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One of Canada’s biggest medical marijuana companies is on the block and conducting talks with some of its rivals that could lead to the creation of the country’s most valuable cannabis grower, sources say.

The most serious discussions MedReleaf Corp. of Markham, Ont., is having are with Aurora Cannabis Inc., said the sources, who spoke on the condition of anonymity because the talks are private. One of them said Aurora has submitted a friendly offer that is being reviewed by a special committee of independent directors at MedReleaf.

The talks come at a time of increasing consolidation for the nascent sector, as many firms appear to be shopping themselves around to cash in on equity valuations that have soared during the past year as Ottawa prepares to legalize the recreational use of the drug.

There’s no guarantee a deal between MedReleaf and Aurora will be finalized, the sources said. If a sale happens, Aurora would become the biggest legal cannabis company in the country by market capitalization, dethroning rival Canopy Growth Corp. (Market capitalization, often referred to as market cap, is the value of a company’s outstanding shares.)

Officials at Aurora and MedReleaf declined to comment.

Shares of MedReleaf have jumped 39 per cent in the past month and are up 9 per cent this week. By comparison, the Horizons Marijuana Life Sciences Index, an exchange-traded fund that includes shares of many of Canada’s largest marijuana firms, is up about 7 per cent over the past month and 1 per cent this week.

On Wednesday, MedReleaf’s stock fell 2 per cent to $21.78.

Even though cannabis stocks have sputtered since January, they are still trading at elevated levels for businesses that have generated little to no revenue. The heightened investor interest in the sector has spurred a wave of deal-making, including several large financing arrangements.

In the first three months of 2018, cannabis companies raised $2-billion from stock sales to fuel their expansion plans both in Canada and abroad, according to data compiled by Canaccord Genuity Corp.

The sector is at a stage where provincial retailers are signing supply deals with growers for recreational stores, giving the producers a clearer picture of pricing and demand for their product in the early days of legalization.

The sources said MedReleaf has contacted other large players, including Canopy and Aphria Inc., in search of an alternative offer. Officials at Canopy and Aphria declined to comment.

Buying MedReleaf would boost Aurora’s production capabilities and give it access to the Ontario market. MedReleaf operates two indoor production facilities in the province, one in Markham and another in Bradford. It also announced plans to retrofit a greenhouse in Exeter, Ont.

Aurora has facilities today in Alberta and Quebec. It is building an 800,000-square-foot greenhouse in Edmonton next to the airport. In mid-April, Aurora said it bought 71 acres of land in Medicine Hat, Alta., to build a new 1.2-million-square-foot growing site to serve Canada’s recreational market and medical markets abroad.

A deal would be the latest in a string of acquisitions for Aurora, which on Tuesday closed its January purchase of Saskatoon-based CanniMed Therapeutics Inc. At the time it was announced, the deal was valued at $1.2-billion, the largest transaction in the sector’s young history.

MedReleaf is known for producing premium dried bud, which it sells at higher-than-average prices. It is also known for serving Canadian veterans, whose medical prescriptions are covered by Veterans Affairs Canada (VAC) . MedReleaf’s sales took a hit last year after VAC imposed restrictions on volume and pricing for what it reimburses.

Shares of Aurora rose 1 per cent on Wednesday to $7.95. The company has a market cap of $4.5-billion. MedReleaf’s market cap is $2.2-billion. It recorded $40-million in revenue in its most recent fiscal year.

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