Here’s Why This Major Marijuana Stock Is Looking To Africa

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The long awaited time has come for the legal marijuana industry. The Cannabis Act, or bill C-45, reached the Canadian Senate for a final vote on Thursday, and indicators have all pointed toward its approval. Upon approval, the Cannabis Act would take a giant step toward legalization, meaning by the end of this month Canada may be the first country in the developed world to legalize marijuana for recreational use.

If everything goes as planned with the votes, sales of legal recreational marijuana should open come August or September. Once it’s running at full speed, the legal recreational market could contribute an additional $5 billion annually to Canada’s cannabis sales.

With concerns for domestic oversupply and falling valuations among marijuana stocks, Canadian growers have looked internationally for supply opportunities.  

As the threat of cannabis glut has grown, Canadian marijuana stocks have set their sights beyond the borders of Canada in search of opportunities to unload excess supply. The estimated demand for Canada, according to Health Canada, is around 1 million kilograms per year, but this amount is far lower than the combined projected annual yields of the country’s major cannabis growers. Sean Williams of The Motley Fool estimated Canada’s combined production will be around 2.4 million kilograms by 2020, which would mean more than 1 million kilograms of surplus. Growers are hoping international markets, which should far surpass domestic demand, can take responsibility for the surplus. With more than 24 countries involved in the legal MMJ industry, export agreements could help growers offset the surplus entirely.

Most of the legal MMJ markets are in Europe, with Germany the largest and fastest-growing, though none of these markets have domestic operations for cultivating cannabis. This places these markets in a place of almost complete dependence on Canadian exports to meet the demands of both physicians and patients. The only other markets currently capable of exporting dried weed are the Netherlands, Australia (a recent addition), Uruguay, and potentially Israel in the near future.

One major grower is eyeing marijuana in Africa.

However, opportunities for cannabis markets exist outside of Europe, and one savvy grower, Aphria (NASDAQOTH: APHQF), is looking to Africa to capitalize on the continent’s budding marijuana industry.

A report from CNN and a recent survey conducted by the United Nations both found that Africa is growing over 10,000 tons of cannabis each year, or over 9 million kilograms. Should enough countries in Africa legalize medical cannabis, this level of production could be valued at multiple millions of dollars.

The current picture looks like this: Lesotho, which is landlocked, has given Verve Dynamics a cultivation permit; in recent news, Zimbabwe became Africa’s second nation to legalize cannabis production for scientific and medical purposes; and several other countries, Morocco, South Africa and Ghana among them, have marijuana industries that may only need access to legal channels in order to prosper.

Aphria issued a press release last week stating the formation of a joint venture that indicated an investment in growing marijuana in Africa is within its sights.

Joining with Verve Group of Companies, the other half of the joint venture, will lead to Aphria’s inclusion of Africa in its interest, in the form of Verve Dynamics. The transaction itself was only $3.13 million, but the larger picture is significant.

The joint venture, CannInvest Africa, will not only supply CBD extracts for medical purposes to African countries with legal markets but also within the dozen markets that belong to Aphria’s network. Aphria’s acquisition of Nuuvera provided the company with many of those markets. The company’s CEO, Vic Neufeld, believes having a licensed growing operation on African soil will assist in creating an economy of scale for the region, making it easier for product to reach the continent’s markets. It also places Aphria in a leading position within the industry as the region is poised for significant economic growth.

For those interested in investing in cannabis stock, no opportunity presents itself without some degree of risk.

Africa may offer opportunities for untapped markets, but investors need to keep in mind that these investments will take some time to pay dividends. Even with expectations for the joint venture between Aphria and the Verve Group to produce extracts at lower costs, which in turn can be distributed among Aphria’s substantial network of exports, they should expect to experience limitations in growing capacity and locating buyers in Africa for an undetermined amount of time. In other words, this is not going to be a big money maker – yet.

Another question Aphria will need to answer is whether its network of export markets will be able to handle receiving the company’s excess supply of dried cannabis. Among Canadian growers, Aphria ranks as the third-largest per production capacity, with annual production estimated at 230,000 kilograms.

As was previously stated, by 2020, Canada’s oversupply may easily reach or exceed 1 million kilograms. The margins of the country’s growers will likely be hammered, even factoring in assistance from economies of scale, if they run into issues offloading their annual production. Looking at Aphria’s export markets, the company appears to have it covered; however, there is always the concern of a grower too thinly spreading its distribution network, or on the other end, being too hasty in expanding its focus. Only time will tell how this Africa investment will play out for Aphria, but the potential for investors remains intriguing.

(For more news on Aphria, read 3 Reasons to Congratulate the Q3 Results for Aphria Stocks)

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