Up in smoke

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Cannabis

Cannabis, which has enjoyed a thriving informal market in the Western Cape for decades, looks set for rapid corporatisation.

While cannabis has already become big business in North America, the industry is still mostly at grass-roots stage in South Africa.

Legal complexities around the use of cannabis for medicinal and recreational purposes are also still clouding the business model – even though the opportunity for small farmers to capitalise on the trend should speak to government’s job creation efforts.

Still, there are some early stage movers. Cape Town-based asset management firm Mergence were the first African institutional investors into cannabis in form of a sprawling project under the MG Health (the old Medigrow business).

Lesotho-based MG is a licenced cultivator and manufacturer of pharmaceutical grade cannabis extracts and products.

MG Health will also become the first African cannabis grower to enter the retail market with its products are expected be rolled out into Dischem stores – like bath salts, mouth spray and a cannabis patch.

Mike Stringer, CEO of newly formed Labat Cannabis, recently estimated that the local marijuana market could be worth as much as R24 billion by 2024.

Mergence initially took a 7% stake in MG Health – but further capitalised the business with loans. The project has created some 250 permanent jobs – but at full production the workforce headcount is expected to exceed 3 000.

MG Health CEO Andre Bothma said as a rapidly scaling up enterprise the company had made great strides over the past two years. “Our path diverged some time ago from other Medigrow entities, and now as we enter a new era, we go forward as MG Health, a distinct global brand committed to supplying world-class medical cannabis products to our local and international clients.”

He explained that MG Health has both its cultivation and state-of-the-art processing facilities based 2 000 metres above sea-level in the mountains of Lesotho. “Clean air and pristine environment ensure the growth of high quality plants.”

Bothma stressed a best-practice production plant was set-up, and operated according to the Good Manufacturing Practices of the EU.

He said the business is preparing for certification this year. “This will make MG Health one of the very few EU GMP-compliant cultivation, extraction and processing cannabis operations worldwide, and the largest in the southern hemisphere for the medicinal and pharmaceutical markets.”

With a new office established in the UK, MG Health plans to drive ambitious growth in the developed markets where health and wellness are growing sectors. The aim is also to meet the demands of informed consumers for product integrity and quality.

Bothma said: “We’re excited in this new phase to take the MG Health brand onto the global stage to represent the incredible quality that our company and our country can produce.”

Labat Africa has arguably blown the most smoke around cannabis investing following a series of acquisitions – which included a 70% stake in Cape Town-based Knuckles Genetics.

Labat has also recently acquired a South African Health Products Regulatory Authority (SAHPRA) approved pharmaceutical facility in form of Pac-con Pharmaceuticals.

Pac-con currently manufactures and packages liquids, tablets, capsules, creams and gels for various clients – but will now be utilised to produce high grade cannabis oils and related products for the retail and wholesale markets.

Labat has argued that while there has been a lot of interest in the cannabis industry in Southern Africa, several international investors have been wary to take advantage of the opportunity in the private sector.

Labat noted that a few international companies had seen large investments not come to fruition. Companies also did not always have the expertise and know-how to produce high quality cannabis products.

Part of Labat’s grand cannabis plan is to build a platform for small scale farmers to take advantage of the industrial component of the cannabis business.

This will see Labat setting up a production facility for a range of industrial hemp products, and has already identified 58 hectares of land in the Eastern Cape and is also currently in negotiations with a number of other parties for additional land.

What is potentially huge for Labat’s fledgling cannabis business is an ‘off take’ agreement with UK based cannabis group New Frontier Holdings, which is the holding company for New Frontier Botanics.

Labat reckoned the ‘off take’ could be worth around R2 billion for the duration of the contract.

The five year projections for Labat’s cannabis business are quite astounding. Revenue in year one is pencilled in at R1.4 billion with gross profit set at R271m. By the fifth year of operation revenue is forecast at over R4 billion and gross profit at R1.2bn. Operating profit is expected to grow from R165 million in year one to over R1 billion in year five.

Of course, this may all be a pipe-dream. Labat still needs to raise considerable capital from local investors to fund its cannabis growth ambitions.