Will Canadian LPs be Ready for Legalization and 12 Stories from New Cannabis Ventures

This is a copy of the April 29th edition of our weekly Newsletter, which we have been publishing since October, 2015.


A few weeks ago, we weighed in on the debate about the potential for a supply shortage or a glut in Canada, sharing our view that there will be a shortage initially and then possibly oversupply a few years out. The factors that will impact the longer-term outlook include how well the LPs scale production, how quickly extracts and edibles are added to the product set, how strong the enforcement against the black market will be, how long the export window remains open and perhaps as well the progress made in pharmaceutical substitution.

Recent data confirms our concerns about the potential for an acute supply shortage initially. The most recent aggregate data provided by Health Canada suggests that there are 50 million grams (55 tons) in inventory at LPs as of December 31st. The inventory was about 75% dried flower and the balance in oils. The retail value of this product is likely no more than $500 million, which is a small fraction of the expected annual demand. The net addition from September to December was only 13 million grams, and a reasonable estimate for how much product might be available for sale at the end of August would be 100 million grams or so, assuming production picks up at current facilities and the inclusion of a few additional LPs or new facilities.

Several LPs have reported financials recently, and we aren’t seeing significant progress in building inventory. This week, for example, Organigram reported inventory of 1 million grams of dried flower and 1.3 million ml of oil at the end of February, carried at $8.3 million, up from the $4 million in the prior quarter. This represents about 1.15 million grams on an equivalency factor, and just its New Brunswick supply agreement requires 5 million grams. Its PEI supply agreement represents another 1 million grams per year. Sensing its lack of inventory for supplying the adult-use market, Aphria revealed on its quarterly conference call earlier this month that it is exiting the wholesale market. The company ended its quarter in February with inventory valued at less than $12 million, an increase over the prior quarter of just $3 million. Total inventory, including dried flower, trim and oils, amounted to 3 million grams. Aphria is supposed to supply just Quebec with 12 million grams. Hydropothecary is expected to deliver 20 million grams to Quebec in the first year. In the quarter ending January 31st, it sold 131K grams, or just 2.5% of the Quebec contract on an annualized basis. Inventory at the end of the quarter was valued at just $7.4 million.

Our review of the inventory across all of the publicly-traded LPs suggests that Canopy Growth, which had inventory valued at almost $91 million at the end of 2017, currently maintains the lead with respect to product inventory. We will receive another update when they report their Q4 ending in March near the end of June. We plan to follow up with more detail about which LPs have accumulated the largest inventories over the next few months as we move closer to legal sales, which are now expected to commence in late August or early September.

Investors should be monitoring which of the LPs will be able to meet their provincial supply agreements, as well as meet the demand from their existing medical patient base or international customers and consider the possibility that some may not be able to fully do so. Finally, we expect the shortage to be even greater for high-quality flower, as much of the supply at the margin is coming from greenhouse facilities creating product better suited for extraction.

With a unique focus on the wholesale market, Supreme’s 7ACRES is a Canadian licensed producer that is doubling down on cultivating craft quality cannabis at commercial scale. To stay up to date with the company, which is a client of New Cannabis Ventures, visit their Investor Dashboard and click “Follow Company”.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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