This is the headline that so many readers have been asking about in recent weeks…

“URGENT: If you missed America’s ‘pot stock mania,’ here’s your second chance to become a marijuana millionaire. This 58¢ pot stock is set to soar on October 31, 2017, when Canada votes to legalize marijuana for the entire country.”

That’s to get your attention, of course, and to try to convince you to subscribe by the “deadline” of October 31 so you can learn about this secret pot stock — the ad letter is signed by Justin Spittler, selling subscriptions to Casey’s Crisis Investing and a set of marijuana stock recommendations that are presumably coming from the mind of Nick Giambruno, who helms that newsletter.

The bill to legalize recreational marijuana across Canada is indeed in the legislature, after having been loudly proclaimed as a priority of Trudeau’s Liberal government over the past six months, and the generalities seem to have strong public approval… though no one is really sure what will happen when it comes to the specifics as the bill (C-45) makes it through the legislature.

And it seems likely that this bill’s progress is what the teaser pitch “deadline” is attached to — promising that as the formalities are passed, the market will change… though the government has already been pretty open about promising that full recreational legalization is targeted for July of 2018. Presumably it’s still possible to derail or change that legislation in some way (it’s already been delayed beyond what folks had expected earlier this year), and certainly not every legislator approves of the plan, but passage of the detailed law and release of the regulations over the next few months, and a July 2018 deadline for legalization, seems to be the consensus bet.

The bill has been passed by House committee, though not yet voted on by the House of Commons, and after presumed approval in the House (where the liberal party has a strong majority) it will pass on to the Senate, Canada’s rough equivalent to the UK’s House of Lords, which is more independent and could have different priorities (though the Senate is likely less conservative than it was a couple years ago, thanks to a rash of new appointments — in Canada, Senators are appointed as regional representatives, not elected, and effectively serve for life… with a majority of recently-appointed senators being at least nominally non-partisan).

So that’s a long-winded way of saying it’s possible that there will be some votes soon, though not likely tomorrow. The House of Commons is in session for much of the rest of the year, other than a couple holiday breaks, so it could come up for a vote or a third reading at just about any time… though it’s not currently scheduled as far as I can tell.

But, perhaps more importantly, there doesn’t seem to be that much room for a positive catalyst — everyone expects approval, every marijuana speculator is pretty much banking on July 2018 as the day the market opens for legal recreational marijuana, at least to some degree, and that any legislative issues would bring relatively minor delays, not threaten legalization itself.

If everyone is expecting legalization to happen, then a formal bill being approved probably does not change the calculus for investors in companies that they believe will be beneficiaries of recreational marijuana legalization. If it gets pushed out another six months or a year, as some police officials want, or hits other hiccups or includes a different regulatory framework than is expected, there could certainly be a negative catalyst for these stocks… but it’s hard to imagine that current leading Canadian marijuana stocks are priced for anything other than “full recreational use in the near future.”

To further reinforce that point, the Canadian marijuana businesses themselves are continuing to become more mainstream — the biggest grower and distributor of medical marijuana, and the closest thing to a “name brand” in Canadian pot, Canopy Growth, just sold 10% of itself to the giant alcohol multinational Constellation Brands (STZ), so there’s further indication of how much legalization is “baked in.” The distributor of Corona, Manischevitz and Robert Mondavi isn’t betting the farm on marijuana (their investment equals roughly a month worth of profits from their current businesses), but neither is it doing this on a lark, they’re putting up a meaningful $191 million for their stake… mostly, it seems, with the intention of putting themselves in position to provide and distribute marijuana-powered beverages or similar products in a legalized future.

So optimism is high for all the Canadian marijuana stocks right now, with a widespread assumption that legalization comes next summer, and that “supplies will be tight” as soon as legalization happens. We don’t know what the details are, or what price controls might exist on recreational marijuana, but dreamers are dreaming big.

