Canada is creating quite the buzz within the investment community thanks to the passage of bill C-45, officially known as the Cannabis Act, back on June 19. With its passage, Canada is set to become the first industrialized nation in the world to legalize recreational marijuana for adult consumption and, in the process, open the floodgates to an incredible amount of demand.
According to Prime Minister Justin Trudeau, legalization will become official in Canada on Oct. 17. The nearly four-month delay following the passage of the Cannabis Act is to allow provinces enough time to get their regulatory infrastructure in place, as well as allow retailers to get enough cannabis products in their dispensaries for sale. But once that proverbial green flag waves, an estimated $5 billion annually could be flowing into the legal Canadian marijuana industry.
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These four growers represent a majority of Canadian marijuana production
In response to the expectation of legalization, the past six or seven months have involved growers expanding their capacity at a breakneck pace. Some of this expansion has been organic via new greenhouse construction announcements, while other growers have chosen partnerships, joint ventures, retrofits, and acquisitions to boost their production capabilities.
What we're left with as investors is a landscape that features four very prominent growers in terms of peak production capacity. In fact, if we add up the production potential of the four-largest pot producers, we're liable to get a run-rate that exceeds 1.5 million kilograms a year by 2020.
Aurora Cannabis: 570,000 kilograms of peak annual production
As of this very instant, Aurora Cannabis (ACBFF +3.01%) is on pace to produce 430,000 kilograms (kg) of cannabis-equivalent production a year. However, should its $2.5 billion, all-share deal to acquire Ontario-based MedReleaf (NASDAQOTH: MEDFF) be finalized, it'll bump Aurora Cannabis's capacity up to 570,000 kg. For what it's worth, the buyout has hit no speed bumps thus far.
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Though Aurora Cannabis has a lot going on within the company, including a key focus on the medical side of the market, which is far less likely to face product-based pricing pressures over time, we're essentially talking about a company with four key projects.
- The Aurora Sky project, which is an 800,000-square-foot facility slated for completion this summer and will produce around 100,000 kg at full capacity.
- The Aurora Nordic project in Denmark, with is a joint venture with Alfred Pedersen & Son. This 1-million-square-foot facility, which is being retrofit from produce production to cannabis growth, should yield 120,000 kg or more a year.
- The Aurora Sun project was recently announced in Medicine Hat, Alberta, and it'll involve a 1.2-million-square-foot growth space that'll yield 150,000 kg of cannabis.
- The Exeter facility, which is owned by MedReleaf and would come under the ownership of Aurora Cannabis if the buyout goes through. Exeter is a produce facility sitting on 69 acres of land that's being retrofitted by MedReleaf to produce around 105,000 kg of cannabis annually.
If all goes according to plan, Aurora Cannabis could be the nation's largest marijuana producer.
Canopy Growth Corporation: approximately 500,000 kg
However, not far behind Aurora Cannabis is Canopy Growth Corporation (CGC +1.51%), the largest marijuana stock by market cap. Unlike Aurora, which is primarily focused on the medical market domestically and abroad, Canopy Growth Corp. is angling to hit both markets full force. It's been boosting capacity to pump out significantly more dried cannabis, as well as investing in new products to meet medical demand, such as its fast-growing line of softgel capsules.
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Interestingly enough, Canopy Growth is one of the few major players to not have divulged a clear production estimate at peak capacity. With an estimated 5.6 million square feet of growing space -- 2.4 million of which has been given the green light by Health Canada -- it's my best guess that Canopy Growth will produce around 500,000 kg a year.
What investors should remember is that Canopy Growth also has cannabis offtake agreements in effect that'll further pump up what it's directly selling to consumers and medical patients. As a refresher, in February, Canopy Growth signed a two-year deal supply agreement with Sunniva to receive up to 90,000 kg in total. These offtake agreement could allow Canopy Growth to match Aurora Cannabis's production pound-for-pound.
Aphria: 255,000 kg
Though there's a pretty significant drop-off in annual production between the second- and third-largest pot producers, Aphria's (NASDAQOTH: APHQF) estimated 255,000 kg of yearly yield is nothing to sneeze at.
Aphria has really been growing its capacity by every means possible: organically, through partnerships, and by acquisition.
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Organically, it's building out the Aphria One project which, when complete, will span 1 million square feet and allow the company to generate around 100,000 kg a year. It's slated for completion in January 2019. Also, it recently announced its intent to construct an extraction center capable of producing cannabis concentrates. When fully operational, this high-margin facility should yield 25,000 kg of cannabis-equivalent production annually.
In terms of partnerships, Aphria buddied up with Double Diamond Farms to retrofit facilities that had previous been used for tomato production. This joint venture and retrofit saves Aphria time and money, as well as puts 120,000 kg of annual production into play once it's complete in January 2019.
Lastly, Aphria gobbled up Broken Coast Cannabis earlier this year, adding what should be a peak of 10,500 kg of yearly production once its capacity expansion is complete. Aphria also acquired Nuuvera this year for its premier distribution network in foreign markets where medical marijuana is legal.
The Green Organic Dutchman: 195,000 kg
Finally, there's the newcomer: The Green Organic Dutchman (TGODF +0.00%). Not only was this the largest marijuana IPO in history, but The Green Organic Dutchman has been turning heads with the pace of its capacity expansion. It recently upped its output forecast three times in a matter of 13 days.
Initially, TGOD, as the company is also known, was expected to be working with its Quebec Project, capable of 102,000 kg a year, and its fully built-out Ontario Project, which should yield 14,000 kg. Combined, this 116,000 kg placed it firmly among the class of growers below the big three. However, in recent weeks, new project announcements have vaulted TGOD firmly into the No. 4 spot.
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On June 14, the company announced a strategic partnership with Epican Medicinals in Jamaica to construct a 125,000-square-foot facility capable of 14,000 kg of production a year. This facility should allow TGOD to service the domestic Jamaican market, as well as supply international markets with cannabis products.
A week later, the company announced the construction of a 287,245-square-foot facility that it plans to devote to its cannabis-infused beverage division. As a reminder, dried cannabis has shown a penchant to be commoditized over time in legalized U.S. states, so product differentiation into alternative cannabis products like infused beverages will be important. This facility should produce 40,000 kg a year once at full capacity.
Lastly, on June 27, TGOD announced a joint venture with Queen Genetics/Knud Jepsen A/S in Denmark. The initial 200,000-square-foot facility should produce 25,000 kg annually. Altogether, that's 195,000 kg a year.
While it's tough to predict demand, supply by the end of 2020, including all licensed Canadian producers, might hit 2.5 million kg of cannabis-equivalent production, by my best estimate. If that's the case, these four pot stocks could be responsible for around 60% of all Canadian marijuana yield.
In other words, you're probably looking at the four pot stocks that'll determine the well-being of Canada's legal cannabis industry.
