Emerald, Ruby and Sapphire Assets With Near-Term Production Potential
Emerald, Ruby and Sapphire Assets With Near-Term Production Potential
Analyst
s'
Ideas of the Week
E
me
rald, Ruby and
Sapphire A
ssets
W
ith Near
-
Term Production
Pot
ential
January
6, 2020
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archfrc
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Mining / Exploration
Company Name:
Ticker Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Fura Gems Inc.
TSX
V
:
FURA
$
0.18
$
1.17
D
ecember
-
31
-
2019
PR Content
Af
ter multiple extensions, the company
finally compl
eted
a
previ
ously
announced
acqu
isition
of
a sapphire mining project in
Queensland,
Australia
from
Richland
Resources (AIM:
RLD) for
US$1.25
million
in cash
.
The project was in
production from
2015 to 2017. According to
RLD, the project
has an estimated 100 million
ca
rats of
sapphire (JORC
2004
resource
estimate). Fura
intends to properly delineate
the deposit
,
and
resume/ramp up
operations
.
Fura
had
compl
eted the
acquisition
of a rub
y
prospecting licence
in
Mozambique
in
October, and
is currently in the process of
com
pleting the
acquisition
of
three a
dditional
licences/concessions in
the area.
FRC
Opinion
Positive
–
With
the latest
acquisition
, the
company now holds
emerald, ruby and sapphire
assets in Colombia, Mozambique and Australia,
respectively
.
The
big three col
oured
gemstones
market (rubies, emeralds and
sapphires)
is
estimated to account for US$1.5
-
US$2.5 billion
per year (Source: Natural
Resource Governance
Institute).
We will be
publishing a
de
tailed
update when
management
provide
s
details on
the
ir
2020
pla
ns for all three
projects
.
N
ote
that
all three p
rojec
ts
h
ave near
-
te
rm revenue
potential
for Fura.
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Cannabis
Company Name:
Ticker Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
AgraFlora
Organics
Internationa
l
Inc.
CSE: AGRA
$0.09
$0.38
January 3, 2020
PR Content
Closed the acquisition of Farmako GmbH
(“Farmako”), the parent company of The
Good Company GmbH (“The Good
Company”). Farmako has a German
distribution network that extends over 20,000
pharmacies
an
d
an
aggregate
patient
population
of
over
100,000
unique
i
ndividuals.
FRC Opinion
Positive
–
We are pleased to see
AgraFlora
close the acquisition of a revenue generating
company (Farmako realized revenue of over
$2.75 million
in
their fiscal 2019). We ex
pect
Farmako to contribute meaningful company top
-
line revenue starting 2020.
W
eekly Cannabis Commentary
Below is
t
he performance of the Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ /
“HMMJ”)
as a proxy for sen
timent of the cannabis market.
Horizons Marijuana Life Sciences Index ETF
Source: Google
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The HMMJ is currently trading at $8.26, a week
-
over
-
week increase of 1.10%. Over a one
-
year
period, the HMMJ has lost 48% in value. Currently, the HMMJ is tradi
ng 1.35% above its 52
-
week low of $8.34. Despite the roll
-
out of cannabis edibles and alternativ
e cannabis products in
Canada, sentiment of cannabis stocks
remains
exceedingly weak.
T
he coming weeks will be
crucial
in gauging whether cannabis
-
infused produ
cts
live up to investor expectations of
being able to
drive
greater value
in
the Canadian cannabis market.
As we have previously
mentioned, cannabis
-
infused products could have a profit margin of up to 92% compared to
dried flower of 76% (Source: Grizzle).
From our interpretation of
current
supply and demand of cannabis
-
infused products
in Canada
,
we believe that supply is severely limited. To reinforce our belief, in Ontario,
the projected
largest Canadian cannabis market, the Financial Post (“FP”) indic
ated that there is limited supply
of cannabis
-
infused products for purchase at retail stores.
It was noted that
“the Ontario
Cannabis Store (“OCS”) has received products from fewer than 10 licensed producers (“LPs”)
since such items became legal on Dec. 16
[2019]
–
the agency has supply agreements with 40
LPs across the country”
.
We believe this st
atement to be concerning,
as it indicates that either (1)
LPs have failed to develop suitable cannabis
-
infused products
in time
for sale to consumers or (2)
regul
atory approval by Health Canada for cannabis
-
infused products are highly stringent
(resulting
in approval delays)
. We believe the latter point to be more probable. Although we
cannot draw conclusions as to the
longer
-
term
availability of cannabis
-
infused p
roducts,
the
currently limited availability of cannabis
-
infused products is a potential red fl
ag.
Marking the start of a new year, we outline trends that shaped the global cannabis market in 2019
,
and
outline the plausibility of such trends extending into
2020.
Trends That Shaped 2019
1.
The Rush to Establishing Commercial Operations;
2.
