Australia isn’t ready for the big time yet…
In the past two weeks, two big Canadian producers have pulled out of the country, and a third is turning to outside capital to build a business there.
It’s an indication that the big players are frustrated with the slow pace of the Australian market and are looking for lucrative opportunities that give shareholders faster results.
On October 13, Canopy Growth Corp. (NYSE: CGC) sold its entire stake (13.2% interest) in AusCann Group Holdings Ltd. (OTC: ACNNF). That sale comes only four months after Canopy increased its stake in the company.
Two days later, Cronos Group Inc. (Nasdaq: CRON) announced that it was creating a public listing for its joint venture in Australia. The company – Cronos Australia – sold one third of itself to a group of pre-selected shareholders.
In this case, Cronos did not sell its stock.
But Cronos has over $2 billion in cash on its balance sheet; if it wanted to increase its investment in Australia, it could have done so without outside shareholders.
The third blow came on October 25.
Aphria Inc. (NYSE: APHA) dumped its 15.7% stake in Althea, its Australian play.
Australia Is Lagging Behind
Australia could be a promising market.
Its 24.6 million citizens have some of the highest illicit cannabis use rates in the world, and Australia never had a “drug war” the way the United States has had with cannabis.
Medical cannabis was even made legal in some parts of Australia as early as 2016.
Cannabis is still illegal for recreational use, but it’s not a major public policy issue. Illicit users are in little danger.
But it has been slow to commercialize cannabis sales and doesn’t show any signs of speeding up.
Australians View Cannabis Legalization Differently
A majority of Australians still oppose legalizing cannabis for recreational use, and the medical program has been slow to roll out.
There are only 11,000 authorized medical patients. That’s about as many as Utah estimates it will have after one year of medical cannabis in that state.
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Meanwhile, there has been an enormous amount of capital building growing capacity in the country, and the country allows imports.
As these facilities come to fruition, there will be far too much legal medical cannabis chasing far too few customers.
That’s not a route to profits.
All that isn’t to say that the big companies are abandoning Australia completely; they just don’t want to have money tied up there because investors want results now.
- Canopy said it will keep working with AusCann to educate doctors and increase patient counts.
- Cronos is repositioning its Australian investment to focus on brands instead of growing operations.
- Aphria hasn’t made a comment about its sale, but Aphria has exported cannabis to Australia in the past, I am confident it will continue to do so.
Given the slow market growth in Australia, all of these moves make sense.
With medical cannabis growing much faster in Europe and with other states and countries preparing to sell recreational cannabis, it would be a waste to have more capital tied up in Australia than is absolutely necessary.
This is part of the industry growing up.
But as the industry grows up, that also means you have the opportunity to get in on ground-floor opportunities.
Companies are dumping investments that aren’t working out now in order to focus on opportunities that will provide better results or long-term projects that are going to be home runs.
That new focus that’s spreading across more and more cannabis companies is going to be good for our model portfolios.
Executive Director, National Institute for Cannabis Investors
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3 responses to “Trend Spotting: Australia Isn’t Ready for Big Investments Right Now”
October 29 2019