EDITOR: | September 11th, 2017 | 8 Comments

Marijuana Decrim Will Not Take Place on Feds’ Timeline

| September 11, 2017 | 8 Comments
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International investors are convinced that the decriminalization of marijuana in Canada is imminent. The only assumption underpinning otherwise unjustifiable valuations is the assumption that decrim is almost here, bringing with it a massive new market, huge cash flows and profits for shareholders.

That assumption will be proven to be false. Come July 1, 2018, decrimin followed by implementation by every province and territory will not have happened.

Position your portfolio accordingly.

For years we have been pointing out the insurmountable challenges facing the federal government in trying to effect decriminalization. Some of those challenges are beyond the feds’ control. They can only tinker with statutes at the federal level – the Canadian Constitution puts provincial and municipal areas of competence out of their reach.

Canada’s premiers met in Edmonton in late July this year. As a group they pushed the Federal Liberals for more guidance, and most importantly, for more time. The Premier of Manitoba, Brian Pallister, publicly requested a one-year delay in decrim to allow that province to prepare all the logistics necessary, from policing to health care to licencing to education.

Manitoba’s neighbor to the east, Ontario, has 13 million people, or forty per cent of all Canadians, making that province the largest target market. Look at what Ontario The Good did this week (see here for The Globe and Mail‘s report.) The effect of Ontario’s plan is to gut the country’s largest target market.

Ontario says it will follow the LCBO mode, and anyone living in Ontario knows how grossly inefficient, patriarchal and bullying that Crown corp is. The goal is to open 40 cannabis-selling stores by July, 2018. That works out to 0.000003 stores for every Ontarian, assuming those stores open on time. You might want to get a place in line now!

But none of those locations have been selected yet, and this isn’t simple retail like opening another lululemon store. Each location will require high security, specialty barriers, special inventory storage areas, and compliance with municipal codes. The task of finding 40 acceptable locations and then building them out by July/18 would be extremely difficult for a privately-owned highly motivated company to achieve. It will be impossible for a bloated slow-moving provincial regulator.

Adding to the grief is that each municipality controls its own zoning codes. As The Globe reported, “provincial officials are just beginning talks with municipalities about where they should be located.” Just because the province likes a location does not mean the local municipality will allow the store to open. These same zoning codes are why you don’t find liquor stores next to high schools or strip joints next to day cares.

Another local problem is that the feds have not yet given guidance on pricing or taxation. How can the province or municipalities make any informed budget decision when two of the largest variables have not been set?

What else did Ontario do? The legal age for consumption will be set to 19, making it illegal to sell to 18 year old adults. No public consumption. No smoking in cars.

Apparently Premier Wynne is doing everything she can to get the Opposition elected.

Then we zoom out from the local problems to the International treaties that limit the feds’ options in other ways, and may themselves completely prohibit decrim from ever taking place.

Those thoughts have been examined in detail earlier this year. For a refresher on that, please revisit April’s article here comparing what we can expect from marijuana to the inefficient morass that is Canada’s alcohol distribution industry.

There also are the other infrastructure impediments like the TSX suddenly finding religion and taking a moral stand related to how the shares of companies with US-marijuana interests get traded in Canada. One can’t help think that is a front, with the real purpose being a collateral attack on its competitor Canadian Securities Exchange which is becoming known as “The Weed Exchange”.

But don’t judge the industry by its words but rather by its deeds (for how theory impacts the junior mining industry in particular, see Hookers and Blow).

One leading company in this space is Aurora Cannabis Inc. (TSXV: ACB | OTCQX: ACBFF), long one of my favourites to withstand the long-term brutal market that will appear if decrim does not happen. A look at Aurora’s history shows a management team that has been nimble and aggressive, while at the same time being risk-adverse.

Aurora has quietly made two interesting admissions. First, in July of 2017, Aurora cut a painful deal with a German company, and its shares were battered as a result. They have recovered about half the lost value since then. The other admission was in late July when Aurora announced it would buy up to 19.9% of Hempco Food and Fiber Inc. (TSXV: HEMP), and that under certain circumstances could increase its ownership position to 50.1%.

Notice that neither of these investments is with a Canadian producer. Aurora is putting its hard-earned dollars to work in the area it sees the least risk for the most return, which is NOT in the Canadian decriminalized field. It is derisking itself by moving far away from what will be a painful 2018 for other producers.

I’m betting with my dollars that decrim will eventually happen, but not on the feds’ current schedule.


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

  • Tracy Weslosky

    The most exceptional piece on the reality of the decriminalization of marijuana in Canada today that I have read.