Loos
en
ing
Regulations on Cannabis; and
3.
The Emergence of CBD products.
The Rush to Establishing Commercial Operations
T
he legalization of cannabis in one of the largest advanc
ed economies in the world (Canada)
created a rush of new cannabis
companies in hopes of becoming
first
-
movers and differentiators
.
The total capital raised from January 2019 through to October 2019
,
wa
s US$10.33 billion
compared to US$7.46 billion over the
same period last year
(a 38% year
-
over
-
year increase)
.
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Taken From: Marijuana Business Daily, Source: Viridian Capital Advisors
However,
against the back
-
drop of a poor
-
performing Canadian cannabis market,
small
and medium
-
sized companies that have rus
hed to establish operations in 2019 are now
facing the risk of bankruptcy.
We believe i
nvestors
are shifting away from being speculators
and
becoming more
cautious in picking companies that are able to achieve economies of scale
and profitability
. As such,
we believe
this trend is not expected to take form for 2020.
We expect
further consolidation in the global cannabis market as unprofitable c
annabis companies shed
their
operations
.
Loosening Regulations on Cannabis
In addition to Canada having a legal f
ramework for adult
-
use and medical
-
use cannabis, a
number of other countries ha
ve
legalized cannabis for medical purposes. To date, more than
5
0
countries
are regulating cannabis for medical purposes (Source: New Frontier Data)
.
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Legality of Can
nabis
Source: New Frontier Data
Currently, only Canada, Uruguay and some
U.S.
states have legalized cannabis for adult
-
use.
Loosening regulations on cannabis in 2019 is expected to extend into 2020 as the domino
-
effect for cannabis leg
alization continues.
Namely, reader
s should look to Mexico and
Luxembourg as countries that are expected to fully legalize cannabis
in 2020
.
The Emergence of CBD Products
With the legalization of cannabis comes the emergence of cannabidiol (“CBD”) produc
ts. As we
have previously
touched upon, there has been many alleged benefits of using CBD products. To
capitalize on such alleged benefits, 2019 marked the start of a number of companies creating
products infused with CBD
. To date,
cannabis products in the
form of CBD are
currently
readily
available
online and
in
the
stores
of
Wal
-
Mart (NYSE: WMT), Tesco PLC (LON: TSCO), etc.
With that said, given that CBD products have only recently started gaining
traction
, there are
numerous uncertainties regarding the b
enefits of using CBD produ
cts over an extended period.
For example, the Food and Drug Administration (“FDA”) noted that CBD products have the
potential to cause harm.
Until more definitive research is published, we
believe
the
popularity of CBD products
wi
ll
extend into 2020.
The following is an excerpt taken from the
FDA outlining the uncertainty regarding CBD products.
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Source: FDA
Conclusion
Overall,
the start of
2019 created a highly optimistic outlook on the cannabis market. However,
against the ba
ck
-
drop of a less
-
than
-
ideal Canadian cannabis market situation,
this optimism was
short
-
lived
and shareholder value was severely destroyed
for the remainder of 2019
. A
s we have
noted, the HMMJ lost 48% over a one
-
year period. W
e believe
that investors wil
l be cautious on
the outlook of the global cannabis market headed into 2020
,
and
will be severely stringent in
their cannabis investment
criteria
. We expe
ct further consolidation and only a handful of big
-
name cannabis companies to emerge vic
torious. The continual legalization of cannabis in
countries around the world is expected to provide the cannabis market with a base
-
line for
growth. Lastly, we expect
2020 to be an essential year in gauging whether the hype regarding
CBD products are warr
anted.
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Performance of Select Canadian LPs
The following shows the performance of select Canadian LPs on a 1
-
month, 6
-
months
,
YTD
and
1
-
year
basis.
Name
YTD
1
-
Month
6
-
Months
1
-
Year
Aphria Inc.
NM
-
6.88%
-
29.52%
-
27.05%
Aurora Cannabis Inc.
NM
-
28.61%
-
74.56%
-
64.66
%
Canopy Growth Corp.
NM
-
7.60%
-
49.59%
-
32.06%
Cronos Group Inc.
NM
-
4.34%
-
55.32%
-
46.55%
Tilray Inc.
NM
-
19.30%
-
65.90%
-
78.40%
Hexo
Corp.
NM
-
35.81%
-
71.06%
-
69.38%
CannTrust Holdings Inc.
NM
28.57%
-
69.40%
-
78.87%
Organigram Holdin
gs Inc.
NM
-
21.35%
-
69.70%
-
50.44%
The Supreme Cannabis Co., Inc.
NM
-
8.96%
-
59.33%
-
63.03%
AVERAGE
NM
-
11.59%
-
60.49%
-
56.72%
Source: Google
The
average
1
-
month, 6
-
months
and 1
-
year
returns were
-
11.59%,
-
60.49% and
-
56.72%,
respectively.
