Jimmy Mengel is pushing a new Marijuana stock, one which apparently just recently became public, for his Marijuana Manifesto service… so what is it?

He calls it a “Marijuana Streaming” company, so that’s music to my ears — I’ve long had a fondness for the “free upside, limited downside” of the streaming and royalty companies who are essentially financiers in the precious metals space (and elsewhere, but precious metals is where the strategy really shines).

And this one is, in all honesty, not going to be all that difficult to find. We can probably leave the Thinkolator in the garage and just read a couple Canadian newspapers… but let’s share the clues just for grins:

“The model it’s employing is similar to the ‘silver streaming’ model pioneered in the 1990s and early 2000s.

“Companies like Franco-Nevada and Royal Gold would give smaller companies cash in exchange for two things:

“Equity (stock) in the smaller company; and

“A portion — or “stream” — of the silver the smaller company produced.

“The strategy worked brilliantly.

“Not only could the larger company and its shareholders benefit when the stock of the smaller companies went up…

“But it also benefitted from the revenue generated from the sale of the silver it got from the smaller companies.

“The companies that employed this model — and their shareholders — got absolutely rich.

“Shares of Franco-Nevada went from $11.60 to $105. 69 — a gain of 811%.”

That’s true, though Franco-Nevada is much more of a gold royalty company than a silver “streaming” company (the “streaming” model was really pioneered by Silver Wheaton), but “streaming” and “royalty” are basically just two mildly different strategies that do the same thing, provide passive exposure to the output of a business without active participation in the business (either in terms of voting power or exposure to income or losses).

That’s particularly appealing in precious metals because building a mine is often ugly and time consuming and challenging, and because costs vary, so the streaming or royalty partner stays out of it and just collects a share of the gold or silver that is produced — they don’t get to decide which part of the mine to dig, or how fast to expand, but they also don’t have to pay extra if diesel costs or labor costs double… but on the flip side, if the miners go on strike or the mine floods they get nothing while there’s no production, and they usually have limited influence over management’s decisions.

And, apparently, someone is doing this with marijuana now. Here’s more from the ad:

“Marijuana Streaming

“This company just raised $150 million to ‘lend’ to several smaller marijuana companies.

“And in exchange for that loan, this marijuana company will get stock in the companies it lends to and a portion — or ‘stream’ — of their marijuana production.

“The fact of the matter is, as I’ll describe in a minute, governments are reducing restrictions on marijuana left and right.

“Because of that, production needs to grow 10 times in the next 10 years.

“Companies are racing to meet that demand — and those that do are making shareholders rich in the process — but many are running into one hurdle: they can’t get cash to grow.

“Banks, for the most part, are still unwilling to lend to cannabis companies.

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“So this new marijuana streaming company is stepping in to fill a market void.”

So… who is it?

Well, as I said, sometimes you just have to read the newspapers — like the article from National Post yesterday in Canada entitled “Marijuana pioneer launches first pot streaming company to finance budding entrepreneurs.” This is Cannabis Wheaton Income Corp (CBW on the Venture in Canada, KWFLF OTC in the US).

Cannabis Wheaton is a play on the “Silver Wheaton” name (Silver Wheaton is proposing to rename itself “Wheaton Precious Metals,” by the way, since gold is becoming a bigger part of their streaming portfolio), but I don’t imagine they have any actual connection to the streaming giant beyond that. And in case you’re wondering, “wheaton” doesn’t mean anything specific to streaming, it’s just a name that filtered through from the original Wheaton River Minerals, which spun out Silver Wheaton back in 2005 or so.

The company was launched by Chuck Rifici, who was one of the co-founders of Tweed (now Canopy Growth… Tweed is probably the strongest “brand” in Canadian marijuana in these early days, and Canopy Growth is the biggest company in that sector). They reportedly have a few deals in place now, though not much in the way of detail is clear about those deals, and, since their financing will probably be primarily intended to boost production, it will probably take a while for it to begin to generate “streaming” cash returns. Not as long as a mine, of course, but building growing facilities takes time — the news reports imply that they expect production to be meaningful in 2019.

This is what was reported in that Financial Post article:

“The company estimates its total share of production capacity on its partners’ sites to be around 1.3 million square feet by the time all are built at the end of 2019, assuming all applicants are approved.”

I don’t know what the yield on those square feet of production will be, or to what extent Cannabis Wheaton will be paying additional costs (per gram, per square foot, etc.) as production continues or is just getting the gross or net yield (do they pay for power, etc.) from those production areas, that would require scouring the details of their streaming deals — but if this article is at all accurate and an industrial scale operation can yield 50 grams per square foot, then that’s 65 million grams of production (Per year? I assume so, but don’t know what the timeframe used by these folks is). 65 million grams would have a retail value of probably $500 million or so (going by the $8/gram price reportedly estimated by Canaccord Genuity).

