analyst ideas of the week - baystreet.ca · 2019-11-13 · analyst ideas of the week ceo continues...

Analyst Ideas of the Week CEO Continues to Invest in This Silver Junior

November 12, 2019

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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Mining / Exploration

Company Name: Ticker Symbol Current Share Price:

FRC Fair Value Estimate:

Date of PR:

Goldplay Exploration Ltd.

TSXV: GPLY $0.21 $0.98 November-7-2019

PR Content Completed an over subscribed private placement of $3 million at $0.20 per share. No free warrants were issued. Directors and officers invested $0.39 million in this financing. CEO, Marcio Fonseca, invested $0.14 million and increased his position to approximately 8.7% of the outstanding shares.

FRC Opinion Positive – We were not only pleased to see management increasing their equity ownership, but also that the funds will used to continue resource expansion at the San Marcial project in Mexico. San Marcial already has an indicated resource of 36 Moz at an average grade of 147 gpt AgEq, and an inferred resource of 11 Moz at 108 gpt AgEq. This estimate includes a shallow, high grade, open pittable, indicated resource of 23 Moz AgEq at 239 gpt AgEq. Recent exploration has resulted in delineating multiple new high-grade silver and gold targets.



Date of PR:

Corvus Gold Inc. TSX: KOR $1.85 $3.75 November-7-2019

PR Content Preliminary geophysical data from an Induced Polarization (IP) survey over the Mother Lode gold deposit (in Nevada) showed a new strong anomaly 150 m below the main deposit. In addition, the company recently recommenced resource expansion drilling on the project.

FRC Opinion Positive – The IP results are encouraging as drilling since the previous resource estimate on Mother Lode (in 2018) had indicated potential for a deeper sedimentary hosted deposit. Drilling has also extended mineralization, primarily towards the north and west of the existing deposit. We are expecting an updated resource estimate in early 2020, on the Mother Lode project, which will likely result in a significant improvement in the already robust economics displayed by a PEA completed in 2018.





Special Situations Company Name: Ticker Symbol Current Share

Price: FRC Fair Value Estimate:

Date of PR:

Clean Seed Capital Group Ltd.

TSXV: CSX $0.19 $2.03 November 7, 2019

PR Content Announced a proposed 50:50 joint venture (“JV”) with Norwood Sales Inc. (“Norwood”) to commercialize seeding and hybrid planting equipment for the North American market. Norwood, founded in 1992, is an agricultural equipment manufacturer with facilities that total 180,000 square foot.

FRC Opinion Positive – The company had announced a significant acquisition last year, but subsequently decided to back out of the transaction after due diligence. Noting that Clean Seed has been actively seeking entry into the U.S. planter and seeder space, this JV would enable Clean Seed to execute on its proposed business plan of penetrating into the U.S. markets. Given that Norwood operates a manufacturing facility, this would allow Clean Seed to commercialize its patent pending smart seeding and planting technologies without the financial requirements of a manufacturing facility.



Date of PR:

iSignThis Ltd. ASX: ISX A$1.07 A$1.30 November 11, 2019

PR Content ISX’s shares remain suspended from trading. The company is expected to provide the Australian Securities Exchange (“ASX”) with answers to a third round of questions sent by the ASX. Responses are due on November 15, 2019.

FRC Opinion Neutral – It has been over a month since securities of ISX have been suspended from trading. We will continue to closely monitor ISX for any developments. On another note, ISX reported their quarterly financial results on October 24, 2019, posting revenues for Q3-2019 of $8.33 million – up 36% quarter-over-quarter from $6.30 million. Our Q3-2019 revenue forecast was $9.63 million. We will publish an update once we have more clarity on when the shares will resume trading.





Company Name: Ticker Symbol Current Share

Price: FRC Fair Value Estimate:

Date of PR:

Siyata Mobile Inc.

TSXV: SIM $0.28 $1.09 November 12, 2019

PR Content Received $800,000 in purchase orders (“POs”) for its UV350, CP250 and CP100 devices through Tier 1 Carriers and distributors. The names of the Tier 1 Carriers and distributors were undisclosed.

FRC Opinion Positive – We are pleased to see demand for company products remain strong. Siyata is slated to report their quarterly financial statements on November 14, 2019 – we will provide an update report once it is publicly released. We expect the upcoming quarterly financial results to show a large increase in revenues compared to the prior quarter (readers can refer to our September 2019 update report on Siyata for our take on revenues to expect for Q3-2019).



Date of PR:

MLI Marble Lending Inc.

