As legalization looms, Canada's pot companies about to be tested

For years now, Canada's cannabis companies have grown in size, soared in value and existed in a sort of ethereal middle ground waiting for that distant future when pot was legal. Now as legalization looms, one of the country's biggest licensed producers is bracing for life on the other side of that legal divide — where promise and reality will finally meet.

"There will be failures. There will be shortcomings. There will be short shipments," said Vic Neufeld, CEO of Aphria, one of the largest and highest-valued cannabis companies in the world.

Founded in 2014, Aphria has expanded and grown at breakneck speeds, making investors rich in the process.

And now, like every other cannabis producer in Canada, it's about to face its biggest test when recreational marijuana becomes legal on Oct. 17, launching what's expected to be a major industry. According to recent data from Statistics Canada, even without legalization, Canadians spend about $5.7 billion on marijuana annually.

And as we move to a legal market, the entire industry is abound with unknowns. Will there be enough supply? Will licensed producers make good on their promises? Will the retail market be as big as expected? Perhaps bigger? 

After all the hype and buildup, there will be a "window of time to perform," Neufeld says, with producers looking to capture as much of the market as possible.

In the face of all the unknowns, cannabis producers are doing what they can to build in some extra cushion. For Aphria, that cushion is size.

Mechanizing marijuana

The company's sprawling facilities in Leamington, Ont., are rapidly expanding. Once a modest potted-plant greenhouse, Aphria now has hundreds of thousands of square feet of growing space up and running. Next spring, they'll add a giant 750,000-square-foot, fully automated facility.

"That's 3 million square feet of footprint," said Neufeld, his voice tinged with pride. "That will be capable, on an annualized basis, in excess of 255,000 kilos of harvest."

That's about 20,000 kilograms of marijuana a month.

The new facility will draw heavily on robotics and automation, which Neufeld says will cut down on costs.

His greenhouses currently require between 14 and 16 workers per acre, while the new greenhouse will need between two and four workers per acre. Last quarter, it cost Aphria about 94 cents to produce a gram. Once the new facility comes online, Neufeld hopes that will fall to 75 cents.

"Machines don't go on vacation," he said. "They don't get sick, they don't have employee benefits, you can sweat 'em 24 hours a day."

Looking to the next phase

But scale and size alone likely won't be enough to thrive as Canada ushers in legalization.

The cannabis industry has been awash in partnerships over the past few months: First it was pot companies combining forces; now industrial giants are swooping in and making their claim on the sector. 

And companies are already looking to the next phase of the industry: edibles and other THC-infused products and drinks. (Though the federal government has said the sale of specialty products, like edibles, won't be legal until at least 2019.)

Canopy Growth partnered with beverage giant Constellation Brands, and Aurora is reportedly exploring a partnership with Coca-Cola. Aphria was rumoured to be in the running to form a partnership with Molson Coors, though the beer company eventually signed a deal with a smaller producer, Hexo.

Edible products are the future of the industry, Neufeld says, and the potential goes well beyond THC-infused beer.

"It's recovery drinks, it's energy drinks, it's utility drinks," he said. "It's juices. It's cabernet sauvignon without an alcohol, and therefore no sugar and calories."

Investors have poured billions of dollars into the sector hoping to capitalize, driving the valuation of pot stocks sky-high over the past two years.

Legalization will show which bets paid off and which companies are best able to adjust when some things inevitably go wrong — and that will be the real test for all of them, Neufeld says.

"Who is prepared?" he asked. "I'm going to suggest to you [that] no licensed producer is fully prepared because of the unknowns."