The cold Northern wind

Have Colombian companies been unfairly burned by the Canadian weed stock downturn?

By: Mat Youkee

Canadian cannabis stocks have taken an hammering in the past six months, with many of them losing over 50% of their value. A number of those top Canadian companies have significant investments here in Colombia, including Canopy Growth (NYSE: CGC), Aphria (TSE: APHA), and Aurora Cannabis (NYSE: ACB) – all of which have tumbled.

After a stock boom in the build up to last year’s legalization of adult use cannabis, a number of firms have blamed federal and local regulation and a stubborn black market for weaker than expected fourth quarter revenues.

Positive news from the sector in recent months, as the first firms received THC production quotas and generated the first significant export volumes, has failed to move market sentiment.

In a statement, leading consumer cannabis company HEXO (NYSE: HEXO) said that “the delay in retail store openings in our major markets has meant that the access to a majority of the target customers has been limited.”

So far only 500 or so stores have opened in Canada, 300 of which have been in Alberta. Not only is it difficult for consumers to find stores where they can legally purchase cannabis, heavy taxation means the prices are significantly higher than those on the black market. Sales of ‘Cannabis 2.0’ (derivatives such as edibles, beverages and extracts) have been delayed until mid-December.

Meanwhile Health Canada continues to drag its heels in granting cultivation, sales and processing permissions and costs remain high. A flurry of scandals relating to listed firms, including the July revelations that CannTrust Holdings (NYSE: CTST) had been growing unlicensed cannabis, has further eroded investor confidence.

Even though the issues originate in Canada, Colombian cannabis stocks have been similarly punished. The CCI Tracker, which monitors the combined market cap of publicly-traded LPs with a primarily Colombian focus, peaked at over CAD$1.4 billion in April. By October it had shrunk to under CAD$600m, despite the addition of two further companies, Blueberries Medical (CSE: BBM) and Avicanna (TSE: AVCN).

APHA, CGC and ACB are not included in the Tracker – their Colombian operations make up a small portion of their overall assets – but they should have the working capital to push through the tough times and demonstrate lower costs, and higher profitability, once their Latin American operations begin commercial production and export.

For the companies on the Tracker, however, the depressed stock price will make raising capital on the markets unappealing in the short term. Positive news from the sector in recent months, as the first firms received THC production quotas and generated the first significant export volumes, has failed to move the market sentiment. However, word on- the-ground is that many companies have overcome their teething problems and expect to deliver quality product at cheap prices in the near future. Whether the Colombian story will be heard above the Canadian market noise is another matter, however.