Valuation
of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) that cannabis
companies are currently trading at.
The change in
average
valuations due to notable news are
also presented below.
The companies used in the chart b
elow are outlined further
.
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Source: FRC
Source: FRC, S&P Capital IQ
The average EV/R, as of
January 6, 2020
, was 1
2.
5
x
–
a
slight
decrease
from an average EV/R of
1
2
.
7
x on
December
23
, 2019. As a number of companies are not EBITDA positive, we
have
refrained from tracking the average
Enterprise Value to EBITDA (“
EV/EBITDA
”)
.
In the following, we provide commentary on Canadi
an retail cannabis pricing.
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Canadian Retail Cannabis Pricing
Source:
Online Provincial Cannabis Store, FRC
The a
verage retail price per
gram increased nominally from $11.62 to $11.63
–
a week
-
over
-
week increase of 0.10%. The largest retail price per gram increases were witnessed in the
provinces/territories of British Columbia (of 0.91%) and Nova Scotia (of 0.69%)
. This was
slightly offset
by a retail price per gram decrease in Quebec (of 0.93%) and Manitoba (of 0.50%).
The other provinces/territories
witnessed
a nominal
week
-
over
-
week
increase/decrease in their
retail price per gram.
Over the long
-
term, to combat
the black market for canna
bis, we expect
retail price per gram to decline
nationwide
.
Having discussed the restricted supply of cannabis
-
infused products
in Canada
, we provide a
discussion on the pricing and dosage of such products. Our discussions will
be
primarily
on
cannabis e
dibles
.
Using the Ontario cannabis market as a proxy for
edible cannabis
prices,
the
retail
prices
per
package of cannabis edibles
range from $7 to $14. Products available include mints, chocolate
bars and gummies. Readers shoul
d note that the legal
limit on THC per package is 10
mg. When
THC regulations on edibles were announced, many Canadian consumers outlined dissatisfaction
and stated that the THC limit was not enough to provide an adequate high. With that said, the
high gen
erated from THC depend
s entirely on the tolerance of an individual.
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Source: latimes.com
Shown above (outlined in red),
those who have low to very low tolerance will find legal cannabis
edibles to provide a suitable high. On the other end, those with g
reater
tolerance will likely find
such products to have a weak high. For comparative purposes, the following outlines the
estimated amount of THC inhaled through a 0.5g joint (
using a
THC
content
of 11%).
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THC Inhaled From a 0.5g Joint
Source:
latimes.com
Using the average price per gram from our model above, a 0.5 gram joint would cost
approximately $5.82 and yield
a
THC
content
of 20 mg.
This amount of THC would provide a
“typical desired” high for beginners, those with some experience, and
t
hose that are
experienced.
To achieve the same THC content in edibles (assuming an average retail price of
$10.50), a consumer would have to pay approximately $21. Adjusting for the duration of the
high (assuming high from dried cannabis flower
to
last t
w
o hours and from edibles to last six
hours),
the cost of
having a 20 mg THC high for
six
hours would be approximately $18 for
dried cannabis flower and $21 for edibles.
We have provided a visual illustration below (each
green rectangle
represents the numb
er of respective products required
to be consumed).
Cost
s to a Consumer for
a “Typical Desired” High Effect for Six Hours
Source: FRC
T
he cost from using dried cannabis
flower to
cannabis edibles
to achieve a similar high
seems to be
14% lower
.
As such
, price
-
sensitive consumers who are strictly looking to
achieve
a high (neglecting the convenience of edibles),
would likely
opt to continu
e using dried cannabis
flower as opposed to cannabis edibles. With that said, given the convenience of using edibles
to
smoking
dried cannabis flower
, we believe that the pricing discrepancy
to
be very reasonable.
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There w
as
no notable cannabis news across Canada this week.
The below chart shows Canadian retail cannabis pricing since we began price coverage.
Sourc
e: FRC, Online Provincial Cannabis Stor
e
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Disclai
mers an
d Disclosure
The opinions expressed in
this report are the true opinions of the analyst(s)
about any companies and industr
ies mentioned. Any “forward looking
stateme
nts”
are our
best estimates and opinions based upon information that is publi
cly ava
ilable
and that we believe to be correct, but
we have
not indepen
dently verified with respect to
truth or correctness. There is n
o guarantee that our forecasts will materia
lize. Actual results will likely
vary. Companies mentioned i
n this report may
be cov
ered by
FRC under an issuer paid model or be c
andidates for coverage.
FRC
or companies
with rela
ted management,
may hold
shares
in some companies mentioned in this report.
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-
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rmance
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ainties that could cause actual
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-
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or contribute t
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he Company's products/services in the marketplace;
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l
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includi
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various securities regulators.
By making these
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