Huge food plant becomes ‘pot’ factory

A junior marijuana start-up has just closed a deal to buy an enormous former food plant facility in Cobourg, Ontario, that spans 27 acres and once manufactured cereals, dog food, Tang and (wait for it . . . yes) Kool-Aid. The new owners aspire to develop the largest indoor cannabis production facility in the world.

Healthcare_Stocks While a lot of attention has been focused on the emerging cannabis sector in recent months, and many new participants have catapulted to premium market valuations along the way, another entrant to this hot sector has just recently commenced trading.

FSD Pharma (CSE—HUGE), through its wholly-owned subsidiary FV Pharma Inc., has put together an aggressive strategy for a startup venture. The company aspires to develop the largest indoor cannabis production facility in the world, and begin supplying a high-quality strain of cannabis to a rapidly-growing market.

After completing several rounds of equity offerings to raise more than $53 million, FV Pharma closed a deal to buy an enormous plant facility in Cobourg, Ont. spanning 27 acres, part of a 70-acre land package that had previously served as a production site for Kraft Canada.

Refurbishment is currently underway to upgrade this plant, which will become the primary cultivation and production centre for cannabis plants and extracts.

With all production operations centralized under one roof, the facility is part of the strategy to control costs. The first phase of development is already complete, a relatively modest 25,000-square-foot operation now in production, aiming for 4,000 kilograms of cannabis output annually. However, the subsequent expansion of this facility will enable a rapid increase of production as additional areas of the building are brought online at minimal cost.

FV Pharma has planned rapid growth that will expand operations to more than 800,000 square feet of cultivation capacity. The production would remain within the existing plant structure currently under ownership.

Former food plants make ideal grow-ops

Thereafter, the surrounding property may also be developed to house an even larger operation, with the potential for several million square feet of cultivation capacity and a workforce of hundreds of people. This would make FV Pharma the largest employer in Cobourg. The local community is strongly supportive of the operation and the job creation that FV Pharma’s plans envision.

The company is focused on investing in R&D on novel pharmaceutical-grade, cannabis-based products in hopes of supplying the health-care industry. Recreational demand is also projected to be robust.

The decision to convert a former food-grade facility for the cultivation of cannabis has worked well in the past for other companies in the sector. Note that Canopy Growth Corp. (TSX—WEED) established production at a facility formerly operated by the Hershey Co., while Aphria Inc. (TSX—APH) set up shop in what used to be a Heinz-operated greenhouse facility. Both of these cannabis producers now trade with market caps well into the billions of dollars.

The advantages of a food-grade facility that has already been optimized for pest control, technologies to deal with mould, and minimized the potential for viral and bacterial contamination, are obvious since quality control is of paramount importance in this highly regulated sector.

Location, location, location

And the location in Cobourg is ideal, located only an hour from Toronto, the largest city in the country. FV Pharma is well-positioned with the market on its doorstep, along with easy access to the rest of the country and international shipping hubs.

Meanwhile, FV Pharma is actively making strategic investments to build even greater leverage to this growth sector. The company acquired a 25 per cent interest in Cannara Biotech, a Quebec-based cannabis producer that will be the second site for FV Pharma to obtain a cultivation licence.

With a large production facility located very close to Montreal, Cannara Biotech is in an excellent position to supply the Quebec market. Currently, only six licences have been granted in Quebec even though it is the second-largest province in Canada.

Building further geographic diversification, the company has also acquired a stake in Alberta-based High Tide Ventures Inc. A downstream company with a large retail presence in Western Canada, High Tide has applied for multiple distribution licences and it may become a potential sales channel for cannabis products as the legalization process advances.

Joint venturer will underwrite expansion

A joint venture arrangement is also underway with Cannabis Wheaton Income Corp (TSXV—CBW), under which CBW will underwrite the funding for the secondary expansion phase planned in Cobourg.

Cannabis Wheaton would earn 49.9 per cent of all subsequent production from the facility through this streaming deal. The joint venture removes much of the financial risk from this story going forward, and still provides HUGE growth potential for FV Pharma, pardon the pun.

An established cannabis specialist with extremely strong management, Cannabis Wheaton is able to provide design and development support to optimize the plant refurbishment, as well as operational guidance once the production expansion is underway.

Chairman Chuck Rifici was one of the co-founders of Canopy Growth and is one of a small group of people with experience converting a large-scale food-grade facility into a successful indoor cannabis operation.

Legal recreational marijuana market almost here

The pending Canadian deregulation of cannabis is scheduled for Oct. 17, and then it is ‘game on’ for the handful of aspiring cannabis producers now gearing up in anticipation of a sales frenzy. FV Pharma has done well to seize this opportunity and provide shareholders with a balanced business model and long-term growth plan.

As an established producer, with cultivation and import-export licences in hand, FSD Pharma is positioned to provide a steady supply of high-quality cannabis to Canadian and international markets.

However, perhaps the most appealing aspect to this company is the viable, fully-funded exponential growth plan that is embedded in the business model through upside in capacity at the large production facility. This bodes well for the performance of the stock going forward.

Considering the ambitious production outlook for this story, the stock symbol HUGE may be appropriate. With almost $40 million in cash in the treasury, no debt and the potential to begin generating tens of millions in sales revenue soon after the Canadian recreational cannabis market is legalized, this company may rapidly join the handful of elite Canadian producers with billion-dollar market caps in this sector.

Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.

This is an edited version of an article that was originally published for subscribers in the June 8, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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