In less than two weeks, Canada’s Senate will be voting on bill C-45, which is best known as the Cannabis Act. Assuming it receives a positive reception from lawmakers — and all signs are currently pointing in that direction — the Cannabis Act has a relatively clear path to being signed into law not long thereafter. By August or September, roughly eight to 12 weeks after being signed into law, adult-use marijuana sales could commence in Canada.
With our neighbor to the north expected to become the first developed country in the world to have legalized recreational cannabis, growers have been angling to expand their production capacity as quickly as their wallets will allow. The initial euphoria following legalization, coupled with the fact that Canada is one of just a very small handful of countries with the authorization to export cannabis to medically legal countries around the globe, has growers and investors believing that no amount of supply will be enough to meet demand.
As a result, Canadian marijuana stocks have been on fire for more than a year now. Investors simply can’t get enough of the partnerships, organic builds, and acquisitions within the space. But buying a cannabis grower isn’t the only way investors can potentially make a buck. A number of unique business models have popped up over the years in the legal weed industry. One such unique company is Cannabis Wheaton Income Corp. (NASDAQOTH:CBWTF).
A one-of-a-kind marijuana streaming stock
Cannabis Wheaton’s name is actually an homage to Wheaton Precious Metals, which is a Canadian-based royalty and streaming stock in the precious-metal industry. But instead of gold and silver, Cannabis Wheaton is streaming marijuana with its licensed partners.
Here’s how it works: Let’s say a cannabis grower has a plan to build a greenhouse or increase capacity at an existing facility, but it doesn’t have the financing to make it happen. In many cases, we’re talking about a small or mid-tier grower. Cannabis Wheaton steps in and provides this up-front capital to allow the grower to expand their capacity. In return, Cannabis Wheaton is entitled to receive a percentage of annual production for a long period of time at a below-market cost. Assuming most Canadian weed is selling for around $6.65 a gram (8.50 Canadian dollars), Cannabis Wheaton might be paying around $1.60 a gram (approximately CA$2) for what it receives. The company can then turn around and sell the product that’s been delivered at market rates, thusly pocketing the difference as profit.
On the surface, the streaming model looks incredibly profitable. The company has suggested that the internal rate of return on its more than one dozen deals is at least 60%, and by 2019, it’s expected to receive about 230,000 kilograms of cannabis a year. It should also generate relatively predictable cash flow, and have adequate enough production diversify such that growing issues at one or two of its licensed partners won’t necessary sink the ship. And, since it’s a middleman, overhead costs are almost nonexistent.
Cannabis Wheaton’s business model is evolving
The issue, though, is that because of its fixed-cost streaming model (i.e., the agreed-upon rate it pays its licensed partners on delivery), Cannabis Wheaton couldn’t benefit from economies of scale. If, for whatever reason, marijuana prices were to decline significantly in Canada, the company would have little means of lowering its costs. That’s a worry — and it’s also a reason why we’ve witnessed the modest evolution of Cannabis Wheaton’s business model to include actual grow sites.
Last week, the company announced the closure of its nearly $30 million acquisition of Dosecann, a Prince Edward Island-based medical cannabis grower that’s in the process of building out a 42,000-square-foot facility. This facility will handle pot growing, as well as formulation, filling, and packaging for the company, and some of its streaming partners.
The week before that, Cannabis Wheaton closed on its $11 million purchase of Robinson’s Cannabis in Nova Scotia. Robinson’s is in the process of constructing a 27,700-square-foot grow facility that’ll solely be used for cultivation. Interestingly enough, Dosecann and Robinson’s are located relatively close to one another, and the plan is to have Dosecann work with Robinson’s to expand its product offerings beyond just dried cannabis.
Cannabis Wheaton also sports a massive joint venture with privately held FV Pharma in Ontario, in which it holds a 49.9% stream of all cannabis, in perpetuity, as long as they’re partners. The FV Pharma facility will span 620,000 square feet, with construction on 200,000 square feet expected to commence within a few weeks. The first harvest is expected to be planted by the end of January 2019.
Long story short, while Cannabis Wheaton still derives most of its marijuana from its streaming deals, its direct ownership in grow facilities should help it respond to changes in pot prices, as well as modestly lower its total costs.
However, one major worry remains: dilution. As with most streaming companies, the only way to raise capital to make new deals and/or acquisitions is by selling shares of common stock. Though Cannabis Wheaton has had no issue raising funds, its share count has gone through the roof. In doing so, it’s diluting the value of every existing share, as well as making it that much tougher to turn a meaningful per-share profit in the future.
According to the company’s annual filing with SEDAR in Canada, it had 168.6 million shares outstanding as of Dec. 31, 2017. By comparison, it had 3 million shares outstanding on Dec. 31, 2016. Each and every deal Cannabis Wheaton makes, whether it’s for streaming or as an acquisition, involves the issuance of new shares to raise capital. This dilution probably isn’t going to stop anytime soon, which is something prospective investors need to keep in mind.