There is an arms race going on in Canada right now. A cannabis arms race.
Select Canadian marijuana growers are building out their capacity like nothing you’ve ever seen. It’s reminiscent of the pedal-to-the-metal acceleration we saw when the internet boom was first lifting off.
Why? Because Canada legalizes recreational marijuana at the end of June in 2018. And there is going to be a shortage of available weed.
That means those who have weed to sell will have pricing power. And profit power.
Currently, Canada’s marijuana growers produce about 80,000 kilograms per year. When that country legalizes recreational marijuana next summer, demand could jump to about 400,000 to 500,000 kilograms per year.
You might ask, how is it possible to have a weed shortage? After all, Canadians know far in advance that legalization is coming. Why don’t they just grow more?
The problem is they don’t just hand out licenses to every bear, beaver and moose who wants one. It’s a long and arduous process.
One report said that, by the end of March, Health Canada had received 1,630 applications for licenses to grow or sell medical cannabis. That’s the only kind of marijuana permitted in Canada now.
Do you know how many licenses they’ve issued?
Just 52. That’s all. In the entire country.
And the seven-stage application process to obtain a license is “not for the faint of heart,” Eileen McMahon said in press reports. She should know. She chairs the food and drug regulatory practice at the Canadian law firm, Torys LLP.
“The entire application process can take more than a year to complete,” advises a Health Canada webpage that outlines the process.
And the government checks out every person who applies very, very carefully.
Once issued, the license is bound to the address, not the person. So a person with a license can’t just run around planting willy-nilly.
But they can grow a lot more where they are licensed to grow it.
Hence the arms race. There is an enormous build-out of greenhouses and grow-buildings by current growers. And by companies that don’t even have licenses yet.
Here’s a chart I made using commonly available data of what I call Canada’s “Fantastic Five.” That is, the five Canadian marijuana growers with the most growth potential.
You can see the build-out is going to be enormous. And demand is only expected to keep … well … growing.
The good news is I’ve already recommended two of the fantastic five to my Marijuana Millionaire subscribers. And I’m looking for more entry opportunities.
A grower isn’t the only way to profit off this trend. For example, there is the marijuana streamer Cannabis Wheaton Income (TSX-V: CBW).
The company is so-named to draw similarity between its business model and that of Wheaton Precious Metals (NYSE: WPM). That’s one of the world’s most-successful gold and silver streamers.
Cannabis Wheaton has signed 15 streaming agreements with marijuana growers across Canada. The way streaming works is that a streaming company takes production and/or equity stakes in companies in return for financing. The streamer also provides expertise and business guidance. After all, it’s in its best interests for the producer to succeed.
For example, Cannabis Wheaton made a C$15 million equity investment in Canadian medical marijuana grower ABcann Global (OTCMkts: ABCCF). In return for C$41 million over the next two years, Cannabis Wheaton gets 50% of the production from a new cultivation space that ABcann is building. This works out to an estimated 8,000 kilograms per year of marijuana.
Still, Cannabis Wheaton isn’t projected to make any money from streaming this year, or in 2018, either. A big reason why is that its partners’ facilities are in the construction phase, and will be going into next year.
Last week, I had a chance to talk to Jeff Tung. He’s the Chief Financial Officer and Chief Operating Officer of Cannabis Wheaton.
He agreed that the looming shortage in supply was a real thing. “That gap in supply will be met by the black market,” Mr. Tung said.
Interestingly, Mr. Tung told me that Cannabis Wheaton doesn’t need marijuana use in Canada to grow for the company to do well. Instead, their forecast is for more and more of black market customers to become legal customers.
And the company is thinking beyond Canada. “We are talking to potential partners in Australia, Germany and other countries with a more-progressive attitude toward Cannabis,” Mr. Tung said.
To be clear, this article is not a recommendation of Cannabis Wheaton. (Sorry, Mr. Tung).
The company has experienced financial bumps. Cannabis Wheaton currently has 174 million shares outstanding on a float of 140 million shares. It has a market cap of US$108 million. For a number of reasons, it had to cancel an C$80 million financing in June. This was replaced with a successful C$50.25 million financing.
But the new deal results in an additional 35 million shares over the next two years. The market sees this financing as dilutive. And you can tell that from the chart …
I may decide to buy Cannabis Wheaton in the future. For now, I think those Fantastic Five growers I told you about earlier are more interesting. I’m keeping the names on that list close to my vest because I’m waiting for buy signals on some of them.
Some have a lot of cash flow now. They’re plowing every cent into building more capacity. Their profit potential could be HUGE!
Pot stocks are volatile. Please, do your due diligence before buying anything. But this is one trend you want to ride.
All the best,