- If company was producing tomatoes debt would be easy, CEO says
- Canadian legalization, overseas expansion sales driver
Now that Canada’s Canopy Growth Corp. has become the first marijuana grower to trade on a major North American stock exchange it’s gearing up for its next big challenge: convincing banks to lend it money.
The company is looking to fund expansion as it grows internationally and Canada inches closer to full legalization of the drug that’s now allowed for medical use, Bruce Linton, chief executive officer, said in an interview July 25.
“Real, legitimate debt has been the principal absent business instrument of this sector,” Linton, 49, said after appearing on Bloomberg TV Canada in Toronto. “If I was producing tomatoes that yielded this margin in these buildings, I’d have a lineup of debt instruments available.”
Canopy is riding North America’s booming marijuana industry. While U.S. federal law still prohibits use of the drug, the legalization of recreational pot in Colorado in 2012 has resulted in a $1 billion industry there that generated a 44 percent surge in state taxes and fees last year and other states are following suit. The government of Prime Minister Justin Trudeau, who campaigned on a legalization pledge, is due to receive a report in November on how Canada plans to move forward.
Canopy, which grows its product in an old Hershey’s chocolate factory in Smiths Falls, Ontario, hasn’t had formal conversations with banks yet, but hopes to do so soon, Linton said.
The company’s graduation to the Toronto Stock Exchange from Canada’s junior exchange on Tuesday gives it a further stamp of legitimacy to pursue that goal, Linton said. Canopy’s market value swelled to C$328 million ($249 million) during two years on the TSX Venture Exchange while revenue rose more than five-fold to C$12.7 million in the year ended March 31 from a year ago.
It’s now the largest publicly traded marijuana producer among global peers focused on growing the product including Canadian companies Aphria Inc., OrganiGram Holdings Inc., Aurora Cannabis Inc. and California-based Medical Marijuana Inc., according to data compiled by Bloomberg.
“Do you think the TSX lets us onto their exchange because we’re not properly governed?” Linton said. “There aren’t many marijuana producers and there aren’t many banks. We’re now all listed on the same exchange, at some point in time they’ll say let’s work with one of them -- and that will be us.”
Royal Bank of Canada spokesman Tony Maraschiello said in an e-mail the bank currently doesn’t provide banking services to companies engaged in the production and distribution of marijuana. Tom Wallis, a spokesman for Canadian Imperial Bank of Commerce and Laurrell Mohammed, a representative for Toronto-Dominion Bank, declined to comment. Bank of Nova Scotia and Bank of Montreal didn’t respond to requests for comment.
Jean-Francois Cadieux, a spokesman for National Bank of Canada, said the bank has a framework in place for medical marijuana producers but is awaiting further guidance from the government on lending to the cannabis industry.
Marijuana’s history as an illegal drug still plays a large role in any hesitation among lenders, and will take some time to fade, Jason Zandberg, an analyst covering marijuana producers at PI Financial Corp. in Vancouver, said by phone.
"Look, if this wasn’t marijuana, we wouldn’t be having this conversation at all,” he said. Zandberg estimated in a July 25 report recreational marijuana sales will begin in Canada in mid-2018, with the combined recreational and medicinal market growing to C$7.4 billion in the first five years after that.
Since May, Canopy has inked a deal to export marijuana to Germany, announced a joint venture with a medical marijuana company in Brazil and a consulting agreement in Australia. Eventually Linton would like to build plants outside Canada for which he estimates he’ll need C$25 million to C$50 million for the first phase.
So far, Canopy has used equity offerings to raise capital, an expensive and dillutive proposition for the company and its shareholders, Linton said. The only debt companies like Linton’s can access comes with strings including excessive interest rates, covenants and warrants, he said.
Linton is interested in all forms of debt instruments including bonds, credit facilities and loans, and would be happy to do business with lenders in Canada or abroad as long as the terms are reasonable. Given the size of his business, a 5.5 percent interest rate would be fair, he said.