Why the west will win at weed

Statistics Canada estimates that Canadians already spent $5.5 billion on marijuana in 2017—giving investors an enormous opportunity to profit as pot transitions from a street drug to a mainstream inebriant.

Features | From Pivot Magazine

Why the west will win at weed

Cheap land. Low taxes. Friendly government. Plenty of sunshine and young people. Alberta has a huge head start in Canada's newest industry.

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The vastness of a Prairie province is hard to convey in anything other than aerial photographs. Alberta is all wide-open fields and gleaming glass cities—although the buildings in those cities are noticeably less bustling since the fall in the price of oil. It has the sense of a place, in other words, that is still waiting to be filled up. Poised for the next boom.

If both government and industry get their way, the seeds of that boom can be seen from the sky when flying into Edmonton.

On the grounds of the Edmonton International Airport sits Aurora Sky, an 800,000-square-foot behemoth: a rectangular pool of pane glass as large as 14 football fields. Inside the building are 27 kilometres of irrigation pipe, an array of robotic systems to handle harvesting and packaging and, when fully operational, more than 700,000 lush, green marijuana plants.

This is the gem of Aurora Cannabis, a juggernaut of the Canadian marijuana industry. It is, at the moment, one of most valuable cannabis companies on the planet, boasting a market cap of about $4.3 billion. But Aurora has even bigger plans. Although its Edmonton facility is mind-numbingly ambitious—set to produce 100,000 kilos of marijuana per year once it’s at full capacity, after the product is legally available in Canada on October 17—another giant grow op, larger again by half, is already under construction in Medicine Hat. And it won’t stop there; the airport location is a strategic bet. Aurora wants to be the leading provider of marijuana in the world, the Budweiser of weed.

This is a rare, arguably unprecedented moment in Canadian business history. A legal multi-billion-dollar industry is about to be created wholesale out of the dregs of a black market. Statistics Canada estimates that Canadians already spent $5.5 billion on marijuana in 2017—giving investors an enormous opportunity to profit as pot transitions from a street drug to a mainstream inebriant.

The legalization of marijuana in Canada is fortuitous for companies with large ambitions. As Canada is the second country, behind Uruguay, to fully legalize marijuana at the federal level, companies that can thrive here will have an enormous early-mover advantage as the drug gains acceptance in Europe, America, Australia and Asia.

It’s a critical moment as well for the regions that want to take advantage—and the province poised to gain the most from Canada’s competitive edge is Alberta.

At Aurora Sky, 27 km of irrigation pipe will carry water to 700,000 plants. Robotic systems will handle the harvest.At Aurora Sky, 27 km of irrigation pipe will carry water to 700,000 plants. Robotic systems will handle the harvest. (Courtesy of Aurora Cannabis)

Ontario may have the country’s largest population and much of its early marijuana investment—Aurora’s biggest competitor, and the leader for the moment in market capitalization, is Canopy Growth Corporation, formerly Tweed Marijuana Inc., based in Smiths Falls, Ontario. But, increasingly, it’s Alberta that’s moving ahead.

The province is as well-known for its farmlands as its oil sands. It has comparatively cheap land, and some of the lowest energy costs of any Canadian province—an enormous boon to an industry that will rely heavily on indoor growing facilities. According to a recent Fraser Institute report, for example, small industrial consumers in the Toronto area paid an average of 16.27 cents per kilowatt hour for their power. By comparison, Calgary-area companies paid 6.53 cents.

Alberta also enjoys more sunshine than almost any other part of the country. Medicine Hat, Lethbridge, Calgary and Edmonton all rank among the top 10 sunniest locales in Canada, which is a boon to large-scale farming.

And it has comparatively low taxes—no provincial sales tax, of course, low income taxes, and a general corporate tax rate of 12 per cent, with a small-business rate of just two per cent. Ontario’s corporate rates sit at 11.5 and 3.5 per cent, respectively. Quebec’s: 11.7 and eight per cent. More than that, the provincial government, desperate to diversify its economy, has introduced a capital investment tax credit. The program offers a non-refundable credit worth about 10 per cent of the cost of capital expenditures like new equipment, structures or machinery. Aurora Cannabis will channel its credit to Aurora Sky.

Demographically, Alberta is the youngest province in the country, with a median age of 36.7, and its labour force is relatively underemployed thanks to the oil downturn, with an unemployment rate at about 6.5 per cent.

Crucially, Alberta opted for a private retail distribution model, which is not only attracting large- and small-business owners but will also ensure that the province has an extraordinary number of marijuana dispensaries. In the first year of legalization, it’s predicted that Alberta will have licensed 250 dispensaries—or roughly five times as many as Saskatchewan and 12 times as many as Quebec. (In Ontario, the newly elected Doug Ford PC government announced in August it was shifting the province from a plan for 40 government-run dispensaries to a private retail system, beginning next April. The province will still handle online sales, but much about the shape of the retail market in Canada’s most populous province has yet to be determined.) A robust private retail system is no small advantage to a company like Aurora, which plans to be vertically integrated, with ambitions to grow, process and sell marijuana products. It’s also, arguably, an advantage for any new industry to operate in a jurisdiction with comparatively less regulation and a more open environment.

