ABcann & Cannabis Wheaton Sign Win-Win Deal to Expand Production
June 2nd, 2017
News, Top Story
Cannabis is poised to become a C$22.6 billion industry in Canada following Prime Minister Justin Trudeau’s move to legalize recreational use of the drug, according to Deloitte Canada. With only a handful of licensed producers, PI Financial anticipates a shortfall in production that could persist until 2020 or later, creating a significant opportunity for those with a license. Some companies have already achieved strong valuations, but others represent a compelling value.
In this article, we will look at ABcann Global Corp.’s (TSX-V: ABCN) binding interim agreement with Cannabis Wheaton Income Corp. (TSX-V: CBW) and why it marks a significant turning point for both companies.
New Cultivation Facility
ABcann is a globally-licensed, cost-efficient producer of premium quality, organic, standardized medicinal cannabis under the Canada’s Access to Cannabis for Medical Purposes Regulations (ACMPR). Over the past few years, the company has invested over $1.5 million in a partnership with the University of Guelph to perfect controlled environmental systems capable of producing pharmaceutical-grade cannabis without pesticides at double the average industry yield.
The company’s phase one facility is a 14,500 square foot facility, known as the Vanluven Facility, that’s already operational and producing 1,000 kilograms of dried cannabis per year. ABcann is currently doubling Vanluven to about 30,000 square feet. Concurrently, the company is building a 100,000 square foot facility – known as the Kimmett Facility – in Napanee, Ontario with production capacity of about 20,000 kilograms per year. All of this construction and expansion is currently funded and owned by ABcann Global.
On May 29, the company announced a deal whereby Cannabis Wheaton agreed to invest $30 million into ABcann (helping with the current operations and expansion to 130,000 square feet). Cannabis Wheaton further committed, pending some conditions and the completion of the initial $30 million equity investment, to fully fund the construction of an additional 50,000 square feet worth of the Kimmett Facility at some point in the future. The proceeds (minus certain costs) from this new 50,000 sf production area would be split 50-50 between the two companies.
The 180,000 square feet of funded production capacity sets ABcann near the top of the licensed producer pile in that metric. The first $15 million investment is being made by June 30th, 2017 at C$2.25 per share, with the second $15 million committed at C$2.25 or 2x the ten day average for the stock at the time (as late as March, 2018), whichever is greater. This pricing represents a significant premium to the current price of C$1.00 per share. But even assuming a C$2.25 per share valuation – or roughly C$226 million, the company still represents a compelling value in the industry with some licensed producers commanding valuations two to four times higher.
First Streaming Deal
Cannabis Wheaton is the world’s first cannabis streaming company with 15 agreements across six provinces to fund facility construction, expansion, and innovations in exchange for minor equity interests and portions of the cultivation production. For investors, this means access to the high-margin upside of multiple cultivation facilities without the many risks associated with owning bricks and mortar – or highly-diversified operations, in other words.
Under its agreement with ABcann, Cannabis Wheaton will receive 50% of the net proceeds of future wholesale or retail sales completed by ABcann with respect to cannabis produced in the new 50,000 sf portion of the Kimmett facility. Management estimates this to be roughly eight million grams of cannabis per year, which translates to about $40 million at $5 per gram. The company will also retain a minority equity interest in ABcann and become a strategic partner.
ABcann will be the sixth licensed producer in Cannabis Wheaton’s portfolio, but it’s their first publicly-traded producer with a sales license. This represents a key turning point for Cannabis Wheaton after just recently becoming a publicly-traded company itself. The deal is highly attractive and could provide internal rates of return in excess of 50% without any consideration for equity, as well as serve as a model for future agreements with public companies.
ABcann Global Corporation’s (TSX-V: ABCN) binding interim agreement with Cannabis Wheaton Income Corp. (TSX-V: CBW) represents a win-win deal for both companies. Investors may want to take a look at ABcann as it’s now capitalized to rapidly expand its cultivation footprint, as well as Cannabis Wheaton as it continues to grow its portfolio of LPs. Both companies represent attractive opportunities in Canada’s burgeoning market.
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