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Canadian cannabis industry raises $700M in six months, report says

Reid Southwick, Calgary Herald

Published on: March 14, 2017 | Last Updated: March 14, 2017 4:49 PM MDT

Canadian marijuana companies have attracted roughly $700 million in financing since investor interest exploded in the fall amid heightened anticipation of a recreational pot market, according to new research by a financial services firm.

Analysts at Canaccord Genuity tracked the capital raised by public and private companies operating in the country’s nascent cannabis market since Health Canada opened the industry to commercial grow-ops in 2014.

There were several flashes of investor interest in the first two years, but none of it matched the frenzy that began in the third quarter of 2016 before hitting a feverish pitch in the final three months of the year.

The industry drew more than $150 million in primarily equity financing during the three months ending in September, according to Canaccord, which now covers six licensed cannabis producers.

Canadian cannabis companies raised well over $350 million in the fourth quarter, with financing levels approaching the $350-million mark so far this year. It means companies have raised roughly $700 million in the past six months.

“One of the key advantages for existing (licensed producers), in our view, is the ability to attract capital,” analysts Neil Maruoka and Matt Bottomley wrote in their report.

“As most (producers) eye aggressive expansion plans to address the anticipated recreational market, investors are stepping up to fund this growth.”

Heightened investor interest in the fall also coincided with anticipation of U.S. ballot initiatives with eight new states passing relaxed cannabis laws, while Canada’s task force on marijuana released its long-awaited report on moving ahead with a recreational market in December.

The federal Liberal government has vowed to introduce legislation allowing for a recreational cannabis market in the spring.

Aurora Cannabis Inc., which runs a production facility north of Calgary with another under construction near Edmonton, has raised $150 million from investors in the past year, including a $75-million equity round that closed in February.

“It’s unlike anything I’ve ever seen,” said Cam Battley, Aurora’s executive vice-president, referring to the birth of a new industry and the money that has flocked toward it.

This attention has also led to what many analysts have viewed as inflated valuations for publicly traded producers. Aurora is valued at $755 million on the stock market, up by 11 per cent in less than two months, even though the company has never posted a profit.

Trading in cannabis stocks is largely driven by anticipated returns from a future recreational market, not current sales or earnings, analysts say.

“That’s what it’s like in a new industry,” said Battley, who expects Aurora will be profitable by the end of June. “Like in any other industry we’re going to see some winners and some losers, and I think we clearly got the strategy in place for us to be right at the top.”

Canaccord selected Aurora as its top investment pick among the six companies it covers, drawing attention to the firm’s capacity to fund its longer-term expansion plans, and its relatively low costs of production.

Pointing to high valuations and intense investor interest, analysts have drawn parallels between Canada’s marijuana industry and the dot-com bubble, which triggered massive losses when it burst in the early 2000s.

Battley doesn’t buy the argument, which he called misguided, noting tech companies that fed the bubble had to create a market for their products, while a market already exists for medicinal and recreational pot.

Aurora, he said, has attracted financing from large institutional and retail investors both in Canada and in the U.S., where investors face restrictions because marijuana remains a federally banned substance.

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Green Acre Capital, a Toronto-based investor, has raised most of a $25-million fund that will be directed toward private cannabis companies.

Canadians with high net-worths, including Calgary’s Brett Wilson, have invested in the fund, along with family offices, which manage the wealth of individuals and families.

The fund will likely consider growers but it will also invest in companies that provide various services, which could include medical research, oil extraction and vaping equipment, said managing director Tyler Stuart.

“There’s a lot of momentum right now in the market,” Stuart said. “People realize that there’s a lot of growth in that industry, and they want to be a part of it.”

Source: http://calgaryherald.com/business/local-business/canadian-cannabis-industry-raises-700m-in-six-months-report-says