The legalization of recreational pot in Mexico has been all over the financial news lately, as it’ll not only become the third nation in the world to legalize recreational pot, but easily the largest as well. It’s following in the footsteps of Canada and Uruguay.
While Mexico is working out the details of the legalization of the recreational pot market, it’s largely a formality as to it being approved, with the final draft of the law to be decided in the near future.
In this article we’ll look at what this means for Aurora Cannabis (ACB – See Price Targets) in the near and long term, and how it will probably play out.
Aurora Cannabis already has a foothold in Mexico
Of the major cannabis companies, only Aurora Cannabis has a foothold in Mexico. It gained that through its 2018 acquisition of Farmacias Magistrales S.A. With that acquisition Aurora received access to over 500 hospitals and pharmacies in Mexico.
Farmacias Magistrales S.A. is the only company in Mexico that is licensed to import cannabis with more than one percent THC.
I think that this will be a positive for Aurora when recreational pot is legalized because it’s highly probable Farmacias Magistrales S.A. could be given favorable licensing treatment in comparison to foreign companies trying to gain licensing approval from this point on. That doesn’t guarantee Farmacias Magistrales S.A. will be approved, but it does have a good chance of being approved, which would be an enormous competitive advantage for Aurora, and a very defensible moat.
Why that’s important is because Mexico is definitely leaning toward giving its own citizens priority in relationship to licensing, to the degree that larger cannabis firms will probably be rejected, or at least put on hold until Mexican producers and distributors are entrenched in the business. That could easily take several years, and maybe longer.
What also remains to be seen is the role the brutal cartels will play after recreational pot is legalized. The biggest question there is whether or not it’ll do nothing more than transition illegal sales to legal sales, with the cartels remaining in power and control of the recreational cannabis industry. Individual and smaller businesses would get the scraps left over under that scenario.
When recreational pot is legalized, it’ll open the door for more medical cannabis sales because potentially new patients will be comfortable with using it under those conditions. Legalization tends to remove the stigma of usage, as the Canadian market and American states that have legalized recreational pot have shown.
Major challenges
As Mexican lawmakers hammer out the details of the recreational pot law, the end result includes some elements that will be challenging for large companies wanting to compete in the Mexican cannabis market.
Most relevant is that larger businesses won’t receive licensing priority in regard to cultivating, processing, or for retailing pot. While this part of the parameters of the law obviously is made to placate Mexican nationals, whether or not it’ll be strictly enforced remains to be seen.
Those most favored will be indigenous residents, smaller farmers, and poor individuals. The problem there, as Health Canada found out the hard way, is most of those people and small businesses don’t have the capital or expertise to build the facilities or retail outlets to meet demand. Consequently, Health Canada revised the rules and now require that those that receive licenses to have facilities built before a decision is made.
There is also the factor of illegal or black market producers and sellers buying up licenses with no intention of following through on building a business from it. I think that has happened in Canada, where licenses were applied for and approved up by black market competitors that simply sat on them for the purpose of protecting their territories. I can’t prove that at this time, but I think the lack of building out facilities is more than the lack of financing, although that’s definitely part of it.
As it relates to the Mexican cannabis market, this is be the equivalent of Health Canada licensing on steroids, where the cartels could get involved in all types of schemes to maintain market share. We already know they have enormous influence in the politics of Mexico.
When taking into consideration that Mexican Senate leader Ricardo Monreal is committed to keeping businesses from outside the country from influencing the type of legislation that will be associated with the legalization of recreational pot in Mexico, it’s obvious that part of this, at least, is the result of pressure and/or “guidance” from the cartels.
As the bill stands today on the Mexican Senate website, among the restrictions will be edibles and infused beverages only being allowed to be sold to the medical cannabis market, along with packaging regulations designed to reduce the attraction of recreational pot to younger people. That said, Mexicans will be able to acquire pot at the age of 18, three years younger than their Canadian counterparts.
The Mexican Cannabis Institute
A key part of the legalization of recreational pot in Mexico will be the creation of the Mexican Cannabis Institute. The institution is required to be launched by no later than January 1, 2021. What happens in the Mexican recreational pot market until then isn’t visible now.
With the Mexican Supreme Court already saying recreational pot was to be legalized no later than October 2019, it would be shocking if that was changed in any meaningful manner to coincide with the establishment of the Mexican Cannabis Institute.
A major purpose of the Institute will be to issue four different licenses in various categories, including production, sales or marketing, processing or extraction, and imports and exports.
There are limitations in the licensing process that would reduce competition for Aurora if the current guidelines remain in place, and assuming Aurora’s Mexican partner receives at least one recreational license.
The major limitation is associated with only one license being allowed for a specific segment of the cannabis market. That virtually eliminates most U.S. vertically integrated U.S. competitors.
Companies that produce cannabis won’t be allowed to have licenses for retail sales, or other parts of the business. That said, competitors will be allowed to have more than one license in a single category. This will be beneficial to Aurora, although it remains to be seen which category it decides to compete in, assuming Farmacias Magistrales S.A. is awarded a license.
Aurora’s large production capacity allows it to scale beyond its competitors, and if the Mexican recreational pot market is opened up to them, it will be a huge positive growth catalyst for Aurora stock.
Conclusion
I believe of all companies outside of Mexico, Aurora Cannabis is best positioned to take advantage of Mexican recreational pot legalization in the short and long term.
The primary reason is because of its partnership with Farmacias Magistrales S.A. and the huge production capacity, that is unrivaled in the industry.
What remains to be determined is how long Mexican lawmakers take to legalize recreational pot, and what influence the cartels will have on the process and eventual outcome.
With the focus being primarily on Mexican nationals in the licensing process, if Farmacias Magistrales S.A. is able to secure one or more licenses in the Mexican market, it would be an extraordinary competitive advantage for Aurora Cannabis, which will have the first mover advantage in a top world market.
If it plays out this way, it would be mostly competing against inexperienced and under-capitalized competitors. It’s highly probable that market demand will allow Aurora to scale rapidly in the country, as its smaller rivals struggle to build facilities and retail stores.
Finally, the negative variables in all of this is the lack of certainty of being awarded licenses, and the influence and level of control the cartels will have on the legal recreational cannabis market in Mexico.
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