North American reefer madness takes toll on Aussie pot stocks

The breakdown in the corporate North American marijuana sector is having ramifications in the Australian industry, and it’s unclear how big an impact the ructions will continue to have.

Lower than expected take up of recreational marijuana in Canada, massive over-investment in servicing that sector, and regulatory confusion in the hyper-competitive US hemp market has led to large asset write downs and cost cutting at the biggest firms.

Three Australian pot stocks have felt the impact of problems overseas, as major industry investors have sold out of speculative antipodean plays.

Cann Group (ASX:CAN) had to tell the ASX at the end of January that its major investor Aurora Cannabis, the global number two cannabis company, would not be participating in any new funding rounds but would be sticking to existing offtake agreements.

Cann is currently trying to cut costs and raise money to build a $75-85m growing facility in Mildura.

Last week, Aurora revealed a massive asset write down of $C1bn ($1.12bn), including $C775m in goodwill and $C225m in intangibles and property, plant and equipment related to the ICC Labs acquisition in South America and the Denmark development project.

The founder and CEO Terry Booth has resigned, 500 employees will lose their jobs, and the company’s credit facility will be cut by a third.

Industry consultant New Cannabis Ventures said the news highlighted the near-term operating challenges licensed producers faced and the layoffs continued a trend across the country.

“While the operating environment is likely to improve as more stores open and the new products roll out, capital to fund operating losses has dried up,” it said in a report.

Major Althea (ASX:AGH) investor Aphria has been under pressure for over a year after a short seller report accused it of being a “shell game” in 2018 and the CEO lost his job as a result.

In April 2019 it issued an asset writedown and missed revenue targets, and in January revenue again fell, by 4 per cent, although recreational marijuana sales grew.

Aphria was a 25 per cent shareholder in Althea, before it sold out between August and October last year.

The largest pot stock in the world, Canopy Growth, sold out of Auscann (ASX:AC8) in October last year.

Canopy reports third-quarter results this week, but in November the US-listed stock sank after the Canadian cannabis producer reported a higher-than-expected second quarter loss due to restructuring charges.

New Cannabis Ventures says struggles in the North American industry are a “lagging indicator of the financial condition rather than being predictive”.

However, the company’s global cannabis index and Canadian index, where the largest companies are based, both declined in January, with the latter making that the 10th consecutive month of falls.

The six largest publicly traded cannabis companies collectively had a $US25bn market value between March and December 2019.

The slump in equity value has made raising money at the mainly-lossmaking companies difficult.

Canadian companies hope that being able to sell edibles, beverages, vapes, and topicals, such as lotions and balms in the recreational market, which was initially restricted to plants, flowers and oils, will generate the revenue the initial opening of the market did not.

US companies hope the country’s slow, piecemeal move towards legalising elements of the industry will open up opportunities.

But as seen with the CBD-hemp sector, such a move unleashed massive competition. That has taken a toll on locally-listed Elixinol Global (ASX:EXL) which has had to sell off non-core parts of the business, remove its founder CEO, and refocus strongly on the US market.

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