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June 2019

Green Rush: Cannabis Market Will Grow by 9 Times by 2030

Amid Widening Legalization

Contents Cannabis stocks have delivered impressive investor returns in 2019, with many of the publicly traded 2 Key Takeaways companies soundly outperforming the broader market. Optimism has preceded actual performance as 4 Cannabis Playbook: We See Multiple Ways to Play Trends the industry has yet to generate positive free cash flow. However, unlike other emergent industries that 12 The U.S. Will Be the Largest and Fastest- have enjoyed fleeting popularity with fickle investors, the cannabis industry should realize a steep Growing Cannabis Market in the World 38 National Legalization Has Unlocked demand growth trajectory that could appeal to investors with a long-term investment horizon. The five Massive Growth for Canada industry leaders we now cover are far from burning out, with some offering attractive upside potential 50 Global Medical Cannabis Market Will as early overhead investments are harvested over time. See Huge Demand Growth but Increasing Competition 60 Cannabis Primer: How It Grows and Is Prohibition has kept cannabis largely in the hands of criminal enterprises. However, legalization is Consumed Has Implications for the gaining momentum. In the United States, 11 states and Washington, D.C., have legalized recreational Industry's Future 72 Appendix: Company Models cannabis, and 35 states have legalized medical cannabis or products that are low in tetrahydrocannabinol, or THC, and high in cannabidiol, or CBD. We expect federal legalization to take

place in the U.S. by 2023. Canada legalized recreational cannabis in October 2018. Internationally, more Important Disclosure The conduct of Morningstar's analysts is governed and more countries have recognized the benefits of medical cannabis and are expanding access. With by Code of Ethics/Code of Conduct Policy, Personal cannabis' popularity already growing organically due to expanded use cases, widening legalization will Security Trading Policy (or an equivalent of), and Investment Research Policy. For information further catalyze demand. regarding conflicts of interest, please visit: https://shareholders.morningstar.com Our research indicates that legal cannabis sales will grow nearly 9 times their current size by 2030. U.S. recreational, U.S. medicinal, Canada, and the global medicinal export market have penetrated just 8%, 21%, 11%, and 19% of their estimated markets, respectively. This large, underserved market will provide massive top-line growth and fixed cost leverage for cannabis companies, supporting a "green rush" through at least the next decade.

Canopy Growth and Curaleaf are our top picks. Canopy provides investors attractive exposure across all markets, as well as a consumer goods-focused strategy. Curaleaf provides pure-play exposure to the U.S. market, where we see massive growth for both its recreational and medical end markets.

Page 2 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Key Takeaways × Cannabis companies are poised to see sales grow by nearly 9 times through 2030 amid widening legalization and increasing consumer participation. × Current U.S. recreational and medicinal cannabis sales have penetrated just 8% and 21% of their estimated markets, respectively. With a significant runway for growth, recreational cannabis sales will Lead Analysts: grow at a 25% compound annual growth rate and medicinal cannabis sales will grow at a 15% CAGR. Kristoffer Inton Director × In the U.S., 23 states have legalized medical cannabis, 12 states have legalized low-THC/high-CBD hemp +1 312 384-4897 or cannabis derivatives, and 11 states and Washington, D.C., have passed both recreational and medical [email protected] cannabis. Through 2030, we expect seven more states to expand recreational cannabis and two states

that have already legalized to expand commercial operations amid implementation. Rachel Elfman Associate Equity Analyst × Current Canadian recreational and medicinal cannabis sales have penetrated just 12% of the estimated +1 312 244-7698 market. We expect Canadian cannabis sales will grow at a 20% CAGR. [email protected] × We size the current global medicinal cannabis market (excluding the U.S. and Canada) at $3.7 billion,

1 2 Contributing Analyst: while other published estimates range from $3.5 billion to $11 billion. We forecast total market Seth Goldstein, CFA potential of nearly $43 billion by 2030. However, due to increasing global competition, Canadian Equity Analyst +1 312 384-5506 cultivation would only see an estimated market of $20 billion. [email protected] × The six cannabis and cannabis-related companies we cover provide exposure to different geographic footprints and long-term strategies. × Canopy Growth: Canadian producer with a focus on cannabis-infused recreational products and the option to expand into the U.S. through an acquisition of Acreage Holdings. × Aurora Cannabis: Canadian producer focused on low-cost production; currently lacks a strategic partner and offers no exposure to the U.S. market. × Tilray: Canadian producer with limited exposure to the U.S. through a CBD partnership and strategic investment from Anheuser-Busch InBev. × Cronos: Canadian producer with a strategic investment from Altria, focused on significantly expanding its production capacity. × Curaleaf: U.S.-only producer with exposure to both the medical and recreational markets through cultivation, processing, and dispensary operations. × Scotts Miracle-Gro: Cultivation equipment supplier that serves the U.S., Canadian, and international markets and provides cannabis exposure without "touching the plant." × At current share prices, we think Canopy Growth, Aurora Cannabis, and Curaleaf offer investors attractive risk-adjusted upside.

1 Source: Coherent Market Insights, as cited by MarketWatch. https://www.marketwatch.com/press-release/global-medical-cannabis-market-to- surpass-us-201765-million-by-2025-2019-01-11 2 Source: Medical Cannabis Market, ResearchAndMarket.com, as cited by GlobeNewswire. https://www.globenewswire.com/news- release/2018/11/01/1641481/0/en/Global-Medical-Cannabis-Market-2018-2023-Market-Value-is-Expected-to-Reach-Approx-US-37-Billion.html

Page 3 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 1 Increasing Participation and Widening Legalization Will Drive Massive Demand Growth for Cannabis in the U.S., Canadian, and International Markets Millions of constant $ 1a U.S. Recreational and Medical Markets Are 8% and 15% Penetrated, Respectively 1b Legalization Remains Widely Different Across the U.S., Current 2030 Market Medical cannabis legal All cannabis illegal Low-THC / High-CBD legal Recreational and medical cannabis legal $80,000

$60,000

$40,000

$20,000

$0 U.S. recreational U.S. medicinal

1c …but Recreational Participation Has Room to Grow… 1d …and Medical Access Continues to Expand Marijuana - today Marijuana - 2030E Alcohol - today Tobacco - today Medical Cannabis Legal Low-THC / High-CBD Legal 100% 60% 80% 50%

40% 60%

30% 40% 20% 20% 10% 0% 0%

18-25 year olds 26+ year olds 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1990s

1e The Canadian Market Will Grow by 9 Times by 2030 1f The Global Medicinal Market Will Grow by 11 Times, but the Opportunity Is Better for Cultivation Outside Canada and the U.S. Canada Total Canada Recreational Canada Medical Global medicinal market (ex-US and Canada) $16,000 $50,000 $14,000 $12,000 $40,000 $10,000 $30,000 $8,000 $6,000 $20,000 $4,000 $10,000 $2,000 $0 $0 Current 2030 Current 2030 Market 2030 Market (excl. Self-Supply)

1g We See Attractive Valuations that Allow Investors to Play the Green Rush Across a Number of Markets and Themes USD USD End-Market Exposure Run-rate Fair Value Current Morningstar U.S. Intl. Production Strategic Strategic Market Cap Name / Ticker Estimate Price Rating Recreational Medical Canada Medical Footprint (sq ft) Partner Focus (bil) Canopy Growth CGC $54.00 $39.77 ÙÙÙÙ 5,940,000 Constellation Brands Consumer goods $14.0 Aurora Cannabis ACB $9.50 $7.46 ÙÙÙÙ 5,158,700 None Low-cost production $7.8 Tilray TLRY $40.00 $46.81 ÙÙÙ Not disclosed AB InBev Consumer, medical $4.7 Cronos CRON $11.00 $15.79 ÙÙ 1,270,500 Altria Expand production $5.2 Curaleaf CURLF $10.50 $7.11 ÙÙÙÙ 890,800 None Verticalized; U.S. $3.3 Scotts Miracle-Gro SMG $88.00 $98.01 ÙÙÙ Not relevant None Equipment, inputs $5.4

Sources: 2018 Marijuana Business Factbook, National Conference of State Legislatures. http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx#3 (accessed April 2019), Substance Abuse and Mental Health Services Administration, Centers for Disease Control, State of the Legal Marijuana Market by Arcview Market Research and BDS Analytics (as cited by Digital Journal), Coherent Market Insights (as cited by MarketWatch), ResearchAndMarket.com (as cited by GlobeNewswire), and Morningstar.

Page 4 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Cannabis Playbook: We See Multiple Ways to Play Trends

Investors Have Multiple Options to Play Cannabis Whether it's investing in widening international medical cannabis legalization or U.S. federal legalization, we see options for investors seeking exposure to different trends. In this section, we discuss which companies in our coverage universe that we see as best ways to play different cannabis trends. We then discuss each company under our coverage in depth.

In Exhibit 2, we've compared the five cannabis companies and one cannabis equipment company we cover. At present, we see Canopy Growth, Aurora Cannabis, and Curaleaf as undervalued. Each company offers different exposure to cannabis trends.

Exhibit 2 We See Attractive Valuations that Allow Investors to Play the Green Rush Across a Number of Markets and Themes

USD USD End-Market Exposure Run-rate Fair Value Current Morningstar U.S. Intl. Production Strategic Strategic Market Cap Name / Ticker Estimate Price Rating Recreational Medical Canada Medical Footprint (sq ft) Partner Focus (bil) Canopy Growth CGC $54.00 $39.77 ÙÙÙÙ 5,940,000 Constellation Brands Consumer goods $14.0 Aurora Cannabis ACB $9.50 $7.46 ÙÙÙÙ 5,158,700 None Low-cost production $7.8 Tilray TLRY $40.00 $46.81 ÙÙÙ Not disclosed AB InBev Consumer, medical $4.7 Cronos CRON $11.00 $15.79 ÙÙ 1,270,500 Altria Expand production $5.2 Curaleaf CURLF $10.50 $7.11 ÙÙÙÙ 890,800 None Verticalized; U.S. $3.3 Scotts Miracle-Gro SMG $88.00 $98.01 ÙÙÙ Not relevant None Equipment, inputs $5.4 Source: Company filings and Morningstar.

Investors' Cannabis Playbook × Widening international medical legalization: Canopy Growth, Aurora Cannabis, Tilray, and Cronos All four Canadian cannabis producers under our coverage export to the international medical market. We think Canada will struggle to maintain its position as the top exporter as lower-cost producers emerge around the world. However, all four companies have opened or are opening production in countries that allow for cheaper outdoor production and have lower-cost labor. As a result, we think all four companies will still benefit from widening international medical legalization.

× U.S. federal legalization: Curaleaf and Canopy Growth We expect the U.S. to become the largest cannabis market in the world. Individual states have been legalizing medical and recreational cannabis, in stark contrast to federal laws that continue to prohibit cannabis for any purpose. However, we believe that the federal government will eventually let states decide their own cannabis legalization, removing federal prohibition. The change in federal law will

Page 5 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

allow U.S. cannabis companies to access normal banking services, pay more normal tax rates, and accelerate demand growth. Operating solely in the U.S., Curaleaf provides pure-play exposure to U.S. legalization. We think Canopy Growth also provides investors direct exposure through its agreement to acquire U.S.-based Acreage Holdings immediately upon federal legalization.

× Cannabis-infused recreational products: Canopy Growth and Tilray Edibles constitute just 11% of cannabis consumption in the U.S. today. However, we expect to see significant growth in cannabis-infused food and drinks, particularly among people who do not consume cannabis currently but will when recreational cannabis is legal. Through strategic investments from Constellation Brands and AB InBev, respectively, we think Canopy Growth and Tilray are well positioned to benefit from growing demand in cannabis-infused products.

× Low-cost production: Aurora Cannabis Unlike its peers that seem to be focused on developing products for particular end markets, Aurora Cannabis appears to be focused on developing the most automated production. We think that most production-based cost advantages could be eventually imitated by competitors. But for investors who want to invest in the cultivator that leads the way in driving production costs down, we think Aurora is the best option.

