This Spring is ushering in not only blooming flowers, but a further blooming of the legal cannabis industry. Most of the excitement is centered around Canada as it anticipates becoming the first developed country – and second country in the world behind Uruguay – to legalize recreational marijuana later this summer.
At this point, it seems highly likely the Cannabis Act will be passed into law in June. Once Canada’s recreational market is up and running, it ought to add $5 billion or more in annual sales to an industry that is already thriving.
As Canadian marijuana stocks wait for the green light to begin recreational sales, energies have been poured into expanding production capacity.
In light of this event, Canadian cannabis growers have widely scrambled to add to their production capacities. These growers have utilized as much of their capital and operating cash flow as possible to fund expansions, acquisitions, strategic partnerships, and renovations in hopes of securing the biggest market share once Canada gives the green light.
Specifically, there are two main motivations for growers to build up production capacity ahead of the anticipated date for legal recreational sales to commence, in August or September. First of all, even given Health Canada’s packaging and labeling restrictions, a large product presence in retail stores may give marijuana businesses an advantage in developing rapport and hooking consumers on their brand.
The second, more critical reason, is that being counted among the country’s top cannabis producers from the get-go, instead of several years down the road, may be significantly more advantageous for securing long-term supply agreements.
These agreements with retailers, individual provinces and fellow growers looking to build up product lines, can stabilize sales and boost cash flow in an industry that is characterized by volatility. All this makes the latest news of which marijuana stock in Canada secured the country’s largest supply agreement a big surprise: the company is largely unknown.
Three Canadian growers have dominated the current cannabis market:
- Canopy Growth Corp. (NASDAQOTH:TWMJF): Between current building projects and greenhouse developments, Canopy operates on 3.7 million square feet of property in British Columbia. The company has remained tight-lipped on the subject of annual production numbers; however, some estimates have put them down for at least 300,000 kilograms per year.
- Aurora Cannabis (NASDAQOTH:ACBFF): Aurora’s preferred method of expansion has been aggressive acquisition. The company anticipates around annual 283,000 kilograms of fully funded pot. As a perk, its Aurora Sky greenhouse is shaping up to be the most technologically advanced of its kind upon completion mid of this year.
- Aphria (NASDAQOTH:APHQF): According to Aphria’s estimates, its annual yield should be around 230,000 kilograms once everything is up and running. This includes produce from its four-phase, organic expansion (100,000 kilograms) and Double Diamond Farms partnership (120,000 kilograms).
A new trait the three of these Canadian producers also have in common is their paltry long-term supply agreements among the country’s provinces, in comparison with what was just arranged between Quebec and Hydropothecary Corporation (NASDAQOTH:HYYDF).
While the kingpin trio also has a role to play in supplying Quebec with dried cannabis – Canopy Growth and Aphria agreed to three years of 12,000 kilograms per year.
Aurora Cannabis will supply 5,000 kilograms minimum the first year and no maximum – Hydropothecary’s deal wins hands down. This unknown grower managed to secure a deal with Quebec for five years, totaling 200,000 kilograms.
According to the deal with Quebec, Hydropothecary’s contribution is as follows: 1st year, 20,000 kg; 2nd year, 35,000 kg; 3rd year, 45,000 kg; 4th year, 50,000 kg; 5th year, 55,000 kg. Beyond this, Quebec maintains the option of extending the agreement another year.
Of note, the supply for years four and five is not yet final, but Hydropothecary has estimated growth demand at 10% annually. After the deal was announced, the CEO of Hydropothecary, Sabastien St. Louis, stated “This is over [CA]$1 billion in forward revenue over five years.”
As one of the lesser-known marijuana stocks to invest in, Hydropothecary (NASDAQOTH:HYYDF) has the appeal of newly expanded Quebec-based operations and non-traditional product offerings.
Back in December, the company acquired 78 acres next door to the 65 acres that house its facility in Gatineau, Quebec. On this property, an organic greenhouse (1 million sq. feet) will be constructed, with the expectation of boosting the company’s capacity to 1.3 million square feet and its annual, fully funded capacity to 108,000 kilograms. The CEO has stated this project is ahead of schedule, with a potential completion date in December.
Adding to Hydropothecary’s appeal is its expanding product line, which is no longer limited to traditional dried marijuana. The company offers oils, extracts, marijuana powder (i.e., Decarb), with a focus on higher-priced niche items like cannabis strains.
However, each of these products come with a higher price point, compared to cannabis in its traditional dried form, translating to higher margins. One of the benefits of these more expensive products is that they cater to an affluent consumer base, which won’t tend to be as affected by fluctuations in the economy. All this points to more consistency in sales.
Investors looking for marijuana stocks to buy now need to understand that, even with these attractive business features, Hydropothecary is not immune to the risks its peers face.
For one, the threat of supply glut in Canada could affect all marijuana stocks, wrecking the margins for most. Long-term supply agreements do not guarantee that Hydropothecary’s profits will match Wall Street’s forecast if oversupply does, in fact, become a reality – particularly if growers can’t export a good portion of the excess to foreign markets where medical marijuana is legal.
In the same manner as its peers, Hydropothecary has relied on bought-deal offerings as a way to raise capital. Though these deals pull in investors, they also tend to cause outstanding share counts to balloon, eventually, diluting existing share value and muddying the valuation of the company as a whole.
Therefore, those looking for marijuana stocks to invest in might want to view Hydropothecary from the sidelines for the time being, keeping in mind the company’s apparent growth and potential as an emerging major player.
(For information on another hot marijuana stock to invest in, read 3 Reasons to Congratulate the Q3 Results for Aphria Stocks)