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Production Bottleneck Spells Opportunity for Canada’s Cannabis Producers

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Production Bottleneck Spells Opportunity for Canada’s Cannabis Producers

NetworkNewsWire Editorial Coverage: While developments in U.S. marijuana markets have no trouble attracting headlines, many seasoned investors have discovered a more predictable method of capitalizing on the cannabis boom by turning their attention to the north. Data from Health Canada suggest that almost 130,000 Canadians had signed up with the country’s 38 licensed cannabis producers by the end of 2016, more than tripling in number from the previous year. One of these licensed producers is ABcann Global Corp. (OTCQB: ABCCF) (TSX.V: ABCN) (ABCCF Profile), which has remained focused on changing the face of medical cannabis since its launch in 2014. With fellow licensed producers Canopy Growth Corp. (OTC: TWMJF) (TSX: WEED), Aurora Cannabis, Inc. (OTCQX: ACBFF) (TSX: ACB) and Aphria, Inc. (OTCQB: APHQF) (TSX: APH) all recording huge PPS spikes approaching or exceeding 1,000 percent following their respective IPOs, ABcann’s comparatively low market cap, combined with its strong balance sheet reflecting investment from cannabis streaming company Cannabis Wheaton Income Corp. (OTC: KWFLF) (TSX.V: CBW), makes it an intriguing investment opportunity as Canada prepares to legalize recreational use of marijuana at the federal level in 2018.

The impending legalization of marijuana for recreational use in Canada could offer licensed producers a chance to record tremendous growth in the coming months. According to a 2016 report by Deloitte, the legal Canadian marijuana market could soon be worth $18 billion annually. As for volume, Deloitte forecast annual demand for the plant at about 1.32 million pounds per year. Therein lies the opportunity. As of the 2016 report, Canada’s network of licensed growers produced about 20,000 pound of dried marijuana per year. Just last week, investors were given an early glimpse into the possibilities presented by this supply bottleneck.

As reported by Vice News, New Brunswick’s financial minister last Friday announced two historic supply deals with Organigram and Canopy Growth Corp. with a combined value of more than $80 million. Both companies saw a jump in share prices following the announcement, but the scale of these agreements demonstrates the nearly insatiable demand for volume in the Canadian cannabis market ahead of next year’s legalization measures. The Financial Post notes that Organigram’s supply agreement with New Brunswick accounts for about 25 percent of its anticipated annual production. With Quebec and Ontario having recently floated details of their individual plans for July’s complete marijuana legalization goal and the other seven Canadian provinces now on the clock, the market is ripe for expansion.

“These are the first agreements that any province has signed for supply from licensed producers in Canada,” Organigram CEO Greg Engel told the Financial Post. “Part of the initiative to get this supply agreement in place was they understand that there will be a supply deficiency for the first couple years of the adult recreational market, and they wanted to make sure that they were in a position to get a significant supply going forward and be the first to do so.”

ABcann Global Corp. (OTCQB: ABCCF) (TSX.V: ABCN) with its fully operational Vanluven production facility, is well-positioned to capitalize on this expansion. The company’s computer-controlled growing platform helps it produce in excess of 250 grams of cannabis per square foot each year, placing it among the highest yields within the Canadian sector, according to data from PI Financial. Likewise, these reliable growing systems have proven extremely adept at producing a consistent chemical compound from plant to plant and batch to batch, allowing ABcann to achieve a long-term cannabinoid profile with deviations of less than 10 percent. This is particularly noteworthy as some competitors within the Canadian cannabis market have faced product recalls resulting from substandard consistency and other production issues.

Canada’s largest cannabis producer, Cannabis Growth Corp., through its recently-acquired Mettrum Health Corp. subsidiary, is one company that has faced product recalls in recent months. Health Canada classified the product deficiency as a Type III recall, defined as “a situation in which the use of, or exposure to, a product is not likely to cause any adverse health consequences.” Aurora Cannabis, Inc. announced a Type II recall of its products in January 2017, with some of its marketed offerings containing “residual levels of myclobutanil and/or bifenazate that exceed any of the levels permitted in food production for these two pesticides.” Aphria, Inc. initiated a Type III recall of its own in March 2017 due to mislabeling of the delta-9-tetrahydrocannabidiol (THC) content of some of its products.

In the face of these quality concerns in the burgeoning industry, ABcann has not had any product recalls. The company’s management team notes that ABcann’s reputation for the consistent production of pharmaceutical-grade cannabis will be vital to both its expansion within Canada and its entry into additional global markets.

