Billions in Financing Flowing Into Canadian Cannabis Companies
Canadian marijuana companies attracted nearly $1 billion in financing in 2017, setting the stage for a budding cannabis industry once legalization is finalized later this year.
Equity offerings by Canadian marijuana businesses reached a new high of nearly $1 billion in 2017, according to data from Thomson Reuters. That was triple the amount of 2016, sending a clear signal that investors are financiers are betting big on the marijuana industry once recreational usage is legalized on July 1.
One of the most prominent examples of financing help comes from BMO Capital Markets, which in January pumped more than $200 million CAD into Canopy Growth Corp (WEED.T0), the nation’s largest marijuana producer.
Canadian marijuana companies have been attracting hundreds of millions of dollars in financing each quarter since 2016, according to data from Canaccord Genuity, an independent investment broker. Financing accelerated in 2017 as investors looked ahead to legalization.
Canadian marijuana stocks were mostly lower on Wednesday after trending mostly sideways for two weeks. The Canadian Marijuana Index shed 2.6% to close at $723.77.
The biggest losers on Wednesday included InMed Pharmaceuticals Inc. (CNX), which fell 11.4%, and Newstrike Resources Ltd. (HIP), which closed down 8.7%. Cannabix Technologies Inc. (CNX) and Emerald Health Therapeutics Inc. (EMH) fell 8.6% and 7.4%, respectively.
South of the border, the U.S. Marijuana Index closed down 1.3% at $86.19.
The North American Marijuana Index finished off 2.4% at $265.69.
Few industries compare with cannabis in terms of expected growth. According to Deloitte, the legalization of recreational weed could generate nearly $23 billion in economic activity annually. In terms of “base market” impact, the marijuana industry could be worth $4.9 billion to $8.7 billion annually.
The base market consists of population of adult consumers, annual consumption in volume and price per gram.
That being said, not all Canadians support legalization. Research from Deloitte found that only 40% of adults were in favor of legalization, compared with a 36% who opposed and a quarter who were undecided.
Despite some social unrest, the Canadian government is expected to reap huge benefits from legalization in the form of tax revenue. Colorado, a state one-seventh the size of Canada, generated more than $500 million in taxes and fees between January 2014 and July 2017.
Canada’s marijuana industry is regarded as one of the biggest investment opportunities of a generation. This is clearly reflected in the performance of marijuana stocks over the past year-and-a-half. However, the euphoria surrounding legalization has left out one crucial detail: very little of the actual trading that has gone on over the past year has been based on earnings or revenue. This is especially true for recreational companies that are still waiting on the green light from the feds.
That green light might not come anytime soon, according to Bill Blair, Canada’s parliamentary secretary to the Minister of Justice. Blair told Bloomberg News earlier this month that the government will take as much time as it needs to “do it right” when it comes to legalization. So while legalization is coming, the timeline remains vague. Investors should plan accordingly.
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