Mining and Marijuana - Smoke and Mirrors?
To understand why some miners are considering the switch to medical marijuana, here is some background on the mining business.
Mining is different than most other sectors in that 95% of the players never create any revenues. Almost all exploration companies attract investments and then spend the majority of the funding on exploration activities with some dedicated to general and administrative expenses. Companies instead try to increase the value of their exploration assets to a point where the properties owned by them become mineable deposits. Only a very small number of exploration properties ever get to the production stage. Most exploration companies make money for investors early on with many shareholders “buying on rumour and selling on truth”. This creates huge share volatility in mining stocks. When companies rely totally on investment dollars to survive, they have to be adaptable when those dollars dry up. So, there is a small percentage of mining companies that are very flexible and chase those investment dollars anywhere.
Even when times are good for investment in the mining sector there are what we call “flavour of the month” plays. Past hot commodity cycles in uranium, lithium, platinum group elements (PGE’s) and rare earth minerals have encouraged some companies to pick up projects in the current fad metal. These companies will often get a run on their stock just for announcing the possibility of participation in the hot commodity. Then, the fad fades almost as quickly as it started and all that is left are the hard working companies that had been specialized in those metals all along.
The 20-year drought in mining investment after the Bre-X fiasco in the mid 1980’s created many sector conversions from mining to high-tech and bio-tech during the dot.com race in the early 2000’s. In the last two to three years, there has been a major decline in mining activity and that small percentage of companies are now looking to other sectors. With the build up of junior mining companies during the recent, decade long commodity boom, there are now more publicly listed mining companies than ever before. Because of the lack of investment and the increased competition those that would have switched to an area within in the metal commodities are now looking for a full sector switch, including medical marijuana as a “greener” pasture.
Health Canada reports that only 13 former mining companies have applied for medical marijuana production permits out of 700 applications – this is only 1 – 2% of the total publicly listed mining companies in Canada. The run to marijuana production from mining is hardly an industry “turning over a new leaf.” Harcourt’s company, True Leaf, has applied for a production permit that alone would handle more than the current demand in Canada. True Leaf was permitted for production on April 1st this year and they are one of the front-runners of the other 700 applicants to Health Canada. The medical marijuana demand is forecast to increase ten-fold in the next few years if all the regulations, permitting and Supreme Court decisions proceed with minimal delays. Given that one company alone can handle a tenth of the forecast demand, it begs the question of what the other 690 applicants will be doing?
Perhaps the true prize is to be ahead of the curve and be permitted for production for when marijuana is legalized for retail sale in Canada. With legalization there would be some major cannabis production to meet demand and that may be the real “gold mine” for any company that owns a permit. Now that sounds like something a mining company can dig.