The three-step program to success for cannabis streaming
By Don Hauka
How Cannabis Wheaton shares their expertise with licensed producers
In 2010, Chuck Rifici wasn’t quite ready to leap into the cannabis industry when it looked like California was about to legalize marijuana. So a couple of years later when the groundwork for the Canadian cannabis industry was being laid, he was determined to get in on the ground floor.
“I vowed that I wouldn’t miss that opportunity when it came to Canada,” says Rifici, Chairman and CEO, Cannabis Wheaton Income Corp. (TSX.V: CBW).
“I really looked at what the next wave of value was and what the opportunities were.”
The formula Rifici came up with was a three-step program to success. Step one — assemble a top-notch team to help implement his vision. Step two — find the right model to provide capital funding and expertise to Licensed Producers (LPs) so they could concentrate on cultivation and innovation. Step three — raise the money to finance the model.
The results? Rifici’s Cannabis Wheaton customized a financing model traditionally used in the mining sector to become the first cannabis streaming company in the world. On June 29, the company announced it had raised over $50.25 million at the close of its latest offering. And that same month, Cannabis Wheaton brought on board two of the top cannabis industry’s legal minds to take the company to the next stage. Hugo Alves and Michael Lickver founded the country’s first cannabis-focused practice group at a large Bay Street firm, and grew that practice into the leading cannabis-focused legal advisory business in Canada. Now Alves is the President and Director of Cannabis Wheaton, while his partner Lickver is the Executive Vice President of Strategy.
Assembling that sort of A-Team to drive a venture is one of the things Rifici lives for as a businessman.
“What really excites me as an entrepreneur and a CEO is you can build out a team of stellar individuals who are all experts in their own fields and really apply them to the model, and that’s what makes Cannabis Wheaton unique,” says Rifici.
“The legal plumbing and the regulatory plumbing of our agreements, and the model itself is very, very unique and it creates a lot of value, but you need the right team to execute on those agreements.”
The streaming model is straightforward but up until Cannabis Wheaton came along, unknown in the cannabis industry. The company provides funding for facility expansions, operations and/or initial construction in exchange for minority equity interests and a portion of the cultivation production. It gives the company’s partners a platform for growth so they can focus on production and innovation.
Not only do the streaming partners get secure financing, they gain access to all the collective brand, marketing and other expertise of the Cannabis Wheaton Team.
“Our team provides that extra layer of due diligence and assistance to our partners to review all top risk elements that you have when you’re trying to build out licensed cultivation,” says Rifici.
“Our partners get our capital and they also get our team for free and I think that makes a pretty compelling case for our partners.”
Not only do Cannabis Wheaton’s streaming partners get access to the industry expertise of the legal dynamic duo of Alves and Lickver, they can tap into the creative thinking of Chief Creative Officer Ian Rapsey, an award-winning creative director who has created and worked with some of the most recognizable brands in North America. Throw in other high performing talent, like Chief Financial Officer and Chief Operating Officer Jeff Tung — who has managed more than $3 billion US of deals in the Telecom, banking, insurance and technology industries — and streaming partners have a bumper crop of talent and experience to draw on.
The model, team and financing have been enough to convince 15 streaming partners in six provinces to come on board. And the sheer scale and diversity of that network is another strength that Cannabis Wheaton can offer both partners and investors.
“The nice thing about Cannabis Wheaton is that it really is a nimble platform, and you get portfolio effects where we can truly balance load across our partners,” says Rifici.
Under the Cannabis Wheaton model, production can be transferred from one LP to another to get a better price. The company can also use its size to cut better deals with large buyers than the individual LP could. And for investors, the risk is spread over a wide variety of LPs with individualized leadership teams and expertise and specialized growing techniques and innovations.
“With our platform we mitigate a lot of those risks,” says Rifici. “They’re really very strong attributes of the platform that we can give all our stakeholders.”
Strong enough for Cannabis Wheaton to enter into a streaming agreement with ABcann Global Corporation, part of a deal that will see the construction of an additional 50,000 square feet of pure cultivation space to ABcann’s proposed Napanee, Ontario cannabis cultivation facility.
“It’s a very interesting deal because with our capital, we can unlock what we believe conservatively to be about 8 million grams a year of production,” says Rifici.
“We model that with a rate of return that is 50% annually on our capital for that stream. So it’s a great first deal, and ABcann had a lot of options for capital, but they knew we were their best choice. It’s a great deal — truly a win-win.”
Moving forward, Rifici says his focus is on bringing some of the company’s streams online by beginning construction on certain partner facilities. And while his formula for success might have been as easy as one, two, three, the supply versus demand numbers are much bigger.
“Today we have roughly 50 million grams supply a year for the medical market, and going into legalization, reports estimate the market size at roughly between 700 million to 1.2 billion grams a year of production,” he says. “That’s a 20 to 30 times increase in demand.”
That means that all the existing facilities and the facilities that are currently in construction serve only about one-third of the “Black Market” demand for cannabis. It will take a while for capacity to meet that demand. Rifici says that bodes very well for investors because “we know that demand is going to exceed supply for several years based just on the facilities that are being built.” That means there’s a huge potential for growth as things stand. But there’s more.
“The icing on the cake is that medical research continues to evolve in cannabis and it’s just early days, so you’re going to see increased demand for cannabis as a pharmaceutical input, which is not really factored into a lot of the demand reports,” he says.
“Every vector of demand is showing a huge increase is coming, and production is going to lag behind for several years.”
So in just a couple of years, Rifici has made good on his promise of not missing the cannabis boat when it sailed into Canada. He now has Cannabis Wheaton in a position where they can expand into every province if the conditions are right, perhaps the finest management team a cannabis streaming company could ask for, and the financial resources to start getting those streams working. All in a very compressed timeframe.
“The Cannabis Wheaton model has allowed us to grow very large, very fast in what is an incredibly fast-changing regulatory and industry environment,” he says.
“It’s really like nothing else.”