November 16, 2018

VIDEO: Horizons ETFs Management (Canada) Inc (TSE:HMMJ) on USA Cannabis Climate

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Midas Letter
VIDEO: Horizons ETFs Management (Canada) Inc (TSE:HMMJ) on USA Cannabis Climate

Horizons ETFs Management (Canada) Inc President and CEO Steve Hawkins talks about the strength of the firm’s Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) (OTCMKTS:HMLSF) in light of the US midterm elections and the Jeff Sessions resignation. Hawkins believes neither event will impact Canadian companies in the short term and that US cannabis companies will still list on Canadian exchanges because of access to capital markets. Hawkins emphasizes that Canadian companies aren’t simply trying to meet the demand of the new Canadian recreational market, but are also continuing to expand into international markets. He believes cannabis is still a long term investment play and that retail investors should be interested in companies that are investing in more efficient production methods.



James West:   Right now, we’re going to talk to Steve Hawkins, who’s the Horizon ETF CEO. Steve, welcome back.

Steve Hawkins: James, thank you for having me again.

[stock_chart symbol=”HMMJ:TSX” align=”left” range=”1Y”]

James West:   And Steve, I want to jump right into the idea that Jeff Sessions’ resignation, alongside the incremental de-prohibition in an additional few states – Utah and North Dakota, I believe it was –

Steve Hawkins: Missouri.

James West:   Is it Missouri?

Steve Hawkins: There was a recreational legalization.

James West:   Okay, right. But is this incremental move towards de-prohibition broadly in the United States, going to have a negative impact on the ability of Canadian companies to maintain the momentum and market caps they’ve achieved, because they’ve been the exclusive owners of this opportunity pretty much since the US has been all tangled up in this?

Steve Hawkins: Yeah, I mean, in the short term, for sure there’s going to be zero impact to Canada. I mean, we still have to see an Act of God through Congress before recreational gets approved, or even medical gets approved, at a Federal level in the US, right? I mean, as of the election last night, the, I guess, Congress could be a little bit more friendlier on an overall basis, and now that there’s only two states where marijuana is not approved in some way, shape or form, you know, that’s just going to be a continued help to – from, you know, this is a motivation of the people, this is not a motivation of the government in trying to enact marijuana from a legalization perspective, whether it be recreation or just medical.

You know, and we see this – you know, this is an iceberg. It’s moving very, very slowly. Sessions was probably one roadblock in the grand scheme of things, because we knew that he was extremely dead set against any sort of marijuana legalization at the Federal level. But with Sessions’ now resignation hot off the news, you know, that’s one less stumbling block; but Trump is still not a supporter of marijuana, you know, publicly.

And, you know, so we’ll have to see. But you know, really, this is a Congress thing, and there’s going to be a lot more pressure on Congress. But then ultimately, Trump still has the right of veto for anything, right?

James West:   Right. He also has the potential to, you know, sweepingly sweep prohibition aside by executive order.

Steve Hawkins: In theory.

James West:   In theory. Okay, so in terms of the election results and Jeff Sessions’ resignation, has this had any impact on your thinking as it pertains to the management of the HMMJ ETF?

Steve Hawkins: I mean really, we’re stuck with following sort of Federal rules from who can invest in. and that’s the TMX’s rule with respect to our ability to invest in companies in the marijuana space; you’re not going to see any US company or US-operating companies listed on the TMX, you’re not going to see any of the TMX companies, because of the election, change the way they’re doing business in the US. I mean, they basically have a prohibition on doing business in the US.

Right now, I think we’re still going to see a number of US companies still come to Canada for its capital markets access. You know, listing on the CSE, listing on Equitas, raising capital on our markets, because our banking system is more favourable from a rules perspective, and our Exchange is an ability under securities law, you know, provides the ability, the landscape, for these American companies to still raise capital here.

But I loved the ad in the Wall Street Journal a couple of weeks ago, you know, basically saying, you know, the American pot companies, you know, you are giving the Canadians this great competitive advantage, Mr. Trump. Why are you doing this, and please help us out, right? And it was, and that’s not going to change. You know, we’ve got boots on the ground in so many countries from our various Canadian companies, we’re building out operations already over there, and all of these American companies are just sitting there, on their hands, twiddling their thumbs, don’t know what to do themselves. They’ve got these stockpiles of cash, they can raise more cash if they want to, and they could very, very easily go overseas – except for this complete prohibition on, you know, leaving the state, you know, with the respect to the way they’re doing business.

They can’t bank overseas, or anything, right?

James West:   Interesting. So in some respects, the, you know, the fact that it’s state by state is a boon to operators within the state in that it creates barriers to entry from outside of state competitors, but in the broader picture, it’s very much a negative, because they can’t actually take this whole operation on the road on an international basis.