CSE: MRBL $0.20 $0.47 November 7, 2019

PR Content Announced a partnership with Lifestyles Management Inc. (“LMI”) where the company will offer its financial wellness product (“Score-Up”) to LMI customers. LMI is a consumer services company that provides an array of solutions, such as: financial services, credit services, mortgage services, tax and travel services, event planning services and business services. According to LMI’s website (lmifamily.com), they have served over 10,500 Canadians. Information regarding the referral fee to be paid to LMI was undisclosed.

FRC Opinion Positive – This marks the second significant partnership that Marble Lending has entered into for its financial wellness product. The first one was on October 31, 2019, with Home Owners Soon Financial Inc. (“HOS FINANCIAL”). Given that LMI has served over 10,500 Canadians and offers a large array of services, we believe that LMI provides Marble Lending with an enormous amount of potential new customers.





Cannabis



Date of PR:

Biome Grow Inc. CSE: BIO $0.25 $1.31 November 7, 2019

PR Content Announced the approval for cannabis sales in the province of Prince Edward Island (“P.E.I.”). Company products will be available through P.E.I. cannabis stores and on the provincial government’s online store.

FRC Opinion Positive – We are pleased to see the company expand its commercial footprint and expect this approval to contribute materially to company revenues for Q4-2019. The company is now licensed to distribute cannabis in (1) Newfoundland and Labrador, (2) Nova Scotia, (3) Saskatchewan, (4) New Brunswick, (5) Manitoba and (6) P.E.I. Biome is slated to report their quarterly financial results in the coming weeks, to which we will provide an update report.







Date of PR:

The Yield Growth Corp. EuroLife Brands Inc.

CSE: BOSS CSE: EURO

$0.30 $0.07

$0.48 N/A

November 12, 2019

PR Content The Yield Growth Corp. entered into a definitive agreement with EuroLife Brands for the distribution of Yield Growth’s new line of mushroom infused coffee mixes. EuroLife Brands is to retain exclusive distribution rights in Germany, the United Kingdom and Switzerland. Financial information regarding the agreement was not provided.

FRC Opinion Positive – Yield Growth’s new line of mushroom infused coffee mixes are currently being developed and is expected to commercially launch in Q2-2020 after testing and registrations are complete. According to a report titled “Functional Mushroom Market” taken from ResearchAndMarkets.com, the global functional food market is forecasted to reach US$34.3 billion by 2024 – a compound annual growth rate (“CAGR”) of 8.04% from 2019. Yield Growth reported their quarterly financial results last week – we will publish an update report shortly. EuroLife Brands Inc. is a leading cannabis brand establishing a data-driven marketplace supported by physician-backed cannabis education and consumer analytics. We will initiate coverage on EuroLife in the coming weeks.





Weekly Cannabis Commentary Continuing from last week, we show the performance of the Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ / “HMMJ”) below as a proxy for sentiment of the cannabis market.

Horizons Marijuana Life Sciences Index ETF

Source: Google

HMMJ posted a week-over-week return of -3.16%. Year-to-date (“YTD”), HMMJ has lost 33.20% in value. Currently, HMMJ is trading at its 52-week low of $10.11. Cannabis sentiment has been hammered by disappointing quarterly results by Cronos Group Inc. (“Cronos”), Tilray Inc. (“Tilray”) and dismal preliminary results by OrganiGram Holdings Inc. (“OrganiGram”), discussed below. Cronos Group Inc. Earnings On November 12, 2019, Cronos (TSX: CRON) reported their Q3-2019 financial results. Here are some key points:

1. The company reported Q3-2019 net revenue of $12.70 million – a quarter-over-quarter (“QoQ”) increase of 24.06% (from $10.24 million) and a year-over-year (“YoY”) increase of 237.77% (from $3.76 million). The following illustrates the average selling price per gram for Cronos.

Selling Price per Gram

In C$ Q1-2019 Q2-2019 Q3-2019

Kilograms sold N/A 1,584 3,142

Net Product Revenue / Gram Sold N/A $6.44 $3.75

Source: Cronos Group Inc. MD&A, FRC





The table above outlines a significant concern for Canadian Licensed Producers (“LPs”). Consistent with what HEXO Corp. (NYSE: HEXO) reported two weeks back, there is evident pricing pressure in the Canadian cannabis market. Cronos reported an average product revenue per gram for Q3-2019 of $3.75 – a QoQ decrease of 41.77%. As Health Canada data showed cannabis inventories starting to pile up among Canadian LPs (see graph below), it is our expectation that the large amount of cannabis inventories will exacerbate the pricing pressure faced by Canadian LPs. Provided by Health Canada, the following illustrates cannabis inventories from October 2018 to August 2019.

