The shares of this cannabis producer rose on news of a deal with a U.S. cigarette maker, then lost many of those gains.
This Canadian firm has a broad portfolio of companies involved in the production and distribution of medical and recreational cannabis, including many international interests. On December 7, 2018, it announced that a major U.S. tobacco company will purchase a 45% stake in the firm. The tobacco company’s wide experience in product development and regulatory requirements should be a plus for the Canadian firm. On the other hand, its image could suffer due to the negative public health consequences of cigarettes. Like many cannabis producers, this company must continue to generate huge revenue growth to justify its high market cap.
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CRONOS GROUP, $15.13, symbol CRON on Toronto (Shares outstanding: 178.7 million; Market cap: $2.9 billion; TSI Cannabis Quality Rating (CQR): ; www.cronosgroup.com) owns a portfolio of companies operating in the emerging medical and recreational cannabis market. Cronos Group’s head office is located in Toronto, Ontario. The company is also listed on Nasdaq under the symbol CRON.
Cronos moved up over $18 on December 7, 2018, from $14, on news that Altria, symbol MO on New York, is paying $2.4 billion for a 45% stake in the company—although the shares have since lost most of those gains. Altria is paying $16.25 a share for 146.2 million newly issued shares of Cronos. Altria will also get warrants that will give it the option to increase its stake to 55%.
Altria makes Marlboro cigarettes for the U.S. market. It has a 46% market share of cigarette sales in the U.S. The deal gives it a foothold in Canada and its newly legal recreational market. Altria has been grappling with a steady decline of tobacco smoking rates, especially in its key U.S. market, and sees the potential to tap into a new segment of growth as marijuana moves into the mainstream.
Cronos will use the funds to expand its international presence, as well as on product development. Its marijuana products could evolve from just dried cannabis to vaporizer cartridges, edibles, beverages, and pharmaceuticals. At the same time, the Altria deal won’t prevent it from teaming up with companies in the drug and beverage markets.
Cronos also believes that Altria has product development and commercialization capabilities that can be readily transferred to cannabis products. This could involve, for example, pre-rolled cannabis products—with every dose of a specific product tasting the same and with the same effects.
As well, as one of the largest companies in the adult consumer products area, Altria has considerable experience in regulatory, government affairs, compliance, product development and brand management.
Note that one aspect of the deal with Altria that could be a problem for Cronos as a medical cannabis producer is Altria’s history as a tobacco company that has produced significant negative public health consequences through making and selling cigarettes. The image that Cronos is trying to project as a seller of medical marijuana could be hurt by a tie-up with a tobacco company.
Meanwhile, Cronos owns three main assets:
Cronos holds 100% of Peace Naturals, a company licensed to produce and sell dried cannabis and cannabis oils through wholesale and direct-to-consumer channels under its own medical cannabis brand. Peace Naturals is located on 90 acres of land in Stayner, Ontario, and has a total annual production capacity of 40,000 kilograms.
- The company also owns 100% of Original BC. That firm, located on 31 acres of land in Armstrong, B.C., is licensed to cultivate and sell medical marijuana.
- In addition, Cronos has an interest in Whistler Medical Marijuana Company. That firm is licensed to produce and sell medical marijuana and cannabis oil. Whistler specializes in growing cannabis that is certified organic.
Cronos has also entered into an array of joint ventures aimed at expanding production, securing supply agreements, and developing an international presence.
- Cronos Australia is a 50/50 joint venture that will serve as a hub for Australia, New Zealand, and South East Asia. Cronos Australia is located on 120 acres in Melbourne, Australia, and will initially include a 20,000-square-foot facility with an expected production capacity of 2,000 kilograms annually.
- The company has signed an exclusive supply agreement with Pohl-Boskamp, a pharmaceutical manufacturer and supplier that distributes products to over 12,000 German pharmacies. With German health insurance now covering medical cannabis, there is expected to be a shortage of cannabis in that country.
- Cronos Israel is a joint venture with Kibbutz Gan Shmuel, which already exports to 35 countries throughout Europe & Asia. Cronos Israel is situated in an ideal climate for low-cost, high-quality production. The operation has the potential to expand its production beyond 100,000 kilograms annually.
