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This Jamaica weed farm is thriving, despite short sellers’ doubts

Off a dirt road outside Kingston, Jamaica, 300 marijuana plants sit in manicured rows overseen by a Rastafarian grow master who goes by the name “Bob on the Job.”

As Canadian pot producer Aphria Inc. tells it, the farm is part of its growing portfolio of international assets. For two U.S. short sellers, it’s one of the catalysts for an offensive that sent Aphria shares plunging in December. Hindenburg Research and Quintessential Capital Management questioned the farm’s existence and said Aphria overpaid for “largely worthless” assets in a three-country deal.

The truth, as uncovered by a tour of the Jamaican countryside and the back streets of Buenos Aires by Bloomberg, is more nuanced. In the nascent world of global pot investing, assets can be hard to document and even harder to value, though first-mover advantage may hold big rewards.

Aphria acquired LATAM Holdings Inc. in a September deal that the Leamington, Ont.-based company valued at $193 million (U.S.) when it was announced and SOL Global Investments Corp., the seller, said was worth $298 million when it closed. The assets include Marigold Projects, a licensed Jamaican grower, a pharmaceutical distribution warehouse in Argentina and licensed farmland in Colombia.

In mid-December, black and yellow plastic tubs brimming with medical-grade marijuana were stacked inside an old shipping container on the Marigold farm. The haul is the product of 2,500 kilograms of weed it harvested from 10 acres of former sugar cane-growing land leased from the government, proof Aphria says, the assets have value.

“There’s been so much interest in Jamaica’s medical marijuana that there were companies coming from all over to the island to assess the situation,” Lloyd Tomlinson, Marigold’s founder, said at his office in Kingston. In the country made famous by the ganja-smoking reggae star Bob Marley, that’s “a huge opportunity.”

Hindenburg and New York-based hedge fund Quintessential called the acquisitions part of a “shell game” to funnel money to insiders at an inflated price. The Dec. 3 report sent Aphria’s stock down by about half in three days, wiping out $1.4 billion in market value.

Aphria called the report “malicious,” false and defamatory, and said the deals were backed by a fairness opinion from Cormark Securities Inc., a Toronto investment bank. Aphria has also appointed a special committee to review the acquisitions and named Irwin Simon as an independent chairman, replacing Vic Neufeld who remains chief executive officer.

Hindenburg has urged Cormark to make the fairness opinion public.

“The emerging cannabis markets in Latin America and the Caribbean are in various early stages of developing a robust medical cannabis regime, like we have in Canada,” Aphria said in a Dec. 17 emailed response to questions about the short report. “They also represent significant opportunities to realize new demand and establish important, low-cost regional cultivation for domestic use and international export.”

The controversy took a new twist when smaller U.S. cannabis retailer Green Growth Brands Ltd. announced a proposed hostile takeover offer on Dec. 27 that valued Aphria at almost $2.8 billion. Aphria’s shares jumped 13 per cent the day after the bid, erasing some of the losses from the report.

Hindenburg called the bid “noncredible” and raised questions about connections between the two companies while Aphria said the offer “significantly undervalues the company.”

Aphria is scheduled to report earnings for its fiscal second quarter on Jan. 11. The company has not yet released the detailed, line-by-line rebuttal of the short report it told BNN Bloomberg it would issue.

The Jamaica farm is the most obvious proof that Aphria bought a functioning business in Latin America. Quintessential said its researcher was unable to find the operation, despite much searching, and was “therefore unable to confirm its existence.”

Located an hour’s drive from Kingston in St. Catherine parish, the farm is tucked about 250 metres off the road, surrounded by a chain-link fence, patrolled by armed guards, and monitored by dozens of security cameras.

Tomlinson, a lanky, bald Jamaica native, said he started the operation in 2015 after obtaining a renewable, 25-year lease from the government. He declined to say how much he paid for the lease.

About 4,100 plants were being grown when Aphria bought the business on Sept. 27, according to a copy of an inventory seen by Bloomberg. On the day Bloomberg visited, workers were moving month-old plants from a covered nursery to the growing fields, including a strain the company developed called “Marigold.”

The October-November harvest is the largest, according to the company, but the climate can support as many as three harvests a year. Tomlinson said the farm has the capacity to increase its production substantially to 16,000 kilograms a year. He’s never been contacted by Quintessential, he said.