× Cannabis exposure without touching the plant: Scotts Miracle-Gro Scotts is the largest cultivation equipment supplier, serving the U.S. and Canadian markets. The company currently holds an estimated market share of 40%-50% for hydroponic growing equipment. Although we don't expect the business to command pricing power, we expect cannabis-derived operating profit will grow to 30% of companywide profits by 2028.

Page 6 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Canopy Growth Offers Investors Exposure to the U.S. and Cannabis-Infused Products Canada currently constitutes about 90% of sales today, but Canopy also generates about 10% of its sales in the international medical market. Historically focused on the medical market in Canada, Canopy has pivoted to the recreational market following legalization, which now accounts for 70% of sales. Based on its messaging and business decisions, we believe Canopy has made the recreational market its strategic focus, particularly the cannabis-infused food and beverage segment. As shown in Exhibit 3, we anticipate that more than 90% of its revenue will be derived from the U.S. and Canadian recreational markets.

Exhibit 3 Canopy Will Derive Most of Its Revenue From Recreational Cannabis in the Future Percentage of gross sales

U.S. Canadian Recreational Canadian Medical International Medical Other Revenue 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Q3 2018 2028 Source: Canopy Growth and Morningstar.

Canopy's future U.S. exposure comes from its April 2019 agreement with U.S.-based Acreage Holdings, a verticalized cannabis company that owns cultivation, processing facilities, and dispensaries in 20 states primarily in the Northeast and West. Immediately upon federal legalization,3 Canopy will acquire Acreage Holdings for $3.4 billion in Canopy shares, $300 million of which will be paid up front in 2019. We think this deal gives Canopy immediate and attractive U.S. exposure at a good price.

In addition to the attractive U.S. exposure, we think Canopy offers exposure to cannabis-infused food and beverages. Although it is far too early to tell which companies will emerge in this budding space, Canopy's strategic investment from Constellation Brands gives it a strong partner in adult beverages. The global spirits producer bought a 37% stake in Canopy for CAD 5 billion in November 2018. Not only

3 The removal of federal prohibition and the recognition of states' rights to choose their own legal treatment of cannabis should also trigger the acquisition.

Page 7 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

did Canopy get much-needed growth capital, but it is receiving important marketing and product development experience that can help it develop its recreational products.

Aurora Cannabis Looks Focused on Becoming the Low-Cost Producer Whereas other cannabis producers have made strategic partnerships with alcohol, tobacco, or pharmaceutical companies, Aurora Cannabis continues to stand alone, though a partnership may eventually occur. For now, the company appears to be focused on developing the most advanced and automated production in the industry. Unlike its peers' messaging focused on the development of products, Aurora's messaging is relatively more focused on its production. Aurora is building out extensive capacity, shown in Exhibit 4, with a focus on large scale and low costs.

Exhibit 4 Aurora Cannabis Has Been Focused on Expanding Capacity With Large-Scale, Low-Cost Facilities

License Name Location Square Footage Capacity (kg/year) Status Cultivation Sale Aurora Mountain Canada 55,200 4,800 Operating since 2015 x x Aurora Vie Canada 40,000 4,000 Operating since June 2018 x x Aurora Eau Canada 48,000 4,500 Facility in full operation x x Aurora Sky Canada 800,000 >100,000 Facility in full operation x x Aurora Sun Canada 1,620,000 >230,000 Full construction to be completed by mid-calendar 2020 Aurora Nordic 1 Denmark 100,000 8,000 Facility construction complete x Aurora Nordic 2 Denmark 1,000,000 >120,000 Full construction to be completed by mid-calendar 2020 Operating since 2004. CanniMed Canada 97,000 19,000 Facility upgrades underway. x x MedReleaf Markham Canada 55,000 7,000 Operating since 2014 x x MedReleaf Bradford Canada 210,000 28,000 Facility in full operation x x Whistler Alpha Lake Canada 12,500 500 Operating since 2014 x x Whistler Pemberton Canada 62,000 >5,000 Phase 1 in operation. Phase 2 expected to be completed in September 2019. x ICC Labs Uruguay 21,000 27,135 Facility in full operation x x MedReleaf Exeter Canada 1,000,000 105,000 Land and building purchased Aurora Portugal Portugal 38,000 4,000 Phase 1 expected to be completed in calendar Q3 2020

Source: Aurora Cannabis.

On one hand, cannabis cultivation is difficult, so any production developments could result in lower costs for Aurora. On the other hand, we think that process-based cost advantages are ultimately imitable in the long run. In addition, we think that Canadian production will be at a disadvantage in the international market in the long run, due to its high labor costs and climate-limited choice of higher-cost indoor production. Nevertheless, any cost advantage would give Aurora an edge in the Canadian market against its peers at least in the short and medium term.

Partnerships Keep Tilray's Options Open to Evolution in Recreational and Medical Cannabis Historically focused on the Canadian medical market, Tilray has shifted its focus to the recreational market following legalization in 2018. Flower and oil for the recreational market now accounts for about a third of sales, and we anticipate it to account for nearly 50% of sales by 2028, shown in Exhibit 5. We expect similar growth for Tilray's food product business, rising from about one fourth of sales to 35% by 2028.

Page 8 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 5 Tilray Will Continue to Pivot Further to the Recreational Market Percentage of revenue

Canadian Recreational Canadian Medical Food Products International Medical 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Q1 2019 2028

Source: Tilray and Morningstar.

Tilray has entered partnerships to develop both its medical and recreational products. For the medical market, the company has partnered with Sandoz to develop cannabis medical products. In addition, the company has partnered with Authentic Brands Group to market CBD products in the U.S. For the recreational market, Tilray has partnered with AB InBev to develop its cannabis-infused drinks product lineup. With the industry in early stages, it's unclear if any of these partnerships will necessarily develop into anything fruitful. At the very least, we think it provides Tilray options as the industry evolves, especially in the budding cannabis-infused space.

Strategic Investment From Altria Provides Cronos Capital for Production Expansion Unlike the other Canadian cannabis companies under our coverage, Cronos does not disclose sales by recreational and medical end markets. We surmise that the company has experienced a shift heavily toward recreational sales, like its peers. Also like its peers, the company is focused on expanding its production significantly to meet the surging demand in the Canadian and international markets. In Exhibit 6, the company is set to more than triple its capacity in the coming years. Some of the expansion is in Israel and Australia as the company looks to meet international demand with lower-cost operations.

Page 9 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 6 Cronos Is Massively Expanding Production Capacity

Facility Location Grow Type Square Footage Estimated Annual Rated Capacity (kg) Existing Capacity Peace Naturals – Buildings 1, 2, 3, 4 Stayner, ON, Canada Indoor 325,000 38,500 Peace Naturals – Greenhouse Stayner, ON, Canada Greenhouse 28,000 1,500 OGBC Armstrong, BC, Canada Indoor 2,500 150 Existing Capacity >355,500 40,150

Capacity in Progress Cronos Israel – Phase I Hadera, Israel Greenhouse >45,000 5,000 Cronos Australia – Phase I Melbourne, VIC, Australia Indoor 20,000 2,000 Cronos GrowCo Kingsville, ON, Canada Greenhouse >850,000 70,000 NatuEra Cundinamarca, Colombia Greenhouse * Capacity in Progress 915,000 77,000

Pro Forma Capacity 1,270,500 117,150

Source: Cronos.

In March 2019, tobacco giant Altria Group invested CAD 2.4 billion for a 45% stake in Cronos, with an option to increase its ownership to 55%. The financial resources are important for Cronos, as its high capital spending continues and it has yet to reach profitability. However, the synergies between cannabis and tobacco are arguably weaker. We think partnerships with alcohol companies can help cannabis companies develop infused drinks. With tobacco companies, cannabis firms get expertise on navigating strict regulations, particularly for marketing and advertising. We struggle to see many additional synergies that can result from the partnership, though. As such, we have less visibility into Cronos' ultimate long-term strategy.

Curaleaf Provides Pure-Play Exposure to Both the U.S. Recreational and Medical Markets We think the U.S. will be the largest and fastest-growing cannabis market in the world. We expect the country to change its laws, no longer prohibiting cannabis at the federal level and instead allowing individual states to choose the legality. Federal legalization will further catalyze already strong market growth while also improving free cash flow as companies will be able to access regular services, pay normal taxes, and operate without the handicaps they do today.

After its acquisition of Cura Select, Curaleaf strengthened its West Coast footprint and exposure to recreational cannabis. As shown in Exhibit 7, the company will have cultivation and dispensary operations on both U.S. coasts following the acquisition.

Page 10 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 7 After the Acquisition of Cura Select, Curaleaf Will Have Significant Operations on Both Coasts

Cultivation State (square footage) Dispensaries Other Arizona 6 Vertically integrated California 150,000 3 Connecticut Products distributed in 9 dispensaries Florida 217,800 24 Maine 1 Maryland 4 Vertically integrated Massachusetts 100,000 2 Vertically integrated Nevada 269,000 2 New Jersey 1 New York 72,000 4 Oregon 82,000

Source: Curaleaf.

Curaleaf is the only company under our coverage that provides direct exposure to the U.S., which we see as having the largest potential and highest growth going forward. For investors looking to play federal legalization, we recommend Curaleaf.

Scotts Miracle-Gro Is Well Positioned to Remain the Top Equipment Supplier As the top supplier of cannabis-growing equipment, Scotts Miracle-Gro provides indirect exposure to the U.S. and Canadian recreational and medical cannabis markets. The stock is an alternative way for investors to play the general growth of the cannabis industry without betting on a single cannabis company. Through acquisitions totaling roughly $1 billion, Scotts Miracle-Gro's Hawthorne business has built a portfolio of products that serves as a one-stop shop for hydroponic growing equipment and inputs. Hawthorne sells everything from specialized fertilizers and crop chemicals for cannabis plants to entire growing systems including fixtures and lighting. As a result, Hawthorne has established itself as the number-one supplier of hydroponic growing equipment, with an estimated market share of 40%-50% depending on the product.

Currently, Hawthorne is pursuing a volume-over-price strategy in order to expand its market share and establish a dominant position, similar to the 50%-70% market share that Scotts' U.S. consumer segment owns for its consumer lawncare and gardening products. While Hawthorne may be able to secure a market share above 50%, we doubt it will be able to command the same pricing power as Scotts' consumer gardening products because the Hawthorne products are commodities. Further, Hawthorne's growing systems do not use a razor-and-blade model that would require a grower to continue to purchase Hawthorne products after installing its fixtures. In our view, this leaves Hawthorne vulnerable to being undercut by competitors when trying to raise prices. However, with a growing market share, Hawthorne should generate an increasing proportion of total company profits, growing from roughly 10% in 2017 to 30% by 2028, shown in Exhibit 8.

Page 11 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 8 The Hawthorne Business Will Grow to 30% of Total Profits Over the Next Decade Percentage of operating profit before tax

US Consumer Hawthorne Other 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 2016 2017 2018 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e

Source: Scotts Miracle-Gro and Morningstar.

Page 12 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

The U.S. Will Be the Largest and Fastest-Growing Cannabis Market in the World

Key Takeaways × The U.S. cannabis market will be 10 times larger in 2030 than it is today. × Our regulatory outlook is that the federal government will no longer prohibit cannabis and allow states to decide. States that have legalized or are likely to legalize cannabis for any purpose will not be inhibited from doing so. However, states that have showed staunch opposition to legalization would be able to continue to prohibit it. To learn more about our regulatory outlook, turn to Page 13. × Based on our forecast, we think legal U.S. recreational and medicinal cannabis have penetrated just 8% and 21% of their estimated markets, respectively. To learn more about our forecast approach, turn to Page 23.

Easing Legal Environment Will Drive the U.S. Market to Expand 10 Times Its Current Size by 2030 Despite a conflicted regulatory environment, the U.S. is the fastest-growing and should be the largest and most attractive cannabis market in the world. As shown in Exhibit 9, we estimate that current U.S. recreational and medicinal cannabis sales have penetrated just 8% and 21% of their estimated markets,4 respectively. Underpenetration leaves a significant runway for growth, as we forecast that recreational cannabis sales will grow 25% per year and medicinal cannabis sales will grow 15% per year, on average.

