Here’s Why Hempco Stock Jumped This Week
Hempco stock shot up more than 20% on Tuesday after Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB) revealed that it was increasing its stake in Hempco Food and Fiber Inc (OTCMKTS:HMPPF, CVE:HEMP).
I’m considering the prospects of this development, which could eventually turn into something big for investors of HMPPF stock. From where I see it, there’s money to be made on this marijuana penny stock.
To give you some background on this, Aurora Cannabis bought a 19.9% stake in Hempco last year. At that time, Aurora Cannabis was given the option to purchase additional shares of Hempco at any point later in time, allowing it to increase its stake in the company in excess of 50%.
The deal was initially not welcomed by many of Hempco’s stockholders. But Hempco’s management somehow managed to persuade the unhappy stockholders and the deal was sealed.
Following Aurora’s latest exercise of 30.5 million warrants this week, the company’s ownership stake in Hempco has now reached 35%.
The CEO of Aurora Cannabis, Terry Booth, said that investors should have anticipated this move from the beginning of their partnership.
“…we intend exercising our option to buy founder shares, and take our position to north of 50%,” said Booth in a press release, making it crystal clear what HMPPF stockholders should be expecting from this partnership hereon. (Source: “Aurora Cannabis Increases Stake in Hempco to 35%,” Cision, March 26, 2018.)
Will Aurora Cannabis Take Over Hempco?
In case it isn’t obvious already, let me put it in black and white. Obviously, Aurora will take Hempco under its wing. What else does a stake “north of 50%” mean?
This acquisition, however, will not have to be hostile like the CanniMed Therapeutics Inc (OTCMKTS:CMMDF, TSE:CMED) takeover. Hempco stockholders, although reluctant, have already given the green light to Aurora’s management.
A good question to ask at this point is: “Does this acquisition make any strategic sense for the two companies?” It does, actually.
To Hempco, Aurora’s investment provided the company with hard cash—exactly what the former needed to fulfill its expansion plans. So far, Aurora has pitched in more than $7.5 million.
Where is this money going, you ask? Well, primarily toward completing the ongoing construction of Hempco’s hemp production facility, which, once completed, would boost Hempco’s capacity to produce 225,000 kilograms of hemp seed per month.
What’s interesting is that this facility is being built in Edmonton, just five kilometers away from Aurora’s largest production site, Aurora Sky, which also happens to be under construction.
So, the geography is one strategic advantage for Aurora, but it’s obviously not enough. For Aurora, Hempco is a big wager.
As a reminder, Hempco is one of the largest producers of industrial hemp and derivative hemp products. Hemp is not the same as marijuana, mind you. Marijuana gets you high, hemp doesn’t. Hemp also has health and therapeutic benefits.
Unlike Aurora, Hempco’s target market, in particular, is the health-conscious millennial who keeps track of his daily dose of leafy greens. So, you see, Hempco opens Aurora’s doors to a new niche that Aurora has so far left untapped.
On top of that, Aurora has another game plan in mind. The company intends to use Hempco’s hemp to extract cannabidiol (CBD) from it.
CBD is proven to have therapeutic properties, but, so far, the government prohibits the harvesting of CBD-containing hemp. That’s because CBD is often confused for tetrahydrocannabinol (THC). The latter has psychoactive properties, meaning it can get you high.
Although hemp and marijuana are both derivatives of the same cannabis plant, marijuana has a high THC content while hemp only carries in it negligible traces.
Aurora hopes that, as the Canadian government embraces recreational pot, CBD extraction from hemp will likewise receive a thumbs up from the regulators. At that point, Aurora’s Hempco investment will bear its true fruit.
Now, take note that Aurora is a marijuana grower. It doesn’t specialize in laboratory techniques of CBD extraction. For that, Aurora will be utilizing the expertise of Radient Technologies Inc (OTCMKTS:RDDTF, CVE:RTI)—another company that Aurora has invested in, which specializes in large-scale CBD extraction.
So to sum it all up; Aurora’s acquisition of Hempco makes economic sense. It perfectly fits into Aurora’s grand scheme of things. Not only does this open its doors to new markets, it gives it a leg up on its competitors in the cannabis market.
Plus, consolidating the business would be a whole lot easier for Aurora, given that the target company is located merely at a stone’s throw from its largest facility.
After the Aurora CEO’s public declaration, it’s certain now that Aurora Cannabis is looking to acquire Hempco. We expect this acquisition to close sometime later this year.
Although you’d expect this news to already be fully priced into their stocks, remember that the efficient market hypothesis does not always hold true in the real world. We expect HMPPF stock to burst into another rally once Aurora makes the conclusive move.
I’ll be watching HEMP stock closely because there’s little doubt now that this marijuana penny stock is poised to go higher.