Shares in publicly traded marijuana suppliers surged in early trading Tuesday, with a Liberal election victory potentially vastly increasing the size of the market that is up for grabs.
During his election campaign, prime-minister-designate Justin Trudeau made it clear that, if elected, one of his early objectives would be the legalization of marijuana – as long as the drug doesn’t end up in the hands of minors.
In campaign literature, the Liberals vowed to design “a new system of strict marijuana sales and distribution, with appropriate federal and provincial excise taxes applied.”
Currently, Canadians can only gain legal access to marijuana for medicinal purposes from licensed suppliers in limited circumstances.
“You look at pretty much every stock in the space. They’re all up on tremendous volume,” said Aaron Salz, an analyst with Dundee Securities Inc., in an interview early Tuesday.
“It all has to do with the election.”
The medicinal marijuana market in Canada is worth about $80-million a year. Twenty-five companies are licensed by Health Canada to sell the drug. A handful of these companies are publicly traded, including Mettrum Health Corp., Aphria Inc. and OrganiGram Holdings Inc.
“Companies were getting valued on a strong medicinal market, but one that was going to take time to grow,” Mr. Salz added.
“You have potential for a recreational market in the next few years that could instantly increase the size of this market by a material amount.”
GMP Capital analyst Martin Landry estimates that the recreational marijuana market could be worth $4-billion to $5-billion eventually.
“We believe the licensed producers will continue to play a central role in the supply of cannabis given the infrastructure established by Health Canada,” wrote Mr. Landry in a note to clients.
Canopy Growth Corp. – formerly Tweed Marijuana Inc. – is the biggest publicly traded Canadian medical marijuana supplier in Canada with a market capitalization in the region of $180-million. Shares in the Smith Falls, Ont.-based company rocketed 20 per cent on the open. The company is still tiny revenue-wise – only bringing in about $1.7-million in its latest quarter – but it is well funded, having raised $22-million via an equity bought deal in May. In an interview, CEO Bruce Linton expressed optimism that the next time the company needs to raise capital, it will qualify for debt and not be forced once again to dilute down its shareholders via equity.
“I think we’re debt-ready,” Mr. Linton said.
“We will be the first one to really qualify for it in the sector, because of our scope and scale and revenue.”
Late in the day, shares in Canopy turned negative and eventually closed the session down 8 per cent.
Full-scale legalization of the marijuana industry is still a ways off in Canada and by no means a fait accompli. A bill would have to be drafted and then passed by the House of Commons and the Senate. Mr. Salz figures that legislation is at least one and a half to two years out.
“The issue is certain to be [a] contentious one with fervent pushback expected from both sides of the aisle,” he added.
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