Regulatory uncertainty has caused the stock prices of many Canadian marijuana stocks, such as Canopy Growth Corp (TSE:WEED), to slump this past spring
SmallCapPower | June 27, 2017: Canopy Growth Corporation (TSX: WEED) revealed recently some big plans to expand its domestic cannabis production in Canada. This includes six additional grow rooms licensed at its Smiths Falls, Ontario Facility, increasing flowering space by 33%, as well as expansion at its Bowmanville, Ontario facility, adding 200% more capacity.
Canopy Growth also reported fiscal 2017 revenue of $39.9 million, an increase of 214% from last year. Its Adjusted EBITDA loss, however, widened to $17.0 million from $14.1 million in 2016. In its release, Canopy Growth referred to its Tweed Main Street online store as being “Amazon-like.”
Many Canadian marijuana stocks, such as Canopy Growth, have stumbled this spring. Shares of Canopy Growth, for example, have slid 22% since April 10, 2017, to its current price of $8.46.
In mid-April of this year, the Canadian government presented its plans for a law to allow for the legal use of recreational cannabis by July 1, 2018. Despite the establishment of a timeline, much uncertainty still exists as to what this legalization will look like, especially since each province will regulate cannabis sales. Just recently, Canada’s Finance Minister Bill Morneau met with his provincial counterparts, urging them not to tax cannabis at such a high rate that would cause black market activity to thrive.
Despite this, Ontario Finance Minister Charles Sousa said a supply crunch was discussed during a meeting with provincial and federal counterparts during the past week. According to a report by the office of the Parliamentary Budget Officer, by the time cannabis becomes legal for recreational use demand is estimated to be 655,000 kilograms a year. To put that into perspective, licensed producers collectively current grow about 80,000 kg a year, and have the funds to expand that capacity to about 400,000 kg to 500,000 kg annually. Health Canada estimates this supply shortfall could remain for two to three years following legalization.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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