Remember when the last boom in junior mining stocks got frothy?
Let me refresh your memory: Unproven companies attracted big valuations; insiders loaded up on stock for pennies a share ahead of deals; investment bankers took personal stakes in companies they advised.
The red-hot market for Canadian cannabis companies now features all the hallmarks of those boom times. And we all know how booms end.
The talk of Bay Street these days is Cannabis Wheaton Income Corp., a TSX Venture Exchange-listed company that's out to seed the marijuana industry.
Cannabis Wheaton wants to be a sugar daddy for pot producers: The company provides cash to startup grow-ops in exchange for a slice of future sales.
It's a financing technique known as streaming, an approach developed in the mining sector. In fact, Cannabis Wheaton's name plays off Wheaton Precious Metals Corp., the world's largest gold and silver streaming business, although the two companies are not related.
The guiding light at Cannabis Wheaton is CEO Chuck Rifici, previously an executive at Canopy Growth Corp., the country's first and largest publicly traded medical-marijuana company. The company has struck steaming deals with 14 fledgling pot producers.
In the past two months, Cannabis Wheaton's stock rocketed from pennies a share to more than $3 as it pitched its plan to investors, raising money in transactions led by two investment banks, Eight Capital – an independent dealer formerly known as Dundee Capital – and Canaccord Genuity Corp.
What's caught the Street's attention is the fact that employees at Eight Capital and Canaccord Genuity hold significant personal stakes in Cannabis Wheaton. There are fund managers refusing to meet with company representatives, simply because of the conflict of interest at the underwriters.
When Cannabis Wheaton was still changing hands for pennies a share, regulatory filings show insiders loaded up on shares and warrants at prices of less than 3 cents a share. In a press release Tuesday that announced a $50-million Cannabis Wheaton offering, the company said "representatives" of Eight Capital and Canaccord Genuity own 13.1 million Cannabis Wheaton shares and the same number of warrants, which is 8 per cent of a company that's now valued at $190-million.
Cannabis Wheaton last changed hands Friday at $1.17 a share, before market regulator IIROC halted trading at the company's request.
A Cannabis Wheaton spokesperson decline to comment on why the company asked for the trading halt.
Beyond the poor optics on ownership, Cannabis Wheaton's business plan is, at best, unproven. Streaming works at a gold or silver mine because there's a massive, established market in precious metals; an ounce of gold will clearly have value once it is pulled out of the ground.
What's the future value of an ounce of pot, in a world where marijuana is legal? Everyone from major pharmaceutical companies to drug-store chains, liquor stores and the home-grown crowd are diving into weed. The upstart producers that Cannabis Wheaton is backing, many of whom still need government licences, will face competition from proven, deep-pocketed rivals.
The fast-money crowd that fuelled the boom and bust in junior mining is now up to its eyeballs in pot plays. While fortunes are going to be made at marijuana companies – Canopy Growth already sports a $1.3-billion market capitalization – this is a high-risk sector.
Look to history for a sense of where the weed stocks are heading: How many backyard stills and bootleggers survived the end of Prohibition?