Which Canadian Growers Will Become Big Cannabis?

There’s Big Agriculture, Big Pharma, Big Oil, and Big Business of all stripes, but so far there is no Big Cannabis. At least not yet. That’s only because government doesn’t allow it yet, but by the way things are developing in the legal cannabis industry, Big Cannabis will soon arrive.

The question for investors is which cannabis companies will have the first shot at being Big Cannabis?

While nobody knows of course, leaders in terms of present and future production are starting to emerge. Those with the largest production without sacrificing responsible financing are the ones with a decent shot.

With Canada far friendlier than the United States on legalization, the largest producers and potential producers are there. Legalization on a federal level there has already passed the Canadian House of Commons in November and is scheduled to take full effect in July of this year.

Concurrent with this move on the legislative front, the Canadian Marijuana Index has quadrupled. The US index, while also showing significant gains off the back of Canadian movement, is far behind. The lack of enthusiasm for legalization in elements of the Trump Administration is generally known.

The surprising thing though is that the companies at the top of the Canadian index currently are not the ones with the biggest future production capacity. Granted, future capacity is a bet, but keep in mind that legalization has not even taken affect yet. When it does, production will skyrocket.

The number one stock by market cap in the Canadian Index is Canopy Growth Corporation (OTCMKTS:TWMJF)(TWMJF), currently with the highest production capacity but not the highest future capacity. See the table below from GrowersNetwork that shows the largest companies by present growing capacity in three regions: Canada, Eastern US, and Western US.

Canopy is the current Canadian leader with 568,000 square feet of growing space, and with that it can produce about 40,000kg of cannabis annually. At a current price of about $1,450 per pound, that puts annual top line revenue for Canopy at $128 million. That’s a big number, but it’s nowhere near Big Cannabis proportions of what it could be in full swing.

Which cannabis company has the most ambitious production targets? For now that title goes to Emerald Health Therapeutics (OTCMKTS:EMHTF)(EMHTF). It is developing a 1.1 million square foot facility in steps with a capacity for 75,000kg annually. The first 75,000ft2 are set to be completed and in production by March. An additional 500,000 are planned to be operational by the end of this year.

Plans beyond 2018 include an option to triple 2018 capacity. That would put Emerald at the top of the production ladder with a potential 300,000kg annually. Whether it will exercise that option or not obviously depends on market development going forward.

Plans may sound expensive, but both Canopy Growth and Emerald Health are actually in strong financial positions. Emerald has $23M in cash and no debt. Canopy Growth has over $108M in cash and only $17.5M in debt, part of the reason why its valuation is higher by more than 10x. It simply has more resources.

Canopy Growth is unquestionably the leader by production at this point, but with cannabis set to be fully legalized by July in Canada, it will be a race to grow the most.

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