Total Inventories and Sales – Dried Cannabis (Kilograms)

Source: Canada.ca

The amount of finished inventories have been increasingly steadily. From October 2018 to August 2019, finished inventories have increased by a compound monthly growth rate (“CMGR”) of 12.66%. Over the same period, sales have increased by a CMGR of 7.37%. Given that inventories are rising at a faster pace than sales, we believe the data provided by Health Canada strongly outlines the pricing pressure faced by Canadian cannabis producers. Readers should be reminded that cannabis is a commodity product – expecting high margins and high valuation multiples is economically naïve. With that said, the recent legalization of cannabis edibles and alternative cannabis products provides such commodity suppliers the opportunity to break out of what we call “commodity jail”. In addition, we believe a lucrative opportunity for cannabis companies lays south of Canada: The United States (“U.S.). This forms the second key point of Cronos’ earnings results.

2. Cronos announced the introduction of a new hemp-derived CBD brand called PEACE+. This new CBD brand is to launch in the U.S. market.





Consistent with our views that cannabis producers should shift to creating cannabis products, Cronos announced that they are introducing hemp-derived CBD tincture products through a test market of approximately 1,000 retail stores in the U.S. (through the utilization of Altria Group’s (NYSE: MO) sales and distribution network). We believe this signals a long-term strategy that moves away from the poor-performing recreational cannabis market in Canada to the hemp-derived CBD market in the U.S. According to Brightfield Group, hemp-derived CBD products in the U.S. could generate sales of up to US$23.7 billion by 2023 – a compound annual growth rate (“CAGR”) of approximately 43% from a forecast of US$5.7 billion for 2019.

U.S. Hemp-Derived CBD Market Size and Projections

Source: Brightfield Group This compares to the Canadian edibles and other cannabis products market; which Deloitte estimated the annual market demand to be $2.7 billion.

Source: AgraFlora Organics International Inc.





As Canadian LPs face increasing pricing pressure from the sale of cannabis, it is our expectation that these companies will largely shift to creating cannabis products from the cannabis that they cultivate. Additionally, we believe the U.S. hemp-derived CBD market to be extremely attractive, as hemp-derived CBD products are federally legal across the U.S. and easily accessible to consumers through convenience stores. A shift in business focus by Canadian LPs from Canada to the U.S. is warranted, as cannabis stocks have fallen over the past quarters due to the extremely slow roll-out of cannabis retail stores across Canada. In addition, Tilray reported quarterly financial results today. The earnings results of Tilray are discussed below. Tilray Inc. Earnings On November 12, 2019, after markets closed, Tilray (NASDAQ: TLRY) reported their Q3-2019 financial results. Here are some key points:

1. The company reported Q3-2019 net revenue of $64.1 million – a QoQ increase of 5.48% (from $60.77 million) and a YoY increase of 379.45% (from $13.30 million). The following illustrates the average selling price per gram for Tilray.

Selling Price per Gram

In C$ Q1-2019 Q2-2019 Q3-2019

Kilograms sold 3,012 5,588 10,848

Net Selling Price / Gram US$5.60 US$4.61 US$3.25

Source: Tilray Inc Financial Statements. MD&A, FRC Similar to results reported by Cronos, there is clear pricing pressure for cannabis. Tilray reported an average selling price per gram for Q3-2019 of US$3.25 – a QoQ decrease of 29.50%.

2. Announced expansion of its brand portfolio. Tilray announced intentions to distribute CBD beverages, edibles and vape products in Canada. In addition, Tilray acquired Smith & Sinclair (a U.K.-based confectionary company) with the goal to introduce CBD-infused consumer products in the U.S. and the United Kingdom (“U.K.”). Similar to what Cronos is pursuing, we believe the long-term strategy of Tilray involves placing a greater emphasis on cannabis markets outside of Canada.





In addition to Cronos and Tilray reporting their quarterly financial results, OrganiGram released preliminary results ahead of its financial results on November 25, 2019. The preliminary results are discussed briefly below. OrganiGram Holdings Inc. Preliminary Results On November 11, 2019, Organigram (TSX: OGI) announced preliminary fiscal Q4 revenues of $16.30 million – a QoQ decline of 34.14% (from $24.80 million). OrganiGram outlined the slow roll-out of retail cannabis stores and also the large amount of cannabis supply for the reason behind the QoQ decrease in revenues. Shares of OrganiGram are down 19.96% today from this news.

