EDITOR: | December 8th, 2015 | 4 Comments

Law and Valuation in the Marijuana Market

| December 08, 2015 | 4 Comments
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weed stock2The Liberal Party promised if elected it would decriminalize marijuana, and as the polls moved more in the Liberals favour, the marijuana market moved up, too. The stock market was betting on a Liberals’ win and on the Liberals then keeping the promise.

The marijuana market celebrated New Year’s Eve on October 19, 2015, when the Liberal Party was elected to a majority government. Throw the confetti, drink the champagne, let the good times roll!

This was because the market knows a fundamental truth – the law trumps all. Unless it’s legal, it ain’t gonna happen. The MMPR applicants can tell the market (as so many of them do) that “Health Canada was just here and we’re going to get our licence next week, wink wink nudge nudge”, but unless that licence to cultivate, sell, import or transport actually gets granted, all they have is a big expensive building.

This is part of the reason for Aurora Cannabis‘ run in the market (CSE: ACB | OTCQB: ACBFF). Aurora already had its licence to grow, and all of its inventory was safely locked away in its well-built vault. The problem was, all of its inventory was safely locked away in its well-built vault. It couldn’t be sold because Aurora had a licence to cultivate but it didn’t have a licence to sell.

There’s not a lot of shareholder value in having sunk millions into CapEx and OpEx but still being forbidden from selling your product. The share price was trading in the high 20 cent range in late September, reflecting the uncertain state of the legal market. Terry Booth, the CEO, battled to maintain that value.

Then it became relatively apparent that the Liberals would win. The value of the company grew accordingly, reflected by the stock price. The Liberals won. The stock ran to the mid 70 cent range. Then on November 30, 2015 Aurora was granted a licence to sell and the stock price has held on to most of that value, now trading in the mid 60 cent range. The reality of law gave Aurora value.

Here’s another example. Pre-election, OrganiGram Holdings Corp. was under great financial stress, facing a cash flow crunch and a lack of financing. I heard at least four different versions of the same rumour about OrganiGram’s pending insolvency and a possible bail-out by a bargain basement equity financing with a private equity firm. The then-existing shareholders would have been diluted like homeopathic solutions.

With the Liberal win, the share price stampeded from the low 20 cent range in early October to closing recently at over 91 cents. The company closed on a $5.7M financing at $1.04 a unit on November 30, relieving the company’s financial stress and turning over the shareholder base on massive volume.

OrganiGram should send a free sample to everyone who voted Liberal.

Canopy Growth Corporation (the new idiotic name for the Tweed – Bedrocan merged entity) also enjoyed a huge run, from a pre-election price of roughly $1.65 to its recent close of over $2.75. The market anticipated the Liberals would honour its election promise, and drove value into the stock.

Would the Liberals deliver?

That brings us to last Friday’s Throne Speech, the protocol whereby Queen Elizabeth’s representative (the Governor General, His Excellency the Rt. Hon. David Lloyd Johnston) reads out the government’s agenda for the term. The key part for the marijuana industry came about halfway through:

“Recognizing that Canada is, fundamentally, a safe and peaceful country, the Government will continue to work to keep all Canadians safe, while at the same time protecting our cherished rights and freedoms. To that end, the Government will introduce legislation that will provide greater support for survivors of domestic violence and sexual assault; that will get handguns and assault weapons off our streets; and that will legalize, regulate and restrict access to marijuana.”

With that, the federal government made it clear it would in some way honour its election promise.

Don’t expect marijuana to be decriminalized overnight. The Liberals have a majority and can take the time to do it right. It will be at least 18 months of consultations and planning before we see the draft legislation. Then the draft has to make its way through three readings in the House and navigate through the byzantine Senate before becoming law. Then the regulations have to be figured out. I’m guessing it will be a minimum of two years before we see the law enacted, but don’t be surprised if it takes up to four years.

And since the law is paramount, keep in mind that the Throne Speech and the Liberals’ intentions could matter for nothing, depending on the Allard decision from the Federal Court of Appeal. The judges are the last word in Canada in interpreting the Constitution, ranking above Parliament. The Supreme Court of Canada in Smith empowered the medical patient over the government’s national interests – if Allard leans the same way in favour of the old MMAR’s then the new MMPR’s could face losing over 40,000 patients.That would crush value.

The law giveth and the law taketh away.


Peter Clausi

Editor:

Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>


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Comments

  • hackenzac

    On the flip side, there’s lawless valuation in the marijuana market which is massively diffused opaque black and will remain so. You Canadians, my non PC “you people” riff, between you and Dr Luc and his back of the envelope stuff please take note; Americans are ahead of you on the medical/recreational marijuana train and the market is tough, very competitive and all the on the sly dealers who have been at it all along are still at it. In Washington state, with a medical card, you’re allowed to grow a good amount and street prices are at most 10 bucks a gram which is more than 30% below the official market price. You guys have laboratories in some US states that you can study so take some trips and get a look. It’s not as proprietary as you’d think. It’s a weed. Corporations and government licensors who think they’re going to box it up for big profits have fierce market competition, some of them actual gangsters already in place.

    December 8, 2015 - 10:40 AM

  • Janet

    Don’t know a lot about the Medical Marijuana business but can only imagine what getting a license to sell would mean to a producer. I understand from Dr. Duchesne’s article that there are only 26 such sales licences making this a real win for Aurora. Good article, interesting to get your perspective on the way the legalization timeline will play out. Imagine where this industry will go then! Enjoyed this article.

    December 8, 2015 - 1:22 PM

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