By Vahan Ajamian
- Last night, Horizons Medical Marijuana Life Sciences ETF (HMMJ-T, not covered) announced a number of changes. Most notably:
- Effective on or about June 15, 2017, it will change its name to “Horizons Marijuana Life Sciences Index ETF.”
- In terms of its investing mandate, “although HMMJ will not invest in any constituent issuers that are primarily focused on serving the medical or recreational marijuana market in the United States, or the recreational marijuana market in Canada, unless and until such time as it becomes legal, HMMJ’s investment strategy will, subject to regulatory approval, be modified to permit the HMMJ to invest in marijuana companies which derive some portion of their revenue, currently or in the future, from the medical and/or recreational cannabis industry in certain U.S. states where cannabis use has been legalized by state law, notwithstanding that the use, possession, sale, cultivation and transportation of cannabis remains illegal under U.S. federal law.” (emphasis ours)
- HMMJ will also launch a version of the ETF which trades in US$ on or around June 19, 2017, under the symbol HMMJ.U.
- From a macro perspective, these changes are completely consistent with our view that the U.S. marijuana sector is steadily becoming more and more mainstream in the investor community – and we continue to believe that exceptional returns may be made in this sector over the next few years.
- In terms of specific names, while we currently have imperfect information (HMMJ’s revised prospectus is not yet available), we believe CannaRoyalty Corp. (CRZ-C, not covered) is the clearest beneficiary from the aforementioned changes – and that they may cause a significant increase in its share price. We believe iAnthus Capital Holdings Inc. (IAN-C, Buy recommendation, C$3.75 target price) and The Canadian Bioceutical Corporation (BCC-C, not covered) could stand to significantly benefit as well.
Possible Implications For CannaRoyalty
- “CannaRoyalty is a fully integrated, active investor and operator in the legal cannabis sector.” Its “focus is to build and support a diversified portfolio of growth-ready assets in high-value segments of the cannabis sector, including research, consumer brands, devices and intellectual property.” The company has 24 investments which include “royalty agreements, equity interests, secured convertible debt and licensing agreements.” Key jurisdictions include: California (medical/recreational); Washington (medical/recreational); Arizona (medical); Oregon (medical/recreational) and Colorado (medical/recreational).
- HMMJ’s mandate is to replicate the North American Medical Marijuana Index. CannaRoyalty is the only stock which is part of this index that HMMJ is supposed to track, yet is not in HMMJ. This was a decision taken during the launch of HMMJ, due to the company’s U.S. exposure. Accordingly, we feel that CannaRoyalty will be the first, and most obvious, stock to be included in HMMJ under its new mandate – potentially on or about June 15, 2017.
- We calculate that CannaRoyalty has a 2.0% weighting in the North American Medical Marijuana Index. Given HMMJ’s net assets of $103MM, a 2.0% weighting would result in $2.1MM of ‘automatic buying’ of CannaRoyalty’s shares. This would represent 3% of CannaRoyalty’s market cap. At its current share price, this would represent about seven days of CannaRoyalty’s average trading volume.
- In terms of visualizing the potential impact this could have on CannaRoyalty’s share price, we point to ICC International Cannabis Corp.’s (ICC-V, not covered) experience during the launch of HMMJ. After analyzing the data before its launch, we predicted that given the demand / average daily volume dynamics, ICC stood to benefit the most of all the stocks in the index from the upcoming launch of HMMJ. Just prior to HMMJ’s launch, ICC’s share price was at $0.76, representing essentially an all-time low. ICC was included in HMMJ with an initial 2% weighting. As HMMJ’s net assets ran to $120MM, in our view, the accompanied ‘automatic buying’ was the key factor which drove ICC’s share price to as high as $1.39.
- CannaRoyalty’s share price closed at $1.74 yesterday, essentially an all-time low, despite having recently announced a number of investments which appear to be quite attractive. We feel that a possible inclusion in HMMJ could be exactly what it needs – to both reinvigorate the share price from a trading perspective, as well as put the story back in the minds of longer-term investors.
Potential Implications For iAnthus and Canadian Bioceutical
- iAnthus is “a provider of capital investment and management services to licensed cannabis cultivators, processors and dispensaries throughout the United States”. The company has investments in six cultivation facilities, four processing facilities and 10 dispensaries in the following four U.S. states: Massachusetts (medical/recreational); Colorado (medical/recreational); New Mexico (medical); and Vermont (medical).
- Canadian Bioceutical “provides substantial management, staffing, procurement, advisory, financial, real estate rental, logistics and administrative services to medicinal cannabis enterprises in Arizona [medical] and Massachusetts [medical/recreational]”. The company recently announced it is exercising an option to acquire a licensed cultivation, production and wholesale business located in Las Vegas, Nevada (medical/recreational) and has an application for a license in Canada.
- We believe that iAnthus and Canadian Bioceutical may also be included in HMMJ in the future and that the effect on their respective share prices may be similar to what we noted above.
- According to Steve Hawkins, President and Co-CEO of Horizons ETFs, “HMMJ will have the potential to invest in a range of recreational cannabis-focused opportunities as applicable laws evolve in both Canada and the United States”.
- The exact criteria for what companies may be included in HMMJ is unclear to us at this time (i.e., what constitutes “primarily focused” vs. “some portion”). Accordingly, we will look for more guidance when the revised prospectus is available.
- However, we note that the management and other contracts that both iAnthus and Canadian Bioceuticals have set up in various states, which have frustrated some investors, may actually come in handy in helping these companies potentially meet the criteria for inclusion in HMMJ.