Tom the Trader’s Take: 48North Cannabis’ 2020 Vision

If you brushed off outdoor producers from your watch list, you better think twice. We’re not far away from autoflowers being harvested and seeing what outdoor growers can do. This portion of the harvest will represent 1 cultivar spanning 372 acres of cultivation-licensed land – it’s only the beginning.

While there are many LP’s with exposure to outdoor growing, I think 48North Cannabis Corporation (TSXV: NRTH) will provide the best returns. Let me tell you why.

The OG Outdoor

It was not long ago that 48North was the only licensed producer with a Health Canada cultivation license application for an outdoor site. Since that first application, we have observed the outdoor space populate rapidly:

  • WeedMD (TSXV:WMD) amended a license to consider an adjacent property for outdoor cultivation with more land-use anticipated for the 2020 season.
  • CannTrust (TSX: TRST), Aleafia (TSXV:ALEF), Emerald Health Therapeutics (TSXV: EMH) and The Flowr Corporation (TSXV: FLWR) followed.
  • Licensed producer Canopy Growth Corporation (TSX: WEED) ensured they had a piece of the pie early with equity investments in 48North & Agripharm.
  • More recently, Aurora Cannabis (TSX: ACB) added 208 acres across two provinces for outdoor cultivation.
  • While private companies like GoodBuds Co. on Salt Spring Island and the Wildfire Collective across Ontario, bring the craft component to outdoor cultivation.

While many other companies have since added outdoor cultivation to their business plan, 48North was one of the first to make it the backbone of their company. I think 48North shows promise with strong business fundamentals that set it apart from other LP’s with outdoor growing exposure.

Before I dive into 48North’s differentiators, let me first provide a basic overview of 48North Cannabis Corporation.

48North – Primed and Ready to Grow

48North is a vertically integrated licensed producer. Their operations consist of a craft-sized indoor cultivation facility (Delshen), a disruptive 100-acre outdoor organic farm (Good:Farm), and a prep and processing facility (Good:House) located 10 minutes away from the outdoor grow.

Their capabilities include propagation, post-harvest processing, packaging, and, in partnership with humble+fume, extraction for next-generation products. 48North also has exclusive agreements with Avitas and Mother & Clone to introduce unique products (vapes & sublingual sprays) to the Canadian consumer following legalization 2.0.

With a market cap of 137M (171M fully diluted) 48North falls into the small-cap category. I’ve interpreted the organization as following an almost forgotten start-up approach; profit first, scale later. Being purpose-built and scaling responsibly has enabled 48North to post industry best gross margins at 78% and 58% for the periods ended December 2018 and March 2019 respectively. With the harvest for their outdoor grow around the corner, I believe 48North continues to show investors a pathway towards profitability.

48North was the first public company to submit and receive their cultivation license for an outdoor site. While I believe 48North was the first to see the opportunity in the outdoor growing, I don’t believe their current valuation accurately represents the companies upside.

In the following sections, I detail why I think there is substantial room for 48North’s stock price to increase.

Mother Nature Doesn’t Send an Invoice

The cannabis sector has a notorious reputation for unprofitable quarters and excessive spending. With the sector no longer falling into the pre-legalization speculative bucket, the market has been quick to transition its attention towards visible pathways to sustainable profitability.

Mother nature is generous, providing sunlight and rain with no invoice to follow. While I’m not forgetting she has two sides and can be an absolute bitch – I’m saving that for a separate article.

Although the proof will be in the post-harvest numbers, outdoor growers are projecting production costs between $0.20 – $0.25/g compared to purpose-built indoor and greenhouse peers, which are sitting at $2.00/g and $0.90/g respectively.

Per Gram Production Cost Estimates

Source: 48North Company Presentation (August 2019)

Why all the fuss about low operating costs?

I already mentioned the market is looking for profitability – low operating cost assets are a positive step towards improving the quality of earnings. Another point, one that is often lost, is that cannabis prices will go down.

As supply begins to catch up to demand, companies will sacrifice selling price to maintain market share. Companies will also want to entice black market consumers, and their best tool will be price. These pending price reductions will directly reduce top-line revenues and increase the importance of efficient operations.

How much cannabis can they grow outdoors?

The outdoor players have provided investors with an array of production estimates.

Outdoor Production Estimates From LP’s

Source: Company Statements

The above figure demonstrates 48North is providing the lowest & most conservative production estimate of 400kg/acre, or 40,000kg total production capacity. It is my opinion that the conservative production estimate is one that investors can count on.

