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CGM Building Hemp Seed Propagation Greenhouse in IL

Peter Epstein, Epstein Research
0 Comments| July 22, 2019


California Gold building hemp seed propagation greenhouse in Illinois, plants 130,000 hemp plantlets on 40 acres

Note: Unless stated otherwise, all figures are in C$. All mentions of revenue refer to trailing 12-month periods ended January, February, March, April or May 2019, depending on each company’s fiscal year end. Data compiled from sedarSEC.gov, the CSE websiteTMX MoneyOTC Markets, and YahooFinance.

The news is pretty big, and it’s really good. In addition to an update on the previously announced, fully-funded 27,000 sq. ft. greenhouse, California Gold Mining Inc. (“CGM“) [CSE: CGM] / [OTC: CFGMF] completed the purchase of a private 82.42-acre contiguous parcel of farmland in Illinois. Earlier this month, it successfully commenced outdoor cultivation of high-CBD hemp biomass on about 40 acres.

Immediately following the $0.50 warrant acceleration in June, the Company had approximately $2.5 million in cash and just shy of 60 million shares outstanding, for an Enterprise Value (“EV”) [market cap + debt – cash] of $39 million.

High-CBD hemp seed propagation greenhouse project moved to Illinois


Illinois…. why does that ring a bell? It’s the latest state, #11, to legalize recreational use of cannabis and is expected to be a top U.S. market over time. There’s tremendous interest in getting a foothold there. Look no further than last week’s major headline, Curaleaf Holdings is acquiring privately-owned GR Companies Inc. for US$875 million. GR is based in Illinois and has a leading presence in the state.

In other news, CGM is going to build its greenhouse in the state of Illinois instead of in California. Importantly, the company’s cultivation expert and partner on this first greenhouse, Delta Valley Hemp, is based in Chicago, Illinois. 

Click to enlarge

Regarding the question that many investors have about the likelihood of additional greenhouses, here’s a quote from CEO Vishal Gupta, from a James West video Interview.

“I don’t want to be too forward looking here, but, you know, if things go well, you can reasonably expect us to have a rapid expansion of our plans in the 2020 season….”


A successful greenhouse project and one or more to follow in Illinois, California or other states, would not necessarily be the end of the line. There are dozens of Multiple State Operators (“MSOs“) that cultivate and sell medical & recreational cannabis and/or hemp (for its CBD) across the U.S.

In addition to greenhouses for seed propagation, management is wide open to outdoor hemp farming, as well as the highly lucrative CBD extraction / isolation business. CGM could become one of the first true seed-to-sale companies (most companies don’t propagate their own seeds).

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If CGM can execute, MSOs could be interested in acquiring them

Fifteen of the top 50 largest hemp / cannabis & related companies are MSOs, {see chart below). The average EV to revenue multiple of those MSOs is 24 times on average revenue of $71 million. The average EV of the 15 is ~$1.3 billion. By contrast, CGM’s EV is $39 million.

Many MSOs could be interested in the vertical integration & business diversification benefits of owning established hemp seed propagation operations, plus outdoor hemp crop capacity across the country. More and more pundits, analysts and consultants are proclaiming that growth in hemp / CBD consumption in the years ahead. 

Click to enlarge

Outdoor hemp cultivation on ~40 acres has commenced

Investors were waiting for an update on greenhouse construction in California…. (now it’s going to be in Illinois). Illinois is a better location for the company because it’s an easy drive from hemp cultivation specialist and partner Delta Valley Hemp’s Chicago, IL headquarters.



In a new development, CGM announced that it acquired and successfully planted, 130,000 hemp plantlets. The crop takes up about half (40 of the 82.42 acres / 33.4 hectares) of the newly acquired farmland. Rest assured, there’s ample room for multiple greenhouses, as each 27,000 sq. ft. structure occupies less than one acre. 


Click to enlarge

The press release indicated a potential yield of 100K-130K pounds of biomass from the initial crop. In Chart #1 below, I calculate how many Kgs of isolate that might be, assuming an 82.5% recovery rate. In chart #2, I list gross revenue scenarios based on a range of potential isolate prices.

Tens of millions in revenue could be months away

The industrial hemp project has been meaningfully de-risked (but is still risky), because hemp plants are in the ground and operations are fully-funded. CGM is officially, “in production,” with first revenue expected in October. If all goes reasonably as planned, CGM should have two revenue streams in Illinois.

The timing of the hemp seed propagation project remains on track for revenue by year end. That would be awesome, but the real prize is 2020 when the two operations alone (there might be more acquisitions) could generate revenue of up to $100 million.

Few people realize how much time & money is required to get hemp plants fully signed off on and expertly planted in the U.S. and around the world. In Illinois, the process is fairly straightforward, which is a big reason why CGM wants to operate there. But it’s not so easy in other states.

Commercial hemp farming is new, most states don’t have rules, regulations and procedures on the books yet. Even if there are guidelines at the state level, each county, city and town has to move up the learning curve. That means CGM and peers face considerable legal and consulting fees, and the extension of project timelines by months. 

Click to enlarge

Click to enlarge

Management believes this is just the beginning of what could come. They are looking at many hemp / CBD / extraction opportunities in many states. A single successful hemp seed cycle, or outdoor harvest this year in Illinois, would generate meaningful cash flow for CGM to go on a hemp / CBD shopping spree.



If CGM can generate anywhere near $100 million in gross revenue next year, that would move the needle for any MSO. Especially if CGM’s two operations are profitable. Only six (15%) of the top 40 cannabis / hemp / CBD / MSO, etc. names were EBITDA positive on a trailing 12-month basis. 

Click to enlarge

The crop is being tended to by Delta Valley Hemp and management is negotiating toll extraction contracts. Before year end, shareholders could have a company trading at under two times 2019 revenue and well under one times 2020 prospective revenue. Just eight of the 305 names I’m tracking are trading at under a two times EV/revenue multiple. And, only three of those eight were EBITDA positive.

How much might a company with tens of millions of high-quality, repeatable revenue be worth? I don’t know. What about a company that’s also EBITDA positive? I still don’t know. I imagine CGM could be worth significantly more than $39 million if things go reasonably as planned. As it stands, the company is ranked #175 of 305 names in my Excel spreadsheet. 
50 companies with higher enterprise values than CGM's had zero or less than $1 million in revenue. Readers might be surprised to learn that only 24 (8%) of the 305 had more than $50 million, and just 60 (20%) had more than $20 million in revenue. Consider this, if full year 2020 revenue for my entire database were to sextuple, there would be 59 names with greater than $100 million in revenue.

That just goes to show how incredibly important revenue and profits will be going forward. The top 50 players account for 85% of the combined 305 EVs and have an average EV/revenue multiple of 41 times. There’s going to be a tsunami of M&A in coming years. 
Conclusion

If management can execute on plans that are well underway and fully-funded, California Gold Mining Inc. [CSE: CGM] / [OTC: CFGMF] has a shot of leaping into the top quartile or tercile (as measured by annual revenue) next year. Yes, tercile is a word. While large revenue numbers are far from a sure thing, a hemp crop is in the ground and construction of a state-of-the art greenhouse begins in August.

With less than 60 million shares outstanding, a free float of roughly 15 million, and no need to issue new shares anytime soon, (unless for a very compelling acquisition) the next several months promise to be very interesting!

 
FULL DISCLOSURE: California Gold Mining Inc. is a client of Stockhouse Publishing.



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