Among the many conversations regarding the impending legalization of marijuana in Canada and other markets, the one that’s getting louder is over the importance of whether a crop can be certified organic or has been exposed to pesticides.
The cannabis sector is heeding the demands of many consumers already that want safe organic products, especially given the risks of newly discovered conditions harming pot smokers.
Multiple companies are working to ensure the health safety of their products including Aurora Cannabis (TSX: ACB) (OTC: ACBFF), Canopy Growth Inc. (TSX: WEED) (OTC: TWMJF), MedReleaf Corp. (TSX: LEAF) (OTC: MEDFF), CannTrust Holdings Inc. (TSX: TRST) (OTC: CNTTF), and newly IPO’d organic grower The Green Organic Dutchman Ltd. (“TGOD”) (TSX: TGOD).
Presently, there aren’t many large-scale organic cannabis operations out there for the market.
The appeal of a secure supply of organic cannabis has driven much of the demand for the more than $100 million raised for the TGOD IPO, and $160 million the company raised privately; including a $55 million investment from Aurora Cannabis for a 17.6% cornerstone stake—the largest single investment by Aurora outside of an outright acquisition.
Two of the top public names for pesticide-free or organic suppliers are CannTrust and TGOD. Both have realized early that while the start-up cost for an all-organic or pesticide-free operation is higher than conventional cultivation sites, over time, there’s a significant drop in operating cost.
Overall, the yields are higher, and thus becoming a far more profitable venture—albeit a trickier road to go down. Players in the organic cannabis space must be ready to work through a lengthy de-risking process to familiarize themselves with the entire organic challenge.
It’s not for the weak-willed.
Whether it’s offering or just “premium” strains, Aurora Cannabis (TSX: ACB) (OTC: ACBFF), Canopy Growth Inc. (TSX: WEED) (OTC: TWMJF), MedReleaf Corp. (TSX: LEAF) (OTC: MEDFF), CannTrust Holdings Inc. (TSX: TRST) (OTC: CNTTF) and The Green Organic Dutchman Ltd. (“TGOD”) (TSX: TGOD) are all separating themselves from the pack in the lead-up to legalization.
ORGANIC AND “PREMIUM” OPTIONS
While Aurora Cannabis was supporting the IPO of TGOD with both cash, and with expertise in the form of its construction subsidiary Aurora Larssen Projects, there has been activity among other majors in the cannabis space.
Arguably the biggest player in the sector, Canopy Growth, recently signed a definitive supply agreement with another Canadian supplier, with the commitment for 45,000 kgs of “premium quality cannabis” annually over a two-year period through a deal with Sunniva Inc. (CSE:SNN) (OTC:SNNVF).
Since its own significant IPO, MedReleaf Corp. (TSX: LEAF) (OTC: MEDFF) has been working to establish its own legacy, recently announcing its “premium” recreational cannabis brand AltaVie, that’s “designed for a premium consumer who is curious, discerning about life in general and searching for physical, mental and emotional enrichment.”
However, premium doesn’t necessarily equate to being certified organic.
Therefore, companies such as CannTrust and TGOD (and by extension Aurora Cannabis) are seeking the approval of health-conscious consumers with their lines of 100% pesticide-free, and 100% organic strains respectively.
CannTrust prides itself on offering 100% pesticide free cannabis with compassionate pricing, and other products.
TGOD has “organic” right in its name.
“The company expects to have a production capacity of approximately 116,000 kg per year of premium organic cannabis,” TGOD management stated in the company’s prospectus.
TGOD’S IPO-RGANIC HEAVEN
As the largest privately held cannabis company in Canada, TGOD quietly amassed value prior to its IPO. Now the company is expected to be worth above $650 million, putting it within the Top 10 most valuable cannabis companies in Canada.
The IPO came with even more hype as the previous mega-cannabis raise, done by MedReleaf Corp. at $9.50 per share—Which was hit by early IPO jitters, raising $100 million, but saw prices fall 22% on the first day of trading. Since then, the stock has reached $31.25 and is now trading at $19.30.
TGOD is certainly cashed-up to move forward, stating that it had $133 million in working capital prior to the IPO.
Going forward, the company has $106.25 million earmarked for the building of its major facility in Valleyfield, Quebec, as well as $27.3 million towards expanding its Hamilton facility, and an additional $22.5 million and $7.5 million, respectively, on Valleyfield’s and Hamilton’s research facilities.
UNIQUE SHARE STRUCTURE SETS TGOD APART
TGOD’s unique share structure is designed to help the Company succeed when it hits the market. The majority of the Company’s shares are subject to a minimum 6-month hold period from the listing date. In turn, only a limited number of shares priced at $3.65 will be free trading with a goal of limiting downward pressure seen in many IPO’s from early stage investors.
PLAYING TO THEIR ORGANIC STRENGTHS
The team at The Green Organic Dutchman has plenty of momentum behind them. Not only did they secure a healthy IPO at the $3.65 share price, coupled with an important vote of confidence from one of Canada’s biggest companies in the cannabis sector in Aurora Cannabis, but they have the backing from Eaton Power, Ledcor Group, and HCE Energy as well.