48North is demonstrating a responsible approach by recognizing that outdoor cultivation is new with no legal historic data. They are also considering that yield may be impacted by unpredictable weather considerations and limitations associated with cultivating an organic product.

All of this speaks to a transparent company that will likely achieve or exceed what they are stating.

Extraction Based Products – Enter Cannabis 2.0

A quick bit of research stateside and you will learn that extraction-based products (vapes, sublinguals, topicals, concentrates, etc) hold significant market share in the cannabis space. These products provide consumers with a convenience factor and enable unique customization. This is good news for extraction-focused companies as convenience and customization come at a premium for consumers.

These next-generation products will help improve gross margin. However, what if you could amplify that margin boost?

An indoor cultivation environment enables the grower to control nearly every aspect (temperature, humidity, airflow, light intensity, etc.). This often results in a premium looking bud. When you leave those variables to mother nature, it can lend itself to a less desirable physical appears. However, cannabinoid content and terpene profiles remain intact and that is what counts for extraction based products.

Growing cannabis outdoors and utilizing the harvest as a raw material for extraction based products creates a win-win scenario. A low-cost input for a high margin output product.

From my perspective, outdoor growers are best positioned to capture market share from the illicit market because they will be able to sacrifice price in exchange for market share while maintaining a competitive margin against the peer group.

Social Responsibility – It’s The Right Thing To Do (And It’s on Trend)

A recent Forbes article summarizes that consumers “prefer to do business with corporations and brands with pro-social messages, sustainable manufacturing methods, and ethical business standards.”

The same article also highlighted “In 2015, Nielson published its annual Global Corporate Sustainability Report. It indicated that, globally, 66% of consumers are willing to spend more on a product if it comes from a sustainable brand. Millennials gave an even more impressive showing, with 73% of surveyed millennials indicating a similar preference.”

Don’t kid yourself – these trends will apply to cannabis. Consumers will connect with sustainable cannabis brands, and organic tags will earn a premium.

With eco-friendly mother nature on their side, 48North hits a home run with their 100-acre organic farm, earning a 100% score in both the clean grid and organic categories.

“What we’re endeavoring to do here is to makes sure that we actually grow organic, which is no harm to the soil, no harm to the community, to the groundwater, that’s the basic I think underlying principle and also keep any kind of synthetic chemicals out of our food chain, I think that if we’re keeping it out of our food chain that it’s probably very important to us to also keep it out of our cannabis” Scott Skinner, General Manager at 48North's Good Farm

2020 Vision

This is what I believe 48North’s co-CEO’s Alison & Jeanette saw before others:

  • The incoming market share shuffle as next-generation products hit the shelves in December;
  • An avenue to connect consumers with an organic product that leads the way for a more socially responsible way to grow cannabis, and;
  • A way to reward investors with a business model that is set up for healthy margins providing that sought after clarity towards achieving sustainable profitability.

Ultimately, I believe this will yield a profitable cannabis company that will reward investors.

If you have any questions or comments on my piece you can reach me on Twitter at @tomthetrader1. 

Disclaimer: The author holds a long position in 48North Cannabis Corporation and the article is not a recommendation to buy or sell a security.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Tomasz Lang
Tom Lang is an active market participant and has navigated the public markets in the Cannabis sector exclusively for the last 4 years, with a focus on identifying value opportunities in the small to mid-cap market. The cannabis sector grew up fast and continues to move at a fast pace. Tom's focus within the sector is built around identifying sustainable business models that are capable of differentiating at the consumer level and demonstrate real pathways towards profitability. Tom Lang holds a B.Sc Chemical Engineering from the University of Alberta.

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Tom Pantone

Mr. Tomasz Lang convinces in all his publications by something that only a few so-called influencers, who also exist in the financial sector, actually have, namely persuasiveness. His individual, extraordinary powers of persuasion, which work through comprehensible and verifiable arguments and an unobtrusiveness imparting of knowledge. Well thought-out is what he says, at no time and in no form as a missionary, but as someone who shares his knowledge without the sound of a megaphone. He is not a dazzler, “no Rich and no Wolf”, who places himself in the foreground and talks with his followers in a funny and… Read more »

Lance B
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Lance B

Fantastic Article. Thoughtful, fact based projections.

Jeff P
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Jeff P

Great article! Well done Tom!!