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Analysts' Ideas of the Week
Opportunity for Value Investors
February 24, 2020
www.researchfrc.com
Page 2
Weekly Mining Commentary
The coronavirus created havoc today as the Dow Jones and S&P 500 declined 3.5%
and 3.3%, respectively. The sharp decline was a result of a surge in reported cases
outside China, more specially in Iran, South Korea and Italy. Base metal prices were hit
hard, as shown in the charts below. In contrast, gold hit another record high, and is
currently at US$1,660 per oz, up 5% week-over-week (“WoW”), and 29% year-over-
year (“YoY”). The last time gold was at such levels was back in December 2012. At
today’s US$/C$ exchange rate, gold is at an all time high of C$2,208 per oz. Silver was
also up the past week, and is currently sitting at US$18.5/oz, up 4.3% WoW, and 22.7%
YoY.
Source: FRC / Various
Although the US$ and gold have historically had a negative correlation, they tend
to move in tandem when there is a global crisis. This is exactly what we are seeing
now as gold and the US$ have been gaining strength. The DXY (U.S. Dollar Currency
Index) is up 2.1% YTD.
Not surprisingly, inventory levels of copper, zinc and nickel were up WoW.
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Source: FRC / Various
We are not making any revisions to our commodity price forecasts as we believe
the coronavirus’ impact to be short-term.
Source: FRC
With regard to the valuation of producers, gold and silver continue to be the only two
sectors (among the mainstream commodities) that have higher Enterprise Value (“EV’)
to Revenue and EV / EBITDA ratios versus their three-year averages.
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Source: S&P Capital IQ
Considering the significant decline in base-metal prices, we believe timing is
excellent for value-investors to acquire shares of companies holding attractive
base-metal projects. In the following section, we review key announcements made by
companies under our coverage in the past week.
Mining / Exploration
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Gran Colombia TSX: GCM $6.89 N/A Feb-20-2020
Gold Corp.
PR Content FRC Opinion
Produced 18.5 Koz gold in January 2020, Positive - 2019 production of 240 Koz (214
up 3.1% YoY. In 2020, management Koz Segovia and 26 Koz Marmato), up 10%
expects 200 Koz - 220 Koz gold YoY, beat our estimate of 235 Koz. We are
(approximately 14 gpt) from Segovia and pleased to see management’s 2020
32 Koz - 37 Koz gold from Marmato. guidance at 232 Koz – 257 Koz, which is
where our estimate falls. We are expecting
2019 financials to be released next month.
As GCM is currently in the process of
completing a reverse takeover to spin-out of
its Marmato project into a TSXV listed
company (to be renamed Caldas Gold
Corporation), we are temporarily
suspending our fair value estimate. We will
provide a new rating and fair value estimate
upon completion of the reverse takeover
and once the year-end results are released.
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Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
UEX TSX: UEX $0.115 $0.45 Feb-20-2020
Corporation
PR Content FRC Opinion
Commenced a 15 hole / 1,900 m drill Neutral – Cameco (TSX: CCO) remains
program on its West Bear project in UEX’s largest shareholder. West Bear has a
February 2020. The program’s objective high-grade cobalt inferred resource of 3.17
is to identify satellite cobalt-nickel Mlbs (0.37%), and 1.93 Mlbs of nickel
deposits. In addition, UEX has increased (0.22%). Subsequent drilling in 2019 has
its interest in the Christie Lake project increased strike length from 250 m to 600
(located between Cameco’s McArthur meters.
River and Cigar Lake mines) from 60% to
64.34%. JCU is not participating in the As a result of the increase in ownership in
current exploration work, implying their Christie Lake, UEX’s portfolio now has a
interest in the project will continue to be combined indicated resource of 69.8 Mlbs,
diluted. The project has a maiden and inferred resource of 29.7 Mlbs
resource estimate of 20.35 Mlbs U3O8. (previously 28.8 Mlbs).
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Golden Arrow TSXV: GRG $0.15 N/A Feb-19-2020
Resources
Corporation
PR Content FRC Opinion
Commenced a 2,500 m / 12-hole Positive - After successfully monetizing its
diamond drill program at the Indiana gold- 25% interest in Puna Operations for $45
copper project in Chile. Management million in cash and shares last year, we are
considers it to be a near-term producer as pleased that the company has resumed
the project is a historic producer with a active exploration. The company holds 1.05
mining permit in place for a historic million shares of SSR Mining (TSX: SSRM),
resource of 0.6 Moz at 6.1 gpt gold which is currently valued at $25 million.
equivalent, including 2.8 gpt gold. GRG’s market capitalization is only $19
million; implying that the market is assigning
zero value to any of its assets.
