sorry it came out like $hit. Too bad as the spreadsheet at the bottom is great cheat sheet for funded capacity.
Buckshot26 wrote:
My posts aren't formatting well for whatever reason so I'm not sure how this will look. This is informative. You may not agree with it, but a lot of hedge funds are passing this note around so it will give you some insight into what the big money is thinking at the moment and why they have been sellers for the past two weeks: REEFER MADNESS AN OVERVIEW OF THE CANADIAN MARIJUANA SECTOR January 16, 2018 As most of you know, I have spent a lot of time researching and investing in the Canadian Marijuana sector over the last 4 years. In the past few months, since Canopy announced that Constellation Brands made a significant investment in the company, the entire sector has been of fire, some stocks being up as much as 300%. Full disclosure: I have now sold all my public market positions and I am selling short. The valuations that the market is paying for the marijuana sector are beyond reason. I firmly believe that current levels are not sustainable. Below is an industry overview that does not attempt to identify or comment on any specific company, just the sector. Studies of the Recreational and Medical market in Canada (KPMG and Deloitte studies are the most comprehensive) suggest that in three to five years, a mature market will be in the $6 - $10 billion a year in marijuana sales. I believe 10 billion to be a good number in five years, but this paper looks only to 2020 and will use the number $8 billion by 2020. Bill Blair, the head of the Liberal Governments Task Force on marijuana estimates that the Canadian black market is in the range of $7 to $10 billion. Lets assume that the black market maintains a market share of $3 billion and that the legal market for recreational and medical is $5bln, for a total of $8 billion. Ok, so it is $5 billion at retail value in the year 2020, for the current L.P.s. ($8 billion total market, less $3 billion black market). Now lets break down the $5bln and see where the money is going. Lets also assume an out the door retail selling price of $10.00 a gram. That is greater than 25% higher than current black-market prices, but we are assuming that the quality and convenience of the legal market will displace the current illegal system. I am greatly concerned, however, at how few retail outlets both the Ontario and Quebec Marijuana Boards will initially open and fear the black market will remain more convenient for the first two or three years after legalization. The Federal excise tax will be the greater of 10% or $1.00 per gram. This tax will be applied before the HST/PST/GST. The Canadian average being 12.1%. Therefore, the average net selling price for retailers will be $7.92 per gram. Here is the math: (($7.92 + $1.00 Excise tax) + ($8.92 x 12.1% HST) = $10.00) Lets assume the retail gross margin will be 120%. (in line or slightly below versus the current LCBO liquor and wine margins in Ontario and most retailing in general.) Therefore, the wholesale price to the Licensed Producers will be $3.60 per gram. (FYI, in Colorado, where recreational marijuana has been legal since January of 2014, wholesalers are receiving U.S. $2.00 per gram for indoor grown dried bud. In Oregon, wholesales are receiving U.S. 50 cents per gram for outdoor grown dried bud). Quebecs SAQ is expected to announce a supply arrangement with Quebec based Hydropothecary any day now, and we expect the wholesale price to be above $3.00 for the first two years, then sub $3.00. Village Farms has stated that they would be thrilled with $2.00 wholesale prices with production costs of $1.00 per gram. (Lets stick with $3.60 to keep with the most optimistic scenario) This means Licensed producers will receive 36% of the total retail revenue. In the year 2020, a $5 billion legal market will translates into $1.8 billion in revenue for all