As Pot Stocks Get Crushed, Some Are Reaping Huge Cash Flows

While high flying marijuana stocks plummet to earth, one segment of that market is actually generating huge cash flows for producers.

CBD oil (CBD = cannabidiol) – which is a non-intoxicating part of the marijuana plant – in Canada is selling for close to $10,000 per kilo on the legal spot market, and contracts as long as 12 months are being signed for $6,000 per kilo.

“CBD extraction is an extremely lucrative investment for our company,” says Andrew Potter, CEO of Blue Sky Hemp Ventures, a private marijuana company in western Canada.

They are now in the process of raising the last half of a $3.5 million cost to build a CBD oil production facility in Saskatoon. And they want to get it done as fast as they can: “We estimate the opportunity cost to us about $100,000 – $250,000 per week.”

Blue Sky’s proforma plant would produce approximately 350 kg of CBD oil a month – which would be worth $2.1 million revenue at $6000 per kilo. He estimated costs (including return on capital) in the low $1000s/kilo range.

CBD is one of more than 80 cannabinoids that can be extracted from hemp. Each cannabinoid affects the body differently. CBD is one that does NOT make you “high”; it’s non-intoxicating.

Not surprisingly, with those kind of profit margins on the table, he is getting a lot of calls.

“Being private probably helps us,” Potter says, acknowledging the bloodbath in public pot stocks in the last six months.

CBD oil is much more profitable in Canada than in the US. Being as CBD products cannot cross international borders, Canada’s regulatory regime has resulted in a price that’s close to double what it is in the United States. US producers – with much less regulation – of CBD oil say they’re getting US$2500 per kilo.

Health Canada recently changed the rules around CBD oil extraction licenses. Up until May 2018, the application process typically took two years and involved a lot of paperwork. Since then, the process is faster but companies have to build their CBD oil processing facilities first, which in most cases means spending at least $5 million before even knowing if your facility will be accepted.  

Given that the market is so bad for marijuana companies, many cannot raise the funds to get a CBD facility up and running. But that’s not a problem for Potter, who used to be a securities analyst for CIBC World Markets.

As marijuana legalization matures across North America, CBD is rapidly overtaking the mind-altering THC cannabidiol; THC is what makes people “high”.

CBD is mostly used now – with no real scientific backup as yet – as a topical for things like pain relief, insomnia and inflammation. 

Those are big markets but it is also already going into pet food – a US$75 billion market in the US. Of that, $16 billion is for over-the-counter medications that could soon contain CBD.

While it is not allowed in human food and drink yet, a lot of industry and university research is going into CBD as a food/ drink additive, and also for medical use to treat Alzheimers and opioid addiction.

In Canada, legal marijuana related product sales are increasing steadily. (This chart is not just CBD but all products):

Source: Eight Capital, Stats Canada

BDS Analytics is one of two leading independent research firms focused on marijuana. In a recent report – “Canada Leads The Way on Global Cannabis Legalization” – they estimate cannabis spending in Canada is set to grow at a Compound Annual Growth Rate (CAGR) of 44.4 percent from $569 million in 2018, the first year of adult-use sales, to nearly $5.2 billion by 2024. (Arcview Market Research co-authored).

BDS Analytics estimates American CBD sales could hit $24 billion by 2023.

Brokerage firm Canaccord Genuity issued a 38 page report on the CBD market in September. They estimate up to 35% of all adults in the US will be using CBD for something by 2024.

Demographics is definitely playing a big role in CBD market demand. In a recent Consumer Reports survey,15% of the people over 60 years old said they had tried CBD. That is a large and wealthy segment of the population who want to sleep better, reduce joint pain and stave off old age. They think CBD can help.

And at $6,000 – $10,000 per kilo, they’re willing to spend to find out. 

For publicly traded pot stocks, that strong market demand and pricing is not making much difference right now. But for private companies like Potter’s Blue Sky Hemp Ventures, CBD oil is set to be a gusher of cash flow.

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