20“The sun is beginning to shine over America’s multi billion dollar medical and recreational cannabis market. This changes everything!”
So says an ebullient Leith Pedersen, President and co-founder of Sunniva Inc (CSE: C.SNN, OTC: SNNVF), a Canadian start up that is on-track to soon become one of the largest vertically integrated cannabis companies in both California and Canada.
Pedersen is referring to the Trump Administration’s announcement last week not to interfere with states that have voted to legalize medicinal and recreational cannabis. California is the largest cannabis market in the world and recently legalized recreational cannabis as of Jan 01, 2018.
This new development is a veritable game-changer that has given Sunniva a clear opportunity to earn the lion’s share of the world’s largest legal cannabis market — California.
Sunniva is building an initial 490,000 square-foot, state-of-the-art cannabis cultivation facility in Cathedral City, near Palm Springs. On schedule for operations commencing Q3 this year, it will be one of the largest of its kind in California (as well as the rest of the US).
All told, this expansive greenhouse is expected to yield as much as 100,000 kilograms of pharmaceutical-grade, contaminant-free cannabis and trim, as well as derivative products, such as medicinal oils.
There are three key value drivers that are converging to leverage the company’s first-mover advantage to optimal effect. They are outlined as follows:
1) Becoming One of the Lowest-Cost Growers of Premium-Quality, Pharmaceutical-Grade Cannabis
California is literally cleaning up its act. State lawmakers have introduced stringent new regulations this year governing the use of pesticides on cannabis crops.
This has not happened a moment too soon. For the past two decades, medical marijuana has been a virtually unregulated, highly fragmented business in California with very limited enforcement if any on quality control.
Truth be told, this lack of quality oversight means that nearly all of California’s 1,000-plus dispensaries inadvertently have been selling cannabis that is tainted with excessive pesticides residues — some of which can be very toxic to consumers.
This is according to well-publicized findings by several independent laboratories.
Sunniva’s Chairman of the Board, Dr. Tony Holler, is a former physician, who finds this systemic health and safety problem to be very troubling.
He says: “California State media continue to report that up to 85% of cannabis products being sold in California today contain excessive residues of pesticides and/or other harmful contaminants.”
So it’s Sunniva’s steadfast commitment to only cultivate pharmaceutical-grade cannabis that is free of pesticides and other chemicals,” he continues. ”It is this quality assurance that will allow us to create trusted Sunniva brands, and white labels for existing brands, as well as enter into long term supply contracts with leading cannabis distributors.”
By being able to produce such “clean” premium-quality cannabis on a vast scale, Sunniva should be able to realize significant economies of scale in a largely automated, climate-controlled facility utilizing the energy of the sun. This will allow Sunniva to grow a high quality product at costs that are projected to be considerably lower than $1.00 a gram — which very few companies can ever compete with.
Additionally, many of California’s existing growers are being shut down by regulators due to their inability to satisfy the state’s stringent new requirements for contaminant-free cannabis. This development alone means that Sunniva is ideally positioned to step in to fill an inevitable supply-side shortfall.
2) A Remarkably Uncrowded Marketplace
As a very well-financed commercial-scale cannabis company, Sunniva is in an unprecedented pole position to become one of California’s dominant cannabis growers and provider of high quality extracted products and devices.
This is because cannabis still remains federally illegal in the US. Accordingly, this reality has emptied the playing field of virtually all of Sunniva’s prospective big-league, publicly-traded American competitors.
In other words, huge pharmaceutical, alcohol and tobacco conglomerates (“The Big 3”) that trade on US capital markets are prohibited from entering this much-coveted multi billion dollar marketplace any time soon.
Yet they are all very anxious to get a foothold in the cannabis industry. For example, Constellation Brands (NYSE: STZ) recently acquired a 10% stake in Canada’s cannabis industry flag-bearer, Canopy Growth (TSX: WEED), for the princely sum of CDN $245 million (US $191 million).
Constellation is a global alcohol powerhouse that has a market capitalization of over US $40 billion – an eye-popping figure that dwarfs Canopy’s market capitalization of around $6 billion.
Additionally, Sandoz Canada, the generics-focused wing of Novartis International AG ( the fourth-largest pharmaceutical company in the world by revenue) recently partnered with B.C. cannabis company Tilray in Canada to develop and distribute medical marijuana products.
Also, Alliance One International — a leading independent leaf tobacco merchant serving the world’s cigarette manufacturers with revenue in excess of $ 2.35 billion US — has purchased an 80% stake in a cannabis facility in Canada. It is also worth noting that Philip Morris International of Switzerland now owns a patent for GMO cannabis plants with higher terpenes.
What does this all mean? It means the “Big 3” see a huge business opportunity and are just starting to make investments in the global cannabis space. So it makes sense for these industry giants to start buying into Canada’s big-league cannabis growers while their share prices are still relatively cheap and with their eye on superior profits in the US when able.
3) Shutting Out Other Expansion-Minded Cannabis Growers
Canada’s dominant publicly-traded cannabis growers all trade on the Toronto-based TMX exchange, which prohibits its listed companies from investing in U.S-based cannabis operations and therefore entering the California marketplace.