of Canadas Licensed Producers, $2.16 billion to the retailers and $1.04 billion the Provincial and Federal Governments. The margins on medical are higher for the L.P.s, so lets optimistically round this number from $1.8 billion up to $2 billion. (again, trying to present the bullish scenario.) Lets talk about cost. Almost all of the L.P.s are losing money selling marijuana. Yes, production price per gram is falling. However, almost half of Canadas 84 L.P.s are in Ontario. The new $14 (and soon to be $15) minimum wage and the highest electricity prices in North America are not helping to drive down costs. Labour and electricity are the highest cost components in cannabis production, followed by water. Canadian government quality standards are the highest in the world, as are the associated compliance costs. I believe that an industry average of sub $1.00 per gram will not be achieved in the next 3 years. That being said, lets continue with the bullish scenario and assume that the industry average per gram production cost is $1.00 per gram. With a cost of $1.00 per gram and a wholesale price of $3.60, this means that on $2.0 billion is sales, the industry will generate pre-tax profits of $1.444 billion. Phenomenal gross profit margins if they can be maintained! Next, we need to examine capacity. 1,000,000 square feet of modern hybrid greenhouse will yield 75,000 kilograms of dried marijuana bud a year. This is a conservative estimate, and many L.P.s have announced plans for much greater efficiency. (Aphria is guiding to 220,000 kilograms with 1.9 million square feet by 2020 115,000 kg/1mln sq. ft.) (Aurora is guiding to 100,000 kilograms from their 895,000 Aurora Sky facility 111,000 kg /1mln sq. ft.) Using our previous assumptions of a $5 billion legal market at $10.00 per gram, this means in 2020, we will need 500,000 kilograms of production, which means we will need 6.7 million square feet of capacity to meet demand. How much capacity will we have? This is where it gets interesting. First, I should thank the research departments at Canaccord, Cormark, P.I. Financial, GMP, Eight Capital, Echelon, Mackie Research, and Beacon Securities. These firms provide research coverage on the sector and publish on the companies that they underwrite. Most of the public company capacity numbers below come from research published by the lead underwriter, or from the latest SEDAR filing or press releases from the company itself. Many of the brokerage firms mentioned above only cover select names within the sector. I believe the work in the spreadsheet below is unique and is the first comprehensive industry summary, including data on many of the larger private Licensed Producers. Here are the top 8 fully funded L.P.s and their capacity forecasts for the year 2020: 1. Canopy Health (CGC) Tweed Hershey Drive 450m, Tweed Newfoundland 150m, Tweed New Brunswick 50m, Vert Cannabis 700m, Bowmanville 60m, Scarborough 50m, Creemore 15m, Tweed Farms 1,000m, Tweed Grasslands 60m, Tweed Edmonton 100m, Tweed B.C. JV1 1,300m, Tweed B.C. JV2 1,700m - Total 5.6mln 2. Aphria (APH) 2mln (including Double Diamond J.V.) 3. Cannabis Wheaton (Rock Garden) (CBW) 1.3mln 4. Hydropothecary (THC) 1.3mln. 5. CannTrust (TRST) 1mln 6. Nuvera (listed Tues Jan 9th - NUU) 1mln 7. The Green Organic Dutchman (private) 970m 8. Aurora (AUR) 895m (Jan 5 announced $200mln financing so significant capacity increase expected) Total: 14.065 million square feet. These do not include some of todays largest current producers, who have not yet announced their full future capacity expansion plans. These include: MedRelief (LEAF); Cronos Group (MJN); Emerald Health (EMH); Supreme Pharmaceuticals (FIRE); CanniMed Therapeutics (CMED); Organigram (OGI); Village Farms (VFF); Emblem Corp {EMC); Maricann (MARI). In total, the model below shows a fully funded total capacity by 2020 of 23.9mln square feet, more than three and