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What’s the story with Canadian Cannabis?
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What’s the story with Canadian Cannabis?


By Paul Orford October 9, 2019
What’s the story with Canadian Cannabis?

Those of you with your charts glued to EUR/USD, Gold or the FAANG stocks may have missed the initial boom in Canadian cannabis. There are a few possible reasons for this. Marijuana’s tentative legal status may have partly been the reason. Maybe it was the fact that stock traders routinely overlook Canada in favour of the US. Or perhaps it was the cryptocurrency hysteria that overshadowed Canadian MJ back in 2017.

This was despite the fact that both markets hit all-time highs between late 2017 and early 2018. When 2018 ushered in a painful crypto bear market, Canadian cannabis stocks surged onwards and upwards, hitting new all-time highs just as cryptocurrencies were busy shedding +80% of the gains they had made. 2019 has seen a good move up in crypto (though we’re still not out of the woods yet), along with a drastic move lower in Canadian cannabis stocks.

Perhaps now, as Canadian cannabis retests price levels last seen more than a year ago, it’s time to revisit the story. With the hype dying down, it may be a good idea to familiarize yourselves with what many pundits are claiming will be the next trillion-dollar industry. Bigger than alcohol, bigger than tobacco.

What’s the story with Canadian Cannabis?
Canopy Growth Corp Vs Bitcoin (purple line) from late 2017 to the present

Why Canada?

Medical marijuana was legalized nationwide in Canada back in 2001, where its sale was permitted under “strict” government rules. Cannabis had previously been illegal in the country since 1923. The first company to be granted a license to commercially grow the plant (under contract from Health Canada), was Prairie Plant Systems (now a subsidiary of CanniMed Ltd.)

Prairie Plant Systems enjoyed a monopoly over the market until 2013, although by 2012 only around 12% of medical marijuana was actually grown by the company, with most medical users opting to grow their own. In 2013 the regulations governing the growing of medical cannabis were updated, prohibiting home-grown cannabis and opening up the market to other commercial grow operations.

Though, technically speaking, marijuana was only available for medical use, the situation on the ground was really a de facto legalization under the veil of medicine. This is because it was incredibly easy to obtain status as a medical user, so both medical and recreational users enjoyed access to the same cannabis.

Legalization

The legalize movement had always been very vocal, but the above situation added further fuel to the debate and catalyzed a lot of support for the legalization of recreational marijuana. Whereas the conservatives were strongly opposed to legalization, Canada’s current prime minister has been on the record as being pro-legalization since before being in office. In 2013, speaking as leader of the Liberal Party, Justin Trudeau made the following statement:

"I'm actually not in favour of decriminalizing cannabis. I'm in favour of legalizing it. Tax it, regulate. It's one of the only ways to keep it out of the hands of our kids... the current model is not working."

In late 2017, Trudeau’s government passed Bill C-45 through the House of Commons, also known as the Cannabis Act, and on October 17, 2018 marijuana was made legal in Canada for recreational and medical use.

Big business

The former Hershey factory in Smith Falls, Ontario, is the perfect symbol of the boom that the Canadian cannabis industry has undergone over the past few years. The 450,000 square foot facility, which had been abandoned when Hershey left town during the last crisis, was taken over by Tweed, the first publicly traded cannabis company in Canada. Tweed was subsequently renamed Canopy Growth Corp, following a merger and is currently the largest cannabis company in the world.

What’s the story with Canadian Cannabis?
The former Hershey factory in Smith Falls, Ontario, now home to the world's largest cannabis company

Bruce Linton, founder & CEO of Canopy Growth Corp has a few interesting ideas when it comes to the target market of his product and the potential it has yet to grow:

“I’m targeting the 54-year-old woman with the Gucci bag who has not bought any at least in the last 25 years... and what I want to make that person comfortable with is that this is in fact a very thoughtful alternative to buying white wine.”

Canopy Growth first turned a profit back in 2016, up until then it had been operating at a loss. This has been partly attributed to the company acquiring competitors on the eve of legalization to prepare for the massive uptick in recreational demand that would occur. Then in 2018, alcohol giant Constellation Brands (of Corona fame) increased its stake in the company from 9.9% to over 35%.

Aurora Cannabis is currently the second largest Canadian cannabis company in the world after Canopy Growth Corp. It was also the first cannabis company to initiate a hostile takeover when in 2017 it attempted to buy-out CanniMed Therapeutics. It succeeded in its bid in 2018 for $1.1 billion (CA).

It’s bigger than just Canada

When Canada became the first G7 and G20 nation to legalize recreational use of cannabis it set a precedent. The cannabis companies that have sprung up in anticipation of legalization (on both sides of the Canada/US border) are banking on the fact that this precedent will be a model for other western nations. In fact, Canada has been very welcoming to legislators from other countries, who have shown an interest in Canada’s policy changes and their reproduction elsewhere.

You can bet that the hype that has surrounded Canadian marijuana is about a great deal more than just supplying happy, high Canadians with their beloved herb. This is about a possible global market in cannabis. This is why we’re seeing such a rush to consolidate, with mergers and buy-outs occurring left, right and center. This is all about who will be the big names when other countries finally relax their cannabis laws an open their markets up.

Canopy Growth already has partnerships and subsidiaries in Spain, Germany, the Czech republic, Denmark, Australia, Africa, Chile and Brazil. Similarly, the reach of Aurora Cannabis extends to Denmark, Germany, Italy, Australia and Brazil. Could we be witnessing the stirrings of a truly global cannabis market? Many people think so. And if we are, then a few big players stand to experience unbelievable growth.

 

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Please read the full Risk Disclosure Statement.

October 9, 2019