And, of course, it would be delightful to get in early on something that really does become a sustainable and profitable business, or that’s going to grow much more dramatically than expected. I’ve avoided the marijuana sector, for the most part, because most of the stocks that I’ve seen don’t have a clear path to being reasonably valued based on any kind of assessment I can make about their future sales… and because I’ve only seen one marijuana stock, Canopy Growth, that had anything approaching a brand that could become premium-priced and valuable in what otherwise looks like a market that could easily be commoditized — Canopy is the only one I’ve seriously considered buying, because of that brand strength, but I’ve never talked myself into accepting the market valuation.

But that’s just me — I write about lots of things that I can’t talk myself into buying personally, so let’s see if we can ID the stocks that the Casey folks are pitching for Canadian marijuana legalization.

More from the ad:

“October 31, 2017 will mark the biggest event in the history of marijuana profits.

“Because, on that day, experts predict that Canada will legalize marijuana across the entire country.

“That move will unleash an $8 billion industry overnight.

“Turning hundreds of everyday folks into Marijuana Millionaires.”

Again, seems a little over the top — none of this is “overnight” and legalization has been promised by the government since earlier this year and expected for longer.

The ad also includes a big graph showing how Canada’s marijuana opportunity is 7X larger than the United States, presumably because the states that have legalized marijuana are one seventh the size of Canada. They use that “7X larger” pitch to say that the stock market mania for Canadian marijuana stocks should be seven times bigger than the crazy 1,000% moves we saw from US penny stocks during the past state-legalization votes… which, you can hopefully see already, is silly.

It is technically true, I’ll stipulate, that Canada’s land mass is something like seven times larger than the land masses of the states that have approved recreational marijuana. It’s a gigantic country… it’s just that no one lives in most of it. California, one of the states that has legalized both medical and recreational marijuana, has both a larger population and a larger economy than Canada… albeit in a much smaller space. Recreational marijuana legalization in California is quite likely to create a larger market than the Canadian cannabis market eventually, though the fact that marijuana remains illegal and tightly controlled at the Federal level in the US keeps that economic impact from emerging… big companies like Constellation Brands certainly won’t risk buying into recreational marijuana operations in Colorado or California as long as that business is illegal (and at risk of Federal backlash) in the US.

So what’s the big reason for profits? The huge shortage that is seen as emerging when legalization happens in Canada…

“To avoid a shortage, Canada is going to grow a lot of pot.

“And fast.

“More than 1.2 MILLION POUNDS.

“That’s over ONE-AND-A-HALF BILLION DOLLARS’ WORTH.

“And one tiny company is in position to capture a large share of this market.

“It has a revolutionary business model.

“It’s unlike anything ever seen in the marijuana business.

“But it doesn’t grow, harvest, or distribute marijuana.

“It doesn’t sell seeds, grow lamps, or fertilizer.

“It does something much more important.

“It has the one thing that every single grower in the country needs.

“And that’s why we see this 58-cent penny pot stock returning up to 29,000% over time to investors who get in now.”

That’s what they refer to as “Marijuana Boom Stock” number one… here are the rest of the clues Spittler drops:

“Marijuana “Boom” Stock #1: The Mother of All Penny Pot Stocks

“Once recreational pot is passed, Canada cannabis growers will need to grow 10 TIMES MORE POT.

“And the Canadian government has tapped the existing medical growers to be first to grow recreational weed.

“These growers are scrambling to expand facilities and acreage.

“But they need cash to do it.

“Even though marijuana will be fully legal, banks are skittish lending to pot growers.
This company is going to fill the demand.

“But not like a bank would.

“The revenue model is much more profitable… for them and their investors.

“It has adapted a ‘streaming’ concept started in the silver mining industry in the early 2000s.”

Ah, so that probably sounds familiar to a few of you — we’ve talked about “Marijuana Streaming” before. A few more tidbits from the ad:`

“This company is the FIRST streaming marijuana company.

“Its head start means it’ll become the ‘go-to’ company for funding.