So that seems fairly reasonable, a $500 million potential revenue stream (probably impacted by some ongoing per-gram cost or some other ongoing cost for the stream, I would assume), so even if those estimates are wildly off — which is very possible, price will be set by provincial governments and we don’t know what the yield or ongoing costs will be — then that’s at least justification for looking into it a bit more.

So I checked the filings. There isn’t much of substance in Sedar yet, but basics are provided in their initial April 27 announcement, here’s a little snippet of that (Cannabis Wheaton was previously called PanCann Streaming, and the company they reverse merged into to get a public listing was Knightswood Financial, a tiny investment firm that didn’t really generate meaningful revenue previously):

“On April 26, 2017 the Company entered into an agreement with PanCann Streaming
Corp. (“PanCann”), a private Ontario company, to acquire the rights to all of PanCann’s
interests in thirteen executed streaming agreements and assume the rights to several
agreements in the final stages of negotiation (each a “Streaming Agreement”) between
PanCann and various companies that are either “Licensed Producers” pursuant to the
Access to Cannabis for Medical Purposes Regulations or have applied to become
Licensed Producers (each a “Streaming Partner”), for a total consideration of
$1,000,000.

“Under each Streaming Agreement, PanCann has agreed that, upon the satisfaction of
certain conditions precedent including PanCann having sufficient cash available for
funding and entering into definitive agreements with the applicable Streaming Partner, it
will provide funding to the applicable Streaming Partner in consideration for: (i) the
issuance of shares of the Streaming Partner at an agreed upon valuation (the “Equity
Component”); and (ii) an allocation of the Streaming Partner’s cannabis production yield
at either a fixed price or a cost-plus price (the “Yield Component”). The Yield
Component will be in respect of a defined period of time ranging from 10 to 99 years
depending on the Streaming Partner.”

So that’s a bit worrisome — it implies that PanCann had made the streaming deals but hadn’t yet financed them (paid for the equity and the construction), so all they own is those contracts… they have deals, but haven’t actually put up the real capital yet (assuming it costs, say, at least $10-20 million to build a large growing facility like these). So what Cannabis Wheaton seems to own now are things that cost them a couple million dollars, they have no cash that I’m aware of on their balance sheet, and they are valued at almost C$200 million. That’s worrisome, and means we might be looking at a huge premium for a “name” and an idea.

The only specific streaming deal I’ve seen is the one with Harvest One Cannabis, announced in a press release here. Here’s a little excerpt to give an example of the detail of at least one of their streaming deals:

“Under the agreement, PanCann will provide all necessary funding to complete the construction of the Lucky Lake facility and provide sufficient working capital for its initial operations.

“As consideration, PanCann will receive 49% of the equity of UGS and 40% of the production yield generated by the Lucky Lake facility at a price per gram equal to the cost of production +10%.”

So when compared to precious metals or even the streaming deals offered on field crops (canola) by Input Capital, for example, that’s a huge equity portion and a huge share of production… but it’s also at a high cost (cost of production plus 10%). And the timeframe is defined, like Input Capital’s is, but is longer-term (Input Capital generally has five year streaming deals for canola, Cannabis Wheaton says theirs range from 13-99 years… mining streaming deals are generally undefined, with much of the upside coming if they find more gold or add more to reserves and the mines become much larger than was initially expected).

And, as is the case with most streaming and royalty deals, a lot of the upside potential comes from price appreciation — no one really knows what the future price of marijuana will be, though it’s likely to be set by the government in Canada and not by the free market, but I suppose it could conceivably be lower than the cost of production for the less-efficient producers, and it could conceivably be dramatically higher (which would increase margins and the value of the streaming deals). Lots of unknowns, but my general sense is that part of the government’s goal in legalization is to knock out the black market, which would mean keeping prices quite low (particularly because taxes will presumably be a large component of retail prices, and black marketers don’t charge sales tax).

That Harvest One Cannabis streaming deal, by the way, is not like the streaming deals that might be familiar from the world of Silver Wheaton or their precious metals peers, who actually provide the capital up front in exchange for the streaming contract, this one, at least, appears not to be paid for yet. Per the press release:

“The agreements remain subject to a number of conditions precedent, such as availability of financing on the part of PanCann (including completion by PanCann of a minimum $20 million financing), receipt by H1 of applicable Health Canada and other regulatory approvals, due diligence by the parties, execution of definitive agreements, and the ability of the parties to agree future construction budgets and timelines. There is no assurance that these financings will be completed on the terms contemplated herein or at all.”

So… are those other dozen or so streaming deals also going to be contingent on raising $20 million or so in equity? I have no idea.

Which leaves us with… what on earth is the valuation for Cannabis Wheaton? That’s awfully tough to figure out, since they just did this reverse merger and there were also splits and warrants for the previous Knightswood, and I have not seen any real accounting of the capital invested in the streaming deals or even the cash on hand for Cannabis Wheaton, if any.