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Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Kootenay Silver TSXV: KTN $0.31 $0.57 Feb-20-2020
PR Content FRC Opinion
Commenced a 7,000-meter Phase II core Neutral – The current program is designed
drilling program on the Columba silver to follow up on a 41 hole / 6,853 m drill
project in Chihuahua state, Mexico. program in 2019. Columba is being
advanced to a maiden resource estimate.
The 2019 program was very successful with
multiple holes returning high grade silver
intercepts on multiple veins, including 1,070
gpt over 0.90 meters, 982 gpt silver over 1.9
meters within 721 gpt silver over 4 meters,
650 gpt silver over 7.45 meters within 159
gpt silver over 39.9 meters. Other key focus
areas in 2020 will be the high-grade and
previously undrilled Copalito silver-gold
project in Sinaloa state. We estimate that
KTN’s shares are currently trading at an
Enterprise Value of $0.38 per silver oz
versus the comparables average of $0.81
per silver equivalent oz.
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Hannan Metals TSXV: HAN $0.22 $0.57 Feb-18-2020
PR Content FRC Opinion
Raised $2.20 million at $0.15 per unit. Positive – Focus this year will be on the
Each unit consisted of a common share new Peruvian exploration properties, with a
and one full warrant (exercise price of special focus on the 66,000 hectare San
$0.30 per share for two years). Martin project, located within a recently
identified high-grade copper-silver system.
Note that the company also has an
indicated resource of 2.66 million tonnes at
8.8% zinc equivalent (“ZnEq”), and an
inferred resource of 1.68 Mt at 8.2% ZnEq
on its zinc-lead asset in Ireland.
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Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Vertical TSXV: VERT $0.04 $0.32 Feb-11-2020
Explorations
PR Content FRC Opinion
Arranged a non-brokered private Positive – The registration, if and when
placement of $1.30 million at $0.05 per approved, will be a significant catalyst for
unit. Each unit will consist of a common VERT. Wollastonite is a naturally occurring
share and half warrant (exercise price of industrial mineral, with a wide range of
$0.07 per share for two years). The applications including ceramics, polymers
company is also moving forward to such as plastics and rubber, paint fillers,
register its wollastonite as an Approved metallurgy, paper and friction materials.
Supplement for the Canadian Agricultural Wollastonite also exhibits traits that make it
and Cannabis Industries. useful in cultivation and soil amendment.
VERT’s St. Onge project is a historic
producer of wollastonite. The project can be
put back into production relatively quickly
and at a low CAPEX, as it can be operated
as a simple quarry and crushing operation.
Permitting is expected to be relatively
straightforward as well. Previous trials (as a
soil additive) have shown VERT’s
wollastonite to be beneficial to cannabis
plants.
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Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
American TSXV: AMY $0.195 $0.45 Feb-20-2020
Manganese Inc.
PR Content FRC Opinion
A test conducted, in partnership with the Positive – We remain encouraged by
U.S. Department of Energy (DOE), on results from AMY’s small-scale tests. Note
products from a disassembled electric that there is currently no known commercial
vehicle battery, generated recycled technology for large scale recycling of
products with purities of 98.91%, 99.72% cathode materials. We feel AMY has two
and 99.27%. options to monetize its technology - a) build
and operate a plant to recover and sell
battery grade cathode materials to battery
manufactures, and/or b) license the
technology to battery manufacturers or
other technology companies.
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Special Situations
Company Ticker Current Share FRC Fair Value Date of PR:
Name: Symbol Price: Estimate:
Inner Spirit CSE: ISH $0.10 $0.40 February 20,
Holdings Ltd. 2020
PR Content FRC Opinion
Announced the additional opening of Positive – We are pleased to see the
Spiritleaf stores in Alberta. The company additional opening of Spiritleaf stores and
is expected to have 46 Spiritleaf stores believe the company is on track to meet our
operating across Canada imminently. store count forecast of 73 by the end of
Additionally, the company is projecting to 2020.
open up to 30 Spiritleaf locations in
Ontario by the end of the year.
We view the company’s projection of up to
30 Spiritleaf locations in Ontario by year-
end to be too rosy. Currently, there are 36
retail cannabis stores in Ontario, of which,
one is a Spiritleaf store (Source: AGCO).
Ontario, a province that houses
approximately 39% of Canada’s population,
will likely attract a significant number of
cannabis retail applicants. It may be difficult
for Inner Spirit to secure enough retail
cannabis licensing rights from the
government of Ontario.
