Canada’s Cannabis Industry Turns The Corner

Canada’s Cannabis Industry Turns The Corner
Canada’s Cannabis Industry Turns The Corner

A recent article in The Globe & Mail will be encouraging for cannabis investors with Canadian holdings.
 
As The Seed Investor has noted in previous coverage, Canada’s cannabis industry has been impaired by a retail bottleneck. Provincial governments have been too slow in opening new cannabis stores. This has resulted in a temporary surge in cannabis inventories.

In particular, the provincial governments of Ontario and British Columbia have lagged most of Canada in opening up an adult use cannabis market. As the previous headline indicates, Ontario is (finally) starting to catch up.
 
This marked the third straight month of double-digit growth for the country’s newest industry, with May sales up more than [CAD]$11 million from April, as legal growers increased their production to meet consumer demand. Every province saw increased sales, with Ontario at the top at [CAD]$22.8 million in May, up 16 per cent from April, followed by Alberta at [CAD]$17.5 million, which was up 10 per cent month-over-month.

Three months of double-digit growth in retail cannabis sales. All indications are that this robust pace of growth will not only continue – but accelerate.

Ontario has announced it will award another 50 retail cannabis store licenses. This will more than triple the total number of cannabis stores from the still sparse total of 22.



These pot stores have been cash cows for those holding licenses. With sales still at such an early stage, no publicly licensed cannabis company has yet acquired a dominant position in Ontario.

Alberta continues to lead Canada in opening up stores. The province is currently ramping up expansion of cannabis stores as a previous supply-crunch in that province has eased.

It will be adding dozens of new cannabis stores in the months ahead. More than 100 retail cannabis licenses have already been handed out.

A previous Seed Investor article noted that several publicly traded companies have already carved out substantial retail operations in the province. National Access Cannabis Corp (CAN: META / US: NACNF), Alcanna Inc (CAN: CLIQ / US: LQSIF), Choom Holdings Inc (CAN: CHOO / US: CHOOF), and Fire & Flower Holding Corp. (CAN: FAF / US: FFLWF) all have multi-store operations with more on the way.

Quebec, Canada’s second-largest province (by population) is also developing a robust retail cannabis trade. Sales of recreational cannabis in April were pegged at CAD$17.1 million. Here, a single public company – HEXO Corp (CAN: HEXO / US: HEXO) – already has a dominant position.

It’s CAD$1 billion supply agreement with the province of Quebec is the single-largest supply agreement in the cannabis industry to date. This deal has resulted in HEXO claiming roughly a third of market share in the province.

Notably absent still from the provincial leaders is British Columbia. Purportedly, it is the province with the largest (historic) black market. B.C. is second to only Nova Scotia in per capita consumption of cannabis.

British Columbia now has nearly 20 retail cannabis stores, not far behind Ontario. But it is a still a laggard in sales. The problem? Over-regulation and over-taxation.

B.C. imposes a provincial levy on retail cannabis sales. This is on top of the 10% federal excise tax and provincial sales tax. The result? Weed that is much too expensive to compete with the black/gray market.

A recent Greencamp article notes that legal cannabis is (on average) roughly 80% more expensive than black market (or gray market) cannabis. Anecdotal reporting from B.C. indicates prices as much as quadruple those of the black market.

The Big Picture here for the cannabis industry and cannabis investors is that Canada’s legal cannabis industry appears to have turned the corner on sales. This is especially encouraging as Phase 2 of legalization looms in Canada.



This will open up new markets for value-added cannabis products derived from concentrates. These products become officially legal in October. New products are expected to reach consumer shelves by mid-December.

The fine print here is that several provinces (notably British Columbia and Ontario) need to do better in legalizing cannabis. This applies to both the pace of opening up cannabis stores as well as overall regulation of the legal industry.

The valuations of most pot stocks in Canada have priced-in only bad news from the cannabis industry in recent months. This could (should?) signal a substantial upward revaluation for most of the industry in the near future.

Note that The Seed Investor has just reported that the Canadian Marijuana Stock Index is nearing previous lows.

The last two times this has happened, stocks have erupted into rallies. Most recently, the last low was the trigger for a 65% jump overall.

While temperatures are rising in the summer, Canada’s legal cannabis industry appears to be set up for a hot market this fall.



DISCLOSURE: Choom Holdings is a client of The Seed Investor.
 

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