4 For the purposes of this report, we define the market as the demand available to legal markets in 2030.

Page 13 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 9 Significant Underpenetration for the Massive Opportunity in U.S. Medicinal and Recreational Cannabis Millions of constant $

Current 2030 Market $80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$0 U.S. recreational U.S. medicinal

Source: 2018 Marijuana Business Factbook and Morningstar.

Our forecast centers on the continued easing of existing legal restrictions, although we do not anticipate cannabis achieving nationwide legalization in the next decade. In the following section, we discuss the current regulatory environment for cannabis in the U.S. and how we see it changing by 2030.

Confusing U.S. Federal Cannabis Regulatory Environment Will Improve In the U.S., cannabis remains illegal under federal law for any purpose. Despite this, individual states have legalized cannabis for both medicinal and recreational purposes. The obvious disagreement between federal and state laws has created a confusing regulatory environment. Cannabis businesses operating in legalized states simultaneously operate within state laws and violate federal laws. Although this confusing situation has existed for decades, we believe a resolution will come in the next few years.

Federal Government Classifies Cannabis as Illegal, but States Have Legalized Anyway Cannabis remains illegal at the federal level. However, as of now, laws have been largely and purposely unenforced for individuals who abide by legalization laws within applicable states.

The most relevant federal law is the Controlled Substances Act of 1970. The CSA makes cannabis illegal for any purpose—including medicinal. It classifies cannabis as a Schedule I substance (the strictest classification), a category reserved for substances with a high potential for abuse and no accepted medical use.

Despite this federal classification, states have been softening their laws regarding cannabis prohibition. In the 1970s, a few states decriminalized the possession of small amounts (generally limited to personal

Page 14 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

use). In 1978, New Mexico passed the Controlled Substances Therapeutic Research Act, the first state law that recognized cannabis' medical potential, permitting use for cancer patients suffering from nausea and vomiting. Although the program was defunded in 1986, it was the first signal of the softening stance against cannabis in the U.S.

By the end of 2010, 17 states had passed some form of medical cannabis law, shown in Exhibit 10. This clear disagreement with federal created a murky legal situation for businesses, consumers, and state and local governments.

Exhibit 10 States Have Increasingly Recognized the Benefits of Medical Cannabis Percentage of states with legalization laws passed (including Washington, D.C.)

Medical Cannabis Legal Low-THC / High-CBD Legal 100%

80%

60%

40%

20%

0%

Source: National Conference of State Legislatures. http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx#3. Accessed April 22, 2019. Note: States that pass medical cannabis laws after previously having a low THC/high CBD law are removed from low THC/high CBD legal to avoid double counting.

The decriminalization trend continued through 2013, with 17 states and Washington, D.C., typically lowering the punishment of possession of personal amounts to fines in lieu of jail time. Generally, these changes reflected states' desires to prioritize police focus on more violent and serious crimes.

Laws Differ Across the U.S., but the Majority of States Have Approved Legalization in Some Form The laws at the state level differ greatly. As of May 2019, 23 states have legalized medical cannabis (blue states in Exhibit 11), 12 states have legalized low-THC/high-CBD hemp or cannabis derivatives (yellow), and 11 states and Washington, D.C., have passed both recreational and medical cannabis (green). However, these laws stand in stark disagreement with the ongoing full federal prohibition of cannabis.

Page 15 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 11 Only Four States Continue to Prohibit Medical, Recreational, and Low-THC/High-CBD Cannabis Products

Medical cannabis legal All cannabis illegal Low-THC / High-CBD legal Recreational and medical cannabis legal

Source: National Conference of State Legislatures. http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx#3. Accessed April 2019.

Lack of progress at the federal level hasn't stopped states from continuing to legalize cannabis in one form or another. This has only created additional pressure for the federal government to address the legal discrepancy. As shown in Exhibit 12, through 2030, we expect six more states will expand recreational cannabis. Michigan and Vermont legalized recreational cannabis in 2018 and Illinois legalized it in 2019. Commercial operations will expand in the next decade as their programs are implemented.

Page 16 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 12 Nine States Will See Legalization or Expansion of Commercial Distribution Through 2030

State Reason Connecticut • Gov. Ned Lamont pledged legalization is a priority for him in 2019 • Gov. J.B. Pritzker signed recreational cannabis into law in June 2019 Illinois • Sales to begin in January 2020

Michigan • Legalization passed in 2018, but implementation ongoing

• House passed HB 481 to legalize marijuana 209 to 147 in February 2019 (59% approval) New Hampshire • Gov. Chris Sununu promised to veto any legalization, but veto can be overwritten with two-thirds vote in both legislative houses • Gov. Phil Murphy supports marijuana legalization New Jersey • Senate and Assembly working on legislation to garner support • ‎Gov. Michelle Lujan Grisham campaigned as supportive of legalization New Mexico • Gov. Grisham also supported cannabis reform measures as a U.S. Representative • Gov. Andrew Cuomo vowed to pass legalization by June 2019 New York • Cuomo commissioned a New York Health Department study that supported legalization • Although reluctant to do so, Gov. Gina Raimondo to call for marijuana legalization in next budget proposal after legalization increases in Rhode Island neighboring states • Legalization passed in 2018, but implementation ongoing • Current law does not currently allow commercial production and sale, but we think it is will be added later Vermont Source: Morningstar.

In contrast, we've identified 10 states that either prohibit cannabis entirely or only allow low-THC/high- CBD cannabis derivatives and are highly unlikely to expand legalization over the next decade. We've listed and commented on these in Exhibit 13.

Exhibit 13 10 States Are Unlikely to Ease Current Restrictions on Prohibitions on Cannabis by 2030

State Commentary • Harsh cannabis possession penalties that are strongly enforced, including up to 1 year jail time for personal use possession Alabama • Medical access for CBD oil only through clinical trials • Low-THC / high-CBD oil allowed for only one qualifying condition (epilepsy) Indiana • Personal use possession carries potential jail time of up to 1 year

Idaho • Medical cannabis remains illegal

Kansas • Although CBD oil is technically allowed, THC is not allowed even in trace amounts, resulting in effective ban • Legalized low-THC / high-CBD oil, but implementation of medical cannabis system has been slow and delayed Louisiana • Cultivation and distribution remain severely limited with just two growers and nine pharmacies currently operating • Medical cannabis program faced attemps to repeal the law by legislators; only saved by Gov. Schweitzer's veto Montana • Very strict posession laws; even small amounts can result in jail time and larger amounts can result in long sentences • No medical cannabis law, as legislature has failed to pass a bill multiple times Nebraska • Attempt to bring medical cannabis to direct voter initiative in 2020, but staunch opposition by most legislators and governor • In November 2018, voters rejected a medical legalization ballot measure with 59% opposed North Dakota • House members defeated a marijuana decriminalization bill in Feb 2019

South Dakota • Medical cannabis remains illegal • In Nov 2018, voters approved Proposition 2, which would have legalized medical cannabis for qualified patients Utah • However, lawmakers replaced it with one with tight restricitons on patient access and significant state oversight Source: Morningstar.

Our 2030 outlook for state legalization, which takes into account our expectations for states likely to expand legalization, is shown in Exhibit 14.

Page 17 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 14 Further Legalization and Commercial Distribution Across 9 States Will Drive More Growth in the U.S.

Medical cannabis legal All cannabis illegal Low-THC / High-CBD legal Recreational and medical cannabis legal

Source: National Conference of State Legislatures. http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx#3. Accessed April 2019. Morningstar.

The Federal Government Has Been Softening Its Stance Despite Jeff Sessions' Efforts In a similar vein to the ongoing decriminalization at the state level, the federal government has softened its stance, although the actual law remains unchanged. The most significant step occurred Aug. 29, 2013, when Deputy Attorney General James Cole issued a Department of Justice memorandum to all U.S. attorneys. It would come to be known as the Cole Memorandum.

The Cole Memorandum stated that, due to limited resources, the Justice Department would not enforce federal prohibition in states that have "legalized marijuana in some form…and implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of marijuana." Cole clarified that enforcement would continue for priorities such as violence prevention, impaired driving, or gang and cartel funding.

Although the Cole Memorandum softened the federal stance on enforcement, it did not change the legal status of cannabis, which can only happen via legislation passed through both houses of Congress and signed into law by the president. Ultimately, the Cole Memorandum directed U.S. attorneys to deprioritize cannabis activity that met state laws but could not and did not prevent U.S. attorneys from pursuing cases if they so chose.

Page 18 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

In addition to the Cole Memorandum (and its rescission), the Rohrabacher-Farr amendment has been one of the most important developments for easing federal cannabis policy. It was initially introduced as legislation in 2001 and became law in December 2014 as part of the omnibus spending bill. As part of the omnibus spending bill, it requires annual renewal to remain in effect. Nevertheless, when in effect, the Rohrabacher-Farr amendment bars federal prosecution of individuals who comply with their state's medical cannabis laws.

When the Rohrabacher-Farr amendment became law, 24 states and Washington, D.C., had passed a medical cannabis law and eight states had passed a low-THC/high-CBD medical law.5 Initial implementation effected no change, as Department of Justice officials interpreted the law as protections for state officials only. Through court rulings disagreed with the DOJ's narrow interpretation, the law now applies more broadly and represents the most significant progress in easing policy, albeit on medical cannabis only.

Following the election of President Donald Trump in 2016, Jeff Sessions was appointed attorney general in February 2017. A noted opponent of cannabis legalization, Sessions rescinded the Cole Memorandum in January 2018, instead directing U.S. attorneys to decide how to handle disagreement between federal and state laws. Rather than lead to immediate prosecution in legalized states, the rescission led to additional confusion.

Legislation Activity Suggests Continued Easing in Federal Cannabis Policy According to Leafly, the 2018-19 congressional session had more than 60 pieces of proposed cannabis legislation, with activity continuing into the current session. In Exhibit 15, we've summarized a few of the current cannabis bills that have been proposed.

5 Low THC/high CBD laws allow cannabis or hemp derivatives that are low in the psychoactive cannabinoid THC for medical treatment but prohibit the more commonly known cannabis that has THC levels high enough to cause a "high."

Page 19 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 15 A Number of Cannabis Bills Have Been Proposed, Though They Differ on National Legalization

Deschedule Marijuana / States Choose Bill Introduced by Support Legalize Nationally Legalization Sen. Cory Gardner Sen. Elizabeth Warren Rep. Earl Blumenauer Strengthening the Tenth Amendment Through Entrusting States (STATES) Act Rep. David Joyce Bipartisan x Sen. Cory Booker Rep. Barbara Lee Marijuana Justice Act Rep. Ro Khanna Democratic x

Regulate Marijuana Like Alcohol Act Rep. Earl Blumenauer Democratic x Restraining Excessive Federal Enforcement & Regulations of Cannabis (REFER) Act Rep. Barbara Lee Democratic x

Sensible Enforcement of Cannabis Act (SECA) Rep. Luis Correa Bipartisan x Sen. Ron Wyden Marijuana Revenue and Regulation Act Rep. Earl Blumenauer Democratic x

Compassionate Access, Research Expansion, and Respect States (CARERS) Act Sen. Steve Cohen Bipartisan x (medical only)

Source: Leafly and U.S. Congress.

Of the numerous bills currently proposed, the Strengthening the Tenth Amendment Through Entrusting States Act enjoys the most bipartisan support, including Trump. The STATES Act would prevent the federal government from interfering in states' legal cannabis operations but would not legalize cannabis nationally or remove it from Schedule I under the CSA. As such, it would not necessarily remove all the confusion that surrounds federal policy. For example, questions related to interstate trade would need to be decided in the courts, as the law would appear to protect trade across two legal jurisdictions, but federal law would still prohibit interstate transportation of Schedule I substances.

The Marijuana Justice Act takes a more progressive stance, as it would deschedule cannabis under the CSA, thus immediately legalizing it nationally. In addition, the bill would introduce cannabis-related criminal justice reforms, especially for prosecution that occurred during federal prohibition. Although the Marijuana Justice Act would be a more favorable result for the cannabis industry, it currently only enjoys support from Democrats, which limits its chances of passing in its current form anytime soon.

