Valens Groworks: More Upside Ahead

Extraction specialist Valens Groworks (TSXV: VGW) has outperformed the cannabis sector this week after closing a C$43.1 million bought deal financing.

It plans to use the net proceeds of the deal to increase extraction capacity at its Kelowna facility, broaden its geographic presence and provide white label solutions. AltaCorp Capital Inc. led a syndicate of underwriters, GMP Securities, Raymond James, Haywood Securities and Mackie Research Capital, purchasing more than 14.6 million units at C$2.95.

Valens bills itself as the largest extraction company in Canada after it expanded capacity to 240,000 kg in Feb. 2019. However, it faces stern competition in this burgeoning sector of the cannabis industry and rival MediPharm is in the process of expanding its own capacity from 100,000 kg to 250,000 kg.

MediPharm will complete this project in the next couple of months and Valens needs to act if it is to retain its crown as the largest third-party extraction specialist in Canada. It initially announced a C$30 million financing, then upsized it to C$37.5 million and it closed this week at C$43.1 million.

A Competitive Scene

Edibles, beverages, vapes, and topicals are set to be permitted in Canada later this year. Concentrates are growing more popular than smoking cannabis in states like Colorado and California, and a similar trend is expected in Canada. Extraction services are in high demand and several firms are bidding to become the market leader in this sphere.

MediPharm is displaying a great deal of ambition and this week it reached a new all-time high as it remains in breakout territory. Last week it announced revenue of $10.2 million and gross profit of $4 million for 2018 and it has been on a tear since then.

NextLeaf Solutions Ltd. has extraction capacity of 100,000kg per year and it closed TRO financing of $5 million last month to boost growth. Radient Technologies is a smaller but ambitious extraction solutions provider that gained processing licenses from Health Canada.

More than half of the new licenses issued by Health Canada have been for extraction only of late. MediPharm was the first, but there has since been an influx, with Neptune Wellness Solutions also joining the party.

Flexible and Scalable

The demand for edibles and other extracts is likely to soar once Canada expands the range of extracts permitted later this year and this growing group of extraction-focused companies stands to benefit. Large licensed producers could eventually cut them out by taking this in-house, but right now those firms are simply tying up deals with the like of Valens and MediPharm.

Valens has signed deals with the likes of The Green Organic Dutchman, Canopy Growth Corp. and Organigram. MediPharm has agreements in place with Up Cannabis, Canopy, James E. Wagner Cultivation Corp., INDIVA Ltd., Emerald Health Therapeutics Inc., and The Supreme Cannabis Company.

These extraction firms are significantly outperforming the Horizons Marijuana Lief Sciences Index ETF, and the future looks bright for Valens, as it is already ahead of the curve and it looks set to carve out a sizeable share of the extraction market. Its next step is to target growth in international markets, with Europe, in particular, becoming a huge focus for the cannabis industry over the next decade.

“We are building a footprint to not only meet the needs of our Canadian customers but meet the needs of the global cannabis marketplace,” said chief executive Tyler Robson. “With edibles and concentrates becoming available later this year in Canada, we must be ready for a shift in consumer demand and in turn be flexible and scalable in our offerings for our clients to meet that demand. The future of cannabis in Canada is coming and we are going to be at the forefront.”

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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.

Martin Green
Martin Green is an experienced journalist with a strong focus on the cannabis, alcohol, and gambling industries. He is particularly interested in the political issues affecting the global marijuana trade, and he has a keen focus on regulation changes and legal topics. He holds a BA English Literature, MA Creative Writing and a National Qualification in Journalism diploma. He has worked in journalism since 2009 and written for a broad range of newspapers, business titles and magazines, including The Sun, The Metro, The Journal, Livestrong, Drinks Retailing News, Harpers, Sportsbook Review, Vital Football, Essex Live and Surrey Live. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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