LAUNCH PAD

CANNABIS FIRM LOOKS TO OTHER QUE­BEC COM­PA­NIES FOR STRATE­GIC BOOST.

National Post (Latest Edition) - - FINANCIAL POST - Sa ndrine Ra stello

MON­TREAL• As Cana­dian mar­i­juana grow­ers rush to boost pro­duc­tion be­fore pot gets le­gal­ized, Que­bec’s big­gest cannabis com­pany looks to a con­ve­nience-store gi­ant for a road map. T he Hy­dropothe­cary

Corp. says it wants to fol­low the foot­steps of Que­bec lead­ers such as Couche-Tard, owner of the Cir­cle K chain, which started with one store out­side Mon­treal and gob­bled up ri­vals from On­tario to Nor­way. Hy­dropothe­cary se­cured about a third of its home mar­ket last month, when it signed a let­ter of in­tent with the prov­ince’s al­co­hol dis­trib­u­tor to sup­ply 20,000 kilo­grams of cannabis prod­ucts in the first year of recre­ational sales.

“I plan to be one of the two to three multi­na­tional com­pa­nies still stand­ing in five years,” founder and chief ex­ec­u­tive of­fi­cer Se­bastien St. Louis, 34, said in a phone in­ter­view last week. “Our strat­egy is to go to Que­bec first, then ex­pand to On­tario, then to Western Canada, and then in­ter­na­tion­ally.”

Canada’s pot pro­duc­ers are jock­ey­ing to grab a slice of a med­i­cal and recre­ational mar­i­juana mar­ket that’s fore­cast to reach $ 8 bil­lion in sales by 2021. Com­pan- ies such as Aurora Cannabis have l aunched takeovers while oth­ers such as Cronos Group are list­ing on the Nas­daq Stock Mar­ket to boost in­ter­na­tional ex­po­sure. Share prices in the in­dus­try have tum­bled since the be­gin­ning of the year, how­ever, amid over­val­u­a­tion con­cerns.

Hy­dropothe­cary, based in Gatineau, has dropped 22 per cent to $3.89 from its Jan. 23 peak. That’s not stop­ping St. Louis from “very se­ri­ously” con­sid­er­ing a Nas­daq list­ing af­ter a planned move from the ju­nior to the main Toronto stock ex­change in the next few months, he said. The com­pany, which shares board mem­ber Nathalie Bourque with Couche-Tard, says it has $ 260 mil­lion in cash, half of which is avail- able for ac­qui­si­tions.

The com­pany, which won a li­cence to sell med­i­cal mar­i­juana in 2015, has a mar­ket cap­i­tal­iza­tion of about $696 mil­lion com­pared with about $ 6.4 bil­lion for Canopy Growth Corp., Canada’s largest pot com­pany by mar­ket value, which has oper­a­tions in seven coun­tries.

Yet the pre­lim­i­nary sup- ply agree­ment with Que­bec, which could grow over time, gives Hy­dropothe­cary greater vis­i­bil­ity and may be worth as much as $ 120 mil­lion, an­a­lysts at GMP Se­cu­ri­ties wrote in a note last month.

“This pro­vides a ma­jor en­dorse­ment of Hy­dropothe­cary’s ex­e­cu­tion ca­pa­bil­i­ties to de­liver qual­ity prod­ucts at large scale,” they wrote.

The com­pany is ex­pand­ing its pro­duc­tion ca­pac­ity to 25,000 ki­los of dry cannabis by July, and 108,000 ki­los by the end of the year. It’s also plan­ning to in­vest in ma­chines that will di­rectly ex­tract the mol­e­cule from plants to make prod­ucts such as sub­lin­gual sprays, mas­sage oils or drinks.

Such higher-mar­gin prod­ucts will even­tu­ally ac­count for 70 per cent of the busi­ness and help the com­pany weather a l oom­ing over­sup­ply that’s go­ing to spur com­pe­ti­tion, St. Louis pre­dicts. In Que­bec, the grower also ben­e­fits from cheap power help­ing keep pro­duc­tion costs lower.

“It’s go­ing to be crit­i­cal to be hy­per- com­pet­i­tive on grow­ing costs but also to de­velop a man­u­fac­tur­ing ex­per­tise,” he said. “Cannabis is talked about for its flower but it’s only a very small part of the story. That’s why we’re putting our ef­forts on trans­for­ma­tion and new prod­ucts.”

I PLAN TO BE ONE OF THE TWO TO THREE MULTI­NA­TIONAL COM­PA­NIES STILL STAND­ING …

HY­DROPOTHE­CARY CORP. / THE CANA­DIAN PRESS

Que­bec’s Hy­dropothe­cary Corp. says it plans to in­crease its pro­duc­tion ca­pac­ity to 108,000 kilo­grams per year.

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