The Canadian cannabis industry has been on the rocks this year and the fanfare that surrounded the legalizations of recreational uses hasn’t lived to expectations. Companies have had to contend with the slow licensing process of physical locations at the federal and provincial levels. As a result, cannabis companies have had to grapple with oversupply as well as the proliferation of black market activity.
Most cannabis stocks have underperformed this year and this has not spared even the bigger companies. There is a general weakness in the cannabis sector and as a result companies such as Aurora Cannabis (NYSE: ACB), Canopy Growth (NYSE: CGC) and Hexo (NYSE: HEXO) have seen their stocks lose significantly.
Cannabis industry affected by the black market
Despite recreational use legalization last year the black market in Canada has continued to flourish. A year following recreational use legalization the illegal pot trade is booming. According to StatsCan, around 40% of Canadians are buying their port from the black market. it is expected that around 70% of pot sales this year will be in the black market.
Canopy Growth CEO Mark Zekulin blames the lack of enough cannabis stores in Canada for the booming black market. He indicated that the company’s high losses this year have been a result of excess inventory and the company lost around $1.6 billion in the last six months. Equally, pricing is another issue that has led to consumers turning to black-market pot because legal marijuana is expensive.
Constellation losing hope on Canopy Growth
Things seem not to be work for Canopy after Constellation Brands (NYSE: STZ) indicated that it is will not increase its investment in the cannabis company. Constellation made its first investment in the company in 2017 and then in November last year it upped its stake to 38% in a CA$5 billion investment.
It seems now that constellation made a mistake and it has now indicated that it is not going to make additional cash investments in Canopy Growth. Constellation currently holds warrants in Canopy Growth with an exercise price of CA$12.98 set to expire in May next year.
Hexo admits growing cannabis in an unlicensed facilityÂ
With much hype regarding the potential of the cannabis industry, most companies embarked on acquisitions to form vertically integrated operations to enable them to leverage industry potential. For instance, Hexo’s acquisition of Newstrike Brands has brought it under the spotlight of Health Canada. The company has reported that it might have acquired unlicensed spaces when it bought Newstrike Brands. The company indicated that it discovered the unlicensed growing area on July 30 but it immediately halted cultivation in the so-called Block B.
This comes at the back of the recent CannTrust (NYSE: CTST) scandal in which the regulator found that the company had been growing cannabis on unlicensed areas. This, therefore, raises concerns regarding whether there was due diligence before Hexo purchased the facility. Hexo is considering closing the affected facility as it looks to cut costs.
