Canada’s new majority liberal government is about to legalise the recreational use of marijuana. A shaggy-haired, tattooed snowboarder, Prime Minister Justin Trudeau recently confiscated a stoner’s lighter and told him sternly: “You are not going to hotbox my office!”
Clearly, there is a new wind blowing across the formerly conservative Canadian tundra. The economics of the new law are being vigorously debated. One university professor predicts that marijuana sales could generate $3-billion a year in tax revenue—about 50% of alcohol’s value. The most conservative estimate pegs the value of the legal crop at $5 billion per year.
OrganiGram Holdings Inc. (TSX.V: OGI) (OTCQB: OGRMF)—a leading producer of organically grown medical marijuana—is one of 18 companies currently in possession of a marijuana production license.
“There is a 100% certainty that the marijuana policy of the new Canadian government is a positive development for OrganiGram,” stated Director and CEO Denis Arsenault in an exclusive interview. “We anticipate that Health Canada will continue to control the licensing. Because of the high capital costs and the slow timeline from seed to crop, new players are not expected to appear quickly.”
If all the licensed producers in Canada enter the recreational market at maximum capacity, they would generate about $550 million in sales. With the recreational market 800% bigger—prices should remain stable or rise.
Some provinces will manage marijuana sales through the existing infrastructure of provincial Liquor Control Boards. They might create shelf space by removing inventory of slow moving wines, or open separate dispensaries, or grant licenses to private agencies.
“Any scenario under discussion will create opportunity for the shareholders of OrganiGram,” explains Arsenault. “Currently we can only send product to certified medical patients. There is paperwork and due diligence involved. Under the new laws, after validating a customer’s age, we would hope to ship directly to their home.”
Importation of marijuana is not expected to play a role on the supply side. The International Narcotics Control Board (INCB) requires specific bilateral agreements between exporter and importer.
OrganiGram’s grow facility is situated in an industrial park in Moncton, New Brunswick. Being the only producer east of the Ottawa region, OrganiGram generates 80% of their sales from the Maritime region. New Brunswick is a spectacularly low cost environment for agricultural producers.
“Our industrial electricity rates are about 70% lower than Ontario’s,” states Arsenault. “With the diminished role of the fisheries, the labour market is tight—giving us access to motivated, highly skilled workers. Currently, these cost advantages increase our bottom line. But in 5 to 7 years, when supply eventually catches up to demand, they will be critical to the long-term growth of the company.
OrganiGram was an early applicant into the Canada Health system, so the company benefitted from “first mover status”. The organic certification is an important differentiator in the health-conscious marijuana market.
Vaporised organic marijuana leaves a pure white ash, contrasting with the tar-like residue of non-organic product. For investors in OGI, the organic label also reduces risk from litigation. Two marijuana buyers in Colorado—one suffering from a brain tumour—recently initiated legal action against the state's largest pot grower for allegedly using a dangerous pesticide called Eagle 20.
“Many of our customers have diminished immune systems, so they’re extremely conscious about what they put into their bodies,” confirms Arsenault. “We do not charge a premium for the organic designation, but we do consider it an important differentiator in the way we brand and market the product.”
OrganiGram currently has 42 full time staff. Over the next 18 months, as production ramps up to meet demand, Arsenault predicts hiring 70 new workers.
“We belong to a select group of government-licensed producers,” states Arsenault. “We intend to stick with what are already good at: growing high quality organic marijuana for Canadians. There is a lot of romanticism about marijuana production, but we view ourselves as a customer-focused agricultural company.
OrganiGram was the first North American marijuana producer to embrace LED lighting. Instead of the traditional 1,000 watt light bulb, which throws off 3,700 BTU, it uses 520 watts which throws off only 1,400 BTU. That means lower light-generation and cooling costs. OrganiGram grows on three vertical levels, reducing capex and generating more kilograms on a smaller footprint.
The quarter ended November 30th, 2015, OrganiGram did north of a million dollars in sales. That’s up from $592,000 from the previous quarter—a 70% growth rate, quarter over quarter.
“You can talk all you want, but the numbers have to be there,” confirms Arsenault. “We are now cash flow even. We have surging sales in a low operating environment.”
OrganiGram sells marijuana for an average of $7.64 per gram, with cost of about $1.91 per gram.
“I could be producing windows; I just happen to be selling marijuana. At the end of the day it’s always the same thing: good people, low costs and great product. OrganiGram is run by businessmen, not stock promoters. Over the long term the focus on quality, sales and customer service will build value for the shareholders as we enter this massive new market.”
https://www.bnn.ca/News/2016/1/6/Licensed-Canadian-pot-growers-eye-5-billion-frontier.aspx