These 4 Marijuana Stocks Are Sitting On Nearly $1 Billion In Combined Cash

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In less than a month, Canada’s Senate will be making a game-changing decision that’ll affect the legal cannabis industry. At stake is bill C-45, which is better known as the Cannabis Act. If approved by Canada’s federal government, it would make our neighbor to the north the very first developed country in the world to have legalized adult-use marijuana. In the process, it’ll also be opening the door to billions of dollars in added annual sales.

Given the very strong likelihood that the Cannabis Act will be signed into law relatively soon, growers in Canada have been busy expanding their production capacity. The idea being that growers with higher production capacity from the outset will be more likely to secure long-term supply deals with provinces and retailers. These deals can help to offer some level of predictable cash flow each year, which management teams and investors tend to appreciate.

These pot stocks are swimming in cash

The expectation of legalization has also led to a flurry of capital raises. In Canada, bought-deal offerings are one of the most common methods of raising cash. A bought-deal offering involves the sale of common stock, convertible debentures, stock options, and/or warrants to an investor or group of investors prior to the release of a prospectus. Canadian weed growers have had absolutely no trouble raising capital thus far. In fact, the combined cash on hand for four of the country’s largest marijuana growers nearly adds up to $1 billion.

Taking into account their cash, cash equivalent, and marketable securities balances at the end of their most recent quarter, as well as any subsequent bought-deal financing activity since their latest quarter ended, here are the approximate cash balances for the top projected cannabis producers in Canada:

Canopy Growth Corp: Approximately $311.2 million (CA$400 million)

Aurora Cannabis: $332.8 million (CA$427.8 million)

Aphria: $135.1 million (CA$173.7 million)

MedReleaf: $192.2 million (CA$247.1 million)

Combined, this works out to $971.3 million in cash, cash equivalents, and marketable securities. In other words, this is capital these weed stocks could deploy quickly, if need be.

…but this cash could soon dwindle

You might be under the impression that this moat of cash is something investors should take into consideration when trying to place an appropriate valuation on marijuana stocks, but the truth of the matter is that a lot of this cash is likely already spoken for. All four of these cannabis giants have major projects to account for, and this cash will go a long way toward ensuring their completion.

Canopy Growth Corp. is expanding its industry presence by increasing its eventual licensed production capacity to 5.7 million square feet in British Columbia. At the moment, Canopy is currently approved to cultivate up to 2.4 million square feet. Its capital is primarily being used to complete greenhouse construction, though it has been known to liberally use its cash on hand to make acquisitions or expand its leading product line.

Arguably no marijuana stock has been more aggressive on an expansionary basis in recent months than Aurora Cannabis. Atop its spending for its 800,000 square-foot Aurora Sky facility, it completed a cash-and-stock buyout of Saskatchewan-based CanniMed Therapeutics in March — the priciest pot deal in history — and just three weeks ago announced its intent to build a 1.2 million-square-foot facility in Medicine Hat, Alberta, after acquiring 71 acres of land in the region. Aurora Cannabis has had little trouble raising, or spending, its capital.

Aphria, which has the least cash of the four at just north of $135 million, is using its capital to complete its four-phase Aphria One facility, capable of 100,000 kilograms of production annually, and to aid with the retrofit of Double Diamond Farms’ greenhouses (now known as Aphria Diamond), which should yield 120,000 kilograms per year when fully ramped up.

Lastly, MedReleaf will be deploying its capital on retrofitting the Exeter facility, which is a 1 million-square-foot facility that was acquired as part of its recently completed 164-acre land purchase in Ontario. With 95 acres left to develop, MedReleaf may have plenty of uses left for its cash on hand.

The downside of a “healthy” balance sheet

Though marijuana stock investors can take comfort in the fact that these publicly traded pot stocks have had little issue raising capital when needed, there’s a downside to these so-called “healthy” balance sheets. Namely, dilution.

Since marijuana is still illegal in every country around the world, except for Uruguay, financial institutions usually want nothing to do with the pot industry. Under a strict interpretation of the current Canadian federal law, banks could find themselves being penalized financially or criminally for offering basic banking services to the cannabis industry. This leaves Canadian marijuana stocks with only one true way to raise capital: bought-deal offerings.

When Canadian pot stocks offer common stock, convertible debentures, stock options, and/or warrants, they’re receiving cash in exchange for ballooning their outstanding share counts either immediately, or within the next couple of years, as is the case with convertible debentures, warrants, and options. This dilution can negatively affect the value of each existing share as well as make it tougher for marijuana stocks to turn a meaningful per-share profit (since there are more outstanding shares to divide net income into).

Long story short: Take this cash hoard with a grain of salt, because a lot of it will likely be gone soon, but the adverse impact on shareholders and EPS could last a long time.

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