CANNTRUST VOWS TO MEET CANNABIS TARGET.
Bylaw hinders planned plant expansion
Cannabis producer CannTrust Holdings Inc. says it is still hoping to hold discussions with an Ontario municipality that recently passed a bylaw that is preventing the company from proceeding with a planned facility expansion, a delay that has raised concerns with analysts and shareholders alike.
On Oct. 15, the Town of Pelham, in Ontario’s Niagara region, voted to prohibit the issuance of new permits for cannabis facilities for a year.
CannTrust had already applied for construction permits before the bylaw was passed, and was scheduled to embark upon a 600,000 square foot expansion to its current facility in Pelham over the summer, but has been unable to get the permits approved.
“We are trying to schedule a meeting with the town next week, urgently. We’ve already had several meetings with them about the permits,” CannTrust CEO Peter Aceto told the Financial Post on Thursday.
Analysts at BMO said Thursday that the delay could limit CannTrust’s ability to cash in on current supply shortages.
“We consider this to be a potential negative development as a delay in CannTrust’s ramp to full production will limit its ability to capitalize on the near-term under-supplied Canadian market,” Bank of Montreal analysts Peter Sklar and Tamy Chen wrote in a morning note.
Failure to obtain the permits will mean that CannTrust will have to seek out other options to boost its production capacity, which the company continues to promise will reach 100,000 kilograms by the end of 2019.
It has two facilities in operation: a 60,000-squarefoot hydroponic facility in Vaughan, Ont., and a 250,000-square-foot greenhouse facility in the Niagara region.
Combined, they can produce up to 35,000 kilograms of cannabis, according to the company.
In June 2018, the company issued a press release promising a dual-phase expansion to its Niagara facility, starting with a 200,000-square-feet “phase 2” expansion that would boost production capacity to 50,000 kgs, to be followed by the 600,000-square-feet “phase 3” expansion to bring total production to 100,000 kgs.
Phase 2 is close to completion, but the construction of phase 3 has “not yet begun,” according to Aceto.
That assessment appeared to contradict the press release, dated June 26, 2018 — when Aceto was not yet CEO — which specifically stated CannTrust had “begun construction of an additional fully funded 600,000 square feet expansion.”
“I’m not sure where that came from, but I can tell you we had applied for our permits prior to the Town of Pelham deadline, and we’re working on getting them with the Town, but construction of the Phase 3 expansion has not yet started,” Aceto confirmed.
Aceto says that CannTrust has a “plethora of options” available to the company to meet production targets, from “acquiring a licensed producer and buying greenhouses in other parts of the country.”
“But we’d like to continue building in Pelham. We have a facility there already, and we’re going to take the right steps to make sure our neighbours are not impacted by us growing cannabis in the region,” he said.
According to BMO analysts Sklar and Chen, the Town of Pelham’s planner indicated that a key issue for residents was odour.
“Other issues include parking availability and supplemental lighting at night,” they wrote.
Aceto attributes the conservatism in the town toward cannabis to the number of cannabis producers that have set up shop in the Niagara region.
“The accumulation of various cannabis growers in one place has gotten people to say maybe we should be thinking about this in a different way, let’s slow this down.”
Meanwhile, some CannTrust shareholders have expressed frustration at the way in which the company has gone about communicating the construction delay.
“I bought my shares in the summer, after CannTrust announced they were doing this huge expansion in Niagara. I thought wow it’s an undervalued stock,” one shareholder told Financial Post on condition of anonymity. The shareholder said he only discovered that the Phase 3 expansion was delayed when Aceto mentioned it in an online interview on Dec. 17.
Two days later, on Dec. 19, CannTrust issued its first formal update on the Pelham expansion, confirming it was in “active discussions with the municipality to obtain the necessary approvals to expand.”
“I thought to myself, for two months after Oct. 15, when the bylaw was issued, they did not update shareholders on the expansion? I was not happy with that,” said another CannTrust shareholder, who also did not want to be named.
When asked to respond to the shareholders’ concerns, Aceto reiterated CannTrust’s commitment to meeting its production capacity of 100,000 kgs by the end of 2019.
“I would say that one of CannTrust’s values is trust. This potential barrier was not something we were aware of until relatively recently and in fact as of today, we don’t have enough information to suggest we can’t work through it in a relatively expeditious way,” he said.