Wednesday, January 10, 2018

Canadian Business Says...Investors are delusional

Provincial buyers are going to want to deal with licensed producers that can supply large amount of product at low prices. At present the average price of medical marijuana is roughly $10 per gram. Some publicly traded companies have boasted that their all-in costs are in the range of  70 cents to $1.75 per gram which translates into profit margins of more than 80 per cent. However, we can expect provincial agencies will severely cut into these margins. The Ontario wine industry provides us with some idea of profit margins that LPs might reasonably expect. In a recent study on Ontario Wine and Grape Industry (2015), for large scale operations the profit margins are just under 15 per cent and in fact many smaller vineyards were posting losses.



Allan Gregory is a professor of economics at Queen’s University.
As the July deadline for the provinces to legalize marijuana approaches, the stock prices of Canadian publicly-traded weed producers have been on a tear. On Monday alone shares in Canopy Growth Corp., soared nearly 20 per cent. The surge in market value comes as firms try to position themselves with sufficient product to meet anticipated demand. But as these companies, some valued in the billions of dollars despite generating no profits, continue to attract starry-eyed investors, it’s worth examining what kind of opportunities will exist for these firms when provinces regulate retail pot sales. It is not difficult to predict profit margins will fall under regulation and that current market cap valuations are predicated on unrealistic expectations.
While there are some variations across provinces in their distribution plans for legalized marijuana, the largest two provinces, Ontario and Quebec, intend to have provincial run outlets modelled on their government-controlled alcohol sales. Indeed, the alcohol model gives us an important clue as to how the industry is likely to shake out—and why marijuana producers face tough times ahead. Keep in mind that there will still be online purchases and the proportional divide between physical store and e-commerce is unclear. Ontario with only a planned 150 outlets might give us an early indication as to online traffic. But let us consider the possible ramifications from only the government outlets.
The Ontario Liquor Control Board (LCBO) and Société des alcools du Québec (SAQ) effectively have a monopoly on the sales of most alcohol products in their respective provinces (with the exception of beer and some wine). The LCBO is one of the world’s largest buyers and demands much from its suppliers in terms of large quantities and price discounts. Minor producers, even in Ontario, who are unable to meet the demands of the LCBO must sell their products elsewhere.
Giant provincial alcohol buyers with market power drive tough bargains in terms of price and quantity which dissipates suppliers’ profits. Of course, having a virtual monopoly on the retail side has meant that these pricing discounts are rarely passed onto its customers. I see the same tactics for recreational marijuana. There is the false belief that the licensed producers (LPs) of marijuana will get the same price from the provinces they have enjoyed in the retail-based medical market business.  However, aggressive bulk buying by large provincial authorities will whittle the producer price down markedly.
Provincial buyers are going to want to deal with licensed producers that can supply large amount of product at low prices. At present the average price of medical marijuana is roughly $10 per gram. Some publicly traded companies have boasted that their all-in costs are in the range of  70 cents to $1.75 per gram which translates into profit margins of more than 80 per cent. However, we can expect provincial agencies will severely cut into these margins. The Ontario wine industry provides us with some idea of profit margins that LPs might reasonably expect. In a recent study on Ontario Wine and Grape Industry (2015), for large scale operations the profit margins are just under 15 per cent and in fact many smaller vineyards were posting losses.
Meanwhile at implementation this will likely mean only the largest producers will be entering into contract with the provincial authorities. The notion of boutique suppliers of cannabis will have to wait, just like craft beer producers waited in alcohol sales. Establishing reliable supply lines will dominate initially any gourmet pot considerations.
Will provinces favour producers in their own backyards? Of course they will. Just as Ontario has favoured its own wine industry and shelves mostly their products for the domestic lines in their stores, so will it be true for provincial distributors. For instance, if you are a cannabis producer hoping to sell in Canada’s biggest markets, you will likely need a physical grow-op in Ontario or Quebec. This means regional producers will face additional barriers to growth. At present only the government of New Brunswick has announced a commitment to Organigram, a Moncton-based producer, to buy five million grams a year. The company, which has seen its shares soar 31 per cent in value so far this year, estimates that deal will translate into a retail value of $40 million to $60 million. (At present, Organigram’s market value stands at $630 million.) Other provinces will soon follow suit I believe and strike distribution arrangements for local provincial growers.
As in many stock market interactions, the industry tells a rosy story of growth and opportunity. But I would suggest a careful recall of the dot com bubble offers a somber warning. Canopy Growth Corp. is currently valued at just over $7.5 billion yet loses about 12 cents a share. At the same time, Canadian Tire Corp. has a valuation of $11.5 billion and earns $10 a share—and pays a dividend yield of 2.14 per cent.  What company offers a better long-term investment?