    September 11, 2017 - 11:33 AM

  • Kelly Bird

    As an Ontario resident, it felt as if the day after Trudeau was elected as PM, marijuana shops opened over night with an expectation that if they were shut down, by the time they went to court it would be legalized…On that note, I feel like this article definitely paints a more realistic picture of what’s to come in the Canadian marijuana space.

    September 11, 2017 - 1:48 PM

  • Peter

    I am getting a little tired of people who are obviously experts on financial/economic matters but who clearly demonstrate time and time again their ignorance of the “pot business” and the government’s plans (both federal and provincial) for implementing this very important and sensible reform.

    Firstly the feds are not discussing “decriminalization” and the feds never have. The federal government is going to strike down the laws that make the growing, distribution and sale of marihuana illegal. The rest is up to the provinces, and the provinces, in all likely hood, are chomping at the bit just thinking about the brand new revenue stream which is about to be created.

    Mr. Pallister appears to me to be typical of people who think marihuana is evil incarnate and should never be legalized. The feds have made it clear that for any province not ready by next summer they will allow purchase by mail order and the mail falls under federal jurisdiction.

    Ontario has followed the path that most people, who I know who are recreational users, would like to see and that is under the control of the LCBO. The LCBO is not “grossly inefficient, patriarchal and bullying”. They offer a vastly better selection than any other province’s setup and seven days a week. They are already setup to handle the sale of products which everyone wants to see kept out of the hands of our youth. The only disappointment is the antiquated proposed setup which harkens back to the 50’s, 60’s and early 70’s when the liquor was kept out of sight; a perfectly understandable setup when one considers the historical and conservative nature of the Ontario attitude towards alcohol.

    There will be no problems between the municipalities and the province because the province is already familiar with the zoning restriction of the municipalities.

    No foreign interests are going to stop the feds. They have no jurisdiction here

    Legal recreational use is coming next year. Best you get in now before the prices take off.

    September 11, 2017 - 2:33 PM

    • Mike Clubine

      Thanks Peter !! I want to believe they will use this as an opportunity in the next election by scaring us into believing if we dont elect them back it aint going to happen at all . But I agree with Peter and that makes perfect sense to me . They did say that consumers could purchase through the mail until the Provinces have their own distribution channels in place.

      September 11, 2017 - 3:20 PM

  • Jeff S.

    I’ve lost count at the number of articles bashing the announcement coming out of Ontario. Most, if not all of these articles complain at the lack of storefronts (starting with 40). Let me repeat a small, but significant piece of information left out of this, and many other articles. In addition to the storefronts, Ontario will also be selling online. Let me repeat that, in case the detail escapes your attention again. Ontario will be selling marijuana online, IN ADDITION to the storefronts. That means that anyone of legal age can purchase the product and have it delivered, from the comfort of their own home regardless of whether you are close to a storefront or not… Stop with these nonsensical expectations. The government will not open 1,000 stores on July 1, 2018.

    September 11, 2017 - 8:04 PM

  • Peter Clausi

    More from Sept 12/17 Globe and Mail: The Globe and Mail pans Ontario’s plan to sell marijuana in “sterile state-run stores” in its Tuesday edition. The Globe’s Andre Picard writes that buying legal cannabis should be as simple as buying illegal weed. He says the problem with Ontario’s plan is that it will make buying cannabis from a government store about as appealing as getting an enema. Products will be kept hidden and customers will have to order from a clerk who will retrieve the bounty from the back room. Mr. Picard calls this a pathetic throwback to the era when Ontarians purchased wine and spirits in this furtive manner — filling out a form and carrying out their bottle of evil spirits in a brown paper bag. Now, you can actually browse, interact with knowledgeable staff and make adult choices in The Beer Store and the Liquor Control Board of Ontario. Adults should be able to do the same in “The Pot Store,” or whatever name the government comes up with. Mr. Picard calls Ontario’s vow to crack down on cannabis dispensaries “stupid.” He says the government should be working to regulate these stores and also learn from them, because they offer decent customer service and employ some impressive pot sommeliers.

    September 12, 2017 - 9:26 AM

  • Peter Clausi

    Then on Sept 12: http://globalnews.ca/news/3736921/marijuana-legalization-police-postpone/ The police are asking Parliament to delay decrim.

    September 13, 2017 - 9:02 AM

  • mike c

    Its already illegal to drive high. Police knew this was happening a long time ago . They still got quite a bit of time. Not buying their story . Cant see anything coinciding with Canada Day but with this treasonous government who knows. But its more likely that they will strike down existing laws before the end of june 2018

    September 13, 2017 - 10:57 AM

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