Leaning on this reputation for quality, ABcann has already outlined some aggressive expansion plans designed to help it widen its presence in the fertile Canadian cannabis market. The company’s Vanluven facility in Napanee, Ontario, boasts 15,000 square feet of production space, and management expects completion of an additional 15,000-square-foot expansion at the site sometime in 2017. Looking ahead, ABcann also owns a 2,649-hectare parcel of land near its Vanluven facility, known as its Kimmett facility, upon which it plans to construct a 150,000-square-foot facility offering annual cannabis production capacity of 20,000 kilograms. In late July, the company provided an update on these construction efforts, noting that its plans to commence construction at the Kimmett facility remain on track for the third quarter of 2017, with first cultivation from the facility expected in the fourth quarter of 2018. These plans are supported by ABcann’s strong cash position.

ABcann earlier this week reported (http://nnw.fm/zQY7o) total proceeds of $11.9 million from the exercise of warrants since its acquisition of ABcann Medicinals, Inc. in April, bringing the company’s working capital to $45 million, to be used to significantly increase production capacity in 2018.

“ABcann thanks our shareholders for their continued support and confidence as we work toward expanding our facilities and increasing production. Our strong financial position, represented by our current cash position is earmarked for new construction and will facilitate the timely execution of our business plan. The Company’s main focus in the coming months will be on the deployment of capital towards the expansion of our existing Vanluven facility and development and construction of the new Kimmett facility, as well as the pursuit of our international expansion plans,” ,” stated director and CEO Aaron Keay, who as of October 1 will be replaced by incoming CEO Barry Fishman (http://nnw.fm/WrOQ4).

This strong cash position is anchored to news from early August, when ABcann announced the close of a $15 million investment by Cannabis Wheaton Income Corp., the world’s first cannabis streaming company, as part of a larger phased investment to fund its expansion efforts. As noted on its website, Cannabis Wheaton aims to construct a pan-Canadian network of streaming partners connecting licensed producers with consumers. This falls in line with ABcann’s current operations, though, notably, the company has already outlined plans for growth beyond the Canadian border.

In its August 2017 corporate presentation, ABcann highlights its active global initiatives targeting cannabis markets in Europe, Israel and Australia. It is in this area that the company’s proven track record of quality production is expected to be most valuable. As a member of ABcann’s management team told NetworkNewsWire, “With Canadian growers moving so fast into commercial production, the opportunities will be in growing international markets. The licensed producer’s with the best domestic reputations for quality consistency and capacity will be the winners in the new emerging markets … We expect ABcann to be successful in the global supply chain.”

Its plans for the construction of a 150,000-square-foot production facility in the coming months place ABcann in the upper echelon of growers in Canada’s developing cannabis market. It’s joined in these ranks by Canopy Growth, the nation’s largest licensed producer, which operates a diverse collection of brands supported by over half a million square feet of indoor greenhouse production capacity. Canopy Growth was first granted a licensed to legally produce marijuana in January 2014, and its production facility was the first approved under the Marijuana for Medical Purposes Regulations in April 2014. This early-mover status propelled the company to rapid expansion, as it became the first company in the marijuana industry to achieve a valuation of $1 billion in November 2016. ABcann will look to record similar growth through its facility expansion projects, as well as its international growth initiatives.

Despite recent recalls impacting their operations, fellow licensed producers Aphria and Aurora Cannabis are also competing in the booming Canadian cannabis space. Marketing a wide variety of products including capsules, oral solutions and vaporizers, Aphria has recorded seven consecutive quarters of positive EBITDA while continuing to expand its production capacity. Its PPS for its Canada-listed shares have highlighted the growth potential of this evolving market, hitting a high of C$7.79 in November 2016 that marked a 967 percent gain from IPO in February 2015. Similarly, Aurora Cannabis’s Canadian shares rose by 1,419 percent, from June 2015 to November 2016, to C$3.95 as the company implemented a strategy combining low-cost production with high customer growth rates in an effort to maximize market share and compete with low-price competitors.

With federal legalization of recreational use scheduled for 2018, the Canadian cannabis industry is in the midst of a major boom. Producers are scrambling to increase production capacity in the face of a forecast supply dearth, and many are facing the quality concerns and product recalls that are often associated with expedited expansion. ABcann Global, on the other hand, is taking a deliberate approach to the so-called ‘Green Revolution’. In addition to rapidly increasing its production capacity by leveraging its strong cash position, ABcann has remained steadfast in its commitment to consistency and product quality. With no product recalls in its history, ABcann is well-positioned to both expand its share of the Canadian cannabis industry and make strategic entries into promising international markets. These factors, when combined with a market cap that’s significantly lower than its competitors in the cannabis space, make ABcann an intriguing option for investors looking to capitalize on the impending legalization of marijuana in Canada and beyond.

For more information on ABcann Global Corp. please visit: ABcann Global (TSX.V: ABCN) (OTCQB: ABCCF)

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