Marijuana is the New Gold for Some Canadian Miners
A number of companies that started in the mining or oil and gas sectors that are now part of Canada’s burgeoning marijuana industry has jumped to more than 40. according to an analyst I read Saturday.
And almost 50% of the country’s marijuana firms started out in the resource sector before many converted to pot via reverse takeovers and spinoffs.
The listings reflect a surge of investor optimism as Canada moves to legalize recreational marijusna this year.
Market values for the 4 largest publicly-traded firms, Canopy Growth Corp., Aurora Cannabis Inc., Aphria Inc. and MedReleaf Corp., have all risen to more than C$10-B.
The cannabis companies on Canadian exchanges have a combined market value of about C$32-B.
The surge is driven by estimates that retail sales of recreational and medical marijuana could reach C$8-B by Y 2021.
But, my concern is that many of these companies are overvalued, as it unclear how Canada will set prices for marijuana and some publicly traded growers have yet to make a sale.
Recall that marijuana stocks dove in January following a rally at the end of Y 2017 that saw Aurora Cannabis more than 3X, while Canopy Growth and Aphria more than 2X.
Stocks began to look “Overvalued & Overbought,” according to a 31 January note from the BCMI Cannabis Report.
The BI Canada Cannabis Index is down 18% YTD.
The Pile On Effect
The reverse takeovers aka reverse merger, allow investors to quickly tap into this new space, giving Canadian entrepreneurs and exchanges a leg up on global rivals as legalization of marijuana spreads around the world.
Many new entrants go public via this route, and use the old mining or Oil & Gas “shells” as the listing vehicle.
It is fast way to list on a public exchange, and unlike a traditional IPO (initial public offering), companies do not have to undergo a full securities commission review or file a prospectus.
There are plenty of failed mining exploration companies that are sitting on Canadian exchanges paying fees and doing annual audits that still have “shell value,” said Canadian Securities Exchange Chief Executive Officer Richard Carleton.
While that’s something that U.S. Securities Commission has cracked down on to avoid fraudulent pump-and-dump schemes on the OTC market, Canadian exchanges demand that companies present a viable plan to sustain their operations and undergo a thorough review.
Recently, Toronto-based Cronos Group Inc. (CRON) became the 1st cannabis stock to list on the NASDAQ Stock Market last month.
Other producers, including Canopy Growth and Aurora, announced plane to follow, which will shift some of the action to the US from Canada.
Canada’s venture markets are known for their risk appetite due to its listing rules and the nation has always been a “mining frontier country,” said the Editor of the BCMI Cannabis Report.
I have been following this sector here on HeffX-LTN for 9 years, and no one can say for sure how much marijuana will be consumed when recreational sales become legal across North America.
But, it is certain that there are small retail investors piling into the legal cannabis market with the notion of getting rich quick.
In Canada it is like a Gold Rush, it is in their ‘DNA’
Have a terrific weekend.