Analysis: Canada's small financial firms get buzz from weed stocks

RF Capital

22/01/2018 19:19

By Fergal Smith 
    TORONTO, Jan 22 (Reuters) - Investors are betting Canada's 
smaller financial firms could see a jump in revenues after they 
helped fund marijuana companies ahead of the country's planned 
legalization of the drug this year. 
    Equity offerings by Canadian weed companies tripled to a 
record high of nearly $1 billion in 2017, with nearly two-thirds 
of that in the final quarter, data from Thomson Reuters showed. 
    Much of the issuance for pot producers has been led by small 
independent brokers, such as Canaccord Genuity Group Inc 
 CF.TO . In addition to being paid underwriting fees, the 
brokers can sometimes receive warrants, which could have become 
significantly more valuable after a surge in the marijuana 
companies' stock, market players said.     
    BMO Capital Markets' move last week to help Canopy Growth 
Corp  WEED.TO , Canada's biggest cannabis producer, raise 
C$200.7 million ($161.3 million) was a sign that established 
brokers were likely to take some market share away from the 
smaller brokers. 
    But smaller players have an early lead in funding research 
and banking relationships with marijuana companies after bigger, 
bank-owned rivals saw the industry as too risky or bad for their 
reputations, market players said. 
    "The smaller independent brokers are fairly opportunistic 
and good at jumping on trends, so crazed market activity in 
anything to do with cryptocurrency and marijuana plays right 
into that ability," said Matt Skipp, president of SW8 Asset 
Management. 
     
    POT KICK 
    Canada's plans to legalize pot for recreational use in mid 
2018 would make it the first Group of Seven country to allow the 
drug nationwide and the second in the world after 
Uruguay. urn:newsml:reuters.com:*:nL1N1HL146 
   Shares of Canaccord and another small cap broker GMP Capital 
Inc  GMP.TO  have surged as much as 67 percent and 110 percent 
respectively since November, when marijuana stocks started to 
take off. GMP has also helped raise money for miners of digital 
currencies, which have also soared in recent months. 
    In addition to increased underwriting in the most recent 
quarter, small brokers could also have benefited from the 
investor trading of pot stocks in the secondary market as well 
as the potential increase in value of any warrants they hold. 
    Compensating the underwriters with warrants can help lower 
the cost of financing for some pot companies who are growing and 
short of cash, said Skipp. 
    An underwriting agreement for Aurora Cannabis Inc  ACB.TO  
from October shows that Canaccord, the lead underwriter, and 
other participating brokers were granted options that would give 
them the right for a period of three years to purchase the 
shares of the company at the transaction's offering price, which 
was C$3. Shares of Aurora were trading at around C$14 on Monday. 
    "To the extent that you want to buy a business that is 
pretty transparent, with proper cash flows and a business that 
you understand and like, some of these independent brokers could 
be a play on the kind of activity that has been going on," said 
Diana Avigdor, head of trading at Barometer Capital Management.  
     
    It remains unclear how many of Canada's biggest banks will 
eventually participate in the market. Those that do could target 
the more established producers, rather than the many smaller, 
potentially riskier ones. 
    The 2018 financing pipeline has already got off to a brisk 
start, including the equity offering from Canopy Growth and a 
C$200 million issue of convertible debentures by Aurora 
Cannabis, that was led by Canaccord. 
    "Obviously there is a healthy market here for companies that 
raise money," said  Vahan Ajamian, an equity research analyst 
covering the cannabis sector at Beacon Securities Ltd. "I don't 
see that shrinking any time soon." 
($1 = 1.2442 Canadian dollars) 
 
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FACTBOX-Pot Nation: Canada's plans for legal marijuana    
 urn:newsml:reuters.com:*:nL1N1NM1L4 
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 (Reporting by Fergal Smith; Editing by Denny Thomas and Andrew 
Hay) 
 ((fergal.smith@thomsonreuters.com; +1 416 941 8113;)) 
 
Keywords: CANADA MARIJUANA/BROKERS