Weekly Cannabis Commentary
As a proxy for performance of the cannabis market, we show the performances of:
• Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ / “HMMJ”)
• Standard & Poor’s/MX International Cannabis Index (“MCAN”)
• Standard & Poor’s/TSX Cannabis Index (“XCAN”)
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HMMJ MCAN XCAN
Current Price $8.18 Current Price $189.78 Current Price $175.12
1-Week 1-Week 1-Week
-4.88% -6.58% -8.68%
Performance Performance Performance
1-Year 1-Year 1-Year
-61.31% NM NM
Performance Performance Performance
Note: MCAN and XCAN was launched on November 18, 2019 and January 20, 2020, respectively.
Source: TMX Money, FRC
Over the past week, the HMMJ, MCAN, and XCAN generated a return of -4.88%, -
6.58%, and -8.68%, respectively. Performance of the cannabis market deteriorated
week-over-week as fears of the coronavirus spreading outside of China sparked a
global sell-off in equities. This week’s poor performance is not primarily attributed to
industry-specific developments.
This week, we discuss Canadian cannabis sales. Before we continue, the following
table illustrates earnings dates to keep in mind. On February 24, 2020, Cronos Group
(NASDAQ: CRON) announced that they will delay its earnings release (previously
scheduled for February 27, 2020). Cronos has stated that it has had a delay in the
completion of its financial statements, but did not dive further into the issue. On this
announcement, Cronos Group is currently trading 10% lower.
Company Name Expected Earnings Date
Cronos Group Inc. N/A
Tilray Inc. March 16
Hexo Corp. March 16
CannTrust Holdings Inc. March 26
Source: Earnings Whispers, NASDAQ, FRC
Canada Retail Cannabis Sales
Provided by Statistics Canada, the following shows cannabis sales, in millions, by
month.
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2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019
Total
Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec
$55 $52 $61 $75 $86 $91 $107 $126 $123 $129 $135 $146 $1,186
2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018 2018
Total
Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec
- - - - - - - - - $41 $54 $57 $152
Source: Statistics Canada
For 2019, retail cannabis sales in Canada totalled $1.19 billion.
Retail Cannabis Sales by Month
Source: FRC
December 2019 marked the biggest month of sales on record, growing 8% on a
month-over-month (“MoM”) basis.
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Month-over-Month growth in Retail Cannabis Sales
Note: January 2019 was used as the base month
Source: FRC
There seems to be seasonality in cannabis sales. Cannabis sales tend to dim in the
months of January, February and September. Given that those aged 15 to 34 are more
likely to consume cannabis (see chart below) than other age groups, we speculate that
the start of a school term may play a role in the seasonality of cannabis sales.
Additionally, we believe that cannabis sales are likely to be higher during the summer
(June, July and August), spring break (March) and Christmas (December).
Source: Statistics Canada
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Through our research, we deem the Canadian cannabis market value to be lower than
industry expectations. A multitude of firms have forecasted a higher 2019 Canadian
cannabis market value:
• Canaccord Genuity (TSX: CF) forecasted a Canadian cannabis market size of
$1.46 billion for 2019 (Source: BNN Bloomberg).
• Deloitte estimated recreational cannabis sales could generate up to $4.34 billion
in sales for 2019 (Source: Deloitte).
We believe high market value forecasts for the 2019 Canadian cannabis stemmed from
the belief that retail cannabis stores across Canada would be established quickly. This
belief has not held up, with only 787 retail cannabis stores in Canada to serve its
population of 38 million.
Going forward, we expect retail cannabis sales in Canada to grow heavily. We compare
Canadian cannabis sales to Colorado, a state that has legalized cannabis since 2014.
Legalization Market 2019 Cannabis
Population
Year Characterization Sales
Canada 2018 Emerging 37.59 million $1.19 billion
Colorado 2014 Mature 5.69 million US$1.75 billion
Source: CNN, FRC
With a population that is 1/6th that of Canada, Colorado generated cannabis sales of
US$1.75 billion ($2.33 billion). This illustrates the immense potential for the Canadian
cannabis market to grow. If we assume that cannabis consumers in Canada and
Colorado are uniform, and simply adjusting for the population difference, a mature
Canadian cannabis market could hit an annual sales figure of $15.40 billion.
Readers should note that this is a preliminary forecast, as it does not consider a number
of things, such as: the difference in GDP per capita, difference in the prevalence of
cannabis use, etc.
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Source: FRC
Although we are unable to speculate on the plausibility of the Canadian cannabis
market hitting our preliminary forecast, we believe that cannabis sales in Canada are
expected to accelerate into 2020 and beyond. The following are three growth
catalysts for the Canadian cannabis market:
Source: FRC, Indiva, Associated Press, AGCO
1. Cannabis 2.0: Sale of cannabis edibles, concentrates, beverages and topicals.
The sale of these products began in January 2020, and we believe will provide a
significant boost to the Canadian cannabis market. In Colorado, taken from
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Indiva’s (TSXV: NDVA) corporate presentation, edibles and concentrate
comprised 45% of Colorado’s cannabis market. This outlines the huge
potential for edibles and associated cannabis products in the Canadian cannabis
market.
