Canadian Financial Firms Catch a Contact from Marijuana Stocks

The new year is coming down the pot stock market financing pipeline at an energetic pace – especially for smaller brokerage firms across Canada. The smaller Canadian financial firms that have extended funding to jumpstart marijuana companies, ahead of the full-scale legalization expected in Canada this year, may see a jump in their own profits.

Investors in weed stocks are turning northward to Canada for ripening opportunities.

According to numbers from Thomson Reuters, Canadian pot companies tripled the value of their shares in 2017, reaching close to $1 billion; most of which came in during the last quarter of the year.

Small autonomous brokers are often behind distribution for pot producers, underwriting and funding for growing marijuana companies.  One such broker is Canaccord Genuity Inc., which has also been the lead underwriter for Aurora Cannabis Inc., one of Canada’s key players on the marijuana market.

They struck an agreement back in October that could potentially benefit them and other participating brokers by allowing them to purchase the company’s pot stock shares at the agreed upon price of $3 CAD for the next three years. As of mid-January 2018, Aurora Cannabis Inc. marijuana stocks traded at $14 CAD.

Canaccord’s pot stock shares have soared by 67% since November 2017.

At the beginning of the year, Canaccord extended an invitation to purchase newly issued stock from Canopy Growth along with a $200 million CAD loan that could potentially be converted to stock by Aurora Cannabis.

GMP Capital Inc., another smaller broker, has seen a 110% increase in pot stock shares, alongside Canaccord. GMP Capital also assists in raising funds for digital currency miners – currencies whose values have also risen over the past few months.

These smaller brokers receive compensation in underwriting fees and warrants that the marijuana company could have profited from at a higher value should the company’s pot stock surge. 

Small brokers can also benefit from these rising values of their held warrants. This type of compensation for underwriters may be a viable, cost-cutting method for marijuana companies that are growing, but, have limited cash flow. Within the secondary market, small brokers may also benefit from investor trading of MMJ stocks.

According to an equity research analyst, Vahan Ajamian, “Obviously there is a healthy market here for companies that raise money. I don’t see that shrinking anytime soon.”

However, at the beginning of 2018, Canopy Growth Corp., the largest of Canada’s marijuana producers, received $161.3 million USD in support from BMO Capital Markets. Bank of Montreal’s CEO, Darryl White, said BMO “is open to more deals with cannabis companies, as long as those firms can get past ‘traps’ in the lender’s due-diligence process.” This news suggests the likelihood of more established brokers throwing their weight around and taking pot stock shares from smaller players.

Smaller brokers are the unlikely champions of the rise in market value of weed stocks.

The advantage still belongs to the smaller brokers in funding marijuana research and establishing banking partnerships with cannabis companies. Smaller brokers tend to be more opportunistic and willing to take risks on market trends, which means cryptocurrencies and marijuana related options play to their strengths.

Their larger rivals, owned by banks, have traditionally taken a more cautious approach after viewing the industry as too great a risk for their finances or reputations. The question of when some of Canada’s big banks will participate in the market remains unclear. Their safest point of entry may be with larger, more established pot producers for now.

A new surge of investors are likely to change their stance on marijuana stocks as legalization continues to spread throughout North America.

Among G7 countries, Canada is set to become the first to legalize recreational pot nationwide by July 2018, second only to Uruguay worldwide. At some point, big banks and pot stock investors alike may consider this encouragement enough to toss their hats in the ring with the smaller players. The kind of growth that the pot industry is experiencing and expected to continue in the coming years suggests a trend that is not likely to disappear any time soon.