Gaining the support of Eaton Power is a major coup. The industrial power wing of the massive multinational power management company Eaton Corporation plc (NYSE: ETN) can see the potential of the cannabis sector, and in particular, the mega-greenhouses that are sprouting up around the world.
For a power company of this magnitude, there aren’t that many new ventures out there that will truly move the needle—but cannabis operations can.
A similarly important power deal came with HCE Energy, which is putting up the capital to build a co-gen power generator, with a 10-year contract secured at approximately $0.045 (down from $0.13 for a 65% discount).
TGOD also was quite selective in locations for its growing operations. Both Hamilton, Ontario, and Valleyfield, Quebec bring their own advantages.
In particular, the major facility in Valleyfield seems to have been a strategic real estate deal—having consulted with the provincial power authority prior to staking ground, and selecting a location that’s perfectly located for cheap and ready access to the much needed power for an operation of that magnitude. The company will be using the same designers that developed Aurora Cannabis’s Aurora Sky facility outside of Edmonton, Alberta.
TGOD’s management have gone through this type of planning before. On the team are names that worked as advisors for, and helped raise funding for groups like Organigram (~$30 million in 2014), and Emblem (~$50 million in 2016).
The group is determined to make a splash beyond the major IPO. By situating in Ontario and Quebec, TGOD hopes to capitalize on cannabis tourism from the large 70 million population in the US states bordering Ontario and Quebec. As well, they have no plans to stand still, having allocated the highest R&D budget of any cannabis producer on the market.
Taking advantage of the demand for organic cannabis, of which there is a major shortage of supply, TGOD appears to be moving forward from the IPO with significant advantages that differentiate the company from the rest of the pack in the cannabis space.
PREMIUM CANNABIS COMPARABLES
Aurora Cannabis (TSX: ACB) (OTC: ACBFF)
Aurora Cannabis boasts the second highest square footage approved for cannabis production in Canada. Together with its subsidiaries, Aurora produces and distributes medical marijuana products in Canada. The company’s products consist of dried cannabis and cannabis oil.
Aurora is one of few cannabis producers located in the province of Alberta, giving the company a cost advantage through its free use of fresh mountain-fed water used on site, and housed under some of the lowest corporate tax rates and power rates in Canada. Capitalizing on numerous farm credit programs provided by the province, Aurora has positioned itself as arguably the lowest cost-per-gram licensed producer in Canada. Aurora became a licensed producer in 2015, and is based in Edmonton, Alberta.
Canopy Growth Inc. (TSX: WEED) (OTC: TWMJF)
Formerly known as Tweed Marijuana Inc., Canopy Growth is a multi-licensed, geographically diverse marijuana producer, described as “one of the world’s — and Canada’s first — premier exporters of marijuana” by the Financial Post in 2016. Canopy is the parent company of licensed cannabis producers, Tweed Inc., Tweed Farms Inc., Bedrocan Canada Inc., as well as newly acquired Mettrum Health Corp. Canopy currently has a combined growing platform of over 665,000 sq. ft. of production space. It was also the first federally regulated, publicly traded cannabis producer in North America, and the first billion-dollar cannabis corporation. Canopy Growth was founded in 2014, and is based in Smith Falls, Ontario.
MedReleaf Corp. (TSX: LEAF) (OTC: MEDFF)
MedReleaf produces and sells cannabis-based pharmaceutical products in Canada. It offers dried cannabis, cannabis oils, and cannabis oil capsules; and various accessories, including grinders, vaporizers, and lockable containers. MedReleaf was Canada’s first and only ISO 9001 and ICH-GMP certified producer of medical cannabis. It recently announced a joint venture with an Australian partner for cultivation and production of medical cannabis in Australia. The company was incorporated in 2013 and is headquartered in Markham, Canada.
The Hydropothecary Corporation (TSX.V: THCX) (OTC: HYYDF)
The Hydropothecary Corporation is an authorized licensed producer and distributor of medical cannabis licensed by Health Canada under the Access to Cannabis for Medical Purposes Regulations (Canada). Hydropothecary creates award-winning innovative, easy to use and easy to understand products. With industry-leading cash cost per gram of $0.89, Hydropothecary is one of the lowest cost producers in the country. The first licensed producer in Quebec, the Company is headquartered in Quebec.
CannTrust Holdings Inc. (TSX: TRST) (OTC: CNTTF)
Since its inception in 2014, CannTrust has led the Canadian market in producing pharmaceutically standardized product. As a federally regulated licensed producer, CannTrust™ brings more than 40 years of pharmacy and healthcare experience to the medical cannabis industry. CannTrust currently operates a 50,000 square foot state-of-the-art hydroponic facility in Vaughan, Ontario, as well as the recently completed 250,000 square foot Phase 1 redevelopment of its 430,000 square foot Niagara Greenhouse Facility. The Phase 2 expansion is underway and is anticipated to be completed and in cultivation towards the middle of 2018.
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