Fewer catalysts remain for pot stocks

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, analyst at Echelon Wealth Partners, said there is also still an expectation for more consolidation in the cannabis sector, although the timing 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 Ontariobased producers such as Aphria Inc. and Canopy Growth Corp.