PUF ( Chlormet Technologies Inc.)
What a great couple days we’ve had here at Alphastox! The junior market is definitely picking up. Alphastox subscribers have enjoyed two great wins in the last month. Aveda Energy (TSXV:AVE) is a name that has done extremely well since we first launched coverage on the name. the stock closed at $5.20 yesterday giving our subscribers over a 20% return in just over a month on steady growth and positive news. Not only has Aveda done well for us, but another one of our companies just got bought out last week-Crocotta Energy (TSX:CTA). CTA just closed a major transaction with Long Run Exploration (TSX:LRE) for a whopping $357 million dollars giving subscribers a 70% return since first being featured on Alphastox! Now if that’s not good enough, one of our other features, a company that has probably generated our subscribers the biggest return since we first initiated coverage, Chormet Technologies (TSXV:CMT), is coming back to trade on the CSE under the symbol PUF.
In case you don’t remember, Chlormet Technologies (TSXV:CMT) was a company we initiated coverage on when the stock was trading at around $0.20. The next day, the stock jumped to $0.465 and $0.59 the day after. Unfortunately the company had been halted for the last couple months because of a potential change in business but they should be trading very shortly here under the symbol PUF on the CSE and we couldn’t be happier about the opportunity presented to us here today.
If everything comes together and the numbers are proven, this truly could be one of the most exciting stories I’ve seen in a long time. Not only do they have an option to acquire AAA Heidelberg, a commercial facility in Ontario that is in the process of getting their MMPR license through Health Canada, but the company just announced this morning that it has entered into an exclusive agreement with a licensed grow facility in Washington State called Babcock Bench Farms LLC (BBF). The marijuana market in Washington is absolutely massive and these guys already have their license in hand, so there’s no way we can shy away from this opportunity.
If you want to check it out for yourself, BBF has been approved under license Number 412996 for a Tier 3 marijuana Producer and Processor license in Washington State. I have added a lengthy summary of BBF below, but here is the essence of why I am so excited about the potential of this deal. BBF’s master growers anticipate production of between 1,350 and 2,150 lbs.of dried marijuana per quarter from their approved 21,000 square foot facility. According to the Rand Report, (a report which outlined the consumption of marijuana in Washington State based on a web-survey), the median price per pound of marijuana goes for around $2,000. Just by connecting the numbers ourselves, we can all see the massive income potential PUF has.
The best part about this deal is that the initial investment could be paid back within the first year. Here’s how: the facility should cost around $2.5 million in total. Chlormet charges $200,000/month in rent to the facility because it already owns the land in Washington. Therefore, if all the ducks line up in a row, the investment proposes a one-year payback period as well as a massive revenue stream from the sale of marijuana in the amount which could far exceed the company’s current market cap.
I have included a more detailed overview of Babcock Bench Farms LLC and the medical marijuana market in Washington below to give you a little more insight about this new industry. I highly encourage you to have a read through. Make sure to keep PUF.C on your radar screens now! This could be a very exciting story for subscribers to keep an eye on going forward.
Medical Marijuana in Washignton:
Currently, the principal who owns Babcock Bench Farms LLC has been involved in the medical marijuana industry in Washington State for a very long time now. The industry is highly regulated, with individuals only being able to grow once they obtain cards from physicians and there are strict limits in place regarding the amount of marijuana that can be grown and carried by cardholders. The current industry of medical dispensaries in the state is non-profit, with customers paying by donation and said donations being distributed to growers. Neither the State nor any local jurisdiction currently taxes these medical marijuana transactions.
In November 2012, Initiative 502 was passed in Washington State, legalizing further uses of marijuana; it allows marijuana to be available for use in small amounts by most legal adults. Three licenses can be applied for: producer, processor, and retailer. I-502 calls for the state to now tax every marijuana related transaction at 25%. Transactions between producers, processors, and retailers would all be taxed at this amount; the final consumer would also have to pay a tax of 25%. Individuals must apply for each license separately, however, one may apply for both a producer and processor license in order to avoid a single 25% tax.