Steve Hawkins: They can’t even put it in a truck and drive it over the border. They have to create a completely separate operation on a state-by-state basis, which is crazy, when you think about it, right? But that’s the competitive advantage that the Canadians have been given through Mr. Trump, and the Federal rules there, and you know, I think we’re going to continue to see a lot of expansion outside of Canada from Canadian companies over this year. So it’s not just, you know, backfilling the Canadian recreational demand, which has been, you know, has been building and, you know, we’re under-supplied at the moment; we’ll be backfilling that from a production perspective. But we’re going to be continuing to expand outside of the US.

You know, the Auroras, the Canopies, the Cronoses, all these guys have very, very active activities outside of Canada, and that’s going to continue to grow substantially. And that’s going to replace a significant part of their future revenues.

James West:   Sure. I’ve seen a couple of power point presentations recently – one was by a company that is proposing to grow on 100,000 hectares or acres, I can’t remember which, in the DRC. And another one which was going to grow on multiple jurisdictions in African countries that would best be considered as dubious at best from a political stability perspective, on, you know, 50,000 acres here, 100,000 acres there. It’s like, do these companies really represent potentially a threat to the supply of CBD and THC as extracts on a global basis?

Steve Hawkins: Yeah, I find all that very interesting to hear about, and extremely skeptical on how that’s going to affect those companies from a going-forward basis. I mean, you look at gold companies operating in Guyana and stuff like that, right? I mean, there’s just, it’s just a completely different set of rules there, you know, how many warlords do you have to pay to, you know, be able to move your trucks from here to there…you know, I just, for me, it’s really a focus on the countries where you see medical already being fully adopted. You see the governments onside from a, like, Germany is an example where, you know, the German government, through the prescription plan, will pay for your CBD oil, you know? And that type of thing, that benefit, you know, why do you need to go into countries where it is so unconventional and skeptical from a – or sketchy, would maybe be a better word to think about it.

James West:   Right. I’ve seen, you know, even Aphria has gone and made, you know, a lot of fanfare about this deal with Lesotho, which is a tiny little African kingdom within South Africa, and it’s like, you know, well, I just look at that and I’m thinking, why? Like, why would you dilute the power of your message by, you know, putting a footprint in such a sort of esoteric, weird place?

Steve Hawkins: I don’t even know why they’d press release something like that.

James West:   [laughter] It’s like, wouldn’t you not want people to know that you’re going to get your stuff from Lesotho? But anyways, I could be wrong; I’ve not been to Lesotho. Have you been to Lesotho?

Steve Hawkins: South of there, but not there.

James West:   Okay, right. Okay, so then, let’s talk about, you know, the potential of these large hemp based cannabis farms that are theoretically going to start appearing in the US as I know, for example, Kentucky is moving towards legalizing industrial hemp on large-scale productions to, you know, to capture the economic opportunity inherent in CBD extracts in the state of Kentucky, or I guess nationally, once that prohibition is removed. Do these, you know, big, huge operations in good jurisdictions represent a threat to the price of cannabis that, you know, all of these LPs rely upon in order to deliver results and balance sheets going forward?

Steve Hawkins: Yeah, I personally don’t believe so. I still think that there’s still so many significant constraints to the way they operate their businesses, that if there’s any touch in any way, shape or form of illegal operations under the Federal rules, they’re not going to be able to do things that they want to do, and it affects their entire business.

So if you’re dealing with one state represented company, it’s really going to be focused only on that state. You don’t see these companies going out and listing on the NYSE right now or the NASDAQ stock exchange, because they can’t do it. You don’t see the Morgan Stanleys and the Citibanks and the States REITS going ahead and helping back these from a capital markets perspective, or just from a day to day operations perspective, because they can’t. they’re just so highly focused on being 100 percent crystal clean; there’s just no way that they’re going to affect the way that our Canadian companies do business, anytime in the near future.

James West:   Interesting. So what about the, you know, what about the growers who are growing it biologically through biosynthetic means?

Steve Hawkins: I think that’s probably the single biggest risk to the physical growers out there, right? I mean, there’s so much medical research going on right now with respect to production, with respect to extraction, with respect to the different stages in between the whole production cycle: and you know, most of the big producers right now have partnered with a university who are doing research for them in some way, shape or form, to help specifically help them on the extract basis, or whatever. But these universities are also working with these synthetic producers. So you have the companies out there like Insys who are creating synthetic CBD specifically, who are direct competition. Like they don’t like marijuana producers, and marijuana producers don’t like them, but they’re both producing CBD in some manner, shape or form, and I think, you know, they’re just looking for really FDA adoption of those – you know, they’re well into their drug phase testings in all of the different you know, with the GWs, the Insys, the Zynerbas out there and the synthetic CBD testing.

You know, they’re well down the line. They’re ready to go to production, if they can get through the final FDA approval processes. And that’s changing all the time, and I think, I don’t know that they could produce it on the same mass scale that we’ll be able to physically produce cannabis plant, but they will be able to definitely compete with us at the end of the day.

