Medical marijuana update: 12 companies get licenses but pubcos flailing

Updated at trading close:

Confirmation today that Health Canada has authorized 12 companies as licensed producers of medical marijuana. These include the soon-to-list Tweed Inc, Bedrocan, Canna Farms, Cannimed, Delta 9 Bio0Tech, GreenLeaf Medicinals, In The Zone Produce, Mettrum, MedReleaf, The Peace Naturals, Thunderbird Biomedical, and Whistler Medical Marijuana Corp.

All of those companies are being pursued, some more than others, by public companies looking to be big movers. But there's another level of medical marijuana facility that is in the thick of negotiations to 'go legit', and that's the growers (some previously licensed, some never) that have been in the business for some time under the radar.

Some of these are run by characters one wouldn't necessarily want on the executive of a public company. Some of them are bad dudes. Some are just farmers who've skirted the law for a number of years.

But they are all in play right now.

Brokers and lawyers and consultants across Canada are shimmying past the barbed wire gates and shaking hands with a class of characters they're not used to hanging with as investors across the world bark down the phone at them that they 'want a marijuana portfolio'. I'm getting calls for advice from far afield as Nova Scotia as investors wonder where to put their money and companies wonder how to appeal to those investors and middlemen struggle to figure out what's real and what's not.

Here's how I break it down.

MMJ Tier 1: Companies who want to be in marijuana but don't really know how – or they've got a toe in but aren't fully committed yet, at least publicly. These include Satori Resources, 88 Capital, Thelon, and pretty much every company that has sent out a press release saying they're 'looking at alternatives in the agriculture and pharmaceutical fields.'

MMJ Tier 2: Companies that have raised some cash, maybe bought an option to buy a facility should it get a grower's license or hired advisors and consultants to help them figure out a plan.

MMJ Tier 3: Companies with a real business plan that are executing it – buying MMJ related companies, building revenue and distribution. These include Next Gen Metals, Enertopia, Tweed.

MMJ Tier 4: Companies paying a dividend on actual business. These include nobody.

I've been asked several times this week what a MMJ shell needs to do to push past the detritus that is the MMJ sector right now, and to me the answer is in three parts:

1. Legitimacy. If you can't field enough directors to keep a TSX listing, you're not there. If you don't have enough money to do a mail-out to shareholders, you're not there. If your company has held rights to a mining property for three years and you haven't put a hole in it before you came over to marijuana – you're not there. Get a track record of success to position your company properly in the investor eye, and let them know what you're doing - regularly.

2. Differentiation. 'Me too' is not a plan. Next Gen's weed investor conference play is a nice differentiation. Acquiring rights to a premium strain with an existing userbase, or a distribution chain that can get your products into stores, or marketing your product in a way nobody else is doing differentiates you from the pack.

3. Achievable milestones. 'Looking at alternatives' isn't a hittable milestone. Hiring a consultant isn't a milestone. Taking out options to buy isn't a milestone. A real business plan, laid out in a fashion that tells the investor what you're doing and how to judge your success along the way gives retail investors what they need to decide whether there's going to be profit potential there.

The fourth part of the three part answer is something nobody has considered yet, but whoever does first wins all the glory, and that is 'yield'.

I'm not talking grow yield, I'm talking investment yield. Dividends. The first MMJ stock to line up a dividend payment, even for six months down the line, automatically jumps to the top of the queue, and from what I'm hearing there are investment funds building right now that will be in the hundreds of millions of dollars in size, that are looking to invest in those few medical marijuana companies that can actually show a legitimate track to yield.

Right now, one single $100m investment fund could buy the whole field, but they won't, because it's not time yet. Nobody has shown the ability to step above the pack. They'd be buying vapour.

Tweed is close, but their $12 per gram product is going to struggle to get a foothold among Canada's 40,000 marijuana patients, most of whom are on disability and used to growing their own strains for $4 a gram.

Others, like Tweed but privately held, are looking at having a large number of strains as being their big differentiation, but how will they distribute, and to who? Will UPS take packages from Tweed? Will anyone process their payments? Even getting janitorial services at a grow op presents problems that a lot of miner-come-latelies haven't considered.

And what happens when there are so many grow ops that the base price drops hard (as it will)? Then you're going to be looking at the companies that can process weed into value-added and premium products as being the big investment space.

The big money hasn't hit this sector yet, because daytraders are crawling around taking half penny profits and messing with the market, but that fat money is waiting to strike, and when it does, the price movements of the last three weeks will look like tremors before The Big One.

So let's get to today, in the daytrader pool.

Cavan Ventures (TSX:V.CVN, Stock Forum) broke large today, busting up 42.8%, and once again the rise had no news to explain it. Because of that, it's tough to say whether it was marijuana interest fuelling the stock spike or renewed interest in the company property next door to Zenyatta (TSX:V.ZEN, Stock Forum). Either way, on 3m+ volume, there's a lot of buying going on for a stock that hasn't moved more than a cent in any direction in some time.

