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The Upcoming LP Squeeze: Are The Big 3 Ready For 2019 & Beyond?

In a recent interview Aphria CEO Vic Neufeld said he believed there would be an LP squeeze in quarter 3 of 2019. In his opinion, many of the companies making big promises today will not be able to deliver down the road. He said it will then be an opportunity for the the bigger LP’s to either fill their supply deals, or, to acquire them or their assets. Vic could really be onto something as we have a seen mass amounts of capital and hype built around ‘funded capacity’ by extremely young companies who have not accomplished many tangible feats as of yet.

Are the big 3 positioned to scale? We will take an individual look at Canopy Growth (NYSE:CGC)Aurora Cannabis (NASDAQOTH:ACBFF), and Aphria(NASDAQOTH:APHQF).

Canopy

Canopy Growth is currently the biggest marijuana grower in Canada. They have in fact gone so mainstream as to being accepted as the first cannabis LP ever to be listed on the NYSE. Canopy created 160 million dollars last year alone, and has raised 450 million over the last 3.5 years.

Possibly the biggest positive for Canopy is its relation to the recreational marijuana in terms of brand recognition. Because Bill C-45 and some of its amendments place limits on what marketing can be done, Canopy’s already-established and well-known Tweed brand should give the company a substantial competitive advantage.

Canopy Growth has also been busy lining up distribution via retail locations. The company recently announced five retail locations in the province of Saskatchewan. It will also have retail outlets in Manitoba and Newfoundland and Labrador. Canopy has also secured supply agreements for recreational marijuana with five of Canada’s 10 provinces. We also all know about the deal Canopy struck with Constellation Brands back in September which will give them incredible access to the liquor industry down the road.

Canopy continue to be great ambassadors of Canadian cannabis. At Cannabis Europa When asked the inevitable ‘is this a bubble’ question which got a cheer from the audience – Canopy responded by saying some of the valuations are too high, companies are making unsubstantiated claims regarding growth capacity, etc, and cautioned against investing in the sector right now. When asked the inevitable ‘what happens when the US comes online” to which Canopy responded, “Bring it on, we beat them at hockey, why not weed”.

Lastly, making money from the Canadian recreational marijuana market will depend on having enough product to sell. Canopy Growth shouldn’t have any worries on that front. The company already has 2.4 million square feet of growing space with a lot more on the way.

Aurora

Aurora Cannabis rivals Canopy Growth for #1 spot in the Canadian cannabis hierarchy, especially after Aurora’s acquisition of MedReleaf is finalized. Aurora and MedReleaf already have well-established brands in the Canadian medical marijuana market. The two companies combined won 17 Lift Canadian Cannabis Awards in 2017, including seven top prizes.

From the Aurora/MedReleaf conference call last month:

  • Total combined production, 570,000kg/year
  • Presence in Ontario allows distribution in Ontario.
  • Medreleaf has a presence in 6 countries currently.
  • Aurora is EU GMP certified, which will allow Medreleaf to distribute on a much wider scale to Europe.
  • At completion of deal, Aurora will have 11 growing facilities.
  • Would place Aurora at largest market cap.
  • estimated canadian market 5-9 billion dollars. 23 billion dollars with ancillary components (license fee’s, security, tourism etc) Aurora plans to operate in ancillary market as well, eg: larssen greenhouses.
  • Global medical market size when mature, estimated at 180 billion dollars. Total implied demand of 10 million kg per year. The global medicinal market will be undersupplied for the foreseeable future.
  • This is a merger of 2 out of 4 of the largest cannabis companies currently.

Like Canopy, Aurora has been preparing to hit the ground running in the retail market when recreational marijuana legalization takes effect. The company bought a 25% stake in Alcanna (formerly Liquor Stores NA), which operates 229 retail liquor stores. Alcanna intends on opening 50 retail cannabis stores in Western Canada by converting some of its existing liquor stores and establishing new stores.

Capacity to supply the anticipated high demand for recreational marijuana shouldn’t be an issue for Aurora. The company already operates two facilities that together have nearly 100,000 square feet of growing space. Aurora should also soon open its biggest facility yet — Aurora Sky — in Edmonton, Alberta which will have a whopping 800,000 square feet of growing space. With its other expansion efforts and MedReleaf’s planned production capacity, Aurora expects to be able to produce more than 570,000 kilograms of cannabis annually by the end of 2019.

Aphria

Vic Neufeld’s Aphria isn’t quite as expansive as Canopy Growth and Aurora Cannabis. However, the company ranks in the top five among Canadian marijuana growers and is built for long term growth and sustainability.

Instead of using an already existing brand from the medical marijuana market, Aphria chose to launch a new brand for the recreational market. In April, the company introduced the Solie brand. Aphria CEO Vic Neufield said at the time that it would be “the first of many adult-use brands” from the company.

While Aphria will have to work to build brand awareness, the company should be in good position to compete on price. One particular deal sees Great North Distributors (GND), the Canadian subsidiary of Southern Glazer’s Wine & Spirits, the largest wine and spirits distributor in North America, agreeing to serve as the manufacturer’s exclusive representative across Canada for Aphria’s line of cannabis products. GND is the largest alcohol manufacturer’s rep within the Canadian wine and spirits market and has a proven track record of driving sales in all provinces.

What about capacity? Aphria has it covered. With its acquisition of Broken Coast Cannabis earlier this year and expansion efforts underway, the company is on track be able to produce around 230,000 kilograms annually by early 2019. Aphria already produces cannabis at a cost of less than CA$1 per gram. $1.20 profit per gram is not unreasonable considering a good portion of their product will be for sale internationally where the profit margins are much higher, which would mean: 230,000 KG  x $1.20 profit per gram =276 million net income/220 million shares o/s = 1.25 EPS.

 

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What is the answer to our question? Yes, it does look as though these three companies are built for a strong and sustainable future into 2019 and far beyond. It will be interesting to see if some of the small and mid cap companies collapse and what that will mean for the industry and the big three moving forward.

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