Under I-502, the state government has allotted 2 million square feet of land to be used in order to produce marijuana. This space is broken down into three “production tiers,” a Tier 1 application consists of up to 2,000 square feet of space, a Tier 2 application consists of up to 10,000 square feet, and a Tier 3 application consists of up to 30,000 square feet. Applicants may apply for a maximum of 3 spaces in each tier, resulting in up to 6,000 square feet of space in Tier 1, 10,000 square feet in Tier 2, and 30,000 feet in Tier 3.
There was a 30-day period in which individuals could apply for space and the total amount that was applied for exceeded the 2 million square feet available. Therefore, the state declared that the most space any applicant would be approved for was up to 70% of how much they applied for on a single license.
I-502
I-502 was approved with 55.7% of the population agreeing to pass the initiative; 1,724,209 people voted yes, while 1,371,235 voted no. It is likely that not all of the adults who voted in favour of the initiative are marijuana users, but that many are and that many marijuana users also did not vote at all, making it possible for the number of users within the state to exceed the 1,724,209 individuals who voted “yes”. However, it is difficult to ascertain how many actual users there are and how many will consume when the product is sold legally within the market. Two reports, done by the Office of Washington State Finance Management and the Rand Corporation, have attempted to determine what the appetite will be.
The Office of Washington State Finance Management’s 2012 report that stated that there are approximately 336,000 marijuana users within the state, a number much lower than the amount of people who voted in favour of I-502, and that total consumption would amount to 187,666 pounds per annum. This 187,666 pounds amounts to marijuana that is smoked and also consumed through edibles such as cookies or brownies and drinking glycerin based products.
The second report, conducted by the Rand Corporation, states that the Washington Office of Financial Management’s figures are too low. It suggests that instead of 85 metric tons (MT), actual consumption in 2013 was around 135-225 MT. With a 90 percent confidence interval, the amount was more around 120–175 MT, with a median estimate of approximately 175 MT. The study notes that it is difficult to ascertain how much surveys differ from actual consumption because most of the relevant studies on the topic are over a decade old and since then, NSDUH methodology has improved. As well, there has been an increase in marijuana use during the 2000s. In addition, national and regional studies may not be relevant to Washington State. The study also asserts that 50% of marijuana consumption within Washington State is concentrated in King, Snohomish, and Pierce counties, with King County accounting for 30 percent and Snohomish and Pierce each accounting for around 11 percent. There is not a lot of literature that currently provides information on how much marijuana users consume per day, especially when trying to focus on a specific area and time (ex: Washington in 2013); more emphasis typically remains on counting users. The Rand Corporation has used the available literature in conjunction with data from its web based consumption survey in order to estimate that those who use marijuana 21 or more times per day consume 1.2-1.9 grams per a typical day use. Finally, it concludes that there is no ideal dataset providing information on the potency of marijuana consumed in Washington. There is no way to take a random sample of marijuana produced or consumed but the current marketplace suggests that lower potency forms do not consist of a large share of the Washington market, probably a smaller share than nationwide.
Truly, no one knows what demand the marketplace will hold. These reports do not consider that higher quality products will always elicit high demand, something management is already aware of as their products currently provoke high demand. Growers who produce high quality products will be able to sell said products more easily. I-502 does not limit the amount of plants that can be grown under a single license, allowing a licensee to grow as much as they possibly can. If the product is of high quality, demand should exceed the possible supply that the licensee can produce. Since there is no currently established market, the company has based projections on how much it can produce. From experience, it feels that there will continue to be a high demand for its products and that because of said demand, all that it produces will be sold.
Babcock Bench Farms LLC
Babcock Bench Farms LLC applied for three Tier 3 licenses under I-502, resulting in a total application for 90,000 square feet. Because of the 70% limit announced by the Washington State Liquor Board (WSLCB), the total space that the applicant will receive is 21,000 square feet of “canopy area”. The current opportunity available to BB Farms LLC is to build a 25,000 square foot “turn-key” production facility with the 21,000 square feet of “canopy area” incorporated into this amount.
As always, if you have any questions, please do not hesitate to get in touch with me anytime. I look forward to hearing from you.
Best,
Etienne