Also up on the day, Maple Leaf Green World (TSX:V.MGW, Stock Forum) which just keeps climbing, now up to $0.045 from a $0.05 price a week ago, when it first announced it was applying for a commercial grow license. The company, which has existing facilities in non-marijuana crops in China, at least has some agricultural knowledge – and revenue. It's up 12.5% today. Whether there's any value left in the company share price remains to be seen, but long holders are very happy to be up 800% in a week.

Thelon Capital (TSX:V.THC, Stock Forum) is up 14.2% on the day on 2m volume, with no news. Which isn't odd – Thelon never has any news, except for a single press release back in late February that a 'marijuana consultant' was joining the board.

On the down side, 88 Capital Corp (TSX:V.EEC, Stock Forum) blew out 25% on low volume, continuing its life as a daytrader penny flipper.

Affinor Resources (TSX:C.AFI, Stock Forum) took a 9% drop today, but one might imagine they did so just to see what it feels like, after weeks of up. The company announced a drug development expert from the National Research Council of Canada has joined their advisory board, a good move, but not one that investors noticed. Sazzad Hossein, Ph.D, a 20 year academic in the area of new drug discovery and natural health product development is their guy.

Sebastien Plouffe, President and CEO of Affinor Resources said of Hossain, "His scientific skills and connections both with in government and the private sectors, will be of paramount importance in Affinor's move to becoming a premier Canadian Medical Marijuana producer."

Enpar Technologies (TSX:V.ENP, Stock Forum) has been awarded a $67k grant by the Water Adaptation Management and Quality Initiative (WAMQI) administered by Farm & Food Care Ontario “based on a proposal submission outlining the use of ENPAR's novel water treatment technology for process water recycle and reuse for the Ontario greenhouse industry.” The company deals in hydroponics but remains a periphery MMJco.

Supreme Pharmaceuticals (TSX:V.SL, Stock Forum) management are heading out to a South Okanagan grow facility to do on-site due diligence as part of their deal to potentially pay $100,000 towards an option to buy the property for $1 million at a later date, presumably when/if it gets a commercial grow license. If that $1m price tag appears small to you for a large scale grow op (especially when the countryside is teeming with brokers looking to buy one), it is – I'm told you could end up with not a lot of change from that figure just in equipment set-up at some facilities, so either the growhouses are hurting right now and looking to cash up, or this is a small facility. Or it's encumbered by owners/employees who may find it hard to get through the licensing process.

Next Gen Metals (CSE:C.N, Stock Forum) has hired conference expert Howard Finch to help run their GreenRush investor conferences. First Conference in Vancouver, British Columbia - Wednesday May 7, 2014 at the Vancouver Convention Centre, Ballrooms A/B/C in the Pan Pacific Hotel. Second Conference in Toronto, Ontario - Tentatively set for May/June 2014.

Prominex Resources (TSX:V.PXR, Stock Forum) announced a $300k private placement and a $125k loan from a shareholder that will be used to, essentially, keep the doors open. They've also revealed they'll need another $60k loan from shareholders in June. No news on their new MMJ direction, but investors aren't exactly flocking. Under 70k volume today.

Enertopia (CSE:C.TOP, Stock Forum) sent out a news release that announced they hired someone to answer phones. But what investors REALLY want to know is, who's going to do the windows?

REVENUE! Growlife (OTCBB:PHOT, Stock Forum), which markets and deploys legal cannabis based products and services in the US, showed 2013 revenues of $4.8m, up 235% from 2012. Much of this came from strategic acquisitions over the last year.

"With the exception of one-time, non-cash charges in 2013, the important metrics of the Company are sound and improving,” said Sterling Scott, CEO of the company. “Importantly, as the legislative environment continues to shift favorably for legal cannabis, GrowLife is very well positioned to increase our market leading presence in a revenue diversified manner that is profitable to the Company and its shareholders."

PANIC! Blackstone Ventures (TSX:V.BLV, Stock Forum) had to tell the exchange today that they don't know why their stock is all over the place. The company's management is "unaware of any material change in the company's operations that would account for the recent increase in market activity". Stock dropped 50% in response, from one penny to half a penny. Move along rumour monkeys.


NEW PLAYERS:

Umbral Resources (TSX:V.UMB, Stock Forum) has jumped into the pool, announcing, "The Company is conducting diligence in regards to the commercial cultivation of marijuana under the newly established Health Canada regulations pertaining to the cultivation of marijuana for medical purposes."

Though late to the party publicly, the company "has invested significant time in researching the industry and believes that there remain opportunities for entry into the sector."

Umbral stock is up 90% on the news, so even if they do nothing more, the exercise has clearly been worth it.


THE MOVERS: