Northern Exposure

The last month we saw the long anticipated entry of Canadian capital into the Colombian cannabis industry. What does this tell us about how the industry wil develop?

By: Mat Youkee

As a market indicator of the potential of the Canadian medicinal cannabis industry it couldn’t have been much better. On July 5th, Canopy Growth Corp, the world’s largest marijuana firm, acquired Colombian Cannabis S.A.S, one of Colombia’s first companies to have acquired cultivation and manufacturing licenses.

The move followed the mid-June entrance of another major Canadian firm, Aphria, through a partnership with local company Colcanna. Ever since the first moves towards legalized marijuana were made in Colombia’s congress, it has been assumed by many that Canadian cash, primarily sourced from the risk tolerant TSX Venture Exchange (TSXV), would be key to building the industry. With these two acquisitions – as well as the listing of Colombian start- up Khiron Life Sciences on the TSXV – that reality has arrived.

This would seem to be the blueprint of how the industry will develop. Local entrepreneurs, quick to take stock of the opportunities brought about by regulatory change, have done the hard work of negotiating the nascent regulatory framework and scouting out suitable cultivation and manufacturing locations. Colombian Cannabis reportedly visited over 110 fincas (small farms) across the country before settling on their 126 hectare site near Neiva, 300km south of Bogotá.

The best located – and perhaps best politically and commercially connected – projects are now prime targets for Big Weed firms looking to gain a toehold in the most exciting cannabis market in the world. Investment and, crucially, know-how then follow.

Shareholders in Colombian Cannabis, to be renamed Spectrum Cannabis Colombia, will receive up to CAD96m in Canopy stock based on meeting future targets. Canopy will fund the construction of its processing facilities, due to be completed by the end of 2019, with the goal of producing products for Colombian and Latin American markets.

The best located – and perhaps best politically and commercially connected – projects are now prime targets for Big Weed firms

In interviews Mark Zekulin, Canopy’s president, stresses that the firm’s strategy is to build a market in Latin America rather than export cheap growth to Canada. Aphria’s deal is smaller; it will invest $20m in the development of a 15 hectare site in Chinchiná, Caldas, with the goal of producing 25,000 tons of plant per year. However, it is also firmly focussed on the local market and bringing its patented technology to Colombia. “One of the reasons we are in Colombia is precisely that its regulatory framework is focused on medicinal marijuana and that’s part of our DNA,” Vic Neufeld, the firm’s CEO, told La Republica. “Our success will be measured in our ability to introduce safe products, train doctors and provide sustainable, quality products to educate the market.”

The summer’s events raise two questions. Firstly, which of Colombia’s 100 licensed companies will be next to go and who will be the buyer? Secondly, what effect will the entrance of Big Weed into Colombia have on the regulatory framework?

Khiron executives estimate that there are 5 million potential medicinal marijuana patients in Colombia, but surely, with Canada’s decision to legalize recreational usage, there must be thoughts of using the country as a base for exporting cheap, high quality cannabis flowers (illegal under current regulations) in the future. Lobbying firms are no doubt licking their lips.

The TSXV is no stranger to Colombia plays. Since the mid-2000s it funded a wave of oil exploration in the country and then, following the 2008 crisis, a proliferation of junior mining firms on the hunt for gold and copper. Colombian resources made many fortunes, but many other firms collapsed under the weight of security threats, social and environmental protests, glacial bureaucracy and political infighting. Investors should know that they could be in for a bumpy ride.