2. The Canadian Black Market for Cannabis: Legal cannabis still remains at a
significantly higher price point than illegal cannabis. As Canadian Licensed
Producers (“LPs”) achieve greater economies of scale, we believe legal cannabis
products will be priced at a competitive price to illegal cannabis products. This, in
turn, is expected to shift the size of the black market for cannabis to the legal
market. According to the Associated Press (“AP”), the black market for
cannabis is estimated to be valued at $5 billion to $7 billion.
3. Ontario Retail Cannabis Stores: There still remains a significant opportunity for
more retail cannabis stores in Canada. This is especially true in Ontario, a
province that currently has 36 stores to serve its provincial population of 15
million. Given that Canada currently has 787 retail cannabis stores, this implies
that each store services 48k Canadians. For comparative purposes, McDonalds
(NYSE: MCD) has 1,400 restaurants in Canada (Source: Thought Co.).
Despite cannabis retail sales in Canada for 2019 falling below expectations, we remain
hopeful that sales will increase substantially in the coming periods. As illustrated by the
two analysts below, the expectation is that the Canadian cannabis market for 2020
will double from 2019.
• Matt Bottomley, an analyst at Canaccord Genuity, forecasted the Canadian
cannabis market to reach sales of $3.16 billion for 2020 (Source: BNN
Bloomberg).
• Vivien Azer, an analyst at Cowen & Co. (NASDAQ: COWN), forecasted the
Canadian cannabis market to reach sales of $3.5 billion for 2020 (Source:
BNN Bloomberg).
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Performance of Select Canadian LPs
The following shows the performance of select Canadian LPs on a year-to-date (“YTD”)
1-month, 6-months, and 1-year basis.
Company Name YTD 1-Month 6-Months 1-Year
Aphria Inc. -20.28% -18.91% -38.58% -59.23%
Aurora Cannabis Inc. -20.91% -16.13% -72.92% -78.31%
Canopy Growth Corp. 3.25% -4.97% -18.64% -53.32%
Cronos Group Inc. -11.10% -11.29% -44.65% -68.20%
Tilray Inc. 5.43% -6.84% -38.69% -77.66%
Hexo Corp. -20.12% -1.50% -67.65% -76.94%
CannTrust Holdings Inc. -16.13% -26.76% -56.12% -91.18%
Organigram Holdings Inc. 9.18% -3.76% -43.94% -57.47%
The Supreme Cannabis Co., Inc. -42.19% -27.45% -73.57% -80.21%
AVERAGE -12.54% -13.07% -50.53% -71.39%
Source: Google
The average YTD, 1-month, 6-months and 1-year returns were -12.54%, -13.07%, -
50.53% and -71.39%, respectively.
Valuation of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) that cannabis
companies are currently trading at. The companies used are outlined further below.
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Source: S&P Capital IQ, FRC
Source: S&P Capital IQ, FRC
The average EV/R, as of February 24, 2020, was 12.7x – a deterioration from an
average EV/R of 12.9x as of February 18, 2020. The average EV/R, from October 7,
2019 to date, is 15.1x. As a number of companies are not EBITDA positive, we have
refrained from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).
In the following, we provide commentary on Canadian retail cannabis pricing.
Canadian Retail Cannabis Pricing
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Source: Online Provincial Cannabis Store, FRC
Average retail price per gram increased nominally from $11.57 to $11.62 – a week-
over-week increase of 0.41%. Ontario witnessed the largest week-over-week price per
gram increase (of 6%). Other provinces/territories had a nominal, or zero, week-over-
week change. We believe the large week-over-week price increase in Ontario is
attributed to newly-listed higher-priced products. We continue to reiterate our view
that the retail price per gram will decrease over the long-term to combat the black
market for cannabis.
Canadian Retail Cannabis Stores
As of February 24, 2020, there were 787 retail cannabis stores open throughout
Canada. This is a 0.51% increase from a week ago. We expect the number of retail
cannabis stores in Canada to continually grow into the foreseeable future. Retail
cannabis store count by each province/territory is as follows:
Source: Provincial Websites, FRC
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Ontario and Quebec remain the two largest underserved cannabis markets in
terms of population to cannabis retail stores. Growth in the Canadian cannabis
market hinges on additional cannabis retail stores in Ontario – there is approximately
one retail cannabis store per 0.40 million individuals.
The below chart shows Canadian retail dried cannabis flower pricing since we began
price coverage.
Source: FRC, Online Provincial Cannabis Store
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Disclaimers and Disclosure
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“forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we
believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our
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