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Canada to legalise smoking pot: Can these stocks smoke the ASX?

Credit: UK police

With Canada finally set to enact legislation to legalise the sale and consumption of recreational cannabis in a matter of months, investor attention might soon return to the marijuana industry.

How are the established local players positioning themselves to take advantage of what could be a new period of growth?

After a frantic period at the beginning of this year, buoyed by news of marijuana legalisation in California and its impending legalisation in Canada, excitement around Australian medicinal cannabis stocks has died down over the last few months.

The bigger players on the ASX, like Cann Group Ltd (ASX: CAN) and Auscann Group Holdings Ltd (ASX: AC8), which both benefited from big gains in their share price over December and January, have seen their market valuations slide lower recently as some of the momentum has gone out of the sector.

But the cannabis industry might be set to start making global headlines again: at the beginning of June, the Canadian senate finally passed a bill to legalise recreational cannabis consumption nationwide, paving the way for legal retail sales to commence as soon as early to mid-September.

It is the second country in the world, after Uruguay, to fully legalise recreational cannabis, and the first of the economically advanced G7 nations to do so.

This makes it a significant global test case – other developed nations, including Australia, will keenly observe how the Canadian industry will be regulated, and how much money it will be worth.

These international developments could mean that investor focus will return to the cannabis industry soon. So it might be worth taking a look at some of our local Australian marijuana companies to see how they are positioning themselves to take advantage of what could be another period of growth.

Cann Group Ltd

Cann Group is the biggest pot stock listed on the ASX with a market cap over $400 million. It was also the first company in Australia to be issued licenses for both medicinal cannabis research and cultivation, giving it a significant head start over other newer entrants to the industry.

More recently the company has taken steps to shore up its international exposure, obtaining permits from local regulators as well as Health Canada to allow the importation of genetic material from its Canadian partners into Australia.

Cann Group also recently announced that it had signed a heads of agreement for the lease and build of a proposed new multi-stage cannabis cultivation plant.

Once completed, the 37,000 square metre facility would be the largest of its kind operating in Australia. If the Canadian test case results in softening political attitudes towards cannabis in Australia, this facility could position Cann Group as the frontrunner in domestic cannabis cultivation and distribution.

Auscann Group Holdings Ltd

Auscann has also had a busy few months. In early June, it announced that its Chilean joint venture had harvested its second crop of cannabis; the 620kg yield represented more than a 50% increase on the prior year’s crop.

The South American market is becoming significant internationally as Argentina, Colombia, Uruguay and Chile have all legalised marijuana for medicinal use.

It also appointed a new Master Grower for its Tasmanian operations, with the aim of accelerating its production capabilities. The man they chose for the job, Luke Pigeau, has extensive experience in marijuana cultivation with established Canadian companies.

Auscann has further strengthened its Canadian connections by establishing a research and development agreement with Canadian company Jade Cannabis. The hope is that the two companies will work together to find ways of achieving greater and more cost-effective yields.

Auscann also completed a $33.4 million share placement offered to institutional and sophisticated investors in North America and Australia. It also plans to raise a further $8 million through a share purchase plan with other eligible shareholders.

This will dilute the share price in the short term, but could add to the company’s longer-term growth potential: Auscann intends to spend the proceeds on further research and development, clinical studies, and expansion of its Australian and Chilean operations.

Others pot stocks

Smaller players with Canadian interests or subsidiaries like MMJ Phytotech Ltd (ASX:MMJ) and Creso Pharma Ltd (ASX:CPH) will also be worth watching in the coming months, though with less established local manufacturing operations they carry significantly more investment risk than the bigger Australian companies.

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Motley Fool contributor Rhys Brock owns shares of AUSCANN FPO, Creso Pharma Ltd, and MMJ Phytotech Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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