The Biggest Fish in the Pond: Delta 9 Cannabis
You may not have heard the name Delta 9 Cannabis Inc. before, but this dark horse of the cannabis industry has been quietly putting together a machine that is looking to take over a large share of the industry.
Delta 9 Cannabis Inc. (“Delta 9”) started trading today on the TSX-V under the stock symbol NINE, and investors quickly drove the stock from $1.50 at open to roughly $2 in the first hour of trading.
Delta 9 Stock: TSX-V: NINE
But that’s only the beginning for Delta 9, which was the fourth company licensed in Canada as a legal producer of medical marijuana.
Tomorrow, however, could be an even bigger day for Delta 9.
Tomorrow, Manitoba Premier Brian Pallister is scheduled to make what he calls an “exciting announcement” on the provincial approach to cannabis legalization for Manitoba.
This will be critical for the future of Delta 9, and could provide a huge boon for investors in a company that has carefully timed its entry into the market.
To understand why, you need to first understand the path of legalization in Canada, and specifically in the provinces.
The federal Liberals under Prime Minister Justin Trudeau have led the push for full legalization of recreational cannabis by July 1, 2018, but implementation is up to the individual provinces and territories.
Some, including the government of Manitoba, have demanded the federal government delay legalization until they have more time to draft laws and regulations regarding sales, distribution, and consumption.
But that may now be changing.
Manitoba has scheduled a press conference for tomorrow where Pallister is expected to make an “exciting announcement” about the future of recreational cannabis in the province.
Political analysts are pointing to a course of action, which, if true, could greatly benefit Delta 9.
Unlike many LPs across Canada, Delta 9 has several key advantages that put it in a unique position within the province, and really, within Canada.
For one, Delta 9 is currently the only Licensed Producer in Manitoba that is able to both grow and sell medical marijuana. At the current time, Delta 9 controls well over half of the entire market in Manitoba for medical marijuana, in addition to its national sales.
Only one other LP in Manitoba, Bonify, has a license to grow cannabis, but they are not yet licensed to sell – nor are they publicly traded.
So, at the moment, Delta 9 is literally the only game in town, and the company is hugely popular with Manitobans.
Or, at least, Manitobans who consume cannabis.
Delta 9 has also opened its first ‘clinic’ or resource centre in the crowded, hip Osborne area of the city, a facility that can be quickly transformed into the province’s first legal marijuana retail outlet.
And it has detailed plans for massive expansion into retail.
Third, Delta 9 has a unique ability to scale its production very quickly and at relatively low capital cost.
The Delta 9 facility is massive.
The current building is 80,000 square feet, but we’ve personally seen the property, and there is potential to include another 400,000 square feet of building space and an additional 65 acres of utilizable expansion land adjacent to the current Delta Facility, including industrial-scale power infrastructure – with one of the lowest energy costs in the country.
That means the expansion potential is enormous and rivals some of the biggest producers today.
But there is another reason why Delta 9 is different.
Delta 9 Grow Pods
Delta 9’s production methodology is based around a modular, scalable, and stackable production unit called a grow pod (a “Grow Pod”).
Delta 9 currently retrofits standard 40-foot high cube shipping containers into Grow Pods, which ensures compliance with federal security and good production practices as well as optimal conditions and layouts for large scale production of cannabis products.
The Company retrofits containers at its business premises, employing Delta 9 staff and certified contractors, and also has retained third party, Manitoba-based companies to supply finished Grow Pods to help facilitate the expansion of Delta 9’s cannabis production at the Delta Facility.
Each Grow Pod costs approximately $40,000, including modifications to the existing Delta Facility infrastructure to accommodate the Grow Pods.
Now here is where the fun begins.
Each Producing Grow Pod is capable of producing approximately 31.5 kg of dried cannabis per year, or approximately $236,250 worth of cannabis at a discounted retail price of $7.50 per gram.