Perhaps most importantly, Alberta is still struggling to get off its back foot since the 2014 oil crash. A province eager to end its reliance on the oil and gas sector has been only too happy to welcome any nascent industry. Despite its reputation as a conservative province, there’s little reefer madness or moral squeamishness about marijuana in Alberta. This is business.

“In Alberta, we recognize that the cannabis industry is booming. Premier Rachel Notley and our government’s position is that this is another way to help diversify the economy,” says Deron Bilous, Minister of Economic Development and Trade.

The provincial government has aggressively reached out to existing and potential cannabis companies; Bilous says he spoke to almost all of the attendees at recent industry conferences held in Edmonton and Calgary. “All of them have said to us that Alberta is the best province to be investing in. This is where all the cannabis companies are going,” Bilous says, noting the combination of industry-friendly government, private retail, low taxes and investment credits: “Ontario obviously has a larger population, but they favour what we are doing in the province of Alberta.”

Aurora has been expanding at a remarkable clip, with strategic investments in medical marijuana companies across Canada, Europe and Australia.

It’s tricky to see inside the enormous grow op now consuming so much of the Edmonton International Airport. Aurora limits access to its facilities for good reason: “Humans are the number one vector for contamination,” says Cam Battley, chief corporate officer of Aurora Cannabis. People are the most common source of mould and other pathogens that can spoil a gram of weed.

So, Aurora has built an enormous facility that is serviced largely by robotic systems. “It is leagues ahead of anything else that exists in terms of cannabis production today,” he says. “What we have is the most tightly controlled environment of any cannabis production facility in the world. I suspect it is not just the most advanced cannabis facility in the world, but the most advanced agricultural facility in the world.”

Aurora has been expanding at a remarkable clip, with strategic investments in medical marijuana companies across Canada, Europe and Australia. But the Aurora Sky facility could only happen in Alberta.

The entire greenhouse sits within the airport property itself. “It’s ideal because we have all the utilities that we need: gas, water and power. And not only do we have power, we have power supplied from two different substations to the airport, because that’s required.” (Airports have to maintain a steady supply of power, leaving Aurora in a strong position to take advantage of that requirement.) The facility can also benefit from the heightened security of an airport.

Edmonton International is small enough, still, to afford the space required for such a venture, but large enough to ensure daily flights to airports across the country and around the world. Aurora Sky will be uniquely well-positioned to provide fast, same-day delivery by air as medical and recreational cannabis gain both social and legal acceptance.

The international market is a key aspect of Aurora’s long-term strategy, Battley says, and as with any commodity, transportation and logistics are critical. “You couldn’t do this at Pearson, there is no way,” Battley says. “It’s our Goldilocks solution.”

In addition to banks, the chambers of commerce in both Calgary and Edmonton have welcomed cannabis in their respective cities.

Cheap power. Low taxes. Good transportation. A favourable climate and a friendly government. Then there’s the money part.

The Auroras of the world are now working with the big banks—in June, the company signed a debt deal worth up to $250 million with BMO, the largest transaction of its kind in the cannabis industry with a traditional lender.

For smaller players, though, one of the benefits Alberta provides has been access to the Alberta Treasury Branches, or ATB Financial, the provincially owned Crown corporation, which has proven more willing to take a chance on marijuana start-ups than larger lenders.

“The basis for us leaning into this industry was the fact that we as Albertans saw—whether you look at our strength in agriculture, the low power prices or the land available—Alberta as an opportunity for this industry to grow,” says ATB’s CEO, Curtis Stange.

“I can tell you that we’re still defining what our policies will be, what our approach will be to this market. That’s part of the due diligence when you enter into a market like this that is brand new. You don’t leave any stone unturned.”

The bank has focused on supporting cannabis start-ups with credible and well-known management teams “that know how to enter a new market, and have got some consistent track record,” Stange says. “And you balance that with the spirit of new entrepreneurs.”

For example, one company, Sundial Growers, secured a $56-million financing deal from ATB, thanks in part to an executive team that boasts Coca-Cola veteran Torsten Kuenzlen, who was appointed its CEO, and former Calgary Stampeders football club co-owner Ted Hellard, who is executive chairman and has a long history in creating local digital marketing companies.

In addition to banks, the chambers of commerce in both Calgary and Edmonton have welcomed cannabis in their respective cities. “The Edmonton chamber’s approach was that we knew legalization was coming and I think we were just really pragmatic about it,” says chamber president and CEO Janet Riopel.

Some members expressed concerns about how legalization would affect workplace safety, but Riopel says that the provincial government is working to address that issue. The province already has rules against impairment on the job but is reviewing those laws in light of legalization.