“As of now, it’s set to receive streaming revenue from 1.4 million square feet of cultivation space. That’s MORE THAN HALF of all the licensed production space in Canada right now….

“This company already has streaming deals with 15 growers located in each of Canada’s six provinces.

“That means it has equity in 15 companies AND it gets marijuana from all 15 companies it will resell on the open market.”

So yes, that means Nick Giambruno is talking up Cannabis Wheaton Income (CBW.V in Canada, CBWTF OTC in the US), which is indeed a streaming company set up to emulate Wheaton Precious Metals (previously Silver Wheaton), though the two don’t have any connection other than the name.

This stock was pitched by JR Crooks earlier this year, when it first started trading after a reverse merger, and at the time I noted that I liked the model but couldn’t make sense of the valuation — they essentially owned streaming deals with a bunch of prospective cannabis growers to help pay for their facility expansion in exchange for a set portion of the marijuana produced from that facility (and some equity, in many cases), but hadn’t actually funded those deals yet. This is what I noted at the time (in my May 9 article):

“If I’m scribbling on the back of a napkin and talking to myself, as has been known to happen before, I probably come up with something like, “If they had C$150 million in the bank to fund these deals they’ve made, I’d pay a little premium up to maybe even close to 1.5X or possibly 2X book value to have access to those deals, because it’s a hot growth sector and the company has interesting deals in place and is led by an industry pioneer, so in that case a C$200 million valuation makes some sense… but if they don’t have any money in the bank and those streaming deals aren’t funded yet, then maybe I’m actually paying something like 50X or 100X book value and they’re going to have to raise $200+ million to fund these deals, and I’m a sucker to buy here.”

I did not buy the shares, so from my perspective things have generally moved in the right direction since then — the company has raised more capital ($50 million over the Summer in both equity and debt, then another $35 million just recently in convertible debt), so they should have close to $80 million to fund their streaming deals now (and $60 million in debt on their balance sheet), and they’ve funded at least one deal… that’s with Beleave, with whom they just announced a pre-streaming financing of $5 million in “D.O.P.E. Notes” (no, I’m not making this up… that is essentially a bond that will be repaid in weed).

There was already a streaming deal in place with Beleave, which is a medical marijuana cultivator that recently licensed its first facility, but that pertained to their potential expansion plans — Cannabis Wheaton agreed to pay for purchase and construction of a new growing facility in exchange for 50% equity interest in the new facility and 50% of the proceeds (net of some costs) from that facility (you can see the details here if you’re curious about how these streaming deals work). That expansion hasn’t taken place yet, and Cannabis Wheaton hasn’t paid anything yet to Beleave on that streaming deal, as far as I can tell, but Beleave does also want to expand their existing facility, and this D.O.P.E. Note funds that with a maximum of $10 million ($5 million so far).

The details of that latest deal are here, but basically Cannabis Wheaton gets 85% of marijuana produced until they’ve gotten 1.275 million grams — which basically means that if they’re selling marijuana at anything over $4 a gram, Cannabis Wheaton makes a profit on this note… if Beleave’s proceeds as a wholesaler are $6 a gram, for example, then Cannabis Wheaton presumably makes about a 50% return on this D.O.P.E. Note. If the price is below $4, then they lose money… no one knows what the market price of marijuana will be under the new regulatory regime for legalized recreational pot, but the numbers most frequently floated are between $8-10/gram… $8 is close to the national price now, we’re told, and the recreational price is likely to be set on the provincial level, though we also don’t know what the tax man’s share of the retail price will be… and some folks are agitating for prices that are considerably lower (to compete with the black market) or higher (to deter use).

The streaming deals are different, in that they generally run further out into the future (I’ve seen terms from 15 years to 99 years), which means the streaming deal will theoretically generate revenue for a long time… and harvests are likewise hard to quantify, since indoor growing gives you a lot of control over investing in higher yield and more harvests, but the energy costs escalate when you do that. But they’re similarly structured to give real upside to the streaming partner (Cannabis Wheaton, in this case) only if the companies are doing well and the price or yield of their marijuana cultivation operation is rising.

