Global marijuana stocks up 1.2% for the week, driven by M&A rumours
The global marijuana stock index had a volatile week, but ended up slightly for the week. Results were driven by M&A buying in the licensed Canadian space with MedReleaf bouncing on buyout rumours.
CannTrust also had a strong return for the week as investors liked the news that they’re working with health benefit administrator NextGenRX to supply medical patients.
Looking at just Canadian producers, the large caps were up 11%, mid-caps down 4%, and the small caps were flat. Canadian producers as a whole are now down 41% since the peak of euphoria in January of 2018.
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
Political Drama this Week Makes it Possible Legalization Could be Delayed
The Senate Committee on Aboriginal Peoples called for a delay to the passage of Bill C-45 on Wednesday to give the government more time to create a framework to share tax revenue from marijuana with First Nations. When asked about a potential delay Prime Minister Trudeau seemed to leave an opening for a delay in the bill when he stated:
However, conflicting information came out Thursday when the Indigenous Services Minister was asked about a delay and stated she wants to move forward with the bill.
There are conflicting voices as can be expected in politics, but dissent does seem to be mounting against the current July or August timeline for the bill. It’s hard to know if the political will is there to actually delay legalization but we will know soon as the final reading of the bill before it becomes law is on June 7, five weeks away.
MedReleaf in Talks to be Acquired by Aurora Cannabis
The Globe and Mail broke a scoop on Wednesday that MedReleaf, the third largest licensed producer by market cap was looking to sell itself and Aurora Cannabis is believed to be the leading bidder. The two companies are currently in talks but no deal has been announced.
We don’t think MedReleaf is worth more than $10 per share but it will likely sell for at least a 20% premium to its recent trading price of $22.74. The company trades for about $16.50 per gram of future capacity (140,000 kg). At that price any buyer would need to sell the newly purchased capacity for $7.60 per gram to make a 10% return on the deal. Black market prices were already below $7.60 in 2017 and with the legal oversupply Grizzle sees coming, retail prices at that level could be a tall order.
What this deal means for stockholders
Investors should be very wary of an industry where the third largest company is cashing out before the massive market opportunity (their words) has even opened. What do they see coming that public investors don’t?
The premium ultimately paid for MedReleaf will give us a good view of what marijuana insiders think the upside is to the stocks post legalization. Watch closely.
For our complete thoughts on the deal see:
Provinces Offering Only $4-$6 Gram to Licensed Producers (LP)
News is starting to trickle out about the pricing provinces are willing to offer to legal producers for their supply. Marijuana Business Daily is reporting that most provinces are offering LPs $4-$6 per gram while British Columbia is trying to get away with $2.50-$4 per gram.
LPs currently make about $8.30 per gram. If you take the $4-$6 per gram range and take off $1 per gram of excise tax, LPs could be making more than 50% less per gram this time next year.
Bottom Line for Licensed Producers
The provinces with government-owned retail models serve 75% of the Canadian population and have all of the negotiating power. Legal producers can take the price they’re offered or else they must rely on international demand to absorb the excess. With legal supply in Canada hitting 900,000 kg next year and 1,500,000 kg the year after, exports to Germany and Australia are going to have to reach an entirely new level from the 500 kg shipped in 2017.
READ THE MARIJUANA EXPORT MIRAGE FOR AN IN-DEPTH REPORT ON THE STATE OF DEMAND FOR MEDICAL MARIJUANA OUTSIDE OF CANADA