TORONTO (miningweekly.com) – During the last several months a group of entrepreneurial junior mineral explorers have floated the idea of broaching the fledgling medical marijuana industries of Canada and the US, keeping some of their penny stocks afloat amidst a moribund junior resources market environment.

While the current medical marijuana industry is highly fragmented, significant recent changes enacted by Health Canada, which would likely consolidate growers into larger commercial operations, had opened the door to first movers in a new uncharted industry that could result in handsome profits.

Despite the Canadian government not endorsing the use of marijuana, the courts have required reasonable access to a legal source of marijuana when authorised by a physician.

Meanwhile, in the US, medical marijuana is legal in about 20 states and the District of Columbia, with Colorado and Washington having recently legalised marijuana for recreational purposes that potentially set the stage for more states to legalise marijuana in some form in the coming years.

Just this week, TSX-V-listed Canada Coal, which is mainly focused on its Fosheim coal project on Nunavut’s Ellesmere Island, in Canada’s Arctic North, said that it was exploring potential business opportunities in the medical marijuana field.

Executive chairperson Bruce Duncan on Monday said that the emerging billion-dollar industry was currently undergoing significant regulatory and legal reform that had created “exciting” growth opportunities.

The company said that it was reviewing business opportunities with the goal of obtaining operations that had been granted ‘Licensed Producer’ status under Canada’s new Marijuana for Medical Purposes Regulations (MMPR) that came in to effect on April 1.

Another firm, Vancouver-based Canadian Mining Company, which is involved in exploring, developing and producing zeolite, on Wednesday announced that it had entered into a memorandum of understanding with Thelon Capital to test the company's zeolite in the growing of medical marijuana.

Zeolite is particularly valuable in holding and slowly releasing valuable nutrients to plants.

Other TSX Venture-listed companies such as Cavan Ventures, Terra Firma Resources, Axe Exploration, Bayhorse Silver, Viking Minerals, Benton Capital, Cavan Ventures, Prominex and Victory Ventures had also aired the idea of entering the medical marijuana industry, with the news releases temporarily sending the stocks upward.

But, it is a volatile market and many of these firms saw their penny stocks tumble after a Canadian Federal Court judge, in Vancouver, last month granted a last-minute reprieve for medical marijuana users from the MMPR, to be able to grow their own marijuana at home until legal arguments have been heard.

While most of the miners' plans to enter the legal marijuana industry were currently at the investigative stage, Health Canada had estimated that revenues from commercial medical marijuana could reach C$1.3-billion over the next decade and draw in an estimated 450 000 users of medical marijuana.

FAD CHASERS

Head of Kaiser Research Online John Kaiser told Mining Weekly Online that these days the bar is much higher when it comes to what is needed to be a ‘serious’ exploration company, and coupled with the difficult market situation, has created about 800 ‘zombie’ companies that have no future.

He explained that the medical marijuana bandwagon has emerged as a fad similar to the ‘dot-com’ craze in 1999, when the juniors were also trapped in a resource sector bear market. After that bubble burst, many of the companies turned their gaze back to the resources sector, with a scant few making noteworthy progress on their respective mineral claims.

“There is a feeling that marijuana will end up entirely decriminalised and that medical marijuana is the launching pad to position a business to benefit from the eventual decriminalisation of marijuana,” Kaiser said.

He argued that the medical marijuana business would never become profitable in a big way, but was optimistic that mining would become profitable once more.

“Marijuana cultivation and distribution is profitable because it is criminal. Decriminalise it and suddenly the need for criminal infrastructure disappears as a barrier to entry,” he said.

He conceded that marijuana could become as profitable as any agricultural crop. "There may be good small business opportunities to produce boutique blends similar to the craft brewing and estate winery industry.”

Kaiser noted that the departees to medical marijuana represented “good riddance” of pretend exploration juniors.

“Unfortunately such fads typically engulf only about 200 companies, so medical marijuana will not suck up enough zombie companies. And there are plenty of non-resource zombies on the TSX-V to jump onto this bandwagon,” he noted.

However, this would pass, owing to the TMX imposing ‘change of business’ (COB) halts on companies that are making a serious effort to shift into the medical marijuana business.

“The scam happening now is to float the ‘intent’ to look for another business area, which does not yet trigger the COB halt. There are some buzzwords that the algorithm traders look for. In our Kaiser Research Online search engine we have flagged such companies that you can search for using the special parameter ‘Companies toying with medical marijuana’,” he said.

He added that there would be zero consequences if these companies leave.

“However, the serious consequence is that the people infrastructure supporting the resource sector, and the retail audience that understands and follows the resource sector, are evaporating to such an extent that the sector may fall through the extinction threshold,” he said.

JUNIOR DILEMMA

Kaiser sketched a grim backdrop against which these juniors are exploring for greener grass (read marijuana) on the other side of the fence.

“The junior resource sector is in a difficult spot for several reasons. One is that expectations for higher metal prices in the near to medium term have largely disappeared.

“In the case of non-precious metals the combination of slowing global economic growth and the mobilisation of new supply in response to the past decade's economic growth and metal price gains has eliminated the imbalance and in the case of metals like copper and iron, possibly tipped them into surplus for the short term.

“In the case of precious metals, the retreat in gold and silver prices to levels close to the ‘all-in’ global average cost, has forced the market to reflect on the stupidity of thinking that the actualisation of the primary argument for expecting higher gold prices, namely ‘fiat currency collapse’ or ‘hyper-inflation’, expands the profit margin of mining gold deposits,” he said.

Kaiser noted that there is no widely believed narrative that explained why higher real gold prices could be expected, so market interest in advanced metal deposits held by juniors engaged in feasibility demonstration remains muted. “The majority of juniors, however, are focused on exploration, which took a back seat during the past decade when the proper game was the economic rethinking of the failures of past exploration cycles,” he said.

The crux of the situation for juniors is, according to Kaiser, that for an exploration junior to succeed, it must deliver a discovery with a grade and size capable of being profitably mined at prevailing metal prices.

“But, especially in the case of gold - which underwent a 400% real price gain during the seventies when it stabilised at $400/oz in 1980, and whose consumer price index-adjusted price is $1 100/oz today, making $1 300/oz gold only a 20% real increase - there is no low-hanging fruit to harvest.

“In other words, after 30 years of intense exploration, any meaningful new discoveries will be difficult to make, more capital intensive, and likely hidden under cover that offers few if any surficial clues about the potential below. The headaches with developing a mine also reduce the likelihood that smaller-sized deposits could be turned into mines, turning exploration into a very high-risk all-or-nothing venture,” Kaiser explained.

Further, institutional capital is not interested in this type of risk, and retail capital is also risk adverse.

Kaiser believes that the situation is compounded by regulatory gridlock with regard to financing mechanisms, structural changes in the brokerage industry, and the diminishment of the market as a price discovery mechanism due to fragmentation through multiple order execution platforms, and a proprietary trading culture that had turned the junior markets into a “capital stripping venue” that discourages after-market activity by retail investors interested in "slow gambling on fundamental outcomes", rather than gambling on price volatility.

“These circumstances have paralysed the Canadian institution of a resource sector exploration and development venture, such that 40% of resource juniors have negative working capital, while another 20% have barely enough to stay listed while doing nothing on the exploration front,” he said.