After years of keeping the burgeoning cannabis sector at arm’s length, some of Canada’s largest financial institutions are warming to the country’s MJ industry, including Bank of Montreal (BMO), which initiated research coverage this week.
The bank’s entry into the medical cannabis sector is a sign of the industry’s natural evolution and the potential for access to additional financial products, said Max Mausner, senior analyst at Vantage Asset Management in Toronto.
“To date, virtually all the capital raised in the sector has been public equity or equity-linked securities like convertible notes,” he said.
“But these businesses will require mortgage financing, debt financing and other more sophisticated banking products,” which are not currently available to them from other financial intermediaries.
But BMO analysts believe that most of the producers – all but Canopy Growth, Aphria and Aurora, three of the biggest – will contribute minimally in the early days of legalization and only “a modest amount” the following year.
There are currently 104 licensed producers, with 500 more in the pipeline.
Supply is anticipated to “catch up with demand in year two” and possibly exceed demand by the third or fourth year after recreational legalization, according to the report, which was distributed to the bank’s clients.
The BMO authors noted that initial demand in the regulated market will “likely be below” industry estimates but will nevertheless “considerably exceed” industry production.
Possible reasons for lower demand include:
- Insufficient stores in some provinces, such as Ontario.
- Stores in inconvenient locations, again citing Ontario.
- Popular products in the illicit market, such as edibles and concentrates, not initially available in the regulated market.
Other takeaways from the report:
- Cannabis cultivation will become a “low-margin, commoditized part of the supply chain and will be taken up by agriculturalists” in the long run.
- The LP business model will likely focus on intellectual property and branding down the road.
Matt Lamers can be reached at firstname.lastname@example.org
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