How a cannabis crash is weeding out the field, while it's a slow burn for others trying to survive

As Brian Keatingpulls the plastic lid off a small cannabis storage container, a pungent herbal smell wafts quickly throughout the room.

"That's quality," saidKeating, referring to the highly potent buds as he wavedhis hand over the container.

This cannabis, though, is not for sale.

These samples destined for mandatory storage, as per Health Canada rules are all that's left of an expensive business venture on Newfoundland's Avalon Peninsulathat has literally gone up in smoke.

"The echoes are deafening," saida disappointed Keating, as he walkedthrough the idled and cavernous Argentia Gold cannabis production facility located inside a sprawling Second World War era building at the Port of Argentia.

A promised golden crop, he adds,has turned into a major flop.

A cannabis cash cow

Keating is chief executive officer of Argentia Gold, which was created three years ago by adeep-pocketed Florida businessman named Bill Higgs. Keating saidHiggsinvested nearly $16 million of his own moneyto establish Argentia Gold, in hopes of cashing in on what many felt would be a cannabis cash cow.

Hicks's money was used toconverta building once used by the American military as a mess hall, theatre, recreational area and casino into a fortress-like cannabis plant surrounded by a sturdy chain-linked fence topped with barbed wire.

But Argentia Gold is now a glaring and costly example of a right-sizing of Canada's legal cannabis industry, which has struggled through a series of highs and lows since legalization in October 2018.

Eager entrepreneurs and investors like Higgs poured billions into Canada'sindustry, but Argentia Gold is not the gold standard when it comes to the cannabis collapses in Newfoundland and Labrador.

That dubious distinction belongs to an Ontario-basedcompany called Canopy Growth, which invested nearly $100 million into a massive cannabis production plant in the White Hills area of St. John'sbut pulled the plug on the project more than three years ago before puttinga single kilogram of cannabis on the market.

WATCH | Why this N.L. cannabis company went up in smoke, according to its CEO:

For this N.L. company, all that glitters is not gold and all that cannabis grown wasnt sold

7 months ago

Duration 1:00

Brian Keating, CEO of Argentia Gold, had high hopes when the company got into the cannabis game. But it started losing $200,000 a month, and in January, laid off all but two employees. Keating tells the CBCs Terry Roberts there were too many costs that put them in the red.

That's because all that investment and capacityled to an oversupply and slumping prices. Producers like Argentia Gold have alsofelt the pinch of what they describe asstrict production, distribution and retail regulations, as well as high taxation and continued competition from the traditional black market.

So instead of producing between 2,000 and 3,000 kilograms of cannabis every growing cycle, and employing about two dozen people, Argentia Gold is now shuttered. The growing rooms have been dismantled, and the 180 cameras part of a nearly $1-million security system keep a watchful eye over empty hallways and lunch rooms and state-of-the-art mechanical, electrical and computer systems.

Keating saidHiggs had a vision that included long-term employment for up to 100 employees, but was eventually forced to cut his huge losses.

"Now he feels bad for every employee that he let go," saidKeating.

Losing $200K monthly

Keatingjoined Argentia Gold in the later stages, hoping to stop the financial bleeding of about $200,000 per month and save the business, but he admits it was an uphill battle, with plenty of mistakes along the way.

"I guess the best thing to say is that the due diligence on running a facility like this was probably not totally researched," Keating said.

The final nail in the cannabis coffin for Argentia Gold came late last year when a $10 million US deal to sell the building to an aquaculture company failed to materialize, after Argentia Gold liquidated large amounts of cannabis products at basement prices.

Argentia Gold stopped producing cannabis in January, laid off all but two employees, and is now embroiled in a court battle with the prospective buyer of the building.

"We're in panic mode, really, and a financial bind," saidKeating.

Two producers left standing

The closure of Argentia Gold means there are now just two cannabis producers remaining in Newfoundland and Labrador.

They are Atlantic Cultivation in St. John'sand Oceanic Releafon the Burin Peninsula. Both companies also operate a chain of cannabis retail stores throughout the provinceand are working hard to maintain their bottom lines in the face of slumping prices and a controversial federal excisetax that amounts to roughly $1 per gram, or 10 per cent of a producer's selling price.

Producers have complained of being overtaxed andover-regulated, while trying to compete with the unlicensed black market.

"The portion of my revenue dedicated to regulatory tax burdens is much higher in this industry in comparison to tobacco and alcohol," saidChris Crosbie,chief operating officer of Atlantic Cultivation.

Crosbie expects that 40 per cent of producers may go out of business over the next 12 months as the federal government starts cracking down on companies that are behind on their taxes.

"It's definitely the year which there's going to be right-sizingof the entire industry, and we're seeing that already," he said.

Finally recording a profit

Atlantic Cultivation is a $29-million joint venture by the Crosbie, Hickman and Collingwood families, three well-known and multigenerational business families in Newfoundland and Labrador.

Chris Crosbie believes Atlantic Cultivationwill be one of the survivors, saying the company recorded its first-ever profit in recent monthsand now employs nearly 200 workers.

"We're building [a] 100-year company. We're not depending on excise tax reform," saidCrosbie.

Crosbiepraises the regulators in Newfoundland and Labrador for allowing companies to vertically integrate their operations, meaning companies like Atlantic Cultivation and Oceanic Releaf can produce cannabis and cannabis productsand sell it through a chain of retail stores. That's not the case in other provinces, he said.

"Wehave a wholesale margin from the grower and then a retail margin. And when you combine those together, it becomes a very healthy business," he said.

Meanwhile, the industry watchdog saidthe cannabis industry has come a long way since 2018, with nearly 60 licensed cannabis retailers now operating in the province.

Bruce Keating is president and CEO of the Newfoundland and Labrador Liquor Corporation, which is responsible for the Cannabis Control Act. He says retails sales in the province will near $90 million for the 2023-24 fiscal year, which is about one-quarter the total of alcohol sales.

"It's developing into a sizable industry in the province," said the NLC'sKeating, who is no relation to Brian Keating. He added that sales were accelerated by the approval of cannabis vaping products in late 2022.

One of the objectives of legalization was to target the illegal cannabis industry, and Keating saidthat goal is being achieved, with about81 per cent of the cannabis market now being supplied by the legal means.

"That's a dramatic leap forward in terms of capturing the illegal market," he said

• Dropping prices and heavy tax burden will mean cannabis industry bankruptcies, warns producer

But Bruce Keating admits the picture is not as rosy on the production side of things, where a flood of licensed producers created what he calls a "real saturation in the marketplace."

He saidthe price per gram at legalization was roughly $10, but that has since slumped to $2 and $3.

"That's clearly not the economic model they thought they were getting into," said Keating.

That crash in priceshas also punished the illicit market, and Keating has heard stories of criminals buying from the legal marketand then reselling on the black market.

"It's just been a dramatic shift," he said.

Bruce Keating agrees the imbalance on the production side is correcting itself, and he believes Atlantic Cultivation and Oceanic Releaf have reached a "point of stability" in their operations.

"They're well positioned, I think, to be successful," he said.

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