- Cronos has a distribution partnership with Delfarma, a privately owned pharmaceutical wholesaler in Poland. Delfarma distributes directly to over 5,000 pharmacies and more than 200 hospitals. That distribution network reaches approximately 40% of the Polish domestic market.
- NatuEra is a 50/50 joint venture between Cronos and an affiliate of Agroidea SAS, a major Colombian agricultural services provider with over 30 years of research, development and production operations. The joint venture will engage in the development, cultivation, manufacturing, and export of cannabis-based medicinal and consumer products for the Latin American and global markets. NatuEra plans to build a cultivation and manufacturing facility on 207 acres in Cundinamarca, Colombia. It then wants to become a major production platform for premium-quality cannabis and cannabinoid-derived products.
- In December 2016, Cronos launched a joint venture led by Phil Fontaine, former National Chief of the Assembly of First Nations. Indigenous Roots plans to build and operate licensed facilities and to provide medical cannabis to First Nations communities. This will provide Cronos with a nontraditional distribution channel, production capacity, and a distinctive brand. Indigenous Roots plans to construct a 30,000-square-foot production facility on the premises of Original BC but is awaiting clarification on provincial distribution frameworks before raising capital for the project.
- In March 2018, Cronos Group entered into a joint venture with MedMen Enterprises. The new company, MedMen Canada, holds the exclusive license for the MedMen brand in Canada for a minimum term of 20 years. It is also in the process of obtaining the necessary licenses, permits, and retail locations to create a retail chain modelled after the MedMen retail concept in Los Angeles, Las Vegas and Manhattan.
- In July 2018, Cronos announced a 50/50 joint venture with a leading Canadian greenhouse operator. The new company, Cronos Growing Company, plans to construct an 850,000-square-foot greenhouse for cannabis production on roughly 100 acres in Kingsville, Ontario. Once fully operational, the greenhouse is expected to produce up to 70,000 kilograms of cannabis annually.
- In August 2018, Cronos announced a supply agreement with Cura Cannabis Solutions. Cura will purchase a minimum of 20,000 kilograms of cannabis per year from Cronos. Cura also intends to build a proprietary extraction facility on land owned by Cronos in B.C.
- In August 2018, Cronos Group finalized supply agreements with both the Ontario Cannabis Retail Corporation and the BC Liquor Distribution Branch.
- On September 4, 2018, Cronos Group Inc. and Ginkgo Bioworks Inc., a biotech company in Boston, MA, announced a partnership to produce biologically engineered cannabinoids. Using its biotech expertise, Ginkgo will work with Cronos Group to genetically engineer the active compounds in cannabis.
On September 13, 2018, Cronos announced the launch of a new brand, Spinach, aimed at the recreational market. Spinach is positioned to complement the company’s premium brand, Cove, and is tailored to the price-sensitive, higher-volume consumer. The company believes that it has the consistency and low production costs necessary to establish itself in this market segment.
For the three months ending September 30, 2018, Cronos’ revenue increased 186.1%, to $3.8 million from $1.3 million a year earlier. In the quarter, cannabis oil sales accounted for 29% of domestic medical sales as compared to 29% the previous year. The other 71% of the company’s total revenue is from the sale of dry cannabis. The company reported a loss of $7.0 million, or $0.04 a share, in the latest quarter, compared to a profit of $1.1 million, or $0.01 a share. However, both quarters benefited from estimated gains on the value of Cronos’ inventory of cannabis. On an operating basis, it lost money in both periods.
On September 30, 2018, Cronos Group had no long-term debt and held cash of $41.5 million.
Even with the Altria investment, Cronos, like most marijuana producers, needs huge revenue growth to justify its current market cap. If its revenue growth stalls, or if its new ventures run into significant problems, Cronos could drop sharply as momentum traders unload the stock.
We’re moving Cronos Group from a 3-Leaf Cannabis Quality Rating (CQR) to a 3½-Leaf Rating. The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.