Pre-legal left with few catalysts after supply deal
Ontario pens agreement with 26 producers
TORONTO • Pre-legalization catalysts for Canadian pot stocks may be harder to come by after Ontario’s government-owned cannabis agency announced it has struck supply deals with a number of major marijuana producers, resolving one of the market’s significant remaining unknowns.
The Ontario Cannabis Store (OCS) announced after markets closed on Monday that it had a deal with 26 licensed marijuana producers, “to ensure that a safe, diverse and high-quality supply of cannabis is ready and available upon legalization this fall.”
At midday on Tuesday, the Canadian Marijuana Index, which has 17 cannabis-related companies for constituents, was up around 2.5 per cent.
Supply agreements with the Ontario government — in addition to last week’s announcement of a private-sector component to the province’s cannabis retail system — were seen as one of the
remaining potential sparkplugs for pot stocks ahead of Canada’s legalization of the drug on Oct. 17.
The spotlight will now shift away from those Ontario-centric milestones to mergers and acquisitions and whether or not cannabis companies can execute on their strategies in the coming legal market.
Greg Engel, chief executive of New Brunswick-based licensed producer Organigram Holdings Inc., one of the companies with an Ontario agreement, said there are still some smaller provinces that have to sort out their supply situations, such as Nova Scotia.
But Engel also said there will be a focus on what is actually available in the supply chain.
“I think we are going to see some inability to supply the market at launch,” he said. “You’re going to see companies that are performing and delivering and hitting the commitments they have, and other companies that aren’t.”
Russell Stanley, an analyst at Echelon Wealth Partners, said there is also still an expectation for more consolidation in the cannabis sector, although the timing of that is difficult to predict.
“Once supply agreements are sorted out, then everybody knows what cards everybody else is holding, and they can make, I think, perhaps more intelligent M&A decisions around that,” Stanley said.
The list of producers that received supply agreements with the OCS included major Ontario-based producers such as Aphria Inc. and Canopy Growth Corp.,
the latter of which has received investments from U.S.-based alcohol giant Constellation Brands Inc. that have acted as votes of confidence in the cannabis industry and catalysts for pot stock prices.
Canopy said in a press release that information about the “specific quantities” of the supply deals would be disclosed once Ontario releases the details.
Canaccord Genuity noted Tuesday that, while “details still remain thin,” there is now some insight into supply agreements for the four provinces making up around 85 per cent of Canada’s population: Alberta, British Columbia, Ontario and Quebec.
Ontario will be the largest of the provincial markets for pot and the OCS will be Ontario’s sole seller of recreational cannabis through its website come legalization.
EVERYBODY KNOWS WHAT CARDS EVERYBODY ELSE IS HOLDING.
The OCS will also act as a wholesaler to private-sector stores, underscoring the importance of the supply deals for producers.
The province’s plan for selling recreational cannabis recently underwent some tweaking, after the government of Ontario Premier Doug Ford decided to deviate from the plan of their predecessor.
Instead of the planned government-owned monopoly on pot, Ford will allow private-sector pot shops next year. In the meantime, the OCS will sell cannabis online to consumers, and then act as wholesaler to the privatesector stores in 2019.
Supply agreements were reached with licensed medical marijuana producers using a competitive process “resulting in a range of cannabis products and size formats among the categories of dried flower, cannabis oil and cannabis seeds,” the OCS said. Subsequent agreements will be awarded using a competitive process, the agency said, and arrangements are also being finalized with suppliers of cannabis accessories. According to the update: “The OCS is focused on providing safe and responsible access to recreational cannabis through its online retail channel when it becomes legal on October 17, and establishing a wholesale distribution network to supply cannabis to legal private stores in Ontario once legislative requirements are put in place.”