Ut you know, I mean, there’s been how many – how long did it take for sort of synthetic tobacco to really come to a stage in, you know, vapes and things like that for people to use? It was a very, very, very long time, right? And it’s only – but it’s been taken a very, very quick adoption over the past year and a half, two years, right? So I would say the same thing could potentially happen in the cannabis market. But you know, that’s, they’re only going to really be able to deliver in one or two different ways of systems of delivery. At this stage, with the physical plant, we’re still looking at so many different possibilities on how we can deliver that to you, and they’re not all approved here in Canada right now, right? It’s really just the plant and the oil, and a year from now we’ll see edibles come online, and you know, when vape happens, I don’t know.

But these are all stages of growth with respect to this fantastic new industry that we’re all living in, and it’s going to be fun to watch.

James West:   Sure, okay, so finally, I’m curious as to what your perspective of the performance of the recreational regime’s legalization on October 17th. You know, almost universally the country ran out of legal cannabis, and you know, my own personal experience was, I ordered on October 17th, I got it –

Steve Hawkins: Oh, you go tit already?

James West:   I got it the day before yesterday! Yeah. And so –

Steve Hawkins: Lucky you, lucky you. One of few.

James West:   Yeah, well, and you know, I actually gave most of it away last night to friends and everything. Actually, I’m wondering if that’s legal now.

Steve Hawkins: Don’t say that on tape and cross the border.

James West:   Well, that’s because I don’t smoke it; I certainly wouldn’t smoke it.

Steve Hawkins: You gave it all away.

James West:   That’s right, I gave it all away. But, so what was your takeaway from that? Has that affected your opinion of any of the Canadian sector or the potential in terms of the performance of the government-operated outlets, as well as the privately operated outlets?

Steve Hawkins: I mean, every one of the producers that we talk to, you know, basically really tell the whole distribution channel because of the provinces really controlling the rules around the distribution and it’s 4different in every province, they’ve screwed this up royally from an implementation perspective. None of them could agree on different way to do things; each of the company had to talk to the regulators in each province separately about how can I do this, and how can I do this. So t really, really disrupted the distribution channel.

Now the correction was there, and they did have product, they just didn’t know how they could get it to you at the end of the day. You know, they couldn’t pop up a shop on October 18th and go out there and sell it to you. So all in all, the distribution channel was really, really messed up to start. It has started to work itself out, they’ve started to figure out the bugs in the different provinces; the product is coming online from a making it more available for you, and we’ll see things continue from there.

But rally, I don’t think the disruption is what affected the price on October 17th. You know, marijuana stocks generally had a  very, very nice buildup to October 17th; you know, there was a lot of buying on rumour, there was a lot of buying on jut what’s going to happen with the place. But it’s kind of like an iPhone. When Apple announces they’re launching a new iPhone, there’s a huge buildup in the stock price; as soon as it launches, stock tanks. There’s no different form that and the way we looked at it. You know, we had a 30, 35 percent selloff in most of the marijuana stocks after October 27th, but now we’ve seen almost like a 20 percent retracement of that, including today where it’ up almost 10 percent today.

So you know, it’s, again, this is not something that you want to invest in for the faint of heart; you have to make sure that your pacemaker’s batteries are charged up, and you can go on, you can buy your stock, an you can move on. But there’s a lot of day traders out there as well, right? So I look at it as a long0term investment lay.

James West:   Okay, Steve, would you like to conclude with, which opportunities or issuers excite you most right now?

Steve Hawkins: [laughter] I have a few. I’m not allowed to personally talk about individual issuers.

James West:   [laughter]

Steve Hawkins: And I don’t give out stock tips, though I have talked to friends about which companies I’ve seen and which operations I like more and which operations I like less.

James West:   So which of all of the emerging sub-segments and opportunities within the cannabis complex, which general segments do you think are more attractive then others?

Steve Hawkins: I like the companies that are coming online and doing something a little bit differently. Partnering it with somebody new, basically from a university or whatever, really looking at breaking down the whole growing operation process and trying something different. So not j putting plants in a bed like this and putting light on it an letting it grow and seeing how much they can produce out of that one patch, and then going through the usual drying process and the usual extraction process; I think that is a way of the past, and every one of the companies needs to be looking forward on how you’re going to be producing more efficiently, creating more product in the smaller space. And there are so many companies that are very, very specific to doing that, rather than doing the traditional way.

So I don’t really care about the size of the acreage that you have anymore, it’s really how much plant can you produce out of that acreage, and whether or not you’ve got to stack it like three levels and move it forward from there.

So companies that are really took a big step backward on production, and are moving things forward in a new designed way of doing things, I think are going to be sort of the way of the future. And we’re going to see a lot more of those companies compete with the traditional producers.

James West:   All right. Your insight is bang-on a usual; really appreciate it. We’ll come back to you soon. Thanks for joining me, Steve.

Steve Hawkins: James, thanks so much for having me again.

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