Aphria said it received a Tier 3 licence for the farm, allowing it to cultivate five acres or more.

In an emailed response to questions, Quintessential stood by its research and said the farm “is of little importance for the purpose of valuing the assets of the company” because Marigold leases the land, instead of owning it. It also doubted the 2,500 kilogram output claim.

“The only asset that Aphria appears to have purchased is a Tier 3 cannabis licence,” Quintessential said.

Aphria can’t yet export its Jamaican weed, as the country currently doesn’t allow it. The government plans to introduce a bill to parliament early this year that would allow for commercial shipments abroad, according to the Cannabis Licensing Authority. Initially, the company plans to focus on the local market, selling to the 2.9 million residents and the more than 4 million tourists who visit annually.

Quintessential also raised doubts about the existence of a Kingston retail shop, called Sensi Medical Cannabis House. The hedge fund said it visited the address in a small shopping centre in Jamaica’s capital in October and couldn’t find the business, coming to the conclusion that “Marigold’s ‘Unit 51’ didn’t exist.”

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Bloomberg found the store well-marked on the second floor, above a pizza-by-the-slice and Jamaican beef-patty joint. Inside, the store was built out, but shelves and display cases were empty. A second room, in which a leather couch sat, was built for smoking on the premises. A sales manager who asked not to be identified said they plan to have a medical doctor on site who can write prescriptions to some of the 3,000 customers they expect each week.

Marigold has three other retail sites that aren’t yet open, according to copies of the approvals seen by Bloomberg.

Quintessential, in response to questions, said it couldn’t locate the business because Aphria had published the wrong address for Sensi.

In Argentina, Aphria’s subsidiary ABP SA is remodelling a warehouse in the residential Parque Patricios neighbourhood of Buenos Aires. The four-story building is not operational, according to three construction workers who asked not to be named. The entrance hall has an empty reception desk, four waiting chairs and eight official authorizations posted on the wall granted by local regulatory bodies.

ABP also runs a drugstore called Farmacia & Perfumeria. Aphria said ABP also distributes to a network of pharmacies, clinics and hospitals and that it’s delivered 1,500 bottles of an oil derived from cannabis for use in clinical studies on treating refractory epilepsy in children.

The LATAM deal was funded by the issuance of 15.7 million common Aphria shares plus the assumption of $1 million in debt. Quintessential and Hindenburg said in their Dec. 3 report that this amounts to about $280 million based on Aphria’s share price when the deal closed, and the Jamaican assets made up $145 million of that total.

Aphria said the deal was worth $193 million when it was announced in July and the seller of the assets said it received approximately $298 million when the deal closed in September.

Neither Aphria nor the seller gave a value for the Jamaican assets.

“Aphria paid 15-20x more for its Jamaican operations than competitors,” Nathan Anderson, founder of Hindenburg, said in an email on Saturday. “A small farm connected by a dirt road does not justify the egregious acquisition price.”

Aphria said the price paid was comparable to similar acquisitions made by other Canadian cannabis producers.

Bank of Nova Scotia analysts Oliver Rowe and Ben Isaacson said the $193 million price given by Aphria at the time of the announcement was more appropriate, “as this was the value management had control over” when they entered the deal. They estimated the Jamaican assets to be worth about $45 million and pointed to similar deals done by Canopy Growth Corp. and Aurora Cannabis Inc.

Canopy agreed to pay an initial $34.8 million in shares for Spectrum Cannabis Colombia S.A.S, giving it 42 licensed hectares of production capacity. Aurora paid $290 million to acquire ICC Labs Inc., which gave them two greenhouse facilities, three outdoor grow sites and two under-construction facilities in Uruguay and Colombia.

In Colombia, Aphria purchased a 90 per cent stake in Colcanna, which it said has an office and 34 acres of farmland in a coffee-growing region about 200 miles west of Bogota.

“These transactions indicate to us that Aphria’s purchase price of $193 million for Colombia, Argentina and Jamaica is, at the very least, rational and perhaps even relatively inexpensive,” the Scotiabank analysts wrote in a note.

Ultimately, the LATAM acquisition is a small part of Aphria’s total assets, which include Canadian production capacity that’s expected to reach 255,000 kilograms annually in 2019, $314 million of cash on its balance sheet and supply agreements with all the Canadian provinces.