Right now, Delta 9 currently has 27 Grow Pods, consisting of 21 Producing Grow Pods and 6 Support Grow Pods.
The Company has ordered an additional 32 Grow Pods from third party suppliers, which should be delivered by the end of 2017 and also anticipates building an additional 16 Grow Pods itself by the end of 2017.
Accordingly, by the end of 2017, Delta 9 anticipates having a total of 75 Grow Pods, consisting of 63 Producing Grow Pods and 12 Support Grow Pods. Together, these Grow Pods are expected to be able to produce up to 396.9 kgs of cannabis per harvest and 1,984.5 kgs of cannabis per year, with an annual value of $14,883,750 (based on a retail price of $7.50 per gram).
That means by the end of this year, Delta’s 9 facilities could generate nearly $15 million in revenue per year.
But that’s not why investors are likely interested in Delta 9.
They are interested because of the potential for massive and rapid growth.
You see, the great thing about these Grow Pods is the ease of scaling. So if Delta 9 had more money, it could deploy it to more pods and increase production very rapidly.
Take a look.
The following table sets forth management’s estimate of the amount and value of cannabis that could be produced by Delta 9 using different numbers of Grow Pods, as well as the capital investment required to produce such Grow Pods:
So for $24 million dollars, the Company could potentially generate over $131 million of revenue per year!
That’s the type of IRR that gets bankers excited.
And with the potential for the massive land expansion package, Delta 9 could rival the biggest producers in Canada today.
While most other Canadian LPs must spend time and money on new construction and power infrastructure, much of that work is already done at Delta 9.
But the key for any licensed producer is developing a market, and that’s where Manitoba’s provincial announcement comes in.
The Big Announcement
If indeed the province announces private retail tomorrow, there is no other company in a position to compete head-to-head with Delta 9 in Manitoba.
Now, you may think, big deal it’s Manitoba.
But Manitoba’s market alone is worth an estimated $1.3 billion at maturity. The market may be smaller than, for example, Ontario or BC, but Ontario has 39 licensed producers, while BC has 19.
Delta 9 turns out to be the biggest fish in a pretty big pond.
And with some strong incentives.
The Manitoba Advantage
For example, the company enjoys what its CEO John Arbuthnot calls the “Manitoba Advantage.”
Power in Manitoba is far less expensive than in other provinces, and both wages and leasing costs are much lower in Winnipeg than the national average.
For all those reasons Delta 9 is able to keep its production costs very low.
Another factor is Delta 9’s self designed grow pods.
We got a chance to tour the facility as the pods were being completed. They’re made from steel sea canisters – the kind you see on freighters – and converted to grow high grade cannabis in a very controlled, secure environment.
Best of all, as we mentioned earlier, the cost of these grow pods fully installed is just around $40,000-$50,000 each.
At the end of the day the cannabis business is like any other business. You need to earn revenue, and you need good margins for your product.
Delta 9 has come up with a solution that provides a great product at a low cost, and it is able to expand rapidly via low capital costs.
Their biggest challenge, like any company, is access to the market.
That means we’ll be listening with interest to see if the province gives them that access tomorrow.
If they do, tomorrow could be one of the biggest days for Delta 9 Cannabis.
Trading Symbol: TSX-V: NINE
We are biased towards Delta 9 Cannabis Inc. (“Delta 9) because we currently own shares in Delta 9 and have been granted stock options by Delta 9. You can do the math. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence and consult your own professional advisers before investing in Delta 9 or trading in Delta 9 securities. Equedia.com and Equedia Network Corporation are not registered as investment advisers, broker-dealers or other securities professionals with any financial or securities regulatory authority. Remember, past performance is not indicative of future performance. This article also contains forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from the forward looking statements made in this article. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will. Delta 9 and its management have no control over our editorial content and any opinions expressed in this article are our own. For a complete disclosure of the compensation received by us from Delta 9, please review our Terms of Service and full disclaimer at www.equedia.com/terms-of-use/.