“We communicated to our members the opportunity that existed. We have been in a very low downturn in our province here for a very long time now,” she says. “The government understood that and proceeded to address [legalization] as a new multi-billion-dollar industry, and an unprecedented opportunity for Alberta and the entrepreneurs there.”

Aurora is planning an even bigger grow op in Medicine Hat, Canada's sunniest cityAurora is planning an even bigger grow op in Medicine Hat, Canada’s sunniest city (Courtesy of Aurora Cannabis)

While the federal government is responsible for legalizing marijuana, the details of how the drug will be distributed and monitored were left to the provinces.

The government of Alberta conducted several surveys to get a sense of how restrictive they should be. Those polls overwhelmingly showed that Albertans preferred a private retail distribution model to parallel the way liquor is sold in the province. A number of other provinces opted instead for a public or a mixed model that would largely keep private businesses both big and small out of the retail chain.

“Because of our success with our liquor distribution model that is long proven now to be a success story, we know that our business community is perfectly ready, willing and able to take this on,” Riopel says.

Alberta received hundreds of applications for dispensaries. The plethora of outlets will not only serve the country’s youngest population, but a province that already spends more per capita on liquor consumption than the Canadian average—a product of its youth and wealth. Alberta has 38 per cent of the country’s medical marijuana licences and is comparatively free of the illegal dispensaries that have become common in other major Canadian cities.

All of these factors are believed to give Alberta a competitive advantage over even Canada’s long-unchallenged bud capital of British Columbia, says Lindsay Blackett, a former Progressive Conservative cabinet minister who’s now a partner at Arete Cannabis Consulting in Calgary.

B.C.’s rollout of marijuana rules has been comparatively disorganized, he says. Alberta has been quick and responsive to the cannabis business, and this has given the unlikelier province an advantage, he says. He summed up the sentiment of early weed investors: “It’s Ontario, then Alberta. Not Ontario, then B.C. Ontario, then Alberta. That is the place,” says Blackett.

Whether legal marijuana can compete with the black market product on price, variety, convenience and quality remains unknown.

Which is not to say Alberta doesn’t still have a lot of work to do, says Chris Damas, editor of BCMI Cannabis Report. By dint of Ontario’s much larger population, he predicts that Alberta’s marijuana industry is destined for second place.

The majority of licensed pot producers are still stationed in Ontario. “It certainly looks like a saving grace that Alberta has another industry that they can diversify into,” he says. However, “like any government initiative, it’s fraught with concern that the government may not get it right.”

Damas notes that monopoly government buyers in Ontario and B.C., for example, are already trying to undercut producers on price. “They’re manufacturing an industry—some say it was already there—but we don’t know how it’s going to unfold,” he says, noting that it’s still uncertain how much of the black market legalization will replace. And while analysts predict that legal marijuana will soon begin to nip at alcohol sales, the valuations on many cannabis companies are, at best, still just projections.

Blackett says he expects that some of the larger players now dominating this market will collapse or be consolidated. No legal marijuana company can rely on a past track record to demonstrate its competence.

Aurora, for example, has grown extremely quickly and run up a lot of debt to fund that expansion. Its financials show it has more than $1.6 billion in assets, but annual revenues prior to legalization of only $18.1 million. Its stock price, like many in the industry, has been volatile, and it’s yet to turn an annual profit.

There are also questions about Aurora Sky’s harvest, and whether its weed will be tainted by proximity to the jet fuel emissions and vibrations of nearby airplanes—concerns that Aurora’s management flatly dismiss.

Whether legal marijuana can compete with the black market product on price, variety, convenience and quality remains unknown. Already, there are concerns about whether there are enough licensed producers to supply the hundreds of retail outlets that will need to stock their shelves come legalization day.

Another mystery is just how large the actual market even is. Edible and concentrated marijuana are expected to be more popular than the dried plant in the long run, as is the case in legalized U.S. jurisdictions. But Canada won’t legalize those products until 2019, at the earliest.

In short, marijuana may soon be legal, but it’s still a risky business. “The key question will be: are the ends going to justify the means? We have to decide how much GDP improvement is going to be sustainable, and whether the social costs of recreational cannabis are not going to be excessive, because there is always a cost,” Damas says.

He is waiting for international push back on Canada’s headlong rush toward legalization as well. “The UN has protested, but we haven’t found out what the repercussions of a G7 nation [making] recreational cannabis legal are.”

Bilous remains more optimistic. “I don’t think we’re in the middle of a cannabis bubble, as far as its crashing,” he says. “Companies are doing their due diligence and I encourage their investors to do their due diligence. But what we see is an increasing demand.”

Of course, as the NDP faces a daunting election in 2019, much of its future is also pinned to the continued success of Aurora, and the diversification efforts behind it.

“I think we’re going to see other companies like Aurora making larger and larger investments in Alberta,” Bilous says.

But, then, that’s Alberta for you. Always looking for the next big thing.