Weed Merchants Are Taking Over an Australian Mining Company

The reverse takeover provides the U.S. and Canadian companies with an entry to the Australian equity market

Like many Australian mining specialists that once hoped to capitalize on demand for the country’s resources, Canberra-based Capital Mining is something of a zombie company, with a stock price worth less than a penny. An unlikely savior is in the wings: A group of U.S. and Canadian companies is preparing a reverse takeover to transform Capital Mining into a yet-to-be-named venture that will focus not on gold but on pot, specifically marijuana for medicinal use and hemp products for foods and cosmetics. The new company will “provide a full range of cannabis products,” says Michael Sautman, the head of Denver-based Nutrawerx, which will join Canada’s Broken Coast Cannabis and Cannan Growersone in the venture. 

A reverse takeover of Capital Mining provides a faster and simpler way to the Australian equity market compared with a more conventional, and expensive, initial public offering.

Pot smoking and growing are still illegal in Australia, but that may soon change. The country’s most populous state, New South Wales, last year introduced the “Terminal Illness Cannabis Scheme,” allowing police to “use their discretion not to charge adults with terminal illness who use cannabis and/or cannabis products to alleviate their symptoms.” New South Wales also started a state-backed clinical trial on the effectiveness of marijuana to treat adults with terminal illnesses and children with epilepsy.

Legalization is also moving ahead in Victoria, Australia’s second most populous state. The question is not “if we should do it, but how we should do it,” the state’s premier, Daniel Andrews, told the Australian Broadcasting Corp. in December. In January, Victoria’s attorney general appointed a senior attorney to review the use of medical cannabis and said the appointment showed the government’s “commitment to legalise the medical use of marijuana.” 

Even Tony Abbott, the old-school conservative who is Australia’s prime minister, has expressed support. “I have no problem with the medical use of cannabis,” he wrote in a letter to talk radio host Alan Jones last August.

Nutrawerx’s Sautman, a 62-year-old University of California at Berkeley grad who has worked in the marijuana business in Canada, the Netherlands, and Colorado, is encouraged by the moves and believes the shifting political environment should help make a publicly traded company more viable. “There are many patients in Australia in the last year or two who have made their point to regulators and politicians that they deserve access to cannabis,” says Sautman, who prefers to use the word “cannabis” rather than “marijuana.” “Now that something might develop in their own backyard, I think it’s of high interest to investors and the general public as well.”

The new company, which will seek to divest its mining interests, will raise A$15 million ($11.4 million) in new capital, according to James Ellingford, non-executive director of Capital Mining. The Australian, American, and Canadian partners expect to complete the transformation by the end of May.

If the Capital Mining deals go through, the new company will be the second marijuana specialist to be traded Down Under, following the IPO in January of PhytoTech Medical, a small-cap company from Western Australia backed by Yissum, an arm of Israel’s Hebrew University. PhytoTech sold A$4 million in shares on Jan. 22, with the stock price almost quadrupling in the first two days of trading, to 78 Australian cents. Its co-founder and executive director, Ross Smith, resigned shortly after the IPO and the stock has since plunged to 32 Aussie cents. On March 25, PhytoTech and Vancouver-based medical marijuana company MMJ Bioscience unveiled a merger, with the combined company planning on maintaining PhytoTech’s Australia Securities Exchange listing.

The nascent stage of Australia’s medical marijuana industry is one of the attractions of the deal to MMJ. Unlike Canada, where several cannabis companies trade publicly, Australia provides a company trying to penetrate the industry with a first-mover advantage among investors, says Dave Cowern, MMJ’s vice president for business development. The new company will combine PhytoTech’s R&D expertise in Israel with MMJ’s facilities in British Columbia and Saskatchewan, which have capacity to grow 11,700 kilograms (about 25,800 pounds) of pot per year. “One of the general problems in the industry, you have a lot of guys who know how to grow marijuana,” Cowern says, “but growing marijuana in your basement is very different from scaling up to an industrial operation.”

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