OrganiGram Holdings One-Day Share Performance

Source: Google

From the quarterly financial results of Cronos and Tilray, and the preliminary results by OrganiGram, we conclude with the following key points:

• Pricing pressure for cannabis in the Canadian market. • Large amount of cannabis inventories in the Canadian market. • Slow roll-out of retail cannabis stores dampening the Canadian cannabis market. • Shift in focus by Canadian LPs from a commodity producer to a cannabis products

producer. • Shift in focus to cannabis markets outside of Canada.

Performance of Select Canadian LPs The following shows the performance of select Canadian LPs on a 1-month, 6-months and YTD basis.

Company Name 1 Month Performance

6 Months Performance YTD Performance

Aphria Inc. -12.55% -31.40% -23.07%





Aurora Cannabis Inc. -5.23% -56.51% -33.57%

Canopy Growth Corp. -4.18% -56.83% -35.29%

Cronos Group Inc. -5.45% -46.23% -32.50%

Tilray Inc. 4.40% -53.58% -69.39%

Hexo Corp. -10.17% -67.78% -44.79%

CannTrust Holdings Inc. -29.12% -82.30% -81.78%

Organigram Holdings Inc. -23.06% -61.79% -37.04%

The Supreme Cannabis Co., Inc. -7.29% -55.05% -40.27%

Source: Google, FRC

Valuation of Select Canadian LPs The following shows the average Enterprise Value to Revenues (“EV/R”) that cannabis companies are currently trading at. The companies used in the chart below are outlined further below.

Average EV/R of Canadian LPs

Note: Vertical axis refers to the EV/R. Source: FRC





Valuation Multiples of Select Canadian LPs

Source: S&P Capital IQ, FRC

The average TEV/Revenue, as of November 12, 2019, was 18.1x – a decrease from an average TEV/Revenue of 18.4x on November 4, 2019. As a number of companies are not EBITDA positive, we have refrained from tracking the average TEV/EBITDA. As readers can see from the graph, the valuation of Canadian LPs has remained relatively unchanged on a week-over-week basis. In the following, we provide commentary on Canadian cannabis pricing.

Source: Online Provincial Cannabis Store, FRC





Average price per gram decreased nominally from $11.77 to $11.76 – a 0.13% week-over-week decrease. Cannabis pricing across provinces remained relatively stable, with the largest cannabis price increase witnessed in Yukon (of 1.22%) and the largest cannabis price decrease witnessed in New Brunswick (of -1.75%). The remaining provinces/territories posted cannabis price increases/decreases ranging from 0.60% to -0.70%. We have included Manitoba and Saskatchewan in the list of provinces/territories tracked and will provide commentary on the cannabis market of Manitoba and Saskatchewan going forward. The average price per gram for Manitoba and Saskatchewan was not incorporated in the nationwide average price per gram for this week (due to prior week not having data on Manitoba and Saskatchewan). The Financial Post (“FP”) published an article on November 6, 2019, outlining that the province of Ontario will allow private cannabis retailers to sell their products online or by phone. Previously, the provincially-run Ontario cannabis Store’s website osc.ca stood as the only option for individuals to purchase cannabis products legally. Although private cannabis retailers in Ontario are allowed to sell their products online, they are not allowed to deliver online orders directly to consumers (consumers must pick-up their online purchases in-store). In addition, the province additionally stated that they would allow LPs to establish retail stores at their production sites. However, it is unclear as to how many stores each LP will be able to open across their production sites. We believe this to be monumental news that would change the cannabis landscape in Ontario. By allowing private cannabis retailers to set up ecommerce stores, this would provide consumers in Ontario with greater access to cannabis products. In addition, allowing LPs to establish retail stores at their production sites is likely to help alleviate demand issues. Given that Ontario is expected to be the largest cannabis market in Canada by 2024 (see image below), we believe the government of Ontario’s willingness to acknowledge that the cannabis market in Ontario is currently severely underserved by making the moves mentioned above as a strong step forward in remedying the slow roll-out of cannabis retail stores in Ontario, and the controversial lottery system for cannabis retail licenses.





Taken from Global News, Source: Arcview Market Research/BDS Analytics

There was no notable news published in other provinces/territories. The below chart shows average price per gram of cannabis nationwide since we began price coverage:

Source: Online Provincial Cannabis Store, FRC

$11.40 $11.60 $11.80 $12.00 $12.20 $12.40 $12.60 $12.80 $13.00

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analyst ideas of the week - baystreet.ca · 2019-11-13 · analyst ideas of the week ceo continues...

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