Ontario pot supply decision a big opportunity for smaller producers

Armina Ligaya The Canadian Press

Cannabis seedlings at the new Aurora Cannabis facilty in Montreal on Friday, Nov. 24, 2017. (THE CANADIAN PRESS/Ryan Remiorz)

TORONTO -- Ontario's cannabis supply agreements could be a boon for smaller producers who will have digital shelf space alongside the sector's dominant players, which have inked distribution agreements with other provinces but are making sure to earmark supply for the country's biggest potential pot market.

Several marijuana stocks saw a slight lift Tuesday, one day after the Ontario Cannabis Store announced its initial supply agreements with 26 licensed producers. Selected firms ranged from the largest producer Canopy Growth Corp. to Northern Green Canada Inc., which received its cultivation license from Health Canada just a few months ago.

The long-awaited announcement offered investors some "clarity" and allayed previous concerns about how concentrated the supplier list would be, said Russell Stanley, an analyst with Echelon Wealth Partners.

"With a number of smaller players in there, I think it gives people some comfort that smaller producers still have a shot at getting shelf space in the country's largest market," he said.

The Ontario Cannabis Store, the government entity tasked with distribution of legal pot for adult use, announced late Monday that it had signed more than two dozen initial supply agreements to stock up its online retail shelves.

Sales of recreational cannabis on Oct. 17 will initially be available only through the OCS' online retail channel until the province establishes a wholesale distribution network to supply pot to legal private stores by April 2019.

OCS spokesman Daffyd Roderick said it conducted a "competitive procurement process" that ensures "we've got prices that square up against the illicit market and a broad variety of product at different price points."

"It's a diverse array of producers, and one of the things that will do is give Ontario consumers choice," he said.

The Progressive Conservative government's new plan to have cannabis sold through a private retail model is a contrast its Liberal predecessor's plan for a provincial government monopoly on cannabis sales. Premier Doug Ford had said during the election campaign that he was open to private retail of cannabis, a plan his government officially confirmed earlier this month.

Confirmation of Ontario's supply deals came after several other provinces including Alberta and Manitoba had already announced agreements of their own with licensed producers.

These previous agreements limited the amount of supply producers could make available for Ontario, said Grant McLeod, senior vice president of regulatory affairs for Beleave Inc., which also signed an Ontario deal.

"When we had higher than anticipated orders from some of the provinces, we did seek to fill those orders," he said. "It did in fact dictate how much was available to Ontario."

Some producers say that in the last couple of months, they have been fielding queries for more cannabis from provinces that have already inked deals.

"A number of provinces are reaching out to larger licensed producers... looking for additional product," said Greg Engel, chief executive of Organigram, which also signed a supply deal with Ontario.

"Because they have concerns that companies may not be able to deliver or fulfil their commitments."

After running the numbers, these provinces have concluded that they need additional suppliers, Barry Fishman, chief executive officer of VIVO Cannabis Inc.

"We're in discussions with a few provinces that are in that situation," he said.

Meanwhile, other provinces and territories such as Saskatchewan are still expected to announce their supply agreements as analysts expect a shortage of supply on day one.

Still, Ontario believes it will have enough cannabis supply for Oct. 17, said Roderick.

"We're confident that we've secured supply and we're ready to go back to the market, should need be," he said.

Given the size of the Ontario market, producers say they are allocating a major amount of their production for the province in any case. For example, Organigram is allocating potentially between 35 to 40 per cent of its output for Ontario.

While there will be a tight supply in the early days before producers' expansion plans bear fruit in the coming years, Ontario will be a priority market, said Martin Landry, an analyst with GMP Securities.

"Ontario will get a lot of attention from LPs, given its a big market," he said. "If an LP wants to develop a national brand, it's going to need to have some sort of presence in Ontario."