Vancouver-based Sunniva whose shares are listed on the Canadian Stock Exchange (CSE) does not have any restrictions on its constituent companies doing business in the US as long as proper disclosures are made.
This affords Sunniva a strategically very valuable operational head start. And it means that Sunniva now enjoys an unfettered opportunity to become one of California’s leading, most-trusted cannabis brand, and to capture significant market share.
Eventually, due to the low cost, high-quality scalability of Sunniva’s business, this would make Sunniva a likely takeover candidate for any corporate titan in the alcohol, pharmaceutical, or tobacco industries.
With its funded large-scale cannabis growing infrastructure and execution of long-term distribution agreements in Canada, Sunniva already has all the right dynamics to become attractive to a household-name corporate suitor.
A Dynamic De-Risked Business Model
It’s very important to note that Sunniva has already virtually de-risked its business model. This involves leveraging strategic commercial real estate and merchant banking relationships to produce at full capacity a total of 100,000 kilograms of cannabis dried flower and trim, plus cannabis oils in California.
Significantly, this can be achieved without incurring any meaningful capital expenditure costs. Instead, Sunniva will only be obliged to finance ongoing operating costs, as well as commit to long-term leases or mortgages for its news facilities.
Additionally, the company is negotiating long-term sales agreements with high-volume retailers and distributors of cannabis products in California (as well as Canada, where Sunniva has already announced one of the largest take or pay supply contracts to date supplying Canopy Growth Corp 90,000 kg of cannabis over a two year period)
These contracts are expected to be worth hundreds of millions of dollars annually in each of the world’s two biggest marketplaces.
Replicating a Proven High-Octane Success Story
This de-risking formula has worked extremely well before for Sunniva’s co-founder Dr. Holler.
He was also founder and former CEO of ID Biomedical Corp. This Canadian start-up quickly became North America’s dominant low-cost, high-quality scalable manufacturer of influenza vaccines.
IDB pre-sold the majority of its supply via long-term contracts prior to commencing production. It was acquired by GlaxoSmithKline PLC in 2005 for total consideration of approximately CDN $2.0 billion.
In the process of replicating this proven business model in California, as well as in Canada, Sunniva has the already received peer-to-peer validation at the highest level.
Pedersen explains: “Sunniva has recently signed the largest take or pay contract to date with Canopy Growth Corp in Canada to supply Canopy 45,000 kilograms of cannabis a year over two years, commencing Q1 of 2019.”
“The recent 90,000 kilogram take or pay supply contract to supply Canopy Growth reaffirms and validates our business model in creating a trusted Sunniva global brand hierarchy as in this arrangement Canopy will also be distributing the Sunniva Brands.”
To this point, Sunniva is building the Sunniva Canada Campus, a 700,000-square-foot purpose-built GMP compliant greenhouse facility to be located in British Columbia. The total campus is expected to produce over 100,000 kilograms of premium cannabis flower a year plus higher margin extracted products such as capsules, cartridges, tinctures and creams.
Sunniva is preparing to break ground within the next 30 days and anticipates this $120 million facility will be funded via bank and subordinate debt financing.
He adds: “We anticipate that Sunniva will sign similar types of contracts to this in California with leading Californian distribution companies and existing big brands.”
Investment Summary
Sunniva’s once-in-a-lifetime opportunity to become one of California’s dominant cannabis companies cannot be over-emphasized. Consider this: the Golden State has a very large progressive-minded (pro-cannabis) population of around 40 million (more people than in the whole of Canada).
It also boasts the world’s sixth largest economy, with a GDP of US $2.75 trillion. And of course, it has the country’s largest cannabis industry, which is expected to be worth US $6.5 billion by 2020, according to ArcView Market Research.
To recap, Sunniva now has de-risked business model and a considerable head start on future deep-pocketed rivals. With a commitment to being a best-in-class operator in both California and Canada, the company promises to deliver contaminant-free, pharmaceutical-grade cannabis products at a low-cost.
It’s a wining formula that should propel Sunniva into the big league – and allow the company to capture significant market share within the world’s two largest cannabis markets – California and Canada
For a more comprehensive analysis on Sunniva, research analyst Vahan Ajamian at Beacon Securities, has initiated coverage on Sunniva with a Speculative Buy rating and a target price of CDN $16.50.
About the Author: Marc Davis has a deep background in the capital markets spanning 30 years. A longstanding financial journalist, he has worked for leading digital financial news agencies in North America and in London’s financial centre. He is also a former business reporter for CBC Television.
Over the years, his articles have also appeared in dozens of digital publications worldwide. They include USA Today, CBS Money Watch, Investors’ Business Daily, the Financial Post, Reuters, National Post, Google News, Barron’s, China Daily, Huffington Post and AOL.
Disclaimer: The principals of M. Davis & Associates Capital Inc. own shares from time to time in companies under coverage. Some of the costs of researching these companies an ongoing basis are therefore defrayed by nominal payments from these companies.
