Global Marijuana Stocks Down 2.2% for the Week, 23% YTD
The global marijuana stock index looked like it was back on its feet early in the week, but steadily retraced Tuesday’s highs and ended the week down for the fourth time in five weeks.
Looking at just Canadian producers, the large caps were down 1%, mid-caps up 2.8% driven by outperformance from Cronos Group, Organigram and Emerald Health Therapeutics and the small caps were down 5%.
Grizzle thinks the industry will require legal supply bottlenecks and higher prices after legalization to push the stocks any higher at current valuations. The stock price gains would only be temporary, however, and if instead prices begin falling soon after legalization, the only direction stocks will go is down at current valuations.
WEEKLY PERFORMANCE OF THE TOP 75 GLOBAL MARIJUANA COMPANIES
Aurora Announces 45% Increase in Capacity — Market Shrugs
Aurora Cannabis announced Aurora Sun, a new 1.2 million sq. ft. hybrid greenhouse that will be producing 120,000 kg initially and 150,000 kg a year at full capacity. They expect production costs below $1/gram compared to $1.40/gram today. The facility will be at full growing capacity by the end of 2019 and will increase Aurora’s funded capacity by 45% (280k kg to 430k kg). Aurora has more than enough cash with $350 million as of the end of 2017.
What This Means for Legal Producers
It’s becoming apparent that marijuana stocks have lost most of their momentum from January and are in a holding pattern leading up to legalization. New capacity announcements used to be enough to drive the stocks 3%-5% higher, but in this case Aurora’s stock price was already below the pre-announcement price only one day later.
Aurora’s stock price of ~$8.60/sh already includes full value for capacity, eventually reaching 430,000 kg, which may explain why the stock didn’t budge on the news.
Hiku Brands Buys WeedMd in All Stock Deal
Hiku, owner of the Tokyo Smoke brand of coffee shops, purchased legal producer WeedMd in an all cash deal. We don’t know exactly how many shares WeedMD has outstanding but we estimate Hiku paid about $2.50 per gram of capacity.
This is a far cry from the days when Aphria and Aurora paid over $50 per gram for Broken Coast and CanniMed. To generate a 10% return on the deal, Hiku will only have to sell marijuana for $1.50 per gram with 30% margins. Definitely achievable in our opinion.
Hiku is the owner of the Tokyo Smoke brand of coffee shops and soon to be retail marijuana stores in Manitoba. Tokyo is trying to set themselves apart by creating a style-first store design that will remind customers of a Starbucks or highbrow local coffee shop. So far they only will be able to sell at retail to 4% of Canadians but they’re positioning themselves for the time when they think the other provinces and/or the US, Europe and Australia will allow private retail stores.
For more details on the regulatory structure of each province read Grizzle’s Guide to Marijuana Legalization.
Ignore What’s Happening in Oregon at Your Own Risk
A very detailed article from Willamette Week explores how bad the oversupply situation is in Oregon, a state with the third-longest track record of legal marijuana sales. Highlights from the article include:
- Retail flower sells for as low as $4.00 per gram
- Wholesale flower is selling regularly for $0.22 per gram
- Oregon has 963 licensed growers compared to under 100 in Canada
Harvard Political Review Lists Barriers to National Legalization
1) Bureaucratic opposition to research
The FDA needs to see proper clinical research showing that medical marijuana works, before they approve CBD- and THC-derived drugs. Conducting clinical research has been so difficult because the DEA routinely blocks applications to grow marijuana for research efforts. The federal government ban on marijuana also has made it almost impossible to conduct clinical trials. Clinical research is stuck in a grey area at the moment which will take time to escape from without political change first.
2) Big Pharma does not want to lose business to the marijuana industry
The classification of marijuana as a schedule 1 drug is supported by pharma industry lobbying. In states where marijuana is legal prescription drug use is down 11% and there has been a 25% decrease in opioid overdoses. Both of these statistics mean sales of prescription pain medicine go down as consumers substitute marijuana to treat pain and other ailments.
The companies that produce Vicodin and Ocycontin (the two most popular painkillers) are the some of the largest donors to lobby groups that oppose marijuana legalization.
3) The law enforcement lobby is even stronger than Big Pharma
Law enforcement is well organized and has been consistently against marijuana legalization. Political support from the local police chief or district attorney is often important for a small town politician to get elected, so the police lobby wields significant influence.
4) The private prison industry doesn’t want to lose jobs
20% of inmates were arrested for nonviolent drug offenses. If marijuana offenses stop leading to prison terms the prison population will fall, leading to lower profits for private prisons handling the overflow of inmates. The largest private prison company in the US spent almost 1% of profit lobbying against marijuana legalization.
What This Means for Legal Marijuana in North America
Lobbying dollars opposing marijuana legalization will make federal approval a drawn out battle. It’s likely a certain critical mass of states will legalize, which will put enough political pressure on the federal government to eventually push through national legalization.
The longer the US drags its feet, the more time Canadian Producers have to establish themselves as world leaders and eventually out compete US producers on a global stage. The US is just giving Canada a head start through the disjointed legalization policies.
Oil and Flower Exports from Canada Still Small, but Growing Quickly
Oil and flower exports from Canada to the rest of the world are growing quickly but from a very small base. Exports on a dry equivalent basis were 4,500 kg in 2017, 2% of current growing capacity in Canada and less than 1% of the oversupply Grizzle expects in Canada by 2021.
As we mentioned in our report The Marijuana Export Mirage, 8.2 million people (1.5% of the population) will have to consume Canadian marijuana regularly in Europe and Australia by 2022 to absorb all of the excess capacity coming out of Canada at that time. Medical patients in Canada were .7% of the population 3 years after legalization so Europe will have to see demand growth double the rate in Canada.
READ THE MARIJUANA EXPORT MIRAGE FOR AN IN-DEPTH REPORT ON THE STATE OF DEMAND FOR MEDICAL MARIJUANA OUTSIDE OF CANADA