a half times the required 6.7mln square feet to meet the Canadian market demand. With the flurry of capital markets funding in the fourth quarter of 2017 and continuing into 2018, I expect the total announced, fully funded planned capacity will soon reach 30 million square feet. Bay Street continues to fund, and Licensed Producers continue to take the money for the purpose of expanding capacity. In the first ten days of 2018, there were $975 million of new issues! This is a story that is going to end very badly. To say that we are headed towards massive overcapacity which will ultimately lead to drastically lower margins is an understatement. We will have over four times the required capacity. Remember that we are using the assumption of 75,000 kilograms per 1 million square feet. If the L.P.s achieve their yield forecast, the overcapacity will be greater. What about the export markets? There has been lots of noise about exporting and many of the current Canadian L.P.s are starting to build export arrangements. Canadian standards are the highest in the world and we have a three-year head start versus countries like Germany and Australia, two countries that are currently importing from Canada. As these foreign markets mature, their nascent domestic industries will develop and grow to meet the demand and the import market will diminish. In Aphria Inc. Q2/18 press release, they expect to sell 60,000 kg of their total 220,000 kg of 2020 capacity internationally. I think this is optimistic. If there ends up being a world market for import/export of marijuana, Canada will not be a long-term leader in export. Our climate, taxes, electricity costs, and labour costs will not be competitive. However, lets assume that 3 million square feet, or 225,000 kilograms of capacity can supply Canadas share of the international export market. In that scenario, our new 2020 required capacity grows to 9.7 million square feet. This lowers the overcapacity to three times. What are marijuana stocks worth? The chart below shows 57 companies owning the 84 current licences. Of the 57, 29 are publicly listed companies and 28 are private. The combined fully diluted market cap or the 29, public companies is over $30 billion on a fully diluted basis. (closing prices as of Monday January 15). Fully diluted because over 90% of the Convertible Debentures and outstanding Warrants are in the money and are in the process of being forced called for conversion or exercise. Q-1 of 2018 should see Tilray and The Green Organic Dutchman coming to market, adding another $1 billion plus to this number. There will be many more coming to market this year. I foresee massive overcapacity that will result in significantly lower wholesale prices. Marijuana is a commodity. With the amount of overcapacity forecasted by end of 2020, it will not make any economic sense for many of todays smaller produces to even be in business. The Canadian Government will continue to issue licenses to the companies that meet their standards and qualify I expect over 120 licensed facilities during 2018! I am scared to predict the peak number of licenses, but willing to predict that the decline will begin in 2020 as new applicants withdraw and existing smaller companies exit the business. Most of the smaller players will not even find buyers for their capacity as they exit the top tier has clearly decided that mass production is the route to go and the sub 100,000 square feet producers are not worth salvaging. I cant answer the multiple/valuation question. With 29 public companies sharing a $30 billion plus market valuation and another 28 private companies all fighting for their share of a very optimistic $1.4 billion of peak sector profits, this will end very badly. Sell the sector. Canadian Domestic Cannabis Industry Overview (Current Price is 01/15/18 Closing Price) 2020 Ticker Current Fully Diluted Market Cap FD Fully Funded