We have noticed a significant increase in the number of companies that are focused on the international cannabis opportunity during the last two years and this is a trend that we are bullish on.
Although North America continues to be a hotbed of activity for the cannabis sector, the market has become saturated and this has put pressure on the price of cannabis. In Canada, the saturation is much more significant due to the size of the market and the scale of the companies that are producing cannabis. In the US, cannabis regulations are determined at the state level and each state has different rules when it comes to regulating the industry. If you look at Oregon, the state’s cannabis market had very low barriers to entry and this caused the price of cannabis to drop below $100 per pound. If you were to compare Oregon to Florida, you will notice that the industry is much more regulated, and this has played a key role in the state’s ability to control the price of cannabis (for now).
Over the next few years, we expect the cannabis industry to see further price compression and this is a trend that our readers need to be aware of. When we are analyzing a cannabis company, the market that the business is focused on plays a key role in our analysis and we prefer opportunities that are levered to emerging international markets.
From Australia to South America, from Europe to Africa, countries all over the world are enacting pro-cannabis legislation and this is a trend that is expected to become more significant in 2020. Today, we want to highlight 5 emerging international markets as well as companies that are focused on these burgeoning opportunities.
Although many people think of the cocaine trade when they think about Colombia, the market has changed over the last several decades and has become one of the most attractive international cannabis markets. The climate in Colombia is ideal for the cultivation of cannabis and this is one of the most important themes when it comes to this opportunity.
In Canada, cannabis producers are able to cultivate cannabis for $1.00 to $2.00 per gram. In Colombia, producers can cultivate cannabis for $0.10 to $0.40 per gram and this provides these operators with a major competitive advantage. Although many experts believe that the product is of a much lower quality when compared to what is produced in Canada, the cannabis that is produced in Colombia will be processed into cannabis oil. In the coming years, we expect Colombia to become a leading market for cannabis oil producers and are bullish on the long-term growth prospects associated with this.
Chemesis International Inc. (CSE:CSI)(OTC:CADMF)(FRA:CWAA) has been laser focused on the Colombian cannabis market and is an opportunity that we have on our radar. 2019 was a significant year for the business and was highlighted by the formation of strategic partnerships and the completion of accretive acquisitions.
Recently, Chemesis issued an update on the progress it has made in Colombia and we are bullish on the growth prospects associated with this opportunity. Through La Finca (a wholly owned subsidiary of Chemesis), the company expects to complete its agronomic evaluation programs in the first calendar quarter of 2020 and this should prove to be an important milestone for the business. The completion of the program represents a major advancement and brings the company one step closer to registering its own genetics as intellectual property.
By leveraging a library of world-class genetics, La Finca believes that it will be able to form a stable and consistent revenue stream as a global seed supplier. Based on the demand we have seen for cannabis seeds in the US, we believe that this represents a major potential growth driver for the business. La Finca has a unique opportunity to capitalize on the growing demand for premium cannabis genetics and we believe that the market is missing out on something here.
In 2020, we expect to see La Finca serve as a major value driver for the entire Chemesis operation. Going forward, the company is focused on increasing the size of its land package through its previously announced non-profit organization, the Association for the Promotion of Cannabis Cultivation. In the coming months, La Finca expects to harvest more than 5,000 kilograms of biomass and we expect this to be a catalyst for the business.
When we look at the companies that are focused on the Colombian cannabis market, we believe that Chemesis does not get the respect that it deserves and are of the opinion that the market has not assigned much value to this aspect of the story. At current levels, we believe that Chemesis has an attractive risk-reward profile and this is an opportunity that we will continue to monitor.
Although Uruguay was the first country to legalize both medical and recreational cannabis at the federal level, the market has been slow to develop and advance. The country is located in South America and it tends to be ignored by the street. Only a few companies are focused on this market which comes as a surprise due to the regulations associated with it.
Last year, Aurora Cannabis (ACB.TO) (ACB) acquired ICC Labs which was the first licensed cannabis company in Uruguay. Although the management team at Aurora Cannabis previously referred to ICC as the jewel of South America, the asset has played a small role in the operation and we have been surprised by this.
The South American cannabis market is barely in the first inning of a major growth cycle and we will be monitoring how the market advances in 2020. Once export laws are enacted by countries like Uruguay, we could see an increase in activity in South America. Although this would be a catalyst for the companies that are levered to this market, import laws must be passed by countries like Canada and this process could take some time to develop.
In 2018, Canadian cannabis companies became overly excited about the South American cannabis opportunity and several major acquisitions were completed. In 2019, activity has slowed down and we will monitor this trend in 2020 and beyond. Over the long-term, Aurora Cannabis could benefit by having exposure to Uruguay and we will continue to monitor how this market continues to evolve.
A few years ago, Australia became the first continent to legalize medical cannabis and this is a market that we continue to be excited about. When compared to North America, the opportunity in Australia is much less saturated and we find this to be significant. From a geographic standpoint, we are favorable on the close proximity to major markets in the South Pacific and consider these markets to be a long-term opportunity.
Aleafia Health (ALEF.TO) (ALEAF) is a Canadian cannabis producer that has been highly focused on the international opportunity. During the last year, Aleafia Health recorded several significant developments as it relates to the international cannabis opportunity and has been capitalizing on the Australian market.
A few months ago, Aleafia Health recorded a major milestone and reported to have successfully secured export and import permits that will allow for its first international product shipment to be distributed by CannaPacific. The company owns 10% of CannaPacific which has been highly focused on increasing production capacity to capture additional market share in Australia. In 2020, we expect to see more developments as it relates to the CannaPacific relationship and we are bullish on the market opportunity for Aleafia Health.