Off a dirt road outside Kingston, Jamaica, 300 marijuana plants sit in manicured rows overseen by a Rastafarian grow master who goes by the name “Bob …

CanadaEnforcementInternationalRegulations Jamaica helps illicit small-time cannabis farmers transition to legal market

Jamaica is working towards stamping out its illicit cannabis market by offering a leg up to farmers growing unlicensed cannabis.

To help raise communities out of poverty and promote sustainable development the government is working with unlicensed farmers to help transition them into the regulated market, rather than punishing them for growing underground weed.

“The programme focuses on community groups,” Jamaican Minister of Industry, Commerce, Agriculture and Fisheries Floyd Green said in a press release. “So it starts with a group of ganja farmers, and we would have gone in and provided the seeds, provided reduced requirements and we have gone through a learning process.”

The country’s Alternative Development Plan has been running as a pilot program in Accompong, St. Elizabeth, where farmers are now growing regulated cannabis and selling it to the medical industry. So far, 44 pounds have been cultivated from one acre, Green said.

“I would say the pilot has been a success,” he added.

The ADP will now move to other communities to lay the groundwork to provide the Jamaican medical cannabis market with quality-controlled weed, the release said.

The country’s Cannabis Licensing Authority also recently announced it was exploring a transitional permit program to allow small time growers to cultivate and sell medical cannabis for up to 18 months before being licensed.

“We’re looking into a transitional permit for the small farmer. So you’re not able to afford all the things a cultivator license would require right away, but we have to give you a start,” CLA director of enforcement and monitoring Faith Graham said on a Jamaican radio show.

Smoking weed in Jamaica

Cannabis isn’t legal in Jamaica, but was decriminalized in 2015 when the country updated its Dangerous Drugs Act.

Cannabis users can now posess up to 57 grams, or two ounces, of dried flower, but risk being ticketed around US$3 if they’re caught wandering around with it.

Medical patients and people practicing Rastafari are allowed to carry up to 57 grams of cannabis around with them but aren’t allowed to smoke cannabis — or cigarettes — in public.

In 2018, medical dispensaries started popping up on the island state to give locals and tourists a place to get a prescription and smoke some weed.

Lonely Planet describes the dispensaries as “equal parts doctor’s clinic, Amsterdam-style coffee shop and hipster boutique.” They’re also usually cash only, advises the guide.

Jamaican medical market a huge opportunity, says Canadian cannabis company

Last week the Tree of Knowledge International Corp. (CSE: TOKI and OTC: TOKIF) announced it will become the first company to be listed on both the CSE and the Jamaican Stock Exchange.

This move will appeal to new international investors as well as strengthen TOKI’s access to the region as it prepares to open its own medical cannabis clinic in Kingston, Jamaica, Courtney Betty, a consultant for TOKI’s international business development told Mugglehead.

Tree of Knowledge $TOKI $TOKIF is proud to announce that it will become the first company to be cross-listed between CSE and the Jamaican Stock Exchange (#JSE). This is a major step by TOKI to play a leading role Internationally in the $3.5 trillion #health and #wellness industry pic.twitter.com/eyvgaRnynV

— Tree of Knowledge International (@tok_int) January 24, 2020

“The big reason we decided to look at the Jamaican stock exchange is, on the cannabis side, there is an investment the Tree of Knowledge has done,” Betty said. “So being able to access that cannabis grown in Jamaica, those specific unique strains, and develop and include them in our products is a major one.”

TOKI focuses on using medical cannabis to treat pain and — as Jamaica grows some of the best pain-treating weed around — the company wanted to be able to access those strains, Betty said.

Getting listed on the JSE also appeals to the Jamaican diaspora who are always looking for a ways to invest in Jamaica, Betty said. He estimates this new listing will appeal to around 500,000 Jamaican-Canadians, one million Jamaican-Americans and one million Jamaican-British.

“That is access to an additional large investor base,” Betty said.

The company will announce its ticker for the JSE and will be listed on the market within two weeks, Betty said. The company will also be releasing information on its medical dispensary in the coming weeks, he added.

Cover photo “Ganja farm, Westmoreland, Jamaica” from Wikimedia Commons.

Jamaica is working towards stamping out its illicit cannabis market by offering a leg up to farmers growing unlicensed cannabis.