Back in the middle of June, CannaRoyalty Corp. (CRZ.C) announced a plan to form a joint venture (“JV”) with Sprott Inc., a storied alternative asset manager launched in 1981 which currently has approximately $9.7 billion in assets under management.
According to today’s update, the recently streamlined Sprott agreed to provide a $12.0 million debenture financing along with the JV deal. In return, Sprott gets a seat on the CannaRoyalty’s board and has nominated Peter Gundy as director.
CannaRoyalty CEO, Marc Lustig, commented, “As Canada continues moving towards full-adult use cannabis legalization, we are beginning to see an increased quantity and quality of true value-add domestic investment opportunities. We believe this JV will be an accretive vehicle for CannaRoyalty to leverage its extensive experience in the global value-add cannabis sector to gain additional exposure to those high-growth opportunities.”
He went on to explain, “Target investments will gain not only CannaRoyalty’s deep experience in the value-add cannabis sector, but also, access to a credible and highly respected institutional lender in Sprott, whose access to capital, strategic expertise investing in emerging sectors, and extensive corporate finance experience truly differentiates it from competitors in the space. We are pleased with how the relationship has already advanced and provided an immediate contribution in terms of valuable Board experience with the nomination of Mr. Gundy.”
Peter Grosskopf, Sprott CEO, added, “We look forward to helping CannaRoyalty continue expanding its footprint in Canada and leveraging our expertise and relationships in the natural resource sector to advance new investment opportunities.”
The JV is expected to launch when the financing closes and will seek out debt investment opportunities in the burgeoning Canadian legal cannabis market.
CannaRoyalty is going to provide the industry smarts, deep industry relationships and investment pipeline while Sprott hands out the financial muscle and asset management experience.
When it comes time for the JV to become involved in a project, the financing for each investment will include both debt and equity upside and be arranged by Sprott with participation from CannaRoyalty.
As a partner in the JV, CannaRoyalty will participate in realized returns from investments made using a customary private equity style waterfall. CannaRoyalty will also have the right to directly enter into royalty, streams, offtake agreements or any other deal with JV borrowers.
As a result of the transaction, CannaRoyalty will gain access to a revolving $12.0 million secured credit facility with a three-year term. The company will receive $6.0 million upon closing. The facility comes with a 10% interest rate which is to be paid quarterly in cash or CannaRoyalty stock at a 10% discount.
Also, as part of the deal, CannaRoyalty issued warrants allowing Sprott to purchase up to 1.8 million common shares in CannaRoyalty at an exercise price of $2.05 per share for a period of 36 months after closing.
All monies raised from this financing will be directed toward specific opportunities already in the company’s sights for the production and/or processing of assets, as well as general corporate purposes.
The transaction is expected to close by July 31, 2017 and is still subject to exchange approval, due diligence and other customary conditions.
This money gives CannaRoyalty the punch to build an even stronger portfolio which currently supports 20 cannabis ventures involving research/IP, CannaRoyalty’s CR Brands segment and market infrastructure.
The deal with Sprott also gives CannaRoyalty some breathing room on the financing side as it moves toward profitability which could arrive when Canada legalizes recreational marijuana.
CannaRoyalty’s portfolio is still in its growth stage as the company posted a net loss of $2.0 million for fiscal 2016, but as of March 31, 2017, the company still had cash of $11.9 million and working capital of $12.7 million – a sizable war chest for continuing operations.
CannaRoyalty’s new board nominee, Gundy, has a variety of post-secondary degrees including a Master’s of Science and an Economics degree from the London School of Economics, a Bachelor of Civil Law degree from McGill University and a Bachelor of Arts degree from the University of Western Ontario.
Gundy began as a mergers and acquisitions lawyer but soon moved on to co-found Potash Corporation (now PotashCorp) where he served as Vice President, Finance and CFO. He also founded Neo Material Technologies Inc which was acquired by Molycorp for $1.3 billion.
Gundy, a resident of Toronto, is also a certified director of the Institute of Corporate Directors.
Upon closing, Gundy will join the board and act as the chair for CannaRoyalty’s Audit Committee.
This is definitely a strong lock-and-load deal for CannaRoyalty as it preps to take on the exploding North American legal cannabis market.
If CannaRoyalty is able to leverage this JV, it could maneuver itself into a dominant position within the sector, making shareholders incredibly happy. Regardless, the next 12 months will be pivotal for the company.
–Gaalen Engen
http://twitter.com/gaalenengen
FULL DISCLOSURE: CannaRoyalty is an EQUITY.GURU client.