Cannabis Buzz - Are junior miners succumbing to the emerging investment trends? 

Cannabis has been a very hot and controversial topic in many regions and cultures of the world. It has been used from many centuries for making oil, beverages like tea and other drinks, medicine etc. But the cannabis is also highly addictive in nature which led to its “illegal status” in many prominent countries. But the extensive researches on Cannabis in the past few years has led to the discovery of its miracle uses in the field of medical science, after which many prominent nations of the world have either legalised or are trying to legalise cannabis for the recreational, medical purpose. This has consequently led to a surge in the number of new cannabis business opening and diversification of medical firms into the same.

This explosive growth was seen all over the world in the entire cannabis sector especially in Canada and the USA. With this, the emergence of an entirely new industry took place, which without a doubt lured most of the investors in this sector especially risk takers. As expected, the sector had seen a huge boom with lots of money coming in from the investors. As the developments went by, some stocks getting two to four times in a couple of years became a normal thing. To put it in perspective, the Canadian marijuana index which tracks the listed cannabis companies in Canada rose from 79.5 – 80 odd levels on February 2016 to 1000+ in January 2018, giving an eye-opening return of 1150% (that’s more than ten times in almost two years).

But the returns were not easy to garner. Being at a very infant stage, the entire sector is highly volatile and associated with many risks. After the massive boom, some of the stocks went down by 50% – 60% from their highest levels. Clearly, the investors realised that this is not a safe sector, and only risk capital can sustain in these major fluctuations. Some of the major risks associated with the sector are excessive speculation from the investors, and other participants, daily traded volume of shares being quite less because of which the price can be easily manipulated and inflated to artificially high levels.

But these risks are not restricting the inflow of the risk capital to the sector. The risk takers will always seek risky opportunities for a higher potential return to put in their money.

Nowadays, the cannabis sector is attracting quite a lot of capital, but interestingly new capital is not coming in, money is being shifted from the mining sector.

According to BDO’s Sherif Andrawes, the Canadian cannabis companies attracted investments at an increasing rate, which increased from over C$100 million in 2016 to almost C$600 million in 2018. The major hit is being taken by the junior miners. In fact, the financing for the junior miners on TSX-V decreased by 4% (from 2017 to 2018), according to TMX Group’s market intelligence. At the same time, the new listings of mining and exploration companies on the TSX-V and Toronto Stock Exchange fell by 20% from 2017 to 2018.

But why is the money shifting from junior mining sector to the risky cannabis sector?

The answer lies in both of the sectors. According to BDO, the main problem in the mining business is the risk of demand ultimately outweighing supply which consequently leads to price spikes and market volatility. As per analysts, the forecasted consumption of metals is expected to go up but without the availability of the adequate capital, the industry’s future is in question.

Raising money has become so much of an issue that Orezone Gold’s Head, Patrick Downey even compared the difficulty of mining sector to what the juniors faced during the dot-com bubble of the late 1990s.

Clearly, this capital-intensive industry needs to have sufficient supply of capital in order to sustain, in the absence of which the project developments seems to be at stake.

Another reason is that the mining industry wastes too much money on listing fees and general and administrative expenses which again becomes a hindrance in the capital adequacy.

The cannabis sector, on the other hand, may not be less risky and in fact, is highly sensitive towards the government policies and consequently is more volatile, as we have seen in the past. But the upside potential of this infant industry after the legalisation of cannabis for recreational purpose is unmatched which has lured the investors to take a risk in this industry.

Some of the ASX listed Cannabis stocks having exposure in the Canadian market are;

  1. Creso Pharma Ltd (ASX: CPH)

With a market cap of ~A$62.86 million, this cannabis company is aiming to improve the life of not only the humans but animals also. The company was the first to import medical cannabis for recreational purposes into Australia. One of the greatest edges of the company is its diversified cannabis product lineup which includes animal health, nutraceuticals, weed-infused edibles etc.

  1. Roto-Gro International Limited (ASX: RGI)

The company is focused on innovation in cannabis technology. It aims to generate profitable revenue by growing cannabis with socially responsible practices while maintaining the environment impact of traditional farming. The company offered patented rotational hydroponic vertical farming system as their first tech offering medical cannabis producers, distributors and resellers.

  1. MMJ Group Holdings Limited (ASX: MMJ)

The company is the global cannabis investment company which has diversified portfolio of cannabis companies and is mostly focused on the lifestyle and recreational market. It has exposure to the Canadian market through Ontario-based MediPharm Labs which is the owner of Canada’s largest medical cannabis oil production facility.

These are some of the few ASX listed companies which are trying to make it big in the cannabis sector by going outside the geographical boundaries of the home country and certainly the investors might have them in the watchlist when it comes to investing in the cannabis sector.


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