Trump Is a Positive Factor for More Favorable Cannabis Laws Trump has generally been supportive of states' rights regarding cannabis legalization. As such, despite the views and actions of his appointment Sessions, we view the president as a positive factor for less stringent regulation. Of course, his influence comes with considerable uncertainty. Initially during the presidential campaign, then-candidate Trump stated that he supported states' rights on both medical and recreational cannabis.

Page 20 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

"The marijuana thing is such a big thing. I think medical should happen—right? Don't we agree? I think so. And then I really believe we should leave it up to the states…but in terms of marijuana and legalization, I think that should be a state issue, state by state." — Donald Trump at a campaign rally on Oct. 29, 2015

The president's support for states' rights continued when he expressed his likely support for the STATES Act, the bipartisan bill that would give each state the right to determine the legal status of cannabis within its borders while leaving it as a Schedule I substance under the CSA. States that have legalized cannabis for certain purposes would not have to worry about federal interference, and states that have prohibited it in for certain purposes could continue to do so.

In addition to his supportive position on states' rights on cannabis legalization, Trump has taken another smaller step that we view optimistically. In December 2018, he signed the omnibus Farm Bill, which included redefining hemp, the nonpsychoactive plant in the cannabis family, as an agricultural product rather than a Schedule I substance. Although hemp carries only trace amounts of THC, and CBD may not carry all the health benefits of THC, additional federal relaxation on the fringes of cannabis law is promising.

Sessions' Replacement More Promising for Cannabis Unrelated to their apparent disagreement on cannabis legalization, Trump asked for and received Sessions' resignation on Nov. 7, 2018. This largely stemmed from his displeasure with how Sessions handled special counsel Robert Mueller's Russia investigation.

On Feb. 14, 2019, the Senate confirmed William Barr as attorney general. Barr has expressed his personal opposition to cannabis. However, during his confirmation hearings, Barr stated that despite Sessions' rescindment of the Cole Memorandum, he would not direct the Department of Justice to target cannabis companies that were operating in compliance with state laws:

"My approach to this would be not to upset settled expectations and the reliant interests that have arisen as a result of the Cole Memorandum."

In addition, Barr pushed for Congress to act.

"However, I think the current situation is untenable and really has to be addressed. It's almost like a backdoor nullification of federal law." — William Barr, Jan. 15, 2019

A Democratic President in 2020 Would Be Even More Favorable for Cannabis Legalization Although we view the Trump administration's influence as generally positive for federal cannabis legislation, the 2020 presidential election is nearing. With campaigns heating up, it is unlikely that significant cannabis legislation will pass in the next two years. As a result, it is important to also consider the stances of the candidates most likely to compete against Trump.

Page 21 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

More than 20 Democratic politicians have declared or stated potential plans to run for the party's presidential nomination. Many differences exist among the candidates, though cannabis legislation is supported across the field. Nearly every candidate has stated some level of support for a federal cannabis law, with most supporting full national legalization akin to candidate Sen. Cory Booker's Marijuana Justice Act.

Sen. Amy Klobuchar takes one of the more conservative stances among the candidates with her position that states should decide legalization within their borders. Nevertheless, this would still represent progress for cannabis at the federal level.

Former Vice President Joe Biden has the highest potential to hinder progress on cannabis legalization, given his long antidrug record as a senator. However, given the current views favoring legalization, especially within the Democratic Party, we think it's likely he would adopt a more liberal position on cannabis than his past would otherwise indicate.

It is far too early to predict the likely nominee. However, with nearly all candidates supporting some form of legalization, we think that the election will at least maintain current federal laws while possibly making them more supportive.

Although Still Illegal Federally, Agencies Have Avoided Addressing the Legal Disagreement Lastly, we briefly discuss the current treatment of cannabis and its derivatives by major federal agencies. The two most relevant agencies are the Food and Drug Administration and the Drug Enforcement Administration.

The FDA has begun to show signs of acceptance of cannabis as a medicine by the approval of some cannabis-derived drugs for prescription use. This includes drugs that use synthetic THC, such as Marinol, Syndros, and Cesamet. However, the most significant approval was for Epidiolex in June 2018. Epidiolex uses CBD to treat seizures related to specific forms of epilepsy.

This FDA approval represented the first drug approval containing an active ingredient derived from cannabis, although the psychoactive cannabinoid THC is only present in trace amounts. The approval also coincidentally caused some challenges to the growing casual use and inclusion of CBD in food and beverages, particularly at restaurants. The FDA bans the use of approved drugs' active ingredients in food and drinks, so the approval of Epidiolex implicitly banned the sale of CBD-infused food and beverages that have not been explicitly approved. Then-commissioner Scott Gottlieb said the ban would remain in place until the FDA could introduce a system to allow products to legally enter the market.

In comparison with the progress at the FDA, DEA classifications remain confusing. Following the FDA's approval of Epidiolex, the DEA reclassified it as a Scheduled V substance, signifying its low potential for abuse. However, the DEA continues to classify cannabis-derived CBD as a Schedule I drug, although enforcement has been nonexistent.

Page 22 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Morningstar's Regulatory Outlook for the U.S. Cannabis Industry We contend that the most likely resolution to the federal and state legal discrepancy is a change akin to the proposed STATES Act, not the Marijuana Justice Act. Under a change similar to the STATES Act, the federal government would be legally prevented (and not simply directed to by the attorney general) from interfering in cannabis operations and consumers operating within a state's laws.

Unlike the Marijuana Justice Act, the STATES Act would not remove cannabis from the CSA, meaning that it would not legalize cannabis nationally. Full legalization would face significantly more challenges to approval, as exhibited by the fact that the STATES Act enjoys bipartisan support while the Marijuana Justice Act is only supported by Democratic representatives and senators.

Overall, we believe states that have legalized or are likely to legalize cannabis for any purpose will not be inhibited from doing so. However, states that have showed staunch opposition to legalization would be able to continue to prohibit it. For the purposes of our forecast, we've included the impact from states with high likelihood to expand cannabis laws. Should more liberal legislation for national legalization be passed, we estimate the market to be nearly twice the size of our forecast at more than $160 billion.

States' Rights on Cannabis Legalization Would Be Similar to Consumer Fireworks Laws The regulatory environment that we envision as most likely would be analogous to the current laws regarding consumer fireworks.

The federal government does not prohibit consumer fireworks; however, the safety of fireworks is regulated by the U.S. Consumer Product Safety Commission, whose authority stems from the Federal Hazardous Substances Act. Similarly, we would expect the federal law to empower the FDA to regulate cannabis products as it does any food or drugs.

Although fireworks are allowed federally, states, counties, and municipalities can pass specific consumer fireworks laws within their jurisdictions. Similarly, we envision each state would maintain the right to determine its own approach to cannabis within its own borders, as proposed under the STATES Act.6

It is illegal to enter states that prohibit certain types of consumer fireworks (Illinois, for example) with those fireworks in your possession even if they were purchased in states that allow them (Wisconsin, for example). Although the initial purchase was legal under federal law as an interstate transaction, the consumer immediately violates Illinois' prohibition of possession of fireworks upon entering its border. We envision similar enforcement of differences in states' laws, in which the relevant jurisdiction's laws are what matters.

6 Source: Sen. Elizabeth Warren's presidential campaign website. https://www.warren.senate.gov/imo/media/doc/STATES%20Act%20One%20Pager.pdf. Accessed April 2019.

Page 23 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Massive Growth for U.S. Recreational and Medicinal Cannabis Is Coming Based on our forecast, we think legal U.S. recreational and medicinal cannabis have penetrated just 8% and 21% of their estimated markets, respectively. This leaves a significant runway for growth, shown in Exhibit 16.

Exhibit 16 We Forecast a 2030 Market for Recreational Cannabis Nearly 13 Times the Size of Today Constant dollars in millions

Current 2030 Market $80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$0 U.S. recreational U.S. medicinal

Source: 2018 Marijuana Business Factbook and Morningstar.

The recreational cannabis market is larger than the medical market both at its current size and at its long-term estimate. The current market estimate of the legal recreational market is about $5.4 billion,7 primarily dominated by the Western U.S. where recreational legalization is more common and distribution more developed. We estimate the market to be 12 times larger than the status quo at roughly $68 billion in constant dollars, representing about 25% average annual growth.

Our robust growth forecast is based on three key pillars, shown in Exhibit 17.

7 Source: 2018 Marijuana Business Factbook.

Page 24 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 17 Market Growth Will Be Driven by Wider Availability and Conversion of Black Market and Nonconsumers

Source: Morningstar.

We forecast that roughly 10% of the U.S. population in 2030, or roughly 35 million people, will represent the market for the legal recreational cannabis market, shown in Exhibit 18. This translates into nearly 7,000 tons of annual cannabis demand. Assuming an end-user price of $10 per gram8 in constant dollars, we estimate the total market to be more than $68 billion.

Exhibit 18 We Forecast Roughly 35 Million People, or 10% of the U.S. Population, Will Be Consumers Millions of people

400

350

300

250

200

150

100

50

0 Total US population Population Underage Non-marijuana Reside in Addressable in 2018 growth people consumers prohibition states market in 2030

Source: Morningstar.

8 Based roughly on market prices in the Western U.S. today. We expect U.S. production to largely come from that region.

Page 25 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

We Use a Demographic- and Usage-Based Approach to Forecast the Market Size We've constructed our forecast based on demographics and usage, starting with the entire U.S. population in 2030, then narrowing the group by age, frequency of usage, and residence.

At the state level, population growth provides a slightly weaker tailwind to recreational market growth than the national growth rate would suggest. Although populations in the legalized states in the Western U.S. will grow faster than the national average, the legalized Eastern states will drag on potential market growth. As a result, the population in states that allow—or that we think will allow— recreational cannabis will grow more slowly at 0.6% per year, shown in Exhibit 19. Although the annual delta in percentage terms is quite small, the impact is magnified when compounded through 2030.

Exhibit 19 States With Legal Recreational Cannabis Face Slower Population Growth Than the National Average Millions of people

Legal or Will Be Legal Illegal 400

350

300

250

200

150

100

50

0 2018 2030E

Source: U.S. Census Bureau, University of Virginia Weldon Cooper Center for Public Service, Demographics Research Group, and Morningstar.

In 2016-17, roughly 12% of people ages 12-17 had consumed cannabis in the past year. 9 This is roughly flat with the 13% participation rate reported in 2008-09. Accessibility and a lack of disposable income likely constrain higher usage. For the purposes of our forecast, we've excluded this cohort completely; they would be unable to access legal distribution anyway, as states that have legalized recreational cannabis have set an age minimum of 21. However, we've included consumers 18-21, even if they would not legally be allowed to purchase recreational cannabis, due to limitations on how usage data has been bucketed.

9 Source: Substance Abuse and Mental Health Services Administration, Center for Behavioral Health Statistics and Quality: National Survey on Drug Use and Health.

Page 26 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

After narrowing the market based on age, we then narrowed our forecast to adults who are likely to consume cannabis. We've bifurcated our assumed future participation rate into two factors: growing secular acceptance and legalization-driven participation boosts.

First, acceptance of cannabis for recreational purposes has been gradually increasing, with rising participation rates growing among adults 18-25 since 2002, shown in Exhibit 20.

Exhibit 20 U.S. Cannabis Participation Rates Have Risen Since 2002 Percentage of 18- to 25-year-olds who consumed each substance in the past month

Marijuana Cigarettes Alcohol 70%

60%

50%

40%

30%

20%

10%

0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: CDC.

U.S. participation rates rose from 2002 to 2016 among 18- to 25-year-olds, especially over the last decade. By 2016, 21% of people ages 12 and above were estimated to have consumed cannabis in the past month. In comparison, cigarette participation fell to 24% and alcohol participation fell to 57% in absolute terms.

On average, cannabis participation rates have grown by about 25 basis points and 23 basis points per year for people ages 18-25 and 26 and older, respectively, from 2002 to 2016. We believe these trends represent growing acceptance of cannabis in the U.S.

Attitudes on legalization support our belief of growing acceptance. In survey data collected by the Pew Research Center, legalization support has risen from 12% in 1969 to 62% in 2018, shown in Exhibit 21.

