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Investment Ideas Drone Delivery Canada shares surge on ‘transformational’ Air Canada contract

Shares of Drone Delivery Canada Corp. surged as much as 18 per cent in trading Tuesday after the company announced a 10-year contract with Air Canada that sees the cargo division of the country’s largest airline market and sell the Toronto-based company’s drone-delivery services in Canada.

Analysts and investors say the agreement adds credibility to the prerevenue startup company, known as DDC, which has developed a system for autonomous cargo delivery through unmanned aerial vehicles, known as drones.

Tony Di Benedetto, chief executive of DDC, called the agreement “transformational” for his company and said it legitimizes the technology and its commercialization.

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“Three to five years ago, people said this would never happen,” Mr. Di Benedetto said in an interview. “Now Canada’s largest airline is doing this with us. I think that speaks volumes.”

Mr. Di Benedetto said the agreement, which still requires regulatory approval, “greatly accelerates our commercial rollout in Canada.” DDC also plans to pursue larger markets in the United States and Europe.

In a release, Tim Strauss, vice-president of cargo at Air Canada, said his company believes drone technology can offer “cost-effective solutions to complex issues” in cargo delivery “in non-traditional markets, including remote communities in Canada.” Mr. Strauss is also an independent member of DDC’s advisory board.

DDC said it will build and operate up to 150,000 drone-delivery routes in Canada, including timetables, flight schedules, payload capacities, type of drones to be deployed and payment terms. Air Canada Cargo has agreed not to work with other drone-delivery service providers, DDC said. Payment terms will be determined on a route-by-route basis, DDC said.

The company said the routes covered will need to be agreed on by both parties and will be subject to DDC obtaining required regulatory approvals.

“It’s a pretty massive credibility boost for Drone Delivery Canada,” GMP Securities analyst Deepak Kaushal, whose firm acted as financial adviser to DDC for the agreement, said in an interview.

“It’s the first time a real global airline has partnered with a drone company to build an operation,” said Mr. Kaushal, who has a “buy” rating on the stock and $2.38 target price as of March 26.

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The company, which last year received Canadian regulatory approval to begin commercial operations, is expected to start generating revenue later this year from a $2.5-million agreement it has to provide services to the Moose Cree First Nation, an isolated community in Northern Ontario.

While competition in the drone business is heating up, including from giant technology players such as Amazon.com Inc. and Alphabet Inc.'s Google, Mr. Di Benedetto said in an interview last week that those services only help to legitimize the industry.

“It’s a small number of operators, in my opinion, that will be allowed to operate and we’ve positioned ourselves, I think, very strategically ahead of the game to secure as much of this [market] as we can.”

Early-stage company investors are eyeing DDC stock, but are reluctant to buy in at this stage.

“We would need to see some early revenue. It’s not about the dollar amount, but the quality of the revenue,” said Maria Pacella, portfolio manager and senior vice-president of private-equity venture capital at Vancouver-based PenderFund Capital Management.

“It’s on our radar,” she said. “We like the market. We like this company. The recent announcement is another indication that it has a real chance to be a leader in this space.”

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