Rubicon Organics (CSE: ROMJ) has been one of the best performers among cannabis stocks so far this year. It has seen a dramatic appreciation from a low of $1.70 at the start of the year to a recent high of $3.25 – a gain of more than 80%. This is due to two key value drivers. The first involves the recent issuance of a federal-government-approved cultivation and processing licence from Health Canada.
The second involves the fact that Rubicon is now one of only a few licensed organic large-scale cannabis growers in Canada. And organic cannabis commands a considerable premium in price due to its superior quality and its scarcity value.
Organic Certification: Earning an Elite Distinction
Now that Rubicon has been given the green light to begin growing premium-quality, contaminant-free organic cannabis at scale, the company is wasting no time in gearing-up to meet burgeoning consumer demand from medical patients and adult-use consumers alike.
This facility will include a 15,000 sq. ft. GMP-euro certified processing and extraction lab for manufacturing especially lucrative organic cannabis oils. This prestigious GMP-euro certification is particularly important because Rubicon intends to supply medical patients in Europe, which arguably has the most stringent growing regulations for cannabis in the world.
The appeal of Rubicon’s business model has also been sweetened lately by a recent industry transaction that revealed to everyone how important the organic cannabis market is destined to become.
By way of explanation, it was recently announced that one of Canada’s two sizeable organic cannabis growers, Whistler Medical Marijuana, is now getting gobbled up by one of the big boys, Aurora Cannabis, for the princely sum of $175 million.
This is a lot of money for a privately-owned craft cannabis company that currently sells far less than the 5,000 kilograms of cannabis per annum that it is intending to produce at full capacity. But it speaks to the fact that Aurora wants in on a very profitable business that is very much under-served in Canada at this time.
A big part of Whistler Medical’s appeal is that its organic cannabis strains sell for $17.99, which is twice the price of most conventional strains of cannabis on offer by rival companies.
Also, it’s worth noting that Whistler Medical was Canada’s first licensed organic cannabis grower. And a big part of its success can be attributed to Jesse McConnell, a co-founder who is now the CEO and co-founder of Rubicon.
McConnell now plans to duplicate this level of success and then go one further. He intends for Rubicon to sell to international markets as well.
Here’s a few of the key differentiators that make Rubicon stand out from the crowd:
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The company’s leaders are among the most experienced in the cannabis industry
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A focus on building consumer brands, especially for cannabis connoisseurs
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Extremely low-cost premium organic production
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Assets in Canada, California and Washington
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An LOI to supply the German market
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Management team has over 130 years in consumer packaged goods, and includes a former president of Red Bull and an executive VP from Diageo (one of the world’s largest alcohol companies).
Why Organic Makes for a Superior Product
It requires that plants only be grown in natural soil, which must be completely uncontaminated by heavy metals and other man-made pollutants. So the harvested cannabis is sure to be untainted by any chemical residues, such as synthetic pesticides and herbicides.
And for an increasing number of cannabis consumers, buying organic means supporting sustainable, low-impact farming practices that demonstrate a respect for good environmental stewardship.
Additionally, for many people, the key appeal of organic cannabis is its more pungent aroma and more flavourful taste. This is due to a proliferation of terpenes and flavonoids.
Organic growing is also said to optimize the potency of the cannabis being consumed, while enriching it with an abundance of “terpenes” – the latest buzz terms among consumers. Consisting of up to 200 different compounds, they are believed to both amplify or buffer the effects of other cannabinoids, such as THC.
Making Strategic Inroads into Lucrative US Markets
The company has already made excellent progress in the US and currently has two in-house brands that have been in the market for over a year, 1964 Supply Co., in California, and the award-winning Doctor & Crook Co., in Washington.
In Washington, the company owns a 16-acre property, with a purpose-built 40,000 sq. ft. high-tech greenhouse built by the same engineer who designed Aurora Sky and TGOD’s facilities – an operation that is capable of 4,400 kgs/year of premium indoor quality cannabis a year.
In essence, Rubicon owns the brands and the real estate, but licenses and leases them out to existing reputable operators in that state.
In the multi-billion-dollar California market, the company has supply off-take agreements with licensed cultivators that grant Rubicon access to production, extraction, and distribution. In fact, the “Supplied by 1964™” brand is already considered one of the best flower brand and pre-rolls brands in the market according to Leafly and Entrepreneur Magazine.
Investment Summary
With Rubicon soon to be one of only several certified large-scale organic producers in Canada, we think the company has an excellent opportunity to build strong consumer brands.
Rubicon has proven management, especially in the form of CEO and co-founder Jesse Mc Connell, who co-founded British Columbia’s iconic Whistler Medical Marijuana – western Canada’s only certified organic grower. And it just became the top-line product for Aurora Cannabis, Canada’s largest cannabis company in terms of output.
The significance of this strategic acquisition for Aurora is that organic cannabis can sell for as much as twice the price of commoditized cannabis, while also being very price inelastic. This is because medical patients with compromised immune systems tend to opt for organic cannabis. And their numbers will certainly grow exponentially once medical cannabis is covered by government health insurers.
Additionally, cannabis connoisseurs and health-conscious consumers alike are sure to further ramp-up demand.
This all bodes well for Rubicon, which is expecting to enjoy especially high margins due to robust demand and a scarcity of competition. Additionally, Rubicon says it can grow its premium-quality cannabis at extremely low costs thanks to the company’s proprietary growing technology.
As of the company’s most recent capital raise, Rubicon had 36.8 million shares outstanding (44.2 million shares fully-diluted), making for a very tight share structure. (Management holds a very large 60% share position that is subject to staggered escrow releases over three years.) Such a tight share structure, when matched with the advent of positive news flow, typically acts as a catalyst to much higher share price valuations.
This certainly has proven the case lately with the stock rallying hard on the back of excellent news. Indeed, if Rubicon is able to execute along an aggressive timeline, it can capture a sizeable segment of the high-premium organic cannabis market, not just in Canada but also internationally. And in so doing, Rubicon is poised to become a standout performer.
About the Author: Marc Davis has a deep background in the capital markets spanning 30 years, having mostly worked as an analyst and stock market commentator. He is also a longstanding financial journalist. Over the years, his articles have also appeared in dozens of digital publications worldwide. They include USA Today, CBS Money Watch, Investors’ Business Daily, the Financial Post, Reuters, National Post, Google News, Barron’s, China Daily, Huffington Post and AOL.