Annual Company Name Price Shares O/S Capacity (Sq Ft)Production (kg) 1 Aurora Cannabis ACB $11.50 509,405,603 $5,858,164,435 895,200 104,000 2 Canopy Growth Corporation WEED $36.50 182,259,127 $6,652,458,136 5,645,000 240,000 3 Aphria Inc. APH $21.70 183,304,901 $3,977,716,352 2,000,000 220,000 4 Medrelief LEAF $23.69 100,224,909 $2,374,328,094 233,500 35,000 5 Cronos Group MJN $9.85 202,595,462 $1,995,565,301 402,000 69,000 6 CannTrust Holding Inc. TRST $10.90 96,699,487 $1,054,024,408 1,000,000 60,000 7 Emerald Health EMH $6.20 121,582,699 $753,812,734 500,000 37,500 8 Supreme Pharmaceuticals Inc. FIRE $2.59 305,338,112 $790,825,710 340,000 10,000 9 The Hydropothecary Corporation THCX $4.12 172,721,343 $711,611,933 1,300,000 132,000 10 Cannabis Wheaton Income Corp (RockGarden Medicinal (2014) Inc. CBW $2.42 264,059,324 $639,023,564 - - 11 Cannimed Therapeutics Inc. CMED $24.58 24,811,918 $609,876,944 282,000 71,000 12 TerrAscend Corp. (Solace Health) TER (CSE) $3.22 149,095,030 $480,085,997 67,300 6,000 13 Organigram Holding Inc. OGI $4.85 113,453,195 $550,247,996 227,500 26,000 14 Village Farms VFF $7.75 43,915,344 $340,343,916 1,000,000 - 15 Emblem Corp. EMC $1.98 138,160,856 $273,558,495 30,000 36,000 16 Maricann MARI.CNX $3.10 103,757,564 $321,648,448 517,000 57,245 17 Abcann ABCN $2.40 149,267,560 $358,242,144 180,000 28,825 18 Newstrike HIP $1.59 392,009,346 $623,294,860 234,000 50,000 19 WeedMD Inc. WMD $2.80 93,459,550 $261,686,740 609,840 72,500 20 Golden Leaf Holdings (Medical Marijuana Group Corporation) GLH $0.47 419,111,331 $196,982,326 50,000 - 21 Invictus MD IMH $2.08 111,819,228 $232,583,994 520,000 76,000 22 THC Biomed International Ltd. THC $2.12 103,683,459 $219,808,933 16,000 - 23 Harvest One Cannabis Inc. (United Greeneries Ltd.) HVST $1.73 126,394,458 $218,662,412 130,000 21,500 24 ICC International Cannabis Corporation ICC $1.38 124,298,570 $171,532,027 102,093 17,500 25 Benchmark Botanics Inc. (Potanicals Green Growers Inc.) BBT $1.45 142,981,308 $207,322,897 12,700 3,125 26 Beleave BE $2.85 40,342,772 $114,976,900 200,000 15,000 27 Canada House Wellness Group Inc (Abba Medix LP) CHV $0.65 166,953,896 $108,520,032 49,500 - 28 Delta 9 Cannabis NINE $2.68 24,690,480 $66,170,486 80,000 500 29 Nuuvera Inc. NUU $6.30 89,538,864 $504,819,000 1,000,000 75,000 Canadian Domestic Cannabis Industry Overview (Current Price is 01/15/18 Closing Price) 2020 Ticker Current Fully Diluted Market Cap FD Fully Funded Annual Company Name Price Shares O/S Capacity (Sq Ft)Production (kg) 30 The Green Organic Dutchmen Holdings Ltd. PR 0 $0 1,790,000 216,000 31 Tilray PR 0 $0 265,000 20,000 32 Natural Medco PR 0 $0 300,000 22,500 33 Scientus Pharma Inc. PR 0 $0 53,000 20,000 34 AgMedica Bioscience Inc. PR 0 $0 886,667 66,500 35 Agrima Botanicals Corp. PR 0 $0 35,000 - 36 Breathing Green PR 0 $0 35,000 - 37 Agro Green Natural Products Ltd. PR 0 $0 35,000 - 38 Bloomera Inc. PR 0 $0 20,000 2,000 39 Bonify Medical Cannabis PR 0 $0 320,000 - 40 Broken Coast Cannabis Ltd. PR 0 $0 100,000 - 41 Cana Farms Ltd. PR 0 $0 27,000 - 42 Cannatech Plant Systems Inc. PR 0 $0 85,000 - 43 DelShen Therapeutics Corp. PR 0 $0 - 13,440 44 Evergreen Medicinal Supply Inc. PR 0 $0 150,000 - 45 Experion Biotechnologies Inc. PR 0 $0 8,300 - 46 FV Pharma Inc. PR 0 $0 300,000 4,000 47 Green Relief Inc. PR 0 $0 30,000 - 48 Greenseal Cannabis Company Ltd. PR 0 $0 28,000 - 49 GrenEx Pharms Inc. PR 0 $0 10,010 1,000 50 Indiva Inc. (Rainmaker Resources Ltd.: RIR) PR 0 $0 36,000 - 51 International Herbs Medical Marijuana Ltd. PR 0 $0 418,000 - 52 James E. Wagner Cultivation Ltd. PR 0 $0 15,000 1,040 53 Natural Naturals Inc. PR 0 $0 700,000 - 54 RockGarden Medicinals (2014) Inc. PR 0 $0 20,000 2,080 55 Sundial Growers Inc. (partner with CBW) PR 0 $0 405,000 - 56 Tantalus Labs Ltd. PR 0 $0 120,000 10,000 57 Whistler Medical Marijuana Corp. PR 0 $0 145,000 - $30,667,895,214 23,960,610 1,842,255