Ready or not, legal marijuana is coming to Canada. On June 19, after less than two weeks of Bill C-45, better known as the Cannabis Act, bouncing back and forth between the Senate and House of Commons, the Cannabis Act was approved. Just days later, Prime Minister Justin Trudeau set an official adult-use legalization date of Oct. 17, 2018, making Canada the first industrialized nation in the world to have given the green light to recreational cannabis.
For investors and growers, legal weed means big bucks. Even with incredible growth from medical marijuana sales and via exports, waving the proverbial green flag should open the door to perhaps $5 billion in added annual sales that, over time, could have the legal weed industry rolling in the dough. As a result, marijuana growers have been expanding their capacity as quickly as their balance sheets will allow in an effort to secure as much market share as possible in the early going.
Over the past year and change, three cannabis growers have maintained their position near the head of the pack in terms of production: Aurora Cannabis (NYSE:ACB), Canopy Growth Corporation, and Aphria. According to company estimates, Aurora Cannabis and Aphria are on track to produce 570,000 kilograms (assuming the completed purchase of MedReleaf (NASDAQOTH:MEDFF)) and 255,000 kilograms of cannabis annually, respectively, with Canopy Growth likely producing around 500,000 kilograms a year, by my best estimate.
This premier pot grower has raised its annual output three times in less than two weeks
However, a relative newcomer is angling to push its way into this elite group of pot growers: The Green Organic Dutchman (NASDAQOTH:TGODF).
A little over three weeks ago, The Green Organic Dutchman, which holds the distinction of being the largest marijuana IPO in history, was expected to produce 116,000 kilograms of cannabis when at full capacity. The bulk of its production should come from its Quebec project, with 102,000 kilograms of annual yield, with its expanded Ontario project kicking in the remaining 14,000 kilograms per year. At 116,000 kilograms, the company was on track to perhaps be a top-five or top-seven grower in terms of annual production, but it was clearly trailing the Big Three.
But The Green Organic Dutchman's forecast changed in a big way in recent weeks. In fact, over the span of just 13 days, the company upped its production forecast a total of three times.
On June 14, the company announced a strategic partnership with Epican Medicinals in Jamaica that'll see TGOD, as the company is also known, aid in the construction of a 125,000-square-foot facility. This facility is expected to provide low-cost cannabis to the Jamaican market, as well as give TGOD an avenue to export a portion of this cannabis to international markets where medical marijuana is legal. All told, this announcement lifted the company's annual production forecast by 14,000 to 130,000 kilograms annually.
One week later, on June 21, TGOD announced that it would be constructing a 287,245-square-foot facility on its 72.4-acre Valleyfield property that'll be devoted to its beverage division. With a shortened construction timeline and budget, the company believes that this purpose-built facility targeted as cannabis-infused beverages can add 40,000 kilograms of cannabis-equivalent capacity when fully operational. This brought expected annual output to 170,000 kilograms and, regardless of whether Aurora Cannabis completes its acquisition of MedReleaf or not (MedReleaf is slated to yield 140,000 kilograms a year when at full capacity), moved TGOD into the No. 4 spot in terms of annual production.
Then, on June 27, just 13 days after it announced a partnership with Epican Medicinals, TGOD made the announcement that it was forming a 50-50 joint venture with Queen Genetics/Knud Jepsen A/S in Denmark that'll initially consist of a 200,000-square-foot facility. When complete, this facility is expected to produce 25,000 kilograms a year, lifting TGOD's annual output to 195,000 kilograms.
At 195,000 kilograms of estimated yield, TGOD will have effectively launched itself into the elite category of growers.
Interesting, but still plenty of question marks
What's particularly notable about TGOD's latest joint venture is that it'll put the company side by side with Aurora Cannabis, which has a 50-50 joint venture with Alfred Pedersen & Son in Denmark (a 1-million-square-foot facility capable of 120,000 kilograms a year).
Though competitors on the surface, it's worth noting that Aurora Cannabis has a roughly 20% equity stake in TGOD. With TGOD's expansion platform somewhat mirroring that of Aurora Cannabis, and Aurora maintaining a sizable stake in TGOD, it's not out of the question that TGOD becomes a buyout target for the acquisition-happy Aurora Cannabis in the intermediate future. Remember, Aurora is attempting to acquire MedReleaf for $2.5 billion in an all-share deal, meaning gobbling up TGOD simply may not be possible for some time.
The Green Organic Dutchman's focus on alternative cannabis products, such as oils and infused products, is also encouraging. To the south, Washington, Colorado, and Oregon have all demonstrated a precipitous decline in per-gram dried cannabis prices over time, which means products that aren't prone to commoditization and yield high margins, like oils and infused products, should be critical to pumping up margins.
But therein lies the risk for TGOD (and most pot stocks, in general): supply and demand uncertainty. While a cannabis shortage and initial legalization euphoria is likely to buoy dried cannabis prices in the early going, domestic production is probably going to more than double demand by 2020 or 2021. What happens then is anyone's guess, but my suspicion is we'll see a significant per-gram decline in dried cannabis prices. Even with reasonable product differentiation, TGOD could see its margins shrink.
For the time being, the sideline looks to be the smartest place for investors to hang out while the industry shakes out weaker players and finds its footing.