Page 27 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 21 Support for Legalization Has Steadily Risen, Indicating Growing Acceptance of Cannabis Percentage of survey respondents

Yes, legal No, illegal 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 1969 1973 1979 1985 2000 2003 2010 2010 2011 2013 2014 2016 2018

Source: Pew Research Center.

Second, in addition to growing secular acceptance for cannabis, legalization appears to drive an increase in participation rates. We believe the increase represents nonconsumers converting into consumers because cannabis has become legal. We see evidence of the increase in participation in Colorado, shown in Exhibit 22. After the state legalized recreational cannabis, participation rates rose 490 basis points for ages 18-25 and 480 basis points for ages 26 and older.

Page 28 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 22 Colorado's Participation Rates Increased Significantly After Legalization Percentage of age group who have consumed cannabis in the past month

2009-2012 (Pre-legalization) 2013-2016 (Post-legalization) 35% +490 bps

30%

25%

20%

15% +480 bps

10%

5%

0% 18-25 26+ Source: U.N. Office on Drugs and Crime.

For the purposes of our forecast, we apply an increased growth rate attributable to legalization for states that have legalized very recently (and thus have not yet established distribution) or that we believe will legalize recreational cannabis in the next few years. These states are Connecticut, Illinois, Michigan, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, and Vermont.

Lastly, we compare our recreational cannabis forecast's implied participation rates in 2030 against today's alcohol and tobacco participation in Exhibit 23. Although we anticipate wider acceptance and increased participation rates for cannabis, our forecast implies that it will not surpass alcohol in participation rates. It will, however, modestly exceed today's participation rates for tobacco. As a side note, this data does not reflect comparable usage intensity for each substance. Those using cannabis tend to consume with less frequency than a consumer of alcohol or tobacco.

Page 29 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 23 Our Recreational Forecast Implies That Cannabis Will Not Surpass Alcohol's Popularity

Marijuana - today Marijuana - 2030E Alcohol - today Tobacco - today 60%

50%

40%

30%

20%

10%

0% 18-25 year olds 26+ year olds

Source: Substance Abuse and Mental Health Services Administration, CDC, and Morningstar.

After estimating the market of cannabis consumers, we translated this into a volume forecast using consumption intensity data from Colorado as a model.

Consumption is not normally distributed across cannabis consumers. Rather, the two largest groups by number of people are the most infrequent consumers and the most frequent consumers, shown in Exhibit 24. Of Colorado users, 30% consumed cannabis less than once per month, consuming roughly 2.5 grams per month, while 23% of users consumed cannabis on 26 days or more per month, consuming more than 600 grams per month.

Page 30 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 24 Colorado Data Indicates Cannabis Use Is Dominated by the Most Infrequent and Frequent Consumers Number of Colorado residents

Frequency of Colorado Residents Age 21+ that Consume Cannabis 350,000

300,000

250,000

200,000

150,000

100,000

50,000

0 Less than once 1-5 6-10 11-15 16-20 21-25 26-31

Source: Substance Abuse and Mental Health Services Administration, CDC, and Morningstar.

While the most frequent consumers (26 or more days per month) constituted just 23% of all users, they accounted for 71% of all cannabis consumed, shown in Exhibit 25.

Exhibit 25 The Most Frequent Cannabis Users Account for the Vast Majority of Consumption in Colorado Tons of cannabis consumed

Consumption by Frequency 160

140

120

100

80

60

40

20

0 Less than once 1-5 6-10 11-15 16-20 21-25 26-31

Source: Substance Abuse and Mental Health Services Administration, CDC, and Morningstar.

Page 31 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

We've assumed that this usage intensity curve is representative of all cannabis consumers elsewhere in the U.S., so we've used the weighted average consumption of roughly 190 grams per month to convert our forecast of consumers into volume demand. Although different states will exhibit varying levels of average consumption, we believe this is a reasonable baseline for forecasting purposes.

The U.S. Medicinal Cannabis Market Will Nearly Quintuple by 2030 Although medical cannabis legalization has been an ongoing trend in the U.S. for years, we still see massive growth ahead. Current market estimates for the U.S. medicinal cannabis market are roughly $2.6 billion-$3.3 billion, according to the 2018 Marijuana Business Factbook. We estimate the market in 2030 to be nearly 5 times larger at more than $14 billion, which would represent more than 10% average annualized growth.

Our forecast may underestimate the market size potential for medicinal cannabis, given insufficient scientific research to gauge the full medical benefits. However, anecdotal evidence of the benefits to help treat certain symptoms like pain and nausea, as well as growing calls for additional scientific studies, gives us confidence and serves as the basis for our forecast. In Exhibit 26, we've summarized results from a survey of medical providers in Minnesota that suggest room for even wider acceptance.

Exhibit 26 Minnesota Medical Providers' Positive Views on Legitimacy and Efficacy Bode Well for Wider Acceptance

Strongly ag ree Somewhat agree Neither agree nor disagree Somewhat disagree Strongly disagree 100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% Medical cannabis is a legitimate medical therapy. Medical cannabis can effectively treat symptoms associated with medical conditions.

Source: BMC Family Practice: A survey of the attitudes, beliefs and knowledge about medical cannabis among primary care providers by Philpot, Ebbert, and Hurt.

Page 32 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

We Focus Our Medicinal Cannabis Consumption Outlook on the Pain Market Our approach to the medicinal segment focuses on estimating the total market by narrowing down the entire U.S. population in 2030 to pain patients who are likely to use cannabis as treatment. This excludes many common conditions that would typically qualify for medical marijuana under many states' laws. However, the most popular condition cited for medical cannabis is chronic or severe pain. In Exhibit 27, more than 90% of patients cited severe pain as at least one of their reasons for applying for medical cannabis access in Oregon and Colorado.

Exhibit 27 Pain Is Typically One of the Most Cited Conditions for Medical Cannabis Percentage of medical cannabis patients reported by condition in Colorado and Oregon, July 2016

Oregon Colorado

Severe pain

Muscle spasms and MS

Nausea

PTSD

Cancer

Seizures and epilepsy

Cachexia

Glaucoma

HIV+ / AIDS

Degenerative neurological condition

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: The Health Effects of Cannabis and Cannabinoids: The Current State of Evidence and Recommendations for Research (The National Academies of Sciences Engineering Medicine).

Based on our estimates for the pain market, we estimate that roughly 6%-30% of the entire U.S. population in 2030, or roughly 20 million-105 million people, will be consumers in the legal medical cannabis market, shown in Exhibit 28.

Page 33 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 28 We Estimate the Pain Market in the U.S. at Roughly 20 Million-105 Million People Millions of people

Low estimate High estimate 400

350

300

250

200

150

100

50

0 Total US population Pain sufferers Addressable market in 2018

Source: Morningstar.

Our estimated range of the total market is quite wide. This is due to the significant differences in estimates for pain severe enough to necessitate medication. In addition, pain is subjectively determined by the individual and cannot be readily diagnosed by another person.

For the low end of our estimate, we've tried to estimate patients suffering from only the most intense pain. As such, we used the percentage of people who identify as having high-impact chronic pain from the 2016 CDC study, "Prevalence of Chronic Pain and High-Impact Chronic Pain Among Adults—United States." We use the statistic of roughly 8% of the U.S. population suffering from high-impact chronic pain as our assumption for patients with the most severe pain, shown in Exhibit 29.

Page 34 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 29 We Assume 8% of the U.S. Population Suffers From the Most Severe Levels of Pain Percentage of U.S. population

Chronic p ain High-impact chronic pain 40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% Total 18–24 25–44 45–64 65–84 ≥85

Source: Prevalence of Chronic Pain and High-Impact Chronic Pain Among Adults—United States by the CDC.

For the high end of our estimate, we use a wider definition of pain to capture people who suffer medium and high levels of pain. For this, we used the percentage of adults suffering from at least one painful condition from the study "Eighteen-Year Trends in the Prevalence of, and Health Care Use for, Noncancer Pain in the United States: Data from the Medical Expenditure Panel Survey," which appeared in The Journal of Pain in January 2019. We use the statistic that roughly 40% of the U.S. population suffers from at least one painful health condition, shown in Exhibit 30.

Page 35 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 30 We Assume Roughly 40% of the U.S. Population Suffers From at Least One Painful Health Condition Millions of people and percentage of U.S. population

US Adults Suffering from at least one painful health condition (left) % of population (right) 200 45%

180 40%

160 35% 140 30% 120 25% 100 20% 80 15% 60 10% 40

20 5%

0 0% 1997-1998 2013-2014

Source: "Eighteen-Year Trends in the Prevalence of, and Health Care Use for, Noncancer Pain in the United States: Data from the Medical Expenditure Panel Survey." The Journal of Pain, January 2019.

We further reduced the total number of pain patients by adjusting for each state's medical cannabis access. We separated each state and Washington, D.C., into one of five categories:

× Illegal/massive restrictions. Including medical purposes, cannabis in all forms remains illegal in some states such as South Dakota and Idaho. Other states such as Mississippi and Kansas have extreme constraints on even CBD products. We've completely excluded pain patients from these states for our estimated market forecast due to inaccessibility. × Very restrictive. Some states such as Texas and Wisconsin only allow patients to access CBD oil, often under a very narrow list of qualifying conditions. We've included 10% of potential pain patients in our market estimate. × Mild restrictions. Some states such as Minnesota and Virginia have a larger list of qualifying conditions but still include various constraints on consumption. We include 40% of potential patients. × Some restrictions. Some states such as North Dakota and Ohio have a long list of qualifying conditions but still prohibit certain forms of consumption such as smoking flower. We include 70% of potential patients. × Most open. States such as Washington and Oregon have nearly no restrictions on medical cannabis consumption and have easy access for patients. We include 100% of potential patients.

Lastly, we converted the number of medical cannabis patients into volume forecasts using two factors: consumption intensity and financial constraints.

Page 36 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

First, we translated the number of patients into a forecast demand volume using the same consumption intensity data from Colorado that we used for our recreational forecast. However, rather than use the same assumption for consumption intensity that's based on the entire population of cannabis consumers, we applied different intensities for the low and high estimates of pain users, shown in Exhibit 31.

Exhibit 31 We Assume Different Consumption Intensities for Our Low and High Cases, Given Different Pain Levels Grams consumed per year

Consumption intensity by frequency (annual grams per user) Low estimate 700 assumption

600 High estimate assumption 500

400

300

200

100

0 Less than once 1-5 6-10 11-15 16-20 21-25 26-31

Source: Substance Abuse and Mental Health Services Administration, CDC, and Morningstar.

Our low estimate is meant to capture only patients suffering the most intense pain, so we've applied the highest consumption intensity. Because these users suffer from the most severe and chronic pain, we reason that they are more likely to need to treat their pain more often, thus resulting in higher consumption.

Our high estimate is meant to capture a wider population of patients suffering from pain, so we've assumed a lower consumption intensity. This larger group includes patients who may not need to treat their pain as often, thus resulting in comparatively lower consumption.

Second, we narrowed the market by financial constraints. Despite the potential demand for helping treat pain, health insurance largely does not cover medical cannabis. In the 2011 report, "Relieving Pain in America: A Blueprint for Transforming Prevention, Care, Education, and Research" by the Institute of Medicine (U.S.) Committee on Advancing Pain Research, Care, and Education, researchers estimated that 17% of medical expenditure costs related to chronic pain are covered by patients themselves, shown in Exhibit 32.

Page 37 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 32 Roughly 17% of Pain Medical Expenditures Are Paid for by Patients Themselves Incremental costs of medical expenditures

Out of Pocket

Medicare 17%

Medicaid

Private Insurance

Department of Veterans Affairs/TRICARE/Other Federal State/Other Public

Workers’ Compensation

Other Sources

Source: "Relieving Pain in America: A Blueprint for Transforming Prevention, Care, Education, and Research." Institute of Medicine (U.S.) Committee on Advancing Pain Research, Care, and Education. Washington (D.C.): National Academies Press (U.S.); 2011.

