As marijuana extraction companies bulk up for a projected increase of business operations in Canada, experts share key points for investors in this space.
The extraction market will see a turnaround in prominence as Canada is set to legalize edibles and concentrates while these products continue expanding across the fractured US market.
The cannabis investment market has seen metrics vary with time as some gain more importance in the minds of investors. As such, the Investing News Network (INN) asked two leading companies what investors should track when it comes to the cannabis extraction space.
As the second round of cannabis legalization in Canada approaches, extraction companies have launched initiatives to expand footprints and the capabilities currently seen in operations in order to meet consumer demand.
Extraction firms operate alongside the producer space, as these companies offer extraction services to attain the cannabis oils used to infuse marijuana items such as edibles or cartridges for vape pens.
The market has seen the entry of new companies dedicated to extraction as well as the rise of existing companies in the minds of investors.
During this year’s edition of the Lift & Co. (TSXV:LIFT,OTCQB:LFCOF) Cannabis Expo in Toronto, Rosy Mondin, CEO of World Class Extractions (CSE:PUMP), said the investment interest is moving towards the extraction play.
“I’ve been kind of banging this extraction drum for four years,” she said. “We see the markets moving towards that. That is where a lot of the money is going now, so extraction is really that next play.”
Companies offering extraction services to marijuana firms are gearing up in the lead-up to the legalization of edibles and concentrates in Canada, which is set for October 17, by expanding operations and capabilities in the country.
However, Health Canada, the federal agency tasked with regulating the market, indicated that sales won’t start until mid-December. This delay is related to the 60 day notice needed for any new marijuana-based products looking to hit the market.
In June, business research firm Deloitte issued a report projecting the annual sales of the entire cannabis edibles and infused product market at C$2.7 billion.
Everett Knight, executive vice president of strategy and investments with Valens GroWorks (TSXV:VGW,OTCQB:VGWCF), told INN that this year marks the real start of the race for extraction companies.
Michael Cammarata, president and CEO Neptune Wellness Solutions (NASDAQ:NEPT,TSX:NEPT), told INN that he elected to leave Schmidt’s Naturals, a health and wellness brand, in favor of the cannabis market since the timing of his move was aligned with the rising role for extraction companies.
“I think the extraction market was something that a lot of people who invested in the cannabis industry were not focused on,” he told INN.
Knight explained for investors, the extraction market is very appealing because of the margins seen from development and operations, whereas traditional cannabis plays in Canada have offered lacklustre results recently.
The Valens executive said if investors look at the development of the extraction market like innings in a baseball game, the sector is only about to enter the first inning.
What are the key metrics for a cannabis extraction company?
The Neptune executive told INN he is seeing a rise in interest in extraction companies as investors realize this process leads to the production of key products, such as vape pen cartridges.
“I think that people start seeing extraction as much more than just consumption … Ultimately the extraction process is a key to the formulation,” Cammarata said.
Cammarata is interested in the investment of new intellectual property for an extraction company and the ability to meet the growing consumer demand with expanded capacity.
Capacity for an extraction firm is related to the amount of cannabis product these companies can receive and turn around with large-scale processing for the development of products such as vape pens, infused cookies or other novelty items.
“You’re seeing us rapidly expand as we’re trying to keep up with demand from our customers,” Knight said. He confirmed the firm currently holds a capacity of 425,000 kilograms, with a projected increase to 1.1 million by the first half of 2020.
Knight explained that, while capacity remains at the top of investors’ minds when it comes to evaluating these companies, he expects that rationale to evolve very quickly.
“(Extraction capacity) matters in the sense of your capabilities. But what matters is what you can actually extract and what everyone is talking about today is, ‘What contracts are you doing? How much are you actually going to extract going into the next year?’” Knight said.
However, despite the natural interest in capacity numbers, both Cammarata and Knight agree the key is the quality of extraction.
Quality will determine the winners of the space, says extraction executives
“The capacity is one thing, but the quality inside the capacity has to stand out,” Cammarata said.
Knight added that he is also expecting the extraction capacity metric to instead develop into a question about distillate capacity.
“What everyone should be focusing on and (what) they will be focusing on six months from now, they are not going to be asking what your input capacity is anymore — they are going to be asking what your distillate capacity is.”
Cannabis distillates are oils produced from the extraction process. This oil is potent in its compound content and is used for a variety of edibles and topicals.
“You can’t have edibles and concentrates without extraction, and you can’t have high quality product development and products on the market without high quality extraction,” Knight said.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: World Class Extractions and Valens GroWorks are clients of the Investing News Network. This article is not paid-for content.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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