis market:

OrganiGram Holdings (OGI.V) (OGRMF) is one of the 36 federally licensed medical cannabis producers in Canada and the company operates through its subsidiary, OrganiGram Inc. The company’s facility is located in Moncton, New Brunswick and they are the only fully licensed medical cannabis producer east of Quebec.

OrganiGram possesses several traits that makes the company an attractive investment. The company sells a premium organic product that continues to see revenue growth and margin expansion, it has established products lines that have strong brand recognition and it has significant expansion opportunities that can be self-funded on account of the company’s strong balance sheet.

Yesterday, OrganiGram reported its full year financial results for the year that ended on August 31st. During the year, OrganiGram sold more than 730,000 grams of medical cannabis, more than 450% higher than the prior year. Highlights from its full-year results include a more than 500% increase in revenue and a 29% improvement in adjusted margin.

OrganiGram continues to grow at rapid rates and is in the process of expanding its current location in order to increase production capacity. When completed, OrganiGram’s expanded facility could bring production capacity to 26,000 kilograms per year.

In early September, OrganiGram announced that it entered into an exclusive product development and distribution agreement with TGS International. The agreement will provide for consulting services related to the development and operation of a commercial scale cannabis extracts production and processing facility as well as the exclusive licensing in Canada of over 225 unique cannabis products.

TGS International is an affiliate of The Green Solution, a vertically-integrated cannabis company that owns and operates over 300,000 square feet of state licensed and regulated production, processing, and manufacturing facilities as well as 11 medicinal and/or adult-use retail locations in Colorado with three additional locations set to open by the end of 2016.

TGS has commercially developed an extensive line of cannabis extract and derivative products. Their award winning proprietary brands, The Green Solution and NectarBee have generated $100+ million in cumulative sales through their affiliated Colorado operations, including $43+ million in 2015.

Following the completion of a capital raise, OrganiGram has $62.4 million in cash and cash equivalents as of December 8th. The company plans to use this capital for future expansion possibilities, for working capital and for general corporate purposes. We are very favorable on OrganiGram’s position within the legal medical cannabis market and we expect to see the company capitalize on higher demand when recreational cannabis is legalized.  

Earlier this month, Canopy Growth Corp (CGC.TO) (TWMJF) announced plans to acquire all of the issued and outstanding shares of Mettrum Health (MT.V) (MQTRF).  The combination of the two businesses will create a globally diversified cannabis company that has six licensed facilities and a licensed production footprint of approximately 665,000 sq. ft. with significant acreage for expansion. The arrangement needs to be approved by the shareholders of both Canopy Growth and Mettrum, as well as by the court and by the TSX.

We are favorable on this acquisition for a number of reasons and believe it will immediately prove to be accretive. The combined company will bring together Mettrum’s simple and proven Mettrum Spectrum brand with the medically-focused brand of Bedrocan Canada and the lifestyle-focused brand of Tweed. 

On the hemp side of the business, the integration of Mettrum Originals with Canopy Growth’s recently acquired hemp.ca platform will solidify Canopy Growth’s position in the hemp market

Following the completion of the acquisition, Canopy Growth will have a cash balance of approximately $68 million, will have one of the strongest balance sheets in the industry and will be well-funded for expansion and product development initiatives.

Aurora Cannabis (ACB.V) (ACBFF) has been selling cannabis products for less than 12 months and continues to register new patients at industry leading rates. The company received its license to sell medical cannabis on November 27, 2015, and started to generate revenue from the sale of medical cannabis on January 5th

Aurora has been executing on its business plan as it continues to increase its market share in the Canadian cannabis market. Aurora’s fundamentals continue to improve and the company’s CEO expects the business to transition to profitability in the near future.

At the end of November, Aurora Cannabis announced that it has broken ground on an unprecedented 800,000 square foot production facility that will be known as Aurora Sky.  The hybrid greenhouse facility is expected to be the largest, most advanced and most automated cannabis production facility in the world. The facility will be located on 30 acres of leased land in Alberta. 

The company said that it believes that Aurora Sky will be able to produce 100,000+ kilograms of high quality cannabis per year. The location of the new facility provides unrivaled access to transportation, industrial infrastructure, power, water, gas, and courier services. Aurora also expects the high level of automation at the facility to provide for ultra-low per-gram cost of production. 

The Aurora Sky project team includes designers and suppliers with impressive track records from greenhouse projects around the world. The nature of the design of the facility will allow for a quick construction process. The company expects the facility to be completed in October 2017.

Outlook is Bright

Although these companies are some of the most attractive investment opportunities, there are plenty of other stocks levered to the Canadian cannabis industry.

We encourage that you take a look at the following: Aphria (APH.V) (APHQF), Emblem Corp (EMC.V), Supreme Pharmaceuticals (SL.V) (SPRWF), and Canabo Medical Corp (CMM.V) (CAMDF).

 

 

Important Investor Disclosures 

Disclosure.  Compensated Affiliate.  This report was authored by and is property of StoneBridge Partners LLC.  All information and data relied upon in drafting this report is publicly available.  The author believes and considers its sources to be reliable, but does not guarantee the accuracy or completeness of any information contained in this report.  Any and all information, data, analyses and opinions are provided for informational purposes only and is not intended, in any manner, as investment advice.  Any projections or other information generated by StoneBridge Partners LLC regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.  None of the material contained in this report is intended as a solution or offer to sell or purchase a specific stock or any other investment.  This report is not directed to, or intended for distribution or use by, any person or entity that is a citizen, resident or located in any municipality, state, country or other jurisdiction where the distribution, publication, availability, or use of this report is contrary to any governing law or regulation.  The securities discussed in this report may not be eligible for purchase and/or sale in certain jurisdictions or by particular individuals.  It is important that you check any and all governing laws and/or regulations that may be applicable in your jurisdiction.  Investing in securities of issuers organized outside of the United States, including ADRs, entail certain risks.  The securities of non-United States issuers may not be registered with, nor be subject to the reporting requirements of the United States Securities and Exchange Commission.  Please contact a Financial Advisor for professional advice regarding any and all securities investments.  This report is intended for informational purposes only.  StoneBridge Partners LLC’s officers, directors, employees, affiliates, or subsidiaries may have positions in securities covered by StoneBridge Partners LLC.  StoneBridge Partners LLC receives compensation from the company and/or has a position in the securities mentioned in this report

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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