Nanalyze

Canadian Weed Industry is Ready to Start Smoking

Investing in the budding marijuana industry can be sticky business.

Last year, at this time we compiled a list of 57 weed stocks, but warned that you’d be better off rolling a blunt with a twenty-dollar bill than buying most of the garbage out there. Of course, there are exceptions to every rule. One of those we told you about is a Canadian company called Canopy Growth Corp., which trades on the Toronto Stock Exchange under the enviable ticker symbol, WEED. Canopy is the biggest grower in the Great White North (if not the world), and its stock has gone absolute bonkers of late. As the Motley Fool reported, Canopy Growth’s shares have appreciated by more than 50 percent over the last five weeks ending Nov. 3, giving the company a market cap of $3.75 billion.

There are a few reasons for that, not least of which is the announcement last month that Constellation Brands (NYSE:STZ), maker of an alleged beer called Corona, would invest $191 million in the ganja grower and retailer, taking a 9.9 percent stake in the company. Besides the obvious synergy between beer and weed, the deal lends further legitimacy to Canopy and the Canadian weed industry in general. And that’s what we want to dive into today: What is the current state of the Canadian weed industry and where is it headed as the Canucks prepare to become only the second country in the world to legalize recreational marijuana at the federal level?

The Big Day

Mark it on your calendar: July 1, 2018. Canada Day, commemorating the date when the country officially united into one nation, will also be remembered as the day when the country united for legalization. Uruguay is the only other nation to legislate legal weed at the national level for possession, sale, transport and cultivation of the cash crop.

Canada legalized medical marijuana back in 2001. And now the political will to pass Bill C-45 for recreational use is there. The big question remains timing, as the Senate is expected to scrutinize the legislation heavily before passing it on through the bureaucratic machine. That could be one delay. Law enforcement has also expressed concern that it won’t be ready, particularly to police impaired driving among users, according to a story that first appeared in the Washington Post. (Though maybe they just need to buy a marijuana breathalyzer.) And then there is the actual implementation of the law from the federal level down to the provinces and municipalities.

What’s in the Bill

Under the proposed legislation, the Canadian government would license the growers and set standards for potency and establish penalties. It would be up to the provinces on how weed would be sold at the local level. Ontario, for example, is considering a government-run operation, as it already does with alcohol.

According to the language in Bill C-45, anyone over age 18 (though that could be increased up to age 21 by some provinces) can possess up to 30 grams of dried cannabis. Adults will be allowed to cultivate up to four plants per household. Consumers will have their choice of dried cannabis, cannabis oils, fresh cannabis, cannabis plants and cannabis plant seeds. Edibles will not be on the shelves but are slated for regulation sometime after the legislation takes effect. Businesses currently licensed to operate in the medical marijuana industry will be grandfathered in for recreational weed.

How Big is the Canadian Weed Industry?

Good question. Our own back-of-the-napkin estimate, based on government figures and the average price per gram sold by Canopy, gave us a market value of about $4 billion for the current medical marijuana industry based on about 700 tons of dried cannabis consumed by Canucks.

A report from global accounting firm Deloitte, attempting to project the new baseline when recreational sales kick in, said the retail market could be worth up to $8.7 billion. Adding in all of the ancillary services that might fit into the new weed economy, Deloitte puts the total market at $22.6 billion. That seems a wee bit optimistic, especially since it’s based on nearly 40 percent of the population being consumers (22 percent who said they use marijuana at least some of the time and 17 percent who might try it once legal).

A report in January 2016, by Canadian Imperial Bank of Commerce, or CIBC, notes that in Statistics Canada surveys, only 12 percent of Canadians admit to using weed. CIBC suggested, based on consumption rates in British Columbia, that total Canadian spending would amount to only about $3 billion. But then their math gets a bit more creative. Using Colorado as a model, CIBC estimated that the market has the potential to reach $10 billion Canadian (about $7.85 billion). Yet a third calculation by CIBC is based on total weed consumption, which it pegs at 770 metric tons (or almost 850 U.S. tons), which gives it a market value of $5 billion Canadian (about $4 billion). That’s more in line with a government report that estimates annual national demand for recreational pot at 650 to 690 tons, for a total retail market of $5.5 to $5.8 billion Canadian ($4.3 to $4.6 billion).

Taxation

It’s the default reason why many governments are legalizing weed: tax revenue. Canadian Prime Minister Justin Trudeau’s government has proposed an excise tax of $1 per gram of cannabis for weed sales up to $10, with a floor of 10 percent of the total price of pot selling for more than $10. Add in federal and provincial tax rates and you’re figuring that consumers will be hit with as much as a 25 percent tax.

The CEO and founder of Canopy, Bruce Linton, told CBC News that taxes would mean that a gram of recreational weed would retail for about $10, adding that price would be on par with the black market.

Production

Canadians probably shouldn’t worry about there being enough weed to go around once the plant is fully legal next year. Canada’s biggest growers appear to be on pace to more than meet demand.

Medical marijuana production and use are trending sharply up in Canada. Credit: Health Canada

Canopy Growth is currently licensed to produce 31,000 kilograms of marijuana with plans to triple that by July 2018, according to a story in Reuters. Canopy recently purchased property that will allow it to add 450,000 square feet of greenhouses to its existing 350,000-square-foot facility in Niagara-on-the-Lake, Ontario, Reuters reported. It is also building an additional 200,000 square feet of greenhouse capacity on its existing property and expanding other properties, including its headquarters in a former Hershey factory.

The Canopy Growth brands. Credit: Canopy Growth.

International Cannabis is reportedly developing four million square feet of possible growing space while Aurora Cannabis is constructing an 800,000 square foot facility near Leduc, Alberta, the Financial Post reported. Work on the facility broke ground this past summer. Company officials say the facility will be able to produce 100,000 kilograms of product per year at full capacity. Yet another Canadian grower, Aphria Inc., purchased a 40-acre greenhouse facility in Snowflake, Arizona, with plans to expand its own facilities from 100,000 to 300,000 square feet, with an annual yield of 18,000 kilograms, according to the Financial Post.

And then there’s a company called MYM Nutraceuticals Inc. that claims to have signed an exclusive deal with the city of Weedon (of course) to build a 1.5 million-square-foot cannabis production facility consisting of fifteen 100,000-square-foot greenhouses. The company says it would be one of the largest growing operations in the world, with the potential to produce more than 150,000 kilograms of cannabis per year.

That’s definitely more weed than Canada could ever hope to smoke. Companies like Canopy are authorized to sell outside of the country, with Germany being a primary market. Canopy CEO Linton told Reuters he expects more than half the company’s revenues to come from business outside Canada in the next few years.

Conclusion

It’s exciting times to be a stoner. It’s even more exciting if you’re an investor who desperately wants to make money in the Canadian weed industry. While there are some big unknowns around what the true market value will be once recreational marijuana becomes legal next year—and we suspect more than a few growers and businesses will overreach—investors have to feel good about an industry legitimized by its federal government. Until the United States follows Canada’s lead, industries at the state level like those in Colorado and Washington will continue to face financial and political uncertainty.

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