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  • ‘Second wave’ mature cannabis grower
  • Situated in ideal geographical environment for outdoor growing
  • Robust strains have produced better than expected 2020 yields
  • Highly cost-effective production of premium derivatives for medical and wellness market
  • Scope for large expansion for output in 2021

Here at The Armchair Trader we believe that the market for cannabis is already approaching its second wave. The key for investors is finding the right companies amid the mix, mature businesses or those which have a new angle of approach.

Growing cannabis outdoors, and at scale

Christina Lake Cannabis (CSE:CLC) has all the hallmarks of one of these. It is cannabis grower and processor situated in British Columbia. Its edge is that it is an outdoor grower with costs which are a fraction of the indoor business. Moreover, its product is grown with natural sunlight and does not contain any of the pesticides or insecticides routinely associated with indoor grow operations. It sits in one of the best locations in North America for an outdoor cannabis cultivator, at a low elevation, with consistent breezes, nutrient-rich soil, dry-arid temperatures and ample sunshine.

Christina Lake Cannabis consists of 20 acres of cannabis plantation already under cultivation, with scope for expansion to a further 80 acres. What makes it unusual is that the vast bulk of Canadian cannabis is grown in greenhouses or indoors, with the associated power costs for light, heating and pesticides, along with other limitations in terms of crop that indoor growing brings with it.

Cannabis grown at Christina Lake uses a range of proprietary strains that have been bred for their hardiness in the outdoor environment. They are resistant to pests which means the farmers don’t need to use the pesticides typically employed in a greenhouse or indoor situation.

This year Christina Lake was able to harvest 33,000 kilos of cannabis, twice the yield expected, according to new CEO Joel Dumaresq. Using both the flowers and leaves of the plants will enable the farm to produce as much as 4,000 kilos of cannabis-derived oil and distillate which sells at between C$5000 – C$8,000/kilo (£4500 – £7000 approx.) The higher figures achieved are sales values for distillate and not oil. Distillate is further refined and therefore achieves a higher price.

We also like CLC because of the fact that it has a state-of-the-art on-site processing facility which is able to reduce the costs by manufacturing oil without additional transport to third party facilities.

A highly profitable operation

This adds up to quite the profitable operation: estimated operating costs for the Christina Lake Cannabis project come to around C$6.5m per annum, with revenue in the area of C$18m – 25m. This is before you factor in projected expansion to the adjacent, second phase, 99-acre cultivation zone.
Christina Lake Cannabis is being managed by an experienced team of expert growers which has been working in the vicinity of the farm for over 20 years and brings together over a century of combined outdoor cannabis growing experience.

The cannabis grown at Christina Lake is converted into high quality, THC-rich oil or distillate which commands a premium price. The bulk of the 2020 harvest is being processed into extracted oils, distillates and isolates. The Company further has the capacity to process hemp to CBD-rich hemp oil and CBD isolate.

The advanced processing plant operating on site, has more than double the capacity of the 2020 crop, and is able to turn the cannabis harvest into the sorts of products required by the high end medical and pharmaceutical market.

Better than expected yields can be built on

What is most interesting here is the productivity of the harvest – it has not only exceeded expectations, but has done so at a fraction of the cost of indoor farming. Christina Lake anticipates that it will be able to scale up production in 2021, with the strong possibility of two crops, planted across a larger site, as opposed to the single crop achieved this year.

This all amounts to a highly profitable operation. It means the Company can stay competitive even if, as some analysts project, cannabis prices fall.

We’re not so sure prices will drop however. We expect to see the market for cannabis products expanding in both the EU and US next year. Political progress is already being made in the US to liberalise the North American cannabis market, and we expect that opportunity to expand considerably during the Biden administration. Cannabis prices will likely firm once outdoor producers begin to price the indoor and greenhouse producers out of the market. This is already evident as Canopy Growth Corp [TSX:WEED], one of the biggest cannabis growers, has just announced it is closing many of its indoor production facilities.

In Europe, the European Commission is also working towards opening up the market for cannabis-derived medical products (e.g. the EC blocked France’s move in November to try to ban CBD-derived food products).

Christina Lake Cannabis’ management is already aware of the European opportunity and considers that it could represent an important export market next year. Its processing facilities incorporate CO2 extraction capabilities and the fascility was built to EU GMP standards that enable CLC to apply for a GMP certification from the European Union, enabling direct export to European firms.

We think the company is well-positioned for the next phase in growth of high end cannabis and hemp-derived products as there is further regulatory liberalisation in Europe and the US in 2021.

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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