We are favorable on the exposure that Aleafia Health has to the Australian cannabis market through CannaPacific and expect this aspect of the story to play an important role in the growth of the business. By being able to export cannabis into the market and by owning a piece of CannaPacific, Australia represents a major growth opportunity for Aleafia Health and we find this to be significant.
At current levels, Aleafia Health is trading at a considerable discount to companies that have a similar structure and comparable assets. We believe that the market is not assigning much value to the assets that the company owns in Australia as well in Germany and are bullish on the growth prospects associated with these markets. In 2020, we expect to see Aleafia Health increase market share in Canada and in emerging international markets and this is an opportunity that we are excited about.
One of the most exciting themes of the cannabis industry in 2019 is related to the Israeli cannabis opportunity and this is a trend that we have been following. During this time, we have seen a significant increase in the number of companies that are focused on this opportunity and we are not surprised by this.
From a climate standpoint, Israel is an ideal market for producing cannabis and the economics associated with it are very attractive. The cost per gram of cannabis that is produced in Israel is similar to what we are seeing in Colombia and this has made the market an attractive destination for cannabis cultivators.
From a geographic proximity standpoint, the Israeli cannabis market represents an attractive opportunity and we are favorable on the export opportunity into the European Union (EU). Once the EU allows for the importation of cannabis from Israel, we expect to see a market shift and expect to see much more interest in companies that are levered to this opportunity.
In late 2019, Tilray, Inc. (TLRY) announced a major milestone and reported to have entered into an agreement with Canndoc Ltd., a wholly owned subsidiary of InterCure Ltd. (TASE: INCR). Through Tilray Portugal, the company will export a wholesale shipment of up to 2.5 tons of medical cannabis from Portugal to Israel.
Founded in 2008, Canndoc is an IMCA (Israeli Medical Cannabis Agency) permit holder for the manufacturing of medical cannabis in Israel. Canndoc has been active for more than 10 years in researching, developing, cultivating and marketing medical cannabis to thousands of patients under a wide range of medical indications approved by Israel’s Ministry of Health.
In 2016, Tilray became the first licensed medical cannabis producer to successfully export medical cannabis from North America and import medical cannabis products into the EU. We are bullish on the relationship between the companies and expect the agreement to serve as a major growth driver in 2020 and beyond.
The shipment represents an important development for the Israeli cannabis market and will arrive early this month. The shipment is the first medical cannabis import allowed into Israel and we are bullish on the growth prospects associated with the relationship between the two companies. Currently, there is a supply shortage of medical cannabis in Israel and Tilray will be able to capitalize on this opportunity though its subsidiary.
Through Tilray, Canndoc will be able to import and distribute GMP-certified medical cannabis to physicians, pharmacies and patients across the country and we will monitor how the relationship evolves from here. For Tilray, Israel represents its fifteenth export country and its second shipment from the company’s EU cannabis campus in Portugal.
In addition to the Tilray-Canndoc Israel supply agreement, Tilray agreed to purchase up to 5 tons of GMP-certified whole flower from Canndoc, starting in mid-2020. If future Israeli regulations allow, the whole flower will be shipped to Tilray’s Portugal facility and turned into GMP-certified finished product to distribute across Europe. Otherwise, the whole flower will be developed into finished medical cannabis and distributed as a Tilray-Canndoc branded GMP-certified finished product in Israel to further support local supply needs.
The international side of the cannabis industry represents a major opportunity for companies like Tilray. During the last year, we have seen an increasing percentage of revenues come from international markets and we expect this trend to become more significant on a going forward basis. Tilray has been laser focused on the international cannabis opportunity and we will monitor how the management team continues to execute on it.
In recent years, there has been a substantial increase in the number of markets that have legalized cannabidiol (CBD) and this is a trend that is expected to become more significant in 2020. Many analysts and experts consider Asia to be the next frontier for the CBD industry and this is a market that we are bullish on.
From a population standpoint, Asia is the world’s largest market, and this is a market that we are excited about. During the last year, we have been working to identify companies that are levered to this emerging market and want to highlight Canrim Growth Group, which has been executing flawlessly on a plan to capitalize on China’s CBD market and is working to complete a go-public transaction on the Canadian Stock Exchange (CSE) in 2020.
We believe that the Asian CBD market is moving in the right direction and are favorable on this trend. Currently, CBD infused cosmetics for the retail market is the only product range which is legal for sale in China. In the near future, the market is expected to expand with the legalization of cannabis infused products, and this would be a major catalyst for Canrim. According to Hong Kong based investment company Regent Pacific Group, the CBD market in China is expected to be a US $15 billion market by 2024. The investment firm expects beauty and wellness products to be the largest value drivers for the market and we are favorable on the leverage that Canrim has to this market.
Earlier this year, Canrim and CGA entered into an investment agreement for Canrim to fund and own up to 75% of the business. CGA is investing and partnering with CBD related start-ups and established businesses in the region to create new brands and we are favorable on the strategy as it relates to capitalizing on the CBD industry. CGA has already secured strategic partnerships with successful North American brands for introduction of their product line into the Asian marketplace through their China focused distribution partners. CGA provides Canrim with a number of benefits and we are especially favorable on its expanding distribution network.
Another exciting aspect of the Canrim story is related to the relationship that it has with NSG. According to an exclusive commercial arrangement, Canrim will be able to distribute co-branded CBD products across NSG’s platform. Like CGA, NSG has a substantial amount of distribution across Asia and we are favorable on this. We are bullish on the amount of value that can be created through NSG’s distribution network and expect it to play an important role in the success of the operation.
Canrim is led by a management team that has a proven track record of success when it comes to the North American cannabis industry and we find this to be the most important aspect of the story. We believe that Canrim has been ahead of the curve with its focus on the opportunity in China and this is a company that we will be closely following in 2020.
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