So as you can see, squishy — but perhaps an interesting way to get diversified exposure to a bunch of growing operations if the valuation is not too ridiculous. I personally will probably stay away, since it looks like Cannabis Wheaton will have to raise a huge amount of equity and it makes little sense to pay a premium for an “idea” like cannabis streaming, or for some unfunded contractual arrangements. I haven’t seen many agricultural producers end up earning a substantial part of the retail value of their end product, and I still think the power of branding is likely to be the most important thing in a growing legalized marijuana business, with prices probably falling significantly for “generic” marijuana. That leads me to think more charitably about Tweed (Canopy Growth, WEED.TO, TWMJF OTC in the US), but that’s just the brand that I’ve seen most prominently in Canadian marijuana so far, and I’m far from an expert. I have about as much of an “edge” in choosing the best marijuana brand in Canada as a South African fisherman has in telling you which pizza place in Brooklyn has the potential to expand from one to ten restaurants.

(Streaming is not “owned” by Cannabis Wheaton, by the way — Canopy Growth is starting a similar project called Canopy Rivers to finance production expansion, and there’s another one called Green Streaming Finance that has announced at least one large deal, though I know nothing else about them).

I like the idea of a diversified financing partner like Cannabis Wheaton, and like that they have a well-connected industry veteran at the helm, but the lack of clarity about pretty much everything in the business is certainly slowing me down — the stock is falling sharply on this second day of trading, perhaps because the 16 streaming deals they say they currently have can’t possibly be worth the C$200 million that the stock was trading at unless they’ve already paid those streaming partners for the full cost of construction, and I don’t know where they would have gotten that money, so they’ll be probably raising a bunch of equity capital by selling more shares sometime soon.

Or, in the words of the May 5 press release that’s in SEDAR (they don’t really have an investor relations website yet)…

“The Company intends to undertake a public prospectus offering to finance its rights under the streaming agreements.”

So they have the 14 or 16 streaming deals, they have a deal in place from a few weeks ago with a network of clinics and distribution centers (that one cost them C$1.2 million, so, again, not a huge value driver for a C$200 million company), and, well, the key point I keep coming back to is that I have no idea how much capital they have or whether they own any assets beyond the ~$2 million worth of stuff they’ve bought recently.

I’ve seen no indication that they’ve raised any real money in the recent past, and Knightswood didn’t have any money to speak of — they raised a few million dollars earlier this year, with lots of warrants issued as well, but that was several months ago before they had made any marijuana investments, and the stock was at just a few cents a share… so that added maybe 50 million or so shares to the share count (along with a ton of warrants at 7 cents, so perhaps there’s another 50 million shares outstanding now if those warrants have been exercised, bringing in another C$3-4 million in cash from those exercised warrants). So I don’t get how they can have more than five or six million dollars in the bank today, even if they’ve issued 100 million new shares since the last quarter. Unless I missed another capital raise somewhere, and I don’t think I did. As of April 10, there were, following a 3:1 split, about 150 million shares outstanding… so that tells me the warrants haven’t necessarily been organized, and they haven’t created any more new shares to sell them to raise capital yet. Capital has to come from somewhere, so unless it’s hiding in their Pan Cann Streaming acquisition (and the streaming contract I noted above, which is contingent on Pan Cann raising at least $20 million for a single streaming contract, indicates that they probably didn’t have any capital either).

What they own are those streaming contracts, and it doesn’t look to me like Pan Cann Streaming already paid the up-front capital for their equity participation in those partners and the construction financing… and given that Knightswood only paid Pan Cann $1 million for all of the streaming deals, I can’t imagine any of them were fully funded.

And the equity investments they’re making (or promising to make, if they haven’t yet financed them) are not going to be immediately accretive, they’re paying a big premium of 2-2.5X market value for that equity according to this interview with CEO Chuck Rifici to make it palatable for their partner, so if there’s “hidden” value then it’s pretty well hidden. That means risk, since it’s early enough that we’re still guessing about the financials and putting a lot of weight on both the future growth of marijuana and the strength of future marijuana prices in Canada.

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.”

And yes, as you’ve probably guessed, my first read through the filings is putting me at that “sucker” point. This looks like a company that could reasonably do an equity offering to raise a couple hundred million dollars to fund these streaming deals they’ve made, if investors have some faith in the contracts and counterparties and management, but it doesn’t look like a company that should already be valued at a couple hundred million.

Interesting business idea, and it could well be that the market becomes enthused about this one and delights in subscribing to whatever equity financing they announce in the (presumably fairly near) future, but even an interesting and promising business has to be evaluated, at least partly, by considering how the value of the assets they’re starting with relates to the market valuation of the company… this is a financing company, they don’t own anything other than their contracts, their capital, and their relationships with customers and partners, so I’d want to know a lot more than I know now before buying a piece of the company myself.

If you’ve seen more detail in the filings (I didn’t scour every single one), or found somewhere that says they’ve raised or spent some considerable capital on these streaming contracts, or think I’m missing something, please do share with a comment below… thanks!

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