Over the medium term, it's likely that patients will need to continue to pay for medical cannabis themselves. We use the 17% estimate for pain-related medical expenses paid out of pocket as a limiting assumption for the financial ability of pain patients to pay for medical cannabis. This leads to a market estimate of roughly $14 billion. If medical cannabis were to be covered by Medicare, Medicaid, private insurance, and other major healthcare providers, we estimate the market would expand sixfold to roughly $80 billion-$90 billion. We view this as a possibility over the very long term but don't anticipate any major changes on this front over our forecast period through 2030.

Page 38 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

National Legalization Has Unlocked Massive Growth for Canada

Key Takeaways × The Canadian cannabis market will be 9 times larger in 2030 than it is today. × Legalization has unlocked massive opportunity for recreational cannabis. We forecast that the Canadian recreational market will dwarf the medicinal market, being nearly 15 times larger by 2030. × Based on our forecast, we think legal Canadian cannabis has penetrated just 11% of its estimated market. To learn more about our forecast approach, turn to Page 39.

Canada's Recent Legalization Should Drive 20% Annual Average Growth Through 2030 National recreational legalization occurred in late 2018 in Canada, leaving current market penetration at just 12% of the market, shown in Exhibit 33. This leaves a significant runway for growth and underpins our forecast that cannabis sales will grow nearly 20% per year on average.

Exhibit 33 Recent Legalization Can Expand the Canadian Market by More Than 9 Times by 2030 $ in constant dollars

Canada Total Canada Recreational Canada Medical $16,000

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$0 Current 2030

Source: State of the Legal Marijuana Market by Arcview Market Research and BDS Analytics (cited by Digital Journal) and Morningstar.

Page 39 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Canada Has the Most Accommodating Regulatory Environment for the Cannabis Industry In stark contrast to the confusing U.S. cannabis laws, Canada's laws are very clear. In June 2018, Canada's House of Commons and the Senate approved Bill C-45, or the Cannabis Act, which legalized recreational cannabis throughout the country. The law took effect Oct. 17, 2018, making Canada the second country after Uruguay to fully legalize cannabis for adult use.

Although cannabis is now legal for recreational adult use nationally, the structure and execution of retail distribution was left for provincial oversight. Expansion of retail distribution has been very sluggish. Toronto, Canada's largest city by population, had slated only five locations to open in the spring of 2019. As of April 20, only three stores had opened, leading to long wait times. Nevertheless, we think the slow pace of the initial rollout will have a minimal impact on the long-term potential of legalized cannabis.

Following the legalization of recreational use, the Canadian Medical Association stated a desire to see the medical cannabis system eliminated, arguing there is no reason for a separate system. In addition, the association argues that many doctors remain unclear on cannabis' efficacy, evidence, dosing, and potential interactions with other drugs. For now, Health Canada will continue to operate the medical system but plans to evaluate its effectiveness and necessity in five years.

The Canadian Market Could Grow 9 Times Larger Over the Next Decade The Canadian market is massively underpenetrated relative to its total potential, leaving room for it to grow 9 times larger than it is today. In 2018, the entire Canadian cannabis market was estimated at roughly $1.6 billion. 10 Our 2030 forecast estimates the market at nearly $15 billion in constant dollars, an average annual growth rate of nearly 20%.

Our robust growth forecast stems from 2018's nationwide legalization, leading to the conversion of black-market consumers into the legal market and the conversion of previous nonconsumers into consumers.

Legalization Unlocks 20% Annual Growth for the Canadian Recreational Market Legalization has unlocked massive opportunity for recreational cannabis. We forecast that the Canadian recreational market will dwarf the medicinal market, being nearly 15 times larger by 2030.

We've estimated the total market for recreational cannabis by narrowing down the entire Canadian population in 2030 to cannabis consumers. Because recreational cannabis is legal throughout the country, our approach mainly focuses on including the boost from legalization and excluding those who don't consume cannabis.

We forecast roughly 20% of Canadians in 2030, roughly 8.5 million people, will be consumers in the legal recreational market, shown in Exhibit 34. Our forecast includes all Canadians older than 15, although the legal age for recreational use is 18 or 19, depending on the province. Due to limitations in

10 Source: State of the Legal Marijuana Market by Arcview Market Research and BDS Analytics (cited by Digital Journal).

Page 40 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

data that bucket the population into a 15- to 24-year-old cohort, our estimate includes some consumers who would be unable to access the legal market for a few years. Additionally, 15- to 24-year-old consumers constitute only about 17% of our estimate in 2030, so any resulting overestimation would be minimal.

Exhibit 34 We Estimate 20% of Canadians Will Be Legal Cannabis Consumers by 2030 Millions of people

45

40

35

30

25

20

15

10

5

0 Total Canadian Population Underage people Non-marijuana Addressable population growth consumers market in 2030 in 2018

Source: Morningstar.

We translated our forecast of roughly 8.5 million consumers in 2030 into nearly 1,400 tons of annual cannabis demand. Assuming a market price of $10 per gram in current dollars, we estimate the total market at roughly $15 billion.

We Use a Demographic and Usage Approach to Forecast the Recreational Market For the Canadian population and future projected growth, we've used data from Statistics Canada's Demography Division. For cannabis participation rates, we've used data from Statistics Canada on survey respondents that consumed cannabis in the past three months, shown in Exhibit 35. Participation rates are strongly tied to age, with the youngest cohort (15-24) having roughly 27% participation rates at the end of the fourth quarter of 2018. In comparison, just 5% of Canadians 65 or older reported consuming cannabis in the past quarter.

Page 41 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 35 Canadian Cannabis Participation Rates Exhibit a Strong Negative Correlation With Age Percentage of age group that consumed cannabis in the past quarter

Consumed cannabis in the past quarter 30%

25%

20%

15%

10%

5%

0% 15 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65 years and older

Source: Statistics Canada (prevalence of cannabis use in the past three months, self-reported).

Starting with the most recent participation rates by age group, we forecast an increase in the participation rate based on growing secular acceptance and legalization-driven participation boosts.

First, acceptance of cannabis has been growing over the years, with participation rates growing among 15- to 64-year-olds since 1961, shown in Exhibit 36. In 1961, just 3% of Canadians 15-64 reported consuming cannabis. By 2018, more than 20% of Canadians 15-64 reported consuming cannabis.

Page 42 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 36 Cannabis Participation Rates Have Been Steadily Rising in Canada Since the 1960s Percentage of age group that consumed cannabis at least once in the past year

15 to 64 years old 35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% 1961 1969 1977 1985 1993 2001 2009 2017 2025

Source: Statistics Canada (prevalence of cannabis use, self-reported) and Morningstar.

Not only have participation rates been rising, but the growth rate has accelerated in the last 10 years at nearly 3% per year, compared with 2% over the past two decades. We see this trend as secular, given the constant and steady increase since 1961. All else equal, we assume that participation rates would grow at about 2% per year, as low participation rates mean that adoption is still in the early stages.

Second, as we observed in our U.S. recreational analysis, legalization provides a clear boost to participation rates. We attribute the increase to the conversion of previous nonconsumers into consumers after legalization occurs.

Page 43 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

After Colorado legalized recreational cannabis, participation rates increased 490 basis points for ages 18-25 and 480 basis points for ages 26 and older, shown in Exhibit 37.

Exhibit 37 Colorado's Participation Rates Increased Significantly After Legalization Percentage of age group who have consumed cannabis in the past month

2009-2012 (Pre-legalization) 2013-2016 (Post-legalization) 35% +490 bps

30%

25%

20%

15% +480 bps

10%

5%

0% 18-25 26+ Source: UNODC.

Canada's nationwide legalization for recreational cannabis went into effect in October 2018. In addition, actual expansion of recreational dispensaries has been very slow. As a result, we do not believe that fourth-quarter 2018 participation rates capture a boost from legalization yet. Therefore, we still apply the boost to our Canadian forecast—roughly 12% compound annual growth for about four years for ages 25 and older and 3% for 15-24.

Page 44 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

As a sanity check on our participation forecasts, we compared our implied marijuana participation rates in 2030 against today's alcohol and tobacco participation, shown in Exhibit 38. Although we anticipate wider acceptance and increased participation for cannabis, we view it as unlikely to surpass the popularity and participation rates of alcohol. Our implied participation rates remain consistent with our view.

Exhibit 38 Our Forecast Implies Canadian Cannabis Participation Rates Will Remain Well Below Alcohol's Percentage of age group who have consumed in the past quarter

Cannabis - today Cannabis - 2030E Alcohol - today Tobacco - today 90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 15-24 years old +25 years old Source: Canadian Alcohol and Drug Use Monitoring Survey; Canadian Tobacco, Alcohol, and Drugs Survey; and Morningstar.

Lastly, we converted the number of consumers into volume using intensity data from Statistics Canada. Consumption is not normally distributed across cannabis consumers. Rather, most users tend to either consume less than once a month or at least weekly, if not daily. Weekly and daily users constituted just 40% of all consumers but nearly 80% of all cannabis consumed, shown in exhibits 39 and 40.

Page 45 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 39 Most Canadian Cannabis Consumers Are Either Very Light or Very Heavy Consumers… Millions of people

2016 Frequency of Canada Residents Age 15+ that Consume Cannabis 2,000,000

1,800,000

1,600,000

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0 Less than once per Once 1-3 per month At least weekly Daily month (excludes daily)

Source: Statistics Canada.

Exhibit 40 …but the Heaviest Users Account for the Majority of Cannabis Consumed Tons per year

2016 Volume by Consumption Frequency 450

400

350

300

250

200

150

100

50

0 Less than once per Once 1-3 per month At least weekly Daily month (excludes daily)

Source: Statistics Canada.

Page 46 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

We've assumed this usage intensity curve is representative of cannabis consumers throughout Canada, and we've used the weighted average consumption intensity of each age group to convert our user forecast into volume (shown in Exhibit 41).

Exhibit 41 We Use Historical Consumer and Usage Data for Our Consumption Intensity Assumption Grams per person per year

Consumption Intensity (grams per person per year) 200

180

160

140

120

100

80

60

40

20

0 15 to 17 years 18 to 24 years 25 to 44 years 45 to 64 years

Source: Statistics Canada.

Canadian Medical Market Opportunity Capped by Recreational Legalization Of the estimated $1.6 billion in legal cannabis sales in Canada in 2018, we believe most came from medical sales. This is because recreational legalization only went into effect in the fourth quarter, and legal recreational distribution remains in its infancy.

Although we struggle to estimate today's current medical market size, we think future growth will be somewhat tepid, ceding growth that would otherwise have been classified as medicinal to the recreational market instead.

We Estimate the Medical Market by Forecasting Pain Patients, Less Self-Medication Our approach focuses on estimating the total market by narrowing down the entire Canadian population in 2030 to pain patients who are likely to use cannabis as medical treatment.

Access is given by a healthcare practitioner (doctors or nurse practitioners) for relief of symptoms such as nausea and vomiting, chronic pain, and insomnia that have not responded to traditional treatment. Similar to statistics that we observed in the U.S., pain seems to be the most common symptom that is

Page 47 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

cited for medical cannabis access. According to Statistics Canada,11 more than half of cannabis consumers self-treating symptoms cited pain as the primary reason, shown in Exhibit 42.

Exhibit 42 Pain Is the Most Common Reason Cited for Canadian Cannabis Users Primary condition cited for cannabis consumers self-treating symptoms

Pain Anxiety, nerves, or depression Insomnia Other

Source: Statistics Canada.

Based on our estimates for the pain market, we estimate that roughly 5% of the Canadian population aged 15 or older in 2030, or roughly 1.2 million people, will be consumers in the legal medical cannabis market, shown in Exhibit 43.

11 Source: Prevalence and correlates of non-medical only compared to self-defined medical and non-medical cannabis use, Statistics Canada, 2015.

Page 48 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 43 We Estimate About 1.2 Million Canadians Will Be in the Medical Cannabis Market in 2030 Millions of people

8

7

6

5

4

3

2

1

0 Canadian pain sufferers in Self-medicators Non-cannabis consumers Addressable 2030 market in 2030

Source: Morningstar.

