How much does a Colombian cannabis project cost?

We delve into the details of Colombian cannabis acquisitions in the past six months to understand how these companies are being valued.

By: Mat Youkee

In the last edition of CCI we struck a cautious tone with respect to the market exuberance for Colombian cannabis projects and we looked back at the country’s gold mining boom and bust for indications of what could go wrong. As we made final edits to the article, a short-selling attack on Canadian firm Aphria (TSX:APHA) dunked cannabis stock prices across the board with potentially long-term connotations for Colombia.

On 3 December, Hindenburg Research published its report in which it accused Aphria of being “a shell game with a cannabis business on the side.” Of particular focus were the Canadian company’s acquisition of cannabis projects in Jamaica, Argentina and Colombia, where the firm purchased a 90% stake in Colcanna, a Manizales- based project. The report accused Aphria of purchasing the properties at inflated prices from anonymous intermediary shell companies.

As the effects of December’s short-seller frenzy wears off, the Colombian cannabis sector can look forward to a transformative year in 2019.

Aphria’s stock halved from CAD$10.54 -$5 in two days, although by early February it had recovered to over CAD$12. The report also hit Canada’s other major weed firms and data compiled by S3 Partners estimates that cannabis short sellers made USD$432m over the course of December. The shock appears to be over, investors who bought the dip are feeling chipper, but the question, from CCI’s perspective, remains: What is a fair price for a Colombian cannabis project?

This thorny question is probably the one CCI’s consulting arm hears most from international clients. So we take a deep dive into the last six months of press releases and public documents and speak to our trusted on-the-ground sources in an attempt to answer it.

INTO THE WEEDS: One answer to the question – the one that local project owners like to promote – is CAD$90m to CAD$100m. That’s roughly the price paid by Canadian giants Canopy Growth Corp (TSX:WEED) and Aphria for comparable projects in Colombia.

In July, Canopy Growth paid out nearly $35m in shares to Spectrum Cannabis, owners of a project in Huila, a hot region south of Bogotá famous for its coffee.

An additional CAD$61m worth of stock will be paid upon the completion of four milestones. In the same month Aphria paid CAD$194m in equity to Scythian Biosciences (CSE:SCYB) for three assets in Colombia, Argentina and Jamaica – the deal cited in the Hindenburg report. The former was a 90% stake in Colcanna a project in Caldas, and – as the most developed of the three projects – an estimated value of CAD$90m seems reasonable.

The two acquired projects are roughly comparable. Both have a similar total property acreage of 126ha and 140ha respectively, although Spectrum has 42ha of licensed property compared to Colcanna’s 15ha. Neither of the projects are in commercial production, indeed no Colombian projects are, so valuations based on multiples of EBITDA – which has become a standard way of valuing Canadian weed stocks – are not possible.

ACRE BREAKER: Land packages could be an indication of future production. Valued at each project’s total land package, Spectrum and Colcanna both cost between CAD$0.7m and CAD$0.75m per hectare. However, in terms of areas licensed for production, Spectrum’s project comes in at CAD$2.26m per licensed hectare compared to CAD$6.67m for Colcanna.

Maybe the assumption is that unlicensed areas can easily be brought in once production is ramped up, but this ignores that fact that production quotas are set by the Technical Quota Group in the Ministry of Justice. While this body has awarded quotas for genetic characterization, no firm has earned its commercial production license and it remains one of the untested – and apparently more arbitrary – steps in the regulatory process.

There is growing excitement about the global market for CBD and THC products and the potential of Latin America as a low cost producer.

The high price per licensed hectare was highlighted in the short-seller report, with the authors claiming that intermediary companies turned a CAD$39m profit for flipping the project. In the aftermath, Spectrum Cannabis issued a press release to clarify the costs of their own acquisition.

Both projects seem expensive when compared to the November sale of similar project for a quarter of the price. Wayland Group (OTCQB:MRRCF) purchased a 125ha project in Tolima, the department that sits between Huila and Caldas, for CAD$22m in stock. The asset, formerly owned by Colma Pharmaceutical includes clone and vegetation greenhouses, although the extraction and processing facilities will have to be built by Wayland.

THE REST: The Canopy Growth and Aphria were the two most high-profile acquisitions in the Colombian cannabis market to date and each spiked the stock price of the mother companies. There is growing excitement about the global market for CBD and THC products and the potential of Latin America as a low cost producer. There are still too many uncertainties for major institutions to take the plunge but bullish retail investors see Canadian giants dominating the market, pushing valuations up to many multiples of their domestic EBITDA.

Another Canadian giant, Aurora Cannabis (TSX:ACB) has made a less bombastic landing in Colombia. On 27 November, it completed its purchase of ICC Labs (TSX-V: ICC) for CAD$290m. The Montevideo-based company has been a leader in the Uruguayan cannabis market whose wider portfolio includes a 13ha project just 20km from Bogotá’s El Dorado airport.

BARGAIN BASEMENT: Separating the value of this asset from its production farms is tricky, but Aurora have also found a much cheaper way into the Colombian market. In July its wholly owned subsidiary, MedReleaf, acquired local firm MED Colombia for €2.75m in cash. According to press releases the firm has cultivation and production licenses and “a library of cannabis genetics.”

In the early days of the industry it’s clear that some quick-witted and entrepreneurial Colombians have already made a killing. Those who possessed the land and the mental fortitude to navigate the ebbs and flows of the developing licensing systems can cash in for a healthy profit on a year or two’s work.

The cheapest deal CCI found was the October purchase of Green Pharma Colombia, a Manizales-based firm with cultivation and fabrication licenses, by USA Real Estate Holding (OTC PINK:USTC) for 25m common shares in the firm, which at the time were worth around 1.5 US cents.

Until recently you could get a licensed company for USD$400,000, but you must expect to put in extra hours to make the project your own. Legislation allows firms to subsequently change their cultivation sites, alter fabrication plant designs and redraw their business plans.

Valuations based on multiples of EBITDA – which has become a standard way of valuing Canadian weed stocks – are not possible.

A boutique industry in cannabis shell firms is emerging. Some companies have acquired licenses based on business plans to develop projects but with the intention to sell-out to investors with deep pockets. Those investors then procure a land package suitable to their needs, make alterations to their license accordingly and thereby bypass months of filling in forms and regulatory uncertainty. There is reason to suspect that the government looks none to kindly on speculative permit- flipping, however, and some in the industry expect new regulations could tie permits more tightly to their original land package. As the door closes, the price of acquiring licensed shells has risen to over USD$1m according to CCI sources.

FAMILY TIES: In Colombian cannabis, however, where you grow might be less important than who you know. CCI spoke to analysts who compared the current weed boom to the tech bubble in that there are many pretenders, but ultimately a select few will dominate the industry. Political and regulatory risk would appear to be the number one challenge facing Colombian cannabis firms and what both Colcanna and Spectrum have in common are strong management teams, well plugged-in to the politics of their region of operation.

As the effects of December’s short- seller frenzy wears off, the Colombian cannabis sector can look forward to a transformative year in 2019 as the first companies reach commercial production. However, the country’s early regulatory framework remains open to change and the negative publicity brought about by the short seller report has already attracted local media and political attention. New entrants report that the licensing process is taking longer than 2018’s six month average. A well-timed and well-priced acquisition could be the smartest way to enter the Colombian market and there appear to be a wide range of projects with price- tags to suit any serious investor.