The marijuana industry is budding before our eyes. Even though pot stocks had a subpar 2018, the cannabis movement simply couldn't be stopped, leading to the pot industry gaining validation like never before.
As you might have imagined, the big news was the legalization of recreational marijuana in Canada this past October. Aside from the billions of dollars in added annual sales this legalization will bring, it more importantly signaled that the weed industry is here to stay. Tack on a handful of U.S. states giving the green light to cannabis in some capacity, and President Trump signing the Farm Bill into law, thereby legalizing hemp and hemp-based cannabidiol products, and it was pretty much a "green sweep" in 2018.
With legitimacy established, attention now turns to the individual marijuana stocks behind this fast-growing industry. In particular, Canada's top-tier growers are coming into focus with regard to meeting production estimates, brand building, and international expansion.
This cannabis producer hit a snag on its largest greenhouse project
In most respects, Canada's biggest growers -- i.e., those expected to yield at least 100,000 kilograms in peak annual output -- have had few issues with regard to capacity ramp-up. Arguably the biggest hurdle has been Health Canada, which has been bogged down with a backlog of cultivation licenses and sales permits since the beginning of 2018. However, one top-tier grower has seen one of its biggest projects delayed for another reason.
Ontario-based CannTrust Holdings (NYSE:CTST), which is expected to produced "in excess of 100,000 kilograms," according to its management team, has been contending with permitting issues tied to its Niagara facility in Pelham.
CannTrust has two producing sites: its Vaughan greenhouse and its Niagara Perpetual Harvest greenhouse. The former only spans 60,000 square feet, while the latter was projected to top 1 million square feet of capacity. The Vaughan facility and 450,000 square feet of capacity at Niagara have already been completed. However, the phase 3 expansion, which would add 600,000 square feet to the Pelham-based Niagara facility, has been put on hold since last summer as a result of light pollution and odor concerns of town residents.
In October, the town of Pelham announced a ban on any new cultivation facilities, with existing facilities (i.e., Niagara) banned from expanding for one year, according to an interim control bylaw. This effectively cut CannTrust's peak yield by at least half to about 50,000 kilograms. On Dec. 19, 2018, CannTrust provided an update on its operations that noted its intent to look at additional grow sites and/or acquisitions if an amicable permitting solution couldn't be reached with Pelham.
Finally, a green light for CannTrust
But that green light finally came for CannTrust earlier this week.
On Tuesday, Jan. 22, CannTrust announced that it had reached an agreement with the town of Pelham to expand the Niagara facility by 390,000 square feet, or 210,000 square feet less than initially anticipated with its phase 3 construction.
According to the press release, CannTrust will be investing heavily in production automation and improved climate control systems, with the first harvest expected in the second quarter of 2020, and project completion forecast for the third quarter of 2020. Full production capacity (i.e., 50,000-plus kilograms) should be expected by the second half of next year. Even with 210,000 square feet less of capacity, management insists that CannTrust will still yield in excess of 100,000 kilograms of cannabis per year, which should put it on the cusp of being a top-10 producer.
Notably, the company also hasn't ruled out the strategic alternatives referenced in December, which could include additional grow sites and/or acquisitions. Said CEO Peter Aceto:
The demand for our medical and recreational products continues to be well in excess of supply and we are keen to move ahead with the Phase III expansion and meet our capacity targets. We also continue to evaluate several strategic alternatives to meet and increase our initial production capacity goals. We are actively pursuing strategic acquisitions of land and facilities, both inside and outside Ontario and hope to update shareholders with these initiatives in due course.
CannTrust's new big question mark
Prior to announcing this permitting with Pelham, CannTrust was making waves for its unique style of production. Namely, its Vaughan and Niagara facilities employ hydroponics, or the growing of plants in a nutrient-rich water solvent as opposed to soil. The Niagara greenhouse also utilizes moving containerized benches that should allow for more consistent harvesting of cannabis. Given CannTrust's relatively cheap access to water and electricity, as well as its perpetual harvest system, it was expected to have some of the lowest production costs per gram in the industry. But this new permitting raises a big question about its growing costs.
In particular, CannTrust's revised phase 3 expansion makes mention of bigger investments in automation and its cooling systems to maintain yield efficiency and address the concerns of Pelham's residents. These investments could prove detrimental to CannTrust's per-gram growing costs, or at the very least minimize the advantages of economies of scale as it expands its capacity.
The wildcard here is whether CannTrust makes good on additional strategic investments. It's unclear if it would employ hydroponic growing systems at new production sites, or have access to inexpensive water and electricity, as it does for its Niagara facility.
While there's clearly more uncertainty for CannTrust than existed say eight months ago, the company's low-cost production on already completed greenhouse sites, and its focus on high margin cannabis oils and alternative consumption options, still makes for an intriguing investment opportunity. I would, however, suggest that CannTrust's upside is somewhat limited until we have a clearer picture on its expansion plans beyond Niagara, and we better understand its operating costs at the phase 3 expansion in Pelham.
Check out the latest CannTrust Holdings earnings call transcript.