The general concept is quite similar to streaming deals in precious metals — the streaming partner pays a substantial fee up front and gets access to a portion of the production without really dealing with the production risks or costs. This isn’t new, investors have an instant attraction to royalties and streaming deals and passive income — it’s an obvious wealth-builder and it doesn’t seem nearly as risky as being an operating business, so royalty and streaming companies are popping up all the time. I’ve written about and owned some of those small royalty/streaming startups that failed (Grenville) and some that have been mediocre (Input Capital), but no one has gotten the system as “right” as the precious metals companies like Sandstorm Gold and Franco-Nevada (both of which I currently own).

What is new is that most of these deals aren’t funded yet, they aren’t “production is pre-bought”, but seem to be more like “we’ve agreed to pre-buy production, as long as lots of conditions are met and we can raise the money”… so there hasn’t been that big up-front capital commitment yet, and therefore it’s hard to judge what the streaming deal is worth. They’re more like prospective streaming deals, and the pricing for all of them that I’ve looked at is pretty aggressive — as would befit an industry where the companies involved are seeing 1,000% share price increases sometimes. Many of the streaming deals that Cannabis Wheaton agreed to included buying equity at twice what the price was at the time, and also paying a cost-plus price for their share of the production instead of a low fixed price (as is more common for precious metals streaming). So really, what you’re paying for is management and their expertise, and their connection to their partner companies.

Cannabis Wheaton’s leader is Chuck Rifici, who was one of the founders of Canopy Growth (it was called Tweed at the time), so he’s certainly a big name in Canadian cannabis, and they do indeed, as teased, have an estimated 1.4 million square feet in planned cultivation (by 2019) with 15 streaming partners, along with access to medical distribution. They need to fund all those deals, though, and I don’t know what that will mean in terms of the amount of capital they have to raise.

The whole point of a streaming deal for Cannabis’ partners is that it’s non-dilutive financing… meaning they can get funding to expand without giving up control of the company, or without blowing up the share count to a scary number and therefore making it impossible to ever make the per-share economics of the company look good. That’s also why it’s popular in junior mining circles, where the insiders see the value of their holdings collapse if they have to issue new equity at progressively lower prices to build a mine (or, sometimes, just keep exploring), but can sell off part of the mine proceeds in the form of royalties or streaming deals without losing control or equity.

But someone is giving up equity, and in this case it’s Cannabis Wheaton shareholders who are seeing the share count increase with the special warrants and convertible debt that they sell in order to raise cash to cover their up-front investments in cannabis production at their partners. That doesn’t mean it’s not worthwhile, it might be, but there is risk — partly because the insiders came in with vast shareholdings at pennies per share, partly because it’s going to be another year or two before the actual economics of these deals become clear, and by then the share count will likely be substantially higher as the two-year convertible debt deals hit the books and become equity positions. And, probably, partly because once there is a legal and regulatory regime for recreational cannabis the producers will have more options for financing their operations or expansion.

We really won’t be able to value Cannabis Wheaton until they’ve got a number of streaming deals in operation and are actually reporting (or even forecasting) cash flow numbers, so we can see what their actual operating cash flow per share might be… and, of course, whether they’ll ever live up to the “Income” part of their name (which they now accent, though they don’t pay a dividend — they’re currently calling the company Wheaton Income in their marketing materials).

And it all starts, of course, with having some idea what the regulatory regime will be for recreational marijuana, what the pricing will look like, and whether there really will be huge demand… and we should also note that since this will be a highly regulated business, there may not be a lot of price elasticity. If the Province of Ontario decides to sell at $10 a gram including taxes and pay distributors or growers $6 a gram, for example (I’m just making up numbers, I don’t know what retail margins or wholesale prices might be in the end), then the supply/demand balance won’t matter except in the bad way — suppliers could perhaps compete to cut costs and sell to the regulated distributors at lower prices if demand isn’t high enough, but if demand is too high they may not be allowed to charge more (remember, a big part of the rationale for marijuana legalization is “destroy the black market and the criminal gangs it feeds” … which means legal prices have to be kept low).

