In less than a decade, Silver Wheaton built a multi-billion-dollar business by pioneering the concept of silver streams. Now diversified and known as Wheaton Precious Metals, the word “Wheaton” remains nearly synonymous with success and streams. Now, the idea of streams has made its way to the burgeoning legal cannabis industry and the aptly named Cannabis Wheaton Income Corp. (TSX-V: CBW) (OTCQB: CBWTF) is leading the charge.
In mining, a stream is an agreed upon amount of a precious metal that a miner is contractually bound to deliver in exchange for upfront cash. Generally speaking, the terms of the agreement aren’t as onerous as conventional financing contracts, especially for smaller companies that predatory lenders often rake across the coals with highly-dilutive funding. Streams are beneficial to both parties, as the miner gets much-needed capital and companies like Wheaton, Royal Gold and others employing streaming models get precious metals without having to go through all the hassles and expenses of mine development.
Cannabis Wheaton is using the stream, or streaming, model to fund cannabis companies, taking an equity stake and future cannabis product in exchange for its investment. While the company has agreements with more than a dozen partners, to date it has made sizeable investments in two, with more planned upon management completing due diligence and negotiation of terms.
Cannabis Wheaton Chairman and CEO Chuck Rifici told Baystreet.ca that he only wants to do deals that are immediately accretive and structured as a “win-win” for both companies. To lend some color on different opportunities, he explained that one way to effectively create value is to build capacity with licensed producers. For example, if a cultivator is looking for financing to build a 100,000 square-feet facility, his team could negotiate financing to build a larger facility, say, 150,000 square-feet, increasing production capacity and improving yields and efficiency.
In this scenario, the grower wouldn’t have to concede any of its planned cannabis production and Cannabis Wheaton would negotiate a deal for a percentage of, or all of, the additional 50 percent. The grower gets the funding necessary without having to give away the farm through ultra-dilutive financing and Cannabis Wheaton is guaranteed product for future sales at cost or as a royalty for its investment and services.
Furthermore, streaming partners of Cannabis Wheaton get the benefit of working with one of the most seasoned team of veterans in the industry. Rifici is well respected as one of the most prominent entrepreneurs in the cannabis business, in 2012 founding Tweed Marijuana Inc., now known as Canopy Growth Corp., and building it into a juggernaut with 500,000 square-feet of growing capacity and a market capitalization of a $3.75 billion. Rifici has surrounded himself with some of the most well-known and successful names in all aspects of the space, including CBW President Hugo Alves and EVP of Strategy Mike Lickver, two men regarded as Canada’s leading advisors in the cannabis industry.
The degree of investment can vary for Cannabis Wheaton. For instance, last month they provided Beleave Inc. (CSE: BE)(OTCQX: BLEVF) with C$5.0 million in non-dilutive financing by way of what is called a “D.O.P.E. Note,” an acronym for a “debt obligation repayable in product equivalents.” Beleave is using the funds to add scale through an expansion facility next to its current production facility in Hamilton, Ontario.
While that gives Cannabis Wheaton the “stream,” in the case of RockGarden Medicinals, CBW acquired the whole company, putting in its portfolio a wholly-owned licensed producer (LP) under Canada’s Access to Cannabis for Medical Purposes Regulations (ACMPR).
Now partnered, Cannabis Wheaton – which could perhaps most accurately be described as an asset management company – has plenty of skin in the game, explaining why they take the vetting process to the degree that they do before investing some of the C$85 million that they have raised this year. This also keeps the partners working closely together to build value in all aspects of business development, including branding, legal guidance, cultivation oversight, patient and customer portfolios and construction management in addition to merely just financing.
For investors, this is a second layer of due diligence with a long-term view that, frankly, is not possible for the typical retail market participant.
Canada is staring down what can be a major demand/supply imbalance. It’s widely expected that Prime Minister Justin Trudeau is going to legalize recreational cannabis within nine months, which will put additional pressure on LPs that already have a tough time meeting demand for medical cannabis alone.
A shortfall of supply will undermine one of the biggest goals of the Canadian government in legalizing recreational marijuana: stamping out black market sales. To that end, regulators are actively taking steps to get in front of a supply log jam, this year awarding licenses that has the number of LPs nearing 70 from less than 40 last year. Rifici estimates that production facilities will need to be expanded 10-fold from current levels to about 14 million square feet to satisfy upcoming demand, creating a tremendous opportunity on the grower side.
Cannabis Wheaton is staying forward thinking with its model and goal to command a strong market share from seed-to-sale. In that light, licensed cultivators are only part of the equation. Distribution is a must for maximum market penetration and the company is taking a leadership role on the front also, positioning itself and its streaming partners with an array of potential sales channels.
Last month an alliance was forged with a 350-store national chain of convenience stores to develop and implement cannabis distribution and retail sales opportunities across Canada. The first deal in the country of this type, Cannabis Wheaton has 10 years of exclusivity with the C-store chain.
Fact is, no one knows exactly how distribution is going to unfold or what the retail cannabis market is going to look like in the coming years.
Pharmacies are a logical sales point, with the Canadian Pharmacists Association reversing its stance from first opposing the idea to believing pharmacies are the safest way to provide oversight and ensure patient safety. In September, Cannabis Wheaton locked down this avenue as well with a 10-year exclusivity agreement with a national chain of independent pharmacies, again, a groundbreaking-type of agreement that demonstrates the strength and reach of CBW management.
Just how exactly the retail landscape will evolve is up in the air and there is likely going to be a great deal of lobbying by businesses and industries to serve as purveyors of cannabis to get a piece of a market expected to immediately rival the $5.0 billion Canadian spirits market with full legalization. Cowen & Co. forecasts the economic impact to range up to $22.6 billion. The decisions on distribution will be dictated provincially. Both pharmacies and convenience stores have ample experience that can easily be translated to the cannabis industry, a fact that Rifici and team have not overlooked and aligned their company for different outcomes.
Fact is, there may not be a company better aligned across the full spectrum of the cannabis industry. Rifici has already proven his chops in founding what is arguably the most powerful cannabis company in North America. Now, he has taken a page right out of the playbook of the mining industry with streams and applied it to the cannabis industry. Nimble and diversified to reduce risk, the company is positioned to realize the full value of the supply chain and is taking the notion of unlocking debt capital to an unprecedented level in the cannabis business, innovative actions that should result in a solid return for the company and its investors if everything pans out as planned.
Legal Disclaimer/Disclosure: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No information in this Report should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. We make no guarantee, representation or warranty and accept no responsibility or liability as to its accuracy or completeness. Baystreet.ca assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Baystreet.ca has been compensated four thousand dollars for its efforts in distributing the TSXV:CBW profile on its web site and distributing it to its database of subscribers. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.
