Cannabis extraction is currently a strong segment in the Canadian cannabis industry. Perhaps the strongest.
A recent Seed Investor article pointed to the success of Canada’s industry leaders in this space: Valens GroWorks Corp (CAN:VGW / US:VGWCF) and MediPharm Labs Inc (CAN:LABS / US:MEDIF).
Both have logged strong revenue growth and are already profitable. Both have made this transition to early profitability while they continue to aggressively increase their total cannabis extraction capacity.
Valens has existing extraction capacity of 425,000 kilograms per year of dried cannabis. MediPharm has 300,000 kilograms per year of capacity.
Investors for both companies have been rewarded with strong stock performances. This comes while most of their Canadian peers have languished so far in 2019.
The Seed Investor explained this discrepancy.
On the positive side, with Canada’s nationally legal cannabis industry, the extraction specialists can service the entire industry. This permits the sort of scale not available (yet) to the U.S. cannabis industry.
On the negative side, Canada’s provinces have generally done a dismal job in opening up the legal cannabis industry. Most have been excruciating slow in opening cannabis retail stores. These retail outlets are the key in building sales. This huge gap can be illustrated by comparing the best and worst province in Canada.
- One licensed cannabis store per 25,000 people
- One licensed store per 700,000 people
The problem is that Ontario is Canada’s largest province, with a population in excess of 14 million people. That’s nearly 40% of Canada’s total population.
Ontario’s failure has imposed a retail bottleneck on Canada’s cannabis industry. The result has been below-expected revenues.
Canada’s publicly listed cannabis companies have been severely punished (in terms of their share prices) for Ontario’s failure.
Largely insulated from this retail bottleneck, Canada’s extraction leaders have been able to thrive. Not surprisingly, several other publicly listed companies in Canada are looking to duplicate the success of Valens and MediPharm in cannabis extraction.
Neptune Wellness Solutions (US:NEPT / CAN:NEPT)
With Neptune’s recent surge, it is actually ahead of both Valens and MediPharm in terms of market cap (US$544 million). But it has more diversified operations than Valens and MediPharm. Much of its recent surge in share price is connected with a U.S. acquisition – to bolster its U.S. extraction capacity.
In Canada, its extraction capacity is still limited. But Neptune has also announced plans to dramatically increase its Canadian extraction capacity. The Company is planning to boost its capacity to 1,500,000 kilograms per year of dried cannabis.
That expansion is already funded. Neptune recently closed on a US$41 million private placement. As things stand today, Neptune will become Canada’s new extraction leader when that expansion is completed, in terms of overall capacity.
Nextleaf Solutions (CAN:OILS / US:OILFF)
Like Valens and MediPharm, Nextleaf’s principal focus is Canadian cannabis extraction. Unlike the two leaders, Nextleaf plans on servicing Canada’s industry through a mixture of centralized extraction capacity and its “mobile extraction labs”.
While larger Canadian LP’s have the size to do industry-scale extraction deals, smaller companies are still frozen out of this market. For smaller “craft” producers, Nextleaf’s mobile facilities offer a turn-key solution to handle the extraction needs of these smaller companies.
Unlike Valens, MediPharm and Neptune, Nextleaf hasn’t yet been rewarding shareholders with its stock performance. Part of this difference reflects the fact that Nextleaf isn’t positioned as an industry leader in terms of its total capacity. But for investors who are attracted to its dual approach to cannabis extraction, the Company may look like a solid bargain with its market cap of only US$31 million.
Radient Technologies (CAN:RTI / US:RDDTF)
Radient has unique, patented extraction process based upon microwave technology. It is suitable for cannabis as well as many other commodities. The Company sees its tech as being more efficient than competing technology.
Radient is already servicing some of Canada’s larger Licensed Producers. Its technology is not only cheaper, but also faster than other extraction processes. It’s also highly scalable.
Another cannabis company that has been trending lower over the past year, investors looking to add another extraction holding may see Radient as a superior value.
World Class Extractions (CAN:PUMP / US:WDEXF)
World Class Extractions is a Canadian extraction specialist that is solely catering to the smaller cannabis producers with its turnkey extraction services. Its (patented) mobile extraction services are also billed as being both faster and more efficient than other extraction methods.
World Class also has a relatively modest market cap (US$44 million). But investors may be concerned by the share structure (>450 million shares issued/outstanding).
(charts courtesy of Stockcharts.com)
A recent Seed Investor article noted the recent surge in the Canadian cannabis industry.
That headline reflected the robust sales numbers that are (finally) showing up at the retail end of the industry. Three consecutive months of double-digit sales growth. Not surprisingly, this coincides exactly with the province of Ontario belatedly starting to open its own retail cannabis stores.
Ontario has announced it will award 50 new retail licenses. This will more than triple retail storefronts in the province.
Phase 2 of cannabis legalization in Canada is almost here. This is when cannabis concentrates and other infused products become legal.
This is why extraction specialists like MediPharm and Valens have already been enjoying good years: cannabis extraction is at the root of all these value-added products. Canadian LP’s are already gearing up to supply these new products.
With these new markets opening and provinces like Ontario finally stepping to the plate in creating retail access, Canada’s cannabis sector should accelerate going forward. This means even with extraction specialists ramping up capacity (and new entrants joining this space), there is no reason why investors need fear the bottom falling out here.
Slightly further down the road, Canada’s extraction specialists will enjoy pole position in servicing the global markets for cannabis oils. While substantial gains have already been made in Canadian cannabis extraction, all signs indicate that the best is yet to come.
DISCLOSURE: The Writer holds shares of Valens GroWorks and MediPharm Labs.
Published at Tue, 30 Jul 2019 10:00:08 +0000