So, as before, I’m left with more questions than answers when it comes to Cannabis Wheaton… how much more money do they have to raise, selling debt or warrants or equity, in order to fund all of their streaming deals? Are those deals worth twice what Cannabis Wheaton agreed to pay for them? Less? More? There’s no reason that other participants can’t enter the “marijuana streaming” business, as indeed Canopy Growth has to some degree (in terms of funding growers in exchange for a share of future production), so the gains are not unlimited — Cannabis Wheaton does not own the idea of streaming, they just have a specific portfolio of (unfunded) deals and a connected management team.

That’s worth something, and I’ll go out on a limb and say that even without a deeper understanding of the business I’d be willing to pay up to 1.5X what they have either paid out in cash for streaming deals or raised in equity — I think their system and their management and their existing network of potential deals is worth something, but I don’t assume that it’s irreplaceable or unique… this is a financing company, at heart, so it’s worth the capital it has plus the return from the deals it has funded, plus some multiple for “they have skilled and connected management and can keep doing this into the future.”

So far, as far as I can tell, they have not paid out any cash to their streaming partners for construction yet, other than that $5 million loan to Beleave that’s not a streaming deal, so I’ll say that I can rationally pay 1.5X their cash (before the Beleave payout) of about C$80 million — and that’s being fairly aggressive, because it ignores the fact that $60 million of that is matched by convertible debt and therefore doesn’t really “belong” to the shareholders just yet, and will become more shares eventually.

So at a market cap of about C$120 million Cannabis Wheaton makes some sense to me, given the potential that their streaming deals could generate meaningful rates of return on that $80 million as they put it to work. The anticipated rate of return is very high, more than 50% for most of their streaming deals, but the risk is also quite high (pricing is unknown, facilities are subject to regulatory risk and oversight as well as regular challenges like managing yield, some of their partners may well go bankrupt given the chicanery that’s attracted to all “hot” sectors, etc.)

The current share count, according to the Toronto Exchange, is 205 million shares (the company in its presentation claims 166 million, but many of their 117 million warrants seem to have really been equity sales — like a “warrant to buy at $1” when the shares were above $1, with the warrants being exercised immediately). There are still another 90 million shares or so possible according to the fully diluted number in the presentation, and they will almost certainly sell more equity before they become a steady cash-flowing operation, but we’ll go with the 205 million to be generous.

So if I think paying C$120 million for 205 million shares makes sense, that means the stock has to be at about 58 cents for this to start making sense and giving some room for error. That’s Canadian — so with the shares at C$1 today, I need them to fall by about 40% before this starts to be something that seems to me to be worth the risk.

Your mileage may vary, of course — it’s possible that I’m being too conservative, and that the details of legalization will make the shares of Cannabis Wheaton and its fellow Canadian pot growers and financiers soar, or that the financial model is less risky than I’m assuming and therefore deserves a higher valuation… or even just that we’ll see more price spikes in all the marijuana stocks, and Cannabis Wheaton will never trade at what seems to me to be a “fair” price. That’s the risk of any sector that’s got a lot of investor enthusiasm and lots of “story” stocks that sound hot. My biggest qualm, at this point, is that the 14 or 15 streaming deals they have appear to be unfunded and therefore represent risk and uncertainty on top of what is already a risky and uncertain business.

Am I being too grouchy with this one? Will I miss the next rocket ship of a cannabis stock? Let me know with a comment below. And I’ve run out of time for today, but wanted to start to address this pitch before that “October 31” deadline… so now that we know that Halloween is not so much a firm catalyst, I’ll follow up soon with a look at the other two Canadian marijuana stocks teased in this ad in a future piece. Thanks for reading!