California Gold Mining Inc. Entering High-CBD Content Hemp Seed Market in the U.S.

I know what readers are thinking…. another junior miner jumping into the #cannabis space… give me a break! Believe me, I thought the same thing. However, after watching several junior miners move on to greener pastures, I’ve learned some things to watch out for. First, there must be an actual business plan. Most teams put out their all-important news announcing a change in direction with limited info of what segments, jurisdictions or products will be targeted.  

I would only look at a company making a significant move like this if it had specific plans and had spent many months, not several weeks, carefully investigating opportunities. I would only consider a company that had a logical reason to move into this new realm, and had engaged industry experts to help. Finally, I would only consider a company with significant revenue & profit potential within 12 months.  

I’ve been following a junior gold miner (an advertiser on my website) that was approached (unsolicited) by a group about the opportunity to grow industrial hemp plants on the Company’s flat, fertile, 100%-owned land, in a temperate climate in central California. Importantly, the Property is well supported by existing infrastructure. {see press release}. Readers should note, this Company was pursued because it had something of value — owned land amenable to growing industrial hemp. Note: {Not all companies own or control surface rights, have water & power, and are situated on flat, fertile land in good climates, in safe places that allow industrial hemp to be grown}. 

The Company I’m writing about is California Gold Mining Inc. (CSE: CGM) / (OTCQB: CFGMF). Unlike most junior miners jumping into a new sector, California Gold has a promising exploration project with 515,000 Indicated near-surface ounces @ 1.71 g/t gold, plus 364,000 Inferred ounces @ 1.44 g/t. Earlier this year, the Company announced high-grade assays. The best intercepts were 1.2m @ 27.6 g/t gold, included within 3.4m @ 10.6 g/t, plus 10.1m @ 3.3 g/t — all near surface. However, junior miners are out of favor, and it would be years before any gold is ever produced, if ever. So, management is going after a much nearer-term revenue opportunity.

This is NOT a pot smoking, getting high kind of story….

While marijuana & industrial hemp belong to the same plant family, a Major difference is the presence of the psycho-active cannabinoid THC. Certified industrial hemp must have a THC concentration of less than 0.3%, making it impossible to get high by consuming it. The THC level in cannabis / marijuana consumed with the intention of getting high, is more like 10%-30%. California Gold is only proposing activities in the high-CBD content industrial hemp arena. Importantly, this wasn’t a hasty decision. Management, the Board & industry consultants spent 10 months researching the industrial hemp space and perfecting their plans.

Cannabidiol (“CBD“)— is the real story here, a compound that has a significant and growing list of medical benefits, (but can not get you high). Scientific & clinical research points to CBD’s potential as a treatment for a wide range of conditions & neurological disorders. There are attributes being ascribed to CBD which may turn out to be untrue, but CBD is not harmful. One can not dangerously overdose, nor would one be inclined to consume vast quantities because it’s not cheap.

Vishal Gupta, California Gold’s President & CEO,

We believe California Gold is entering the cannabinoid-rich industrial hemp space that is in its infancy, with tremendous growth potential lying ahead. Our 100% ownership of the land, the availability of water & power, the highway connectivity, the close vicinity of skilled labour, and our location within the most populated State in the U.S., makes our Fremont property the ideal launch pad for CGM’s proposed high-CBD content industrial hemp seed operations.”

California Gold Prudently Retains Experts, Starting out Small

California Gold, in close consultation with industry experts, plans to build a 27,000 sq. ft. greenhouse, at an all-in cost of ~US$2M, for the purpose of high-CBD content, feminized hemp seed propagation. I called Delta Valley Hemp (“DVH“), the firm that CGM is using to build & operate the Greenhouse and sell (broker) the seeds. DVH is an industry-leader in hemp, with decades of cultivation, seed propagation, permitting, crop insurance & wholesale brokering experience. I was very impressed by the senior executive I spoke with there. I’ve been exchanging emails & texts with her and I’m excited that CGM displayed the wisdom to choose industry experts like DVH.

According to the executive at DVH, the highly-specialized, feminized hemp seeds that CGM & DVH propose to propagate will have stable genetics. The seeds are empirically proven to produce low-THC (< 0.3% concentration) and high-CBD (range 12% – 22%) an average of ~16%-19% CBD plants. Seeds with these highly attractive characteristics are in high demand, especially after the passage of the 2018 U.S. Farm Bill. The executive at DVH believes that high-CBD content hemp seed demand could remain strong, for patented strains, for several more years. DVH plans to work with CGM to patent strains at CGM’s Greenhouse. Both parties would share ownership of the patented strains.

High-CBD Content Seed Propagation, a High Value, Niche Market

Make no mistake, this is a highly speculative investment, plans could fall apart, there could be significant delays. The Company, through DVH, is in discussions with customers that appear to be willing to agree upfront to a volume of seeds (and pay at harvest time) based on a market-derived price, minus a modest discount. We will see how the first seed-sale cycle plays out.

If the Company could sell 1,000 pounds in year 1 at US$20,000/pound, for gross revenue of US$20M, (call it US$16M in net revenue assuming 20% in fees / commissions & other deductions) that would be ~C$21M. Compare that to CGM’s market cap of ~C$20.5M (55 M shares outstanding). CGM would be trading at 1x next year’s sales. In the chart below, I show annual gross revenue scenarios, in US$. In the first year of operations, I imagine gross revenue could range from US$5.0 to US$37.5 million, (in green), the average of the green scenarios is US$17.5 million. The other gross revenue figures represent year 2 or 3 possibilities, assuming just the one Greenhouse. Net revenues might be ~20% lower than the gross figures in the chart, and those figures are in USD.

Management mentioned the risks of secondary permits & approvals that still need to be obtained from the County & State. So, the timing of getting the Greenhouse up and running is a risk. I would add to the risks column the price of high-CBD content hemp seeds. There’s also execution risk of California Gold’s partner Delta Valley Hemp. The first harvests in the new Greenhouse will carry risks that readers (and me) can’t name or quantify. Obtaining funding for the Greenhouse is a risk, but management expects to have that lined up in April. These risks cause me to believe that the maximum number of pounds produced in year 1 will be 1,500. I consider year 1 as starting in September.

Conclusion

Even if it were to take 18 months to generate net revenue of ~C$21M, that would still be a good outcome. I’m guessing the profit margins would be strong. California Gold has several hundred acres amenable to industrial hemp-related activities. There’s room to expand well beyond a single Greenhouse. Perhaps management could grow high-CBD hemp plants from their own propagated seeds and extract CBD oil…. but that’s a whole new business plan, a whole new set of risks. Still, growing the flower and extracting CBD oil would be a logical next step. With its own hemp seeds, (a very significant cost factor), California Gold Mining Inc. (CSE: CGM) / (OTCQB: CFGMF) could become a low-cost producer of high-quality CBD Oil. However, as far as I know, there are no plans to grow hemp plants at this time.

Perhaps simpler than moving into CBD oil extraction would be to build more greenhouses. Although, as far as I know, there are no plans to build more greenhouses. The potential upside seems to be substantial (with commensurate high risk). The capital structure is tight, just 55 million shares outstanding. If California Gold’s management team executes its high-CBD content hemp seed business, I will compare the segment’s valuation to that of other hemp-focused companies in the U.S. & Canada. Readers beware, this new chapter in the Company’s story will take time, patience is required. First revenue is not expected until the 4th quarter.

DisclosuresThe content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER](together, [ER]) about California Gold Mining, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing co-ntained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of California Gold Mining are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Peter Epstein owned shares of California Gold Mining and the Company was an advertiser on [ER]. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.