This is the week the entire legal cannabis industry has been waiting for. On Thursday, June 7, Canada's Senate will vote on bill C-45, likely approving it, and moving the Cannabis Act (as it's best known) one step closer to becoming law. By sometime later this month, Canada could become the first developed country in the world to have legalized recreational marijuana.
Should the votes fall as believed, adult-use legalization would open the door to legal sales beginning in August or September. In total, this legalization is expected to add $5 billion in annual sales to Canada's weed industry, once fully ramped up.
Marijuana growers look abroad for opportunity
But, truth be told, the Canadian cannabis industry is looking well beyond its domestic borders for opportunity. Even though Health Canada has estimated that domestic demand could hit 1 million kilograms of cannabis per year, it's overseas markets that could be responsible for even greater aggregate demand. In fact, by 2020, yours truly has estimated that combined production could hit 2.4 million kilograms in Canada, creating a surplus of well over 1 million kilograms. Growers are counting on export agreements with the more than two dozen countries around the globe that've legalized medical weed to completely offset this oversupply.
In most instances, these medical marijuana-legal markets are located throughout Europe. Countries like Germany, which have come to embrace the potentially therapeutic effects of cannabidiol oil and dried cannabis, have virtually no domestic growing operations. Thus, they are almost wholly reliant on imports to meet patient and physician demand. Aside from Canada, only the Netherlands, Uruguay, Australia (via a recently passed measure), and perhaps soon Israel are in the market of exporting dried cannabis.
This major pot company has its eyes on Africa
There are market opportunities that exist beyond Europe. Aphria (OTC:APHQF) is one such major Canadian pot player that's turning its attention to Africa's burgeoning cannabis industry.
According to a recent United Nation's survey, and per CNN, more than 10,000 tons of marijuana (that's more than 9 million kilograms) are produced on the African continent each year, which would be worth billions upon billions of dollars if a wave of African countries were to legalize access to medical marijuana.
Thus far, the landlocked nation of Lesotho has issued a cultivation permit to Verve Dynamics, while Zimbabwe recently became the second African country to legalize production for scientific and medical use. Other African countries, such as South Africa, Morocco, and Ghana, have visible cannabis industries that could flower with the proper legal channels.
According to a press release issued by Aphria last week, it has formed a joint venture with the Verve Group of Companies that'll result in it acquiring an interest in Verve Dynamics. Though the transaction itself is small in scale -- only amounting to $3.13 million -- the bigger picture is not.
The new venture, known as CannInvest Africa, will supply medical cannabis extracts to legalized African countries, as well as to Aphria's network of one dozen markets, of which many were inherited when it acquired Nuuvera. Having a licensed growing entity in Africa creates a regional economy of scale in terms of getting product to markets located on the continent, and it also puts Aphria in the driver's seat of an industry that could create substantial economic growth in the region. Said Aphria CEO Vic Neufeld:
Given the abundant natural resources and our collective expertise and that of our partners, Verve is poised to become one of the lowest-cost producers of medical cannabis extracts in the world. This represents another significant pillar in our strategic international expansion, where our presence extends to more than 10 countries across five continents.
Opportunity comes with a price
Of course, investors should also understand that while Africa does represent a largely untapped cannabis market, investments in the region are unlikely to pay dividends anytime soon. Though Aphria's joint venture is expected to result in the production of low-cost extracts that it can to distribute to its numerous export destinations, growing capacity in Africa, and its ability to find buyers on the continent, is probably going to be limited for some time. In sum, this is no needle-mover. At least not yet.
Perhaps even more important is finding out whether or not Aphria's export markets will prove suitable for offloading any excess cannabis supply. With an estimated annual production of 230,000 kilograms of cannabis, Aphria currently ranks as the country's third-largest grower by production.
Yet, as noted, domestic oversupply could easily hit 1 million kilograms by 2020. Even with the assistance of economies of scale, marijuana growers could see their margins hammered if they're unable to find a home for all of their annual production. Aphria would appear to have more than enough export markets at its disposal. However, there's also the concern that perhaps it's spreading its distribution system too thin and/or broadening its focus too quickly, which could cause it to miss out on lucrative opportunities.
Given its lofty valuation -- i.e., more than 80 times Wall Street's full-year EPS estimates for 2019 -- my suggestion remains that investors stay firmly on the sidelines for the time being. Still, as the company has taken the first step into Africa, call this investor at least the slightest bit intrigued.