Investor buzz for Canadian marijuana stocks has been building since Justin Trudeau became PM
SmallCapPower | September 23, 2016: This isn’t the first time we’ve written about the medical marijuana industry (past articles) but with the top-performing stock in this space soaring 605%, some speculators might be tempted to try and make a ‘big score’. But is it worth the risk?
Related:
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Current State of the Market
In the Canadian market, many medical marijuana producers’ stock prices were stagnant after the jump that resulted from Justin Trudeau’s election win in 2015. However, over the past month, stocks in this sector have jumped 65% on average amongst 44 producers based in Canada, with the Top 5 gainers seeing a 300% average surge. One major contributing factor was the news of Canopy Growth Corporation (CVE:CGC) graduating on July 26th to the largest and most coveted exchange in Canada, the Toronto Stock Exchange (TSX) and the subsequent string funding that followed.
To illustrate the effect, the chart below was pulled from a list of medical marijuana producers which have experienced significant growth since July. The first column is YTD change, the second is the price change from July 1st until September 22nd, 2016 and the final column is the price change from January 1st, to July 1st, 2016. A detailed list of companies can be found at the end of this article.
Recent Market Moves
The availability of funding for the marijuana industry has seen a recent surge since July. Supreme Pharmaceuticals (CSE:SL) has raised cumulatively almost $15 million this summer, of which its most recent $10 million was raised at a stock price of $0.40. Supreme’s stock price now currently sits at about $0.90. Aphria Inc. (CVE:APH) also obtained $30 million in a ‘bought deal’ back in July, which it plans to use to build its $24.5 million expansion that will bring its total production space to 300,000 square feet.
Large producer Aurora Cannabis (CSE:ACB) unveiled its plans in late August to continue on with the construction of a 600,000 square foot, fully automated greenhouse, bringing Aurora’s total production capacity to well over 60 tonnes per year, if current production rates remain steady. With an expected completion date of 2018, that will put Aurora Cannabis in the big leagues with Canopy Growth Corp, who currently boast 550,000 square feet. Aurora has also announced on September 16th that they will be undergoing a private placement for $15 million of unsecured convertible debentures at a price of $1000 per unit, with a 10% annual interest rate, paid semi-annually and maturing in 18 months.
In addition, PharmaCan Capital announced its acquisition of Peace Naturals Projects Inc. on September 6th. This deal expands PharmaCan’s reach from the West Coast into Ontario, and with 35 licensed producers across Canada, you can expect more consolidation as the largest producers look to snatch market share ahead of legalization.
Future Outlooks and Risk
With the recent activity that is going on in the market, it is easy to get caught up in all the hype. Remember that all of this recent activity is for the eventual legalization of marijuana next spring. But what if it doesn’t happen? However small the chance, there still is a chance that the government won’t produce a sufficient law by spring, or ever for that matter. So what would become of the industry then?
Well when looking at the number of registered clients in Canada from April 2015 to March 2016, the yearly increase was 124%. When compared to the number of registered user from the January to March quarter of 2015 to January of 2016, that jumps to 290%.
Analyzing the production numbers of registered medical marijuana producers in terms of kilograms produced vs. kilograms sold (graph below), you can see that production was just barely meeting demand. Although inventories of dried Marijuana are quite high right now, sitting at over 10,000 kilograms, it doesn’t take much of an accident to lose inventory, so the fact that production was so close to demand, posed some risk.
That all being said, with the upward trend of registered clients likely to continue into the future and subsequent demand rising with it, even if legalization for recreational use doesn’t happen in the spring, or at all, there will still be a market for it, the size of it though, that would be up for debate. Although most companies would have to shut down capacity under that scenario, that almost always happens in emerging/ boom markets and you can use it to your advantage. If you get on the ship now that the tide is rising, it’ll be a lot easier to just jump off if the tide rolls out, than it would be to try getting on while the ship is sailing away.
List of Medical Marijuana Producing and Related Companies Based in Canada