Monday, January 8, 2018

House Buys and Sells Aura Cannabis ACB




House Positions for C:ACB from 20180108 to 20180108
HouseBought$ValAveSold$ValAveNet$Net
13 Instinet4,362,33260,935,18713.9683,918,37354,764,03613.976443,959-6,171,151
53 Morgan Stanley571,3618,018,94814.035142,3161,988,14613.97429,045-6,030,802
85 Scotia2,254,43931,507,03813.9761,858,13725,971,08213.977396,302-5,535,956
33 Canaccord1,247,78017,443,53713.98883,08012,327,67813.96364,700-5,115,859
39 Merrill Lynch1,192,22116,675,69213.987938,51813,106,62313.965253,703-3,569,069
80 National Bank816,10411,411,95613.983606,5168,485,92413.991209,588-2,926,032
2 RBC2,776,63538,833,53513.9862,583,42836,146,50413.992193,207-2,687,031
89 Raymond James182,5082,521,51913.81629,615411,49613.895152,893-2,110,023
72 Credit Suisse130,5951,828,24313.9990130,595-1,828,243
143 Pershing214,4302,994,87713.96788,2201,234,61513.995126,210-1,760,262
9 BMO Nesbitt1,426,60819,911,18513.9571,333,20918,646,18213.98693,399-1,265,003
59 PI68,833961,46513.96817,152240,65014.0351,681-720,815
58 Qtrade164,9362,311,97014.017114,8821,610,54314.01950,054-701,427
65 Goldman121,5221,699,67113.98790,0831,262,98114.0231,439-436,690
14 ITG33,938474,18013.9724,97469,78714.0328,964-404,393
15 UBS30,068421,38614.0142,43434,08614.00427,634-387,300
88 Credential54,509763,52414.00730,000418,83713.96124,509-344,687
99 Jitney512,9007,163,45313.967493,6006,905,96213.99119,300-257,491
83 Mackie95,3301,335,22514.00687,2001,222,53014.028,130-112,695
18 Echelon8,000111,88013.98508,000-111,880
74 GMP24,890348,71814.0117,550243,89713.8977,340-104,821
56 Edward Jones18,472258,46413.99211,486160,86214.0056,986-97,602
22 Fidelity14,678204,68513.9457,827109,23213.9566,851-95,453
77 Peters3,00042,08014.02703,000-42,080
48 Laurentian3,15043,84413.91995013,32214.0232,200-30,522
94 Hampton93512,98813.8910935-12,988
62 Haywood2,10029,23813.9231,50020,99413.996600-8,244
25 Odlum5507,69413.9890550-7,694
101 SG Capital19,100266,78913.96818,700259,34513.869400-7,444
68 Leede2,52035,45514.0692,50035,09514.03820-360
84 Ind Trading6,00084,60014.106,00084,09014.0150-510
3 AltaCorp7,00096,87013.8397,00096,99613.8570126
36 Latimer6,00083,96613.9946,20086,57913.964-2002,613
70 Manulife3,25745,47813.9639,151127,97013.984-5,89482,492
90 Barclays7,465103,94313.92414,500202,61513.973-7,03598,672
57 Interactive11,142156,02114.00326,922374,84913.924-15,780218,828
28 BBS86,9001,210,18013.926107,1191,498,23213.987-20,219288,052
19 Desjardins327,6624,582,94513.987367,9805,136,07013.957-40,318553,125
124 Questrade884,82412,375,49313.986931,99413,016,02713.966-47,170640,534
1 Anonymous7,022,54498,098,55813.9697,337,892102,517,10613.971-315,3484,418,548
76 Industrial Alliance15,265213,44913.983332,3004,659,24114.021-317,0354,445,792
7 TD Sec6,087,66985,081,78613.9766,662,10393,099,16513.974-574,4348,017,379
79 CIBC4,191,51158,530,58413.9645,920,27282,648,95013.96-1,728,76124,118,366
TOTAL35,011,683489,238,29913.97435,011,683489,238,29913.97400

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