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This Cannabis Company Just Landed a Big-Name Partner

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The marijuana market has exploded before our very eyes. As evidence of this claim (if any is needed at this point), consider that a relatively small investment in one of the major cannabis companies just a few years ago, Canopy Growth Corp (TSX:WEED) (NYSE:CGC) for instance, would be worth exponentially more today.

While investors might be more inclined to gravitate toward the big names in the sector, it might be worth considering some of the smaller options. One of them, namely Auxly Cannabis Group Inc (TSXV:XLY), just got a bit more attractive. 

Far-reaching operations

First, it is important to note that Auxly has several things going its way. Most notably, the company has a notoriously diversified portfolio of assets.

Auxly’s operations span the entire cannabis supply chain, from the cultivation and extraction phase to the distribution and sale of various cannabis products to consumers.

The firm is projected to reach a production capacity of around 170,000 kilograms per year via its partners by 2020, putting Auxly squarely among the top companies in this department. 

Auxly is also looking to benefit from some of the more lucrative segments within the industry. The legalization of derivative cannabis products is expected to happen by the end of this year, and the Toronto-based company is already set to profit from it.

Auxly is planning to unveil products, including vapes, capsules, oils and sprays, cannabis-infused chocolate, etc., into the market. According to Auxly, this market is set to generate about $6 billion in revenues, a figure that is more or less in line with other estimates.

While the competition will be fierce, the pie is more than big enough for multiple companies to  have a slice.

Auxly gets a major partner

Auxly has signed agreements with quite a few companies in its industry. However, the firm’s latest deal in arguably in a different category altogether.

British multinational tobacco company Imperial Brands recently invested $123 million by way of a debenture convertible in Auxly Cannabis; Imperial Brands acquired a 19.9% ownership in Auxly as a result of the transaction.

Of course, this isn’t the first time a big-name tobacco company dipped its toes in the cannabis market. Altria made a similar (though significantly larger) investment in Cronos Group Inc (TSX:CRON)(NASDAQ:CRON)

This partnership will aid Auxly in at least three ways. First, the company has relied heavily on dilutive forms of financing to fund its growth thus far, much like many of its peers.

This transaction allows the firm to have access to some cash that will be of use in its efforts to expand its operations.

Second, Imperial Brands obviously has experience navigating in the realm of controlled substances, something it could help Auxly with. Finally, the partnership between the two firms could lead to more high-margin derivative products. 

Is Auxly a buy? 

There is no doubt that Auxly’s prospects suddenly became more interesting, and that is on top of what the firm already offered. Still, Auxly has yet to truly stand out among its peers, and until that happens, it is probably best to keep observing (from a distance) how things evolve. 

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Prosper Bakiny has no position in any of the stocks mentioned.

 

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