Newstrike Resources Will Likely Have Other Suitors After CanniMed

Newstrike Resources Ltd. (TSXV:HIP) has a strong brand in Canada because of its partnership with iconic Canadian musical artists The Tragically Hip

SmallCapPower | January 26, 2018: Newstrike Resources Ltd. (TSXV:HIP) shares slid 19% to close at $1.47 on Wednesday following a friendly agreement in which Aurora Cannabis Inc. (TSX:ACB) will acquire CanniMed Therapeutics Inc. (TSX:CMED) in a stock-and-cash transaction valued at approximately C$1.1 billion. The acquisition by Aurora Cannabis, which would create Canada’s largest cannabis company by market capitalization, stipulates that CanniMed terminate its proposed acquisition of Newstrike Resources, in which Newstrike investors would have received 0.033 CanniMed shares for each Newstrike share held.

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Newstrike Resources, though, will receive $14.1 million, which includes a $9.5 million break-up fee in addition to funds from the exercising of warrants by CanniMed Therapeutics. Newstrike Resources said it will use this money to bring its 160,000 square foot automated Niagara Facility greenhouse into licensed production ahead of schedule and accelerate and expand the roll-out of its Up Cannabis brand across Canada.

Newstrike Resources also announced late Wednesday that it has entered into an $80 million bought-deal financing agreement, which could grow to $92 million if over-allotment option is exercised. A cash-up Newstrike would be even more appealing as a potential takeover target.

Newstrike Resources is the owner of the marijuana producer Up Cannabis, and is based in Brantford, Ontario. The Company has three production sites at Brantford, Grimsby (Niagara), and Creemore. Currently, the Brantford facility has a cultivation license with a production capacity of 3,000 kgs. The other two facilities are still under construction and Newstrike Resources expects total production to reach ~10,000 kgs by the end of 2018.

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Newstrike Resources recently received approval from Health Canada to amend its license, which will allow its wholly-owned subsidiary Up Cannabis to sell cannabis in dried marijuana form. Shortly after, Newstrike received approval that would permit the expansion of Niagara region greenhouse facility to approximately 320,000 sq. ft. of dedicated cannabis production space, along with a further 80,000 sq. ft. of cannabis processing space.

The real appeal of Newstrike Resources, however, is in its branding. Newstrike has a strong brand in Canada because of its partnership with iconic Canadian musical artists The Tragically Hip, which also has an ownership interest in Newstrike Resources. Since cannabis strains appear largely indistinguishable to most consumers, branding become an increasingly important part of the sales process.

Canopy Growth Corporation (TSX:WEED) could be considered a leading contender to acquire Newstrike Resources, as Canopy has a first-mover advantage in branding cannabis products in Canada, which includes a partnership with a rap musician Snoop Dogg. With Aurora Cannabis set to overtake Canopy Growth as Canada’s biggest market cap cannabis company, it seems inevitable that Canopy Growth Corp will make further moves to cement its market-share leadership in Canada as well as globally. Canopy Growth announced recently a bought-deal financing in excess of $200 million.

Disclosure: Neither the author nor his/her family own shares in any of the companies mentioned above.

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