Although we estimate that nearly 7.5 million Canadians will suffer from chronic pain in 2030, we don't think every one of them would be a medical cannabis consumer. Therefore, we reduced our market estimate by removing self-medicators and nonconsumers.

First, based on data from Statistics Canada,12 we estimate that roughly 13%-38% of cannabis users are self-medicating health conditions. We've excluded these consumers from our medical forecast to avoid double-counting with our recreational marijuana forecast, as we think it's likely these consumers are more likely to convert to the legal recreational rather than the legal medical market from the black market.

Second, we also applied general cannabis participation rates for each age group to our pain patient forecast. We think there will still be a natural propensity for some pain patients to avoid cannabis, and thus we have reduced these potential patients from our market estimate.

Our forecast for 5% of the total population in Canada to be medical cannabis consumers seems somewhat small, but current registrations leave significant room for growth. As of September 2018, there were roughly 340,000 medical cannabis patients in Canada. This implies just 28% market penetration based on pain alone, shown in Exhibit 44.

12 Source: Prevalence and correlates of non-medical only compared to self-defined medical and non-medical cannabis use, Statistics Canada, 2015.

Page 49 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 44 Current Medical Registrations Still Imply Significant Upside to Our Market Forecast Millions of people

Registered medical cannabis patients Morningstar 2030E addressable market 1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0 Jul-14 Jul-15 Jul-16 Jul-17 Jan-15 Jan-16 Jan-18 Jan-17 Sep-15 Sep-14 Sep-16 Sep-17 Nov-14 Nov-15 Nov-16 Nov-17 Mar-14 Mar-15 Mar-16 Mar-18 Mar-17 May-14 May-15 May-16 May-17 May-18

Source: Health Canada and Morningstar.

Lastly, we converted the number of medical cannabis consumers into consumption volume and dollars, using consumption intensity and our pricing assumptions.

We translated the number of medical cannabis patients into demand volume using consumption intensity data from Health Canada. On average, registered medical marijuana patients consumed about 75 grams per year as of September 2018. We use this figure for our consumption intensity assumption.

Consumption intensity has been declining over time. However, we believe this is because less intense users (patients with relatively milder conditions) have since entered the market. Nevertheless, these patients will still consume some baseline amount, and our assumption of 75 grams per year falls well below the maximum recommended 3 grams per day by Canada's medical marijuana program.

Page 50 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Global Medical Cannabis Market Will See Huge Demand Growth but Increasing Competition

Key Takeaways × We expect the global medical cannabis market will be more than 5 times larger in 2030 than it is today. × Treaties on drug enforcement limit global trade to medical cannabis. We view international trade of recreational cannabis as unlikely through 2030. To learn more about the international regulation of cannabis, turn to Page 51. × Based on our forecast, we think global medical cannabis has penetrated less than 20% of its estimated market. To learn more about our forecast approach, turn to Page 54.

We See Huge Growth in International Medical Markets, but Competitors Are Emerging Medicinal cannabis' benefits are only starting to be recognized, with more and more countries legalizing its use. The global market (excluding the U.S. and Canada) remains severely underpenetrated, leaving room for it to expand more than 11 times its current size. The opportunity is more muted for current Canadian exporters, but we still see the market expanding more than 5 times its current size after taking into account increased competition.

As shown in Exhibit 45, we size the current global medicinal cannabis market (excluding the U.S. and Canada) at roughly $3.7 billion based on estimates ranging from $3.5 billion13 to $11 billion.14 We forecast total market potential of nearly $43 billion by 2030, but we narrow this estimate to a market of $20 billion.

13 Source: Coherent Market Insights, as cited by MarketWatch. https://www.marketwtch.com/press-release/global-medical-cannabis-market-to- surpass-us-201765-million-by-2025-2019-01-11 14 Source: Medical Cannabis Market, ResearchAndMarket.com, as cited by GlobeNewswire. https://www.globenewswire.com/news- release/2018/11/01/1641481/0/en/Global-Medical-Cannabis-Market-2018-2023-Market-Value-is-Expected-to-Reach-Approx-US-37-Billion.html

Page 51 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 45 Significant Opportunity in the Global Medicinal Market, but Increased Competition Limits Upside Millions of current dollars

Global medicinal market (ex-US and Canada) $50,000

$45,000

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0 Current 2030E Potential Market 2030E Addressable Market

Source: Current market estimate based on Coherent Market Insights (as cited by MarketWatch) and ResearchAndMarket.com (as cited by GlobeNewswire. Forecast from Morningstar.

Canada and to a lesser extent the U.S. are two of the largest and most developed markets that have passed medical cannabis legalization on some level. We estimate that the two North American neighbors constitute more than half of all current medical cannabis sales, though their population constitutes just 5% of the world's.

Given how few people live in countries with significant cannabis production, the opportunity for medical cannabis exports is very large at face value. However, the lack of supportive laws, regulated cultivation and distribution networks, and societal attitudes limit the potential to a smaller market. Nevertheless, we estimate that the market for Canadian and U.S. exports could reach nearly $20 billion in sales by 2030 in current dollars, compared with nearly $4 billion currently.

International Law Likely Limits Global Recreational Opportunity, but Medical Market Can Grow International laws are designed to fight drug abuse by focusing on the supply side and trafficking rather than the demand side of users. Medical and scientific uses are generally excluded, provided some benefit has been established.

Three major treaties are in place with the United Nations to govern drug control: the Single Convention on Narcotic Drugs of 1961, the Convention on Psychotropic Substances of 1971, and the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988.

Page 52 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

The Convention on Psychotropic Substances focuses on psychoactive drugs that were relatively new when the Single Convention on Narcotic Drugs was created, so it is largely inapplicable to cannabis. The Convention Against the Illicit Traffic in Narcotic Drug and Psychotropic Substances was designed to strengthen the legal mechanisms targeting the illicit drug trade, which had grown in scale and scope since the signing of the other two major drug treaties. This treaty didn't change the legal status of cannabis but was intended to strengthen the ability of countries to prevent the trade of illicit drugs.

The main international treaty applicable to cannabis is the Single Convention on Narcotic Drugs of 1961,15 a U.N. treaty signed by 186 state parties. The Single Convention was not self-executing, which means that it was not enforceable through ratification. Rather, it was designed to be implemented by participating states through legislation, thus creating enforcement. For example, the Controlled Substances Act was the U.S.' implementation of the treaty.

The treaty intended to coordinate countries' efforts against drug abuse through two goals: (1) "limit the possession, use, trade in, distribution, import, export, manufacture and production of drugs exclusively to medical and scientific purposes" and (2) cooperation against drug trafficking.

The treaty organizes drugs into four schedules: IV, I, II, and III. Schedule I through III drugs are organized as needing the most control measures to needing the least control, in order. Schedule IV drugs are a subset of Schedule I and face additional measures of control, making it the most restrictive category. The treaty acknowledges the potential medical value of the drugs on the list, allowing the use of controlled substances that provide medical benefit with restrictions and organized distribution systems.

Cannabis is currently classified under Schedule IV. Other drugs in this group are semisynthetic and synthetic opioids like heroin and fentanyl. In comparison, drugs like cocaine and natural opioids like opium are classified as Schedule I and not Schedule IV. Interestingly, the Commentary states that cannabis did not meet the criteria for classification into Schedule IV but was included anyway. Thus, it is legally bound to all restrictions under Schedule IV, although further research could support its removal from Schedule IV and its downgrade from Schedule I to Schedule II.

Recreational Trade Unlikely to Open Soon, but Medical Trade Is Already Open We view the Commentary's discussion of cannabis' status as a Schedule IV drug as reason to be optimistic for a long-term loosening of restrictions. However, any change is likely to take some time, as further scientific studies would probably be required. Given the particularly stark differences in social acceptance of cannabis among countries, we view the opportunity for recreational global trade as minimal through the next decade.

On the other hand, medical cannabis' benefits allow it to be excluded from the restrictions of the Single Convention. At present, nearly 40 countries have legalized medical or recreational cannabis in some

15 In 1962, Commentary on the Single Convention was issued by the Secretary-General's office to help interpretation and implementation. It is generally considered to be part of the original treaty.

Page 53 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

form. Furthermore, these countries have already begun to trade cannabis products across borders, given the lack of production in many of them.

For the purposes of our forecast, we need to consider not only which countries have demand, but which countries have ambitions to become major exporters in the global market, or at the least plans to self- supply through domestic production. Our analysis is shown in Exhibit 46.

Exhibit 46 We've Categorized Relevant Countries by Their Likeliness to Be a Cannabis Exporter or Importer

Country Medical Legalization Exporter / Importer Argentina Legal Currently set up for imports only; no indication this will change Australia Legal Likely major exporter Belgium Considering legislation Building state-controlled production; will likely be an exporter Chile Legal Currently importing but domestic production permits have been issued Colombia Legal Likely major exporter Croatia Legal Currently importing; no indication this will change Czech Republic Legal Currently importing; no indication this will change Denmark Legal Building cultivation; will likely meet domestic demand with domestic production Finland Legalized but strict approval requirements Most likely will need to import, as there are no major plans for domestic production Germany Legal Patient demand for medical cannabis has outpaced domestic production growth Greece Legal Plans for domestic production Israel Legal Likely major exporter Italy Legal Exploring partnerships to expand domestic production as well as imports Jamaica Legal Likely major exporter Lebanon Legalization is being considered Likely major exporter Lesotho Legal Likely major exporter Luxembourg Legal, potential for recreational expansion Limited country size increases likeliness for reliance on imports Macedonia CBD oil only Likely major exporter Malta Legal Currently importing, but plans to increase domestic production albeit slow Mexico Legal (current President proposing recreational as well) Considering expanding production to export Netherlands Legal Currently and will remain a major exporter New Zealand Legal but limited to CBD oil & Sativex Currently importing, but product restrictions limit importing and production need Norway Legal Currently importing; likely to continue Paraguay Legal Currently importing, but state-controlled domestic production will likely expand Peru Legal Likely expanding domestic production, limiting need for imports in long-term Poland Legal Currently importing; no indication this will change Portugal Legal Likely major exporter Spain Commercially prohibited, but personal use allowed No change likely that would allow commercial production or import Switzerland Legal, but patient access is strictly controlled Restrictive patient access limits import need Turkey Legal but limited to oromucosal sprays Likely major exporter Ukraine Legalization is being considered; CBD allowed currently Currently importing CBD oil only United Kingdom Legal Currently relying on imports due to very recent legalization; future production possible Uruguay Recreational is also legal Likely major exporter Legal Likely major exporter Zimbabwe Source: Morningstar.

Page 54 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

We Forecast Global Medical Cannabis Sales by Focusing on Pain Sufferers We forecast a medical market of nearly $20 billion in today's dollars for U.S. and Canadian exporters. Although we expect to see increased medical legalization in international markets, we think it is highly unlikely that recreational cannabis will see much growth, if any. As a result, our forecast is focused entirely on the growing medical market.

In the preceding regulatory discussion, we identified the countries that have legalized medical cannabis or are likely to do so. Given the large number of potential new geographic markets, we've focused our analysis at country-level populations and import need.

Given our view that recreational cannabis consumption in Canada and the U.S. will dwarf that of medical cannabis, it's unsurprising to see that the opportunity for global medical exports is not as robust. However, we still forecast 15% annual market growth, on average. Our forecast stems from wider acceptance of medical cannabis as a legitimate treatment and easing barriers to access.

We've Estimated the Global Opportunity by Focusing on Pain, Cannabis Use, and Export Goals Our approach focuses on estimating the total market by: (1) estimating the number of pain patients in legal markets, (2) adjusting for cannabis prevalence to estimate likely consumers, (3) and then excluding markets that are likely to be net exporters.

In the U.S. and Canada sections of this report, we've identified that chronic pain has been the highest single reason cited for medical cannabis in those markets. In The Journal of Pain (Vol. 9, No. 10, October 2008), researchers analyzed chronic pain prevalence among 17 countries and noted a difference between developed and developing countries, shown in Exhibit 47. We use these estimates as a basis for estimating the number of pain patients in each market.

