Nick's New Marijuana Deal Just Opened

Written by Nick Hodge
Posted September 26, 2017 at 8:00PM

We have a chance to fund a new cannabis grower from the same group that brought us the Emblem Corp. deal on which we more than doubled our money.

Like Emblem, this company is also private and plans to IPO in the coming months. And I expect a similar return when it does.

It will produce some of the highest-quality organic cannabis in Canada for medical use, and it will do it at costs that are equal to or below traditional growing costs. It is a fully licensed producer. 

By growing organically and at low costs, its product will fetch a premium in the market, thereby increasing the company's margins.

It can do this because it has partnered with Eaton Corp., the US$36 billion global power management company. Eaton is providing research and optimization that will allow the company to have some of the lowest electricity input costs in the business. Eaton is doing this so it can become a leader in cannabis-growing power management and lighting, and corner business in this thriving field.

Eaton TGOD Partnership

Its facilities are located in Ontario and Quebec — two provinces that house 66% of the Canadian population. This also reduces costs via shorter shipping distances.

It has a facility expansion underway in Ontario that’s expected to be complete in June 2018. That would take this company to annual production of 14,000 kilograms. At an C$8 per gram sale price, that indicates annual revenues of C$112 million.

It also has a much larger expansion it’s working on in Quebec that's expected to be finalized in Q1 2019. It's just secured a 75-acre facility with help from Eaton and the government of Quebec. The site was strategically selected as it’s within one kilometer of a substation that can provide 50 megawatts of electricity. Electricity costs at this facility are expected to be ~C$0.04 per kilowatt-hour.

Permits to begin construction there could be received as early as Q4 this year with construction beginning immediately after receipt. A phase 1 building would add 22,000 kilograms of annual production, bringing total annual production to 36,000 kilograms, which would equate to annual revenues of C$288 million.

TGOD Phase 1 Expansion

A phase 2 expansion will bring total production to 62,000 kilograms and phase 3 final expansion would ultimately bring total production to 116,000 kilograms annually. That level of production, at an C$8 per gram sale price, equates to C$928 million in annual revenue.

TGOD Expansion Plans(Click to Enlarge)

The current round of funding is for the phase 1 expansion in Quebec.

With Eaton’s guidance, these will be the highest-tech grow houses in the world, using combined heat and power for efficiency and reduced costs.

As a peer group, cannabis growers are fetching a 2X-3X multiple. So at the end of its current expansion to 14,000 kilograms and C$112 million in annual revenues… this company should be valued at C$224-336 million.

At the end of the final stage of expansion — 116,000 kg at C$928 million annually — the company should fetch a public valuation of C$1.85-C$2.78 billion.

The placement in which we are participating is being done at C$1.65 with a half warrant at C$3.00 good for three years.

The company currently has 121.9 million shares outstanding, meaning this raise is being done at a C$200 million valuation. That’s lower than what the company should be valued at after its initial expansion alone.

Insiders own ~47% of the company, and their shares are locked up for six months after the stock starts trading.

TGOD Share Structure(Click to Enlarge)

As a comparable, Aurora Cannabis (TSX: ACB) is currently undergoing a similar expansion that will take it to 100,000 kilograms of annual production. It currently has a C$1.1 billion market cap.

What’s more, I used $8 as an average selling price. That is lowballing. Current sales of organic cannabis in Canada are going for C$11 per gram. Plus the company is also adding an oil extraction line that is expected to bring in an additional C$170 million every year.

I firmly expect this company to trade north of C$4.00 when it lists, making it an easy double from this financing price. The warrant will also be listed and tradable.

There is already C$36 million in the bank and the IPO is expected in the first quarter next year.

This deal closes at the end of September 2017.

We've put full details on how you can participate in this and similar deals together for you here.

Call it like you see it,

Nick Hodge Signature

Nick Hodge

follow basic@nickchodge on Twitter

Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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