Page 55 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 47 Developing Countries Have a Slightly Higher Chronic Pain Prevalence Rate Percentage of population with chronic pain condition

% chronic pain prevalance 42%

41%

40%

39%

38%

37%

36%

35% All countries Developed countries Developing countries

Source: Common Chronic Pain Conditions in Developed and Developing Countries: Gender and Age Differences and Comorbidity With Depression- Anxiety Disorders, The Journal of Pain, Vol. 9, No. 10 (October 2008).

We rely on the U.N. Population Division for population forecasts for each country and the U.N. Human Development Reports to categorize each country into developed or developing. The U.N. assigns a Human Development Index score,16 allowing us to bifurcate our legalized country list to apply the correct pain prevalence rate to each country.

From a total 2030 population of nearly 870 million in legal or likely-to-be-legal countries (excluding the U.S. and Canada), we estimate the pain patient population at roughly 345 million, shown in Exhibit 48.

16 The U.N. Human Development Program assigns a Human Development Index score based on life expectancy at birth, years of school, and income per capita. A score above 0.9 categorizes a country as developed and a score below categorizes it as developing.

Page 56 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 48 We Estimate the ex-U.S. and -Canada Potential Pain Market for Cannabis at About 345 Million People Millions of people

Developed countries Developing countries 1,000

900

800

700

600

500

400

300

200

100

0 2030E population 2030E potential pain patients

Source: United Nations, The Journal of Pain, Morningstar.

Next, we've reduced our estimate by accounting for propensity to consume. Not all pain patients will use medical cannabis for treatment, even if it is legal in their country. To reduce the pain patient population to likely cannabis consumers, we've applied cannabis participation rates for each country, shown in Exhibit 49. We believe this reflects societal attitudes and other factors that shape differences in each country's likely cannabis adoption.

Page 57 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 49 Cannabis Participation Rates Vary Widely Among the Countries That Have Legalized Medical Cannabis Percentage of population who consume cannabis

Developed countries Developing countries 30%

25%

20%

15%

10%

5%

0% Italy Peru Chile Israel Malta Turkey Poland Greece Croatia Mexico Finland Ukraine Norway Lesotho Belgium Portugal Jamaica Uruguay Lebanon Australia Germany Denmark Colombia Paraguay Argentina Zimb abwe Macedonia Switzerland Netherlands Luxembourg New Zealand New Czech Republic United Kingdom Source: UNODC.

Applying participation rates leads to a significant reduction in potential medical cannabis consumers. Our estimate of 345 million pain patients falls to just 17 million potential medical cannabis consumers, shown in Exhibit 50.

Page 58 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 50 The Acceptability of Cannabis Varies Across the World and Severely Narrows the Pain Opportunity Millions of people

Developed countries Developing countries 400

350

300

250

200

150

100

50

0 2030E potential pain patients 2030E potential cannabis consumers Source: Morningstar.

Many countries have ambitious plans for medical cannabis exports. Recognizing the burgeoning multi- billion-dollar global industry, countries such as Australia and Greece have laid plans to supply not only their own medical consumers but also markets around the world. In contrast, some countries such as Germany have expressed plans for wider accessibility for patients but less ambitious or no plans at all for domestic cultivation, leading them to be likely major importers.

We've applied an adjustment factor to each country based on our assessment of their most likely net export position in the global market, ranging from definitive exporters (10% of potential cannabis consumers considered to be in the market) to definitive importers (90% of consumers included). We also apply an additional 50% reduction in market size estimate to countries that have challenged patient access. This is applied to countries that have restrictive access, only allow CBD products, or other barriers that are likely to hinder patient access.

Our analysis narrows the 17 million potential medical cannabis consumers to roughly 6 million customers that Canadian and U.S. exporters could supply, as increased competition limits the global opportunity (shown in Exhibit 51).

Page 59 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 51 Many Countries Plan to Develop Cultivation, Limiting the Global Export Opportunity Millions of people

Developed countries Developing countries 18

16

14

12

10

8

6

4

2

0 2030E potential cannabis consumers 2030E potential cannabis consumers (excluding self-supplied countries)

Source: Morningstar.

Lastly, we converted the number of export medical cannabis patients into volume and dollars, using consumption intensity and our pricing assumptions.

We translated the number of medical marijuana patients into demand volume using U.S. consumption intensity data. We assume the average pain patient consumes roughly 250 grams per year, just slightly above the average of roughly 190 grams per year for all consumers. We expect medical cannabis users to have a higher consumption intensity, given they are treating chronic pain issues rather than consuming purely for recreational purposes.

Page 60 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Cannabis Primer: How It Grows and Is Consumed Has Implications for the Industry's Future

In this section, we detail how cannabis works, how it grows, and how it's consumed, helping establish how we believe the market will develop as it matures.

Basics of Cannabis Cannabis, commonly referred to as marijuana, is a flowering plant grown for two main purposes: as industrial hemp and as a drug. The two major strain groups of cannabis are indica and sativa.

Indica is believed to be sedating and relaxing. Plants from this strain tend to be short in stature with broad leaves, have shorter flowering cycles, and are suitable for colder climates with shorter seasons.

Sativa is believed to be more invigorating with regard to cerebral effects. Plants from this strain tend to be tall in stature with narrow leaves. They have longer flowering cycles and are better suited for warm climates that offer a longer growing season. However, much of today's cannabis is a hybrid strain or has been bred to accentuate certain effects. Therefore, it can be difficult to simply classify today's most popular strains into one category or the other.

To better understand cannabis, it's important to understand some of the basics of the plant and the science behind its effects. From a cultivation perspective, the most important part of the plant is the flower, commonly known as the bud, shown in Exhibit 52.

Page 61 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 52 The Cannabis Flower Is the Most Important Part of the Plant

Source: Pixabay.

The flower has the highest density of trichomes on the entire plant. Trichomes are crystal resins secreted from glands within the plants. Giving cannabis plants the "hairy" look they are known for, particularly on the flower, the resin contains the highest concentration of cannabinoids, terpenes, and flavonoids—the sources of cannabis' effects and flavors.

Cannabinoids Are the Best-Known Chemical Compound in Cannabis Cannabinoids are well known because they provide the "high" that cannabis is known for. Endocannabinoids, found in the human body, are like cannabinoids except that they are naturally produced to help regulate various aspects of health by binding to cannabinoid receptors. Cannabinoids produced in plants are still very similar chemically, allowing them to bind to the same receptors as if they were endocannabinoids.

Cannabinoid receptors include both type 1, or CB1, receptors found in the brain and type 2, or CB2, receptors found throughout the body. When endocannabinoids and cannabinoids attach to these receptors, they provide relief from symptoms such as inflammation, pain, and nausea.

Although there are dozens of cannabinoids found in cannabis, the two most common are Δ9- tetrahydrocannabinol and cannabidiol. THC binds to CB1 receptors in the brain, creating psychoactive effects such as euphoria, sedation, elation, relaxation, hunger, and increased heart rate. THC is the chemical that creates the psychoactive high associated with cannabis consumption.

Although chemically identical to THC, CBD's different atomic structure means that it does not bind to CB1 receptors and thus has no psychoactive effects. Although not intoxicating, CBD is believed to

Page 62 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

alleviate pain, inflammation, anxiety, and epilepsy. However, few scientific studies have been done to validate these claims.

Terpenes and Flavonoids Are Also Important Contributors Due to the Entourage Effect Terpenes and flavonoids are not the primary cause of cannabis' effects but are still important contributors. Supposedly, synergies occur among cannabinoids, terpenes, and flavonoids, creating an effect together that each individual chemical could not bring about on its own. This combinatory impact is known as the entourage effect.

Terpenes, the second contributor to the entourage effect, are pungent oils secreted from trichomes. Found naturally in other plants, different terpenes are known to produce distinctive scents and effects. Over 100 terpenes have been identified, with just a small sample shown in Exhibit 53.

Exhibit 53 Over 100 Terpenes Have Been Identified With a Wide Range of Aromas and Effects

Terpenes Aromas Effects Also Found In Medical Benefits

Musk, Cloves, Herbal, Sedating, Relaxing, Enhances THC's Mango, Thyme, Citrus, Lemongrass, Bay Antiseptic, Anti-bacterial, Anti-fungal, Myrcene Citrus psychoactivity leaves Inflammation

Antioxidant, Inflammation, Muscle Caryophyllene Pepper, Wood, Spice No detectable physical effects Pepper, Cloves, Hops, Basil, Oregano spasms, Pain, Insomnia

Insomnia, Stress, Depression, Anxiety, Linalool Floral, Citrus, Spice Sedating, Calming Lavender, Citrus, Laurel, Birch, Rosewood Pain, Convulsions

Pinene Sharp, Sweet, Pine Memory retention, Alertness Pine needles, Conifers, Sage Inflammation, Asthma (Bronchodilator)

Humulene Woody, Earthy Suppresses appetite Hops, Coriander Inflammation, Anti-bacterial, Pain

Depression, Anxiety, Gastric reflux, anti- Limonene Citrus, Lemon, Orange Elevated mood, stress relief Citrus rinds, Juniper, Peppermint fungal

Source: Leafly.

The last contributor to the cannabis experience is flavonoids, impacting the smell, taste, and color. Over 6,000 naturally occurring flavonoids have been identified in various flowers, fruits, and vegetables. Roughly 20 are found in cannabis, with those that are cannabis-specific known as cannflavins. Flavonoids are believed to be pharmacologically active, bringing specific medical benefits.

Cannabis Is Analogous to Wine in Complexity and Experience We think the easiest way to understand cannabis is to make the analogy to wine both in complexity and consumption experience. Just as it would be overly simplistic to pick the best wine based purely on type or alcohol content, there are more determinants of the quality and effect of cannabis than just its strain or how much THC it contains.

Page 63 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

When a person consumes cannabis, the combination of the cannabinoids, terpenes, and flavonoids creates a specific experience—the previously mentioned entourage effect. New and different physiological and psychological impacts can be created in combination that each individual chemical component wouldn't create on its own.

We believe cannabis' entourage effect is analogous to how one experiences wine. Even when tasting two wines from the same grape with the same alcohol content, the experience can differ greatly depending on:

× terroir of the vineyard × barrels that were used for aging × tannin and acidity of the grapes × serving temperature.

The implications of this observation are meaningful, as they point to an industry where heterogeneity is valued, such as in wine or beer, and homogeneity is less valued, such as in tobacco.

Cannabis Cultivation Methods Differ Greatly in Cost and Output Next, we discuss how cannabis is typically produced, based on wide-ranging industry research and discussions with cultivators like Epoch Farms in Oregon. Most cultivation occurs through three methods—outdoor, indoor, or greenhouse—each offering specific advantages and disadvantages.

No matter the cultivation method, labor is by far the most expensive single cost. We estimate that 30%- 50% of operating costs are related to labor. No matter what cultivation method is used, cannabis requires trained oversight throughout the lifecycle and harvest.

Outdoor Cultivation Is Far Less Cost-Intensive, but Resulting Quality Is Less Consistent In outdoor cultivation, cannabis is grown outside like most major crops, receiving natural sunlight but leaving it exposed to the elements and other flora and fauna. Generally, cannabis is a durable plant that can survive a range of weather conditions. However, extreme wind, rain, or frost can impact trichome content, adversely affecting quality and yield.

Although an outdoor facility provides less control over the plant's growing conditions, it is the least expensive cultivation method by a wide margin. Using the sun for light saves substantially on lighting- and cooling-related costs. Given the lower capital intensity of outdoor production, scale for outdoor growing operations tends to be very large.

The major disadvantage of outdoor cultivation is that the plants are fully exposed to exogenous threats. Cannabis plants are particularly vulnerable to pests, leading to costly pest control. Major capital equipment may be needed for spraying pesticides to protect the crops. In addition, by following natural light patterns, harvests are typically limited to just one per year.

Page 64 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Indoor Cultivation Allows the Grower to Control Nearly Every Environmental Variable On the opposite end of the spectrum, indoor facilities allow growers to control and manipulate every aspect of the environment, shown in Exhibit 54. Many climates such as Canada and the Northeastern U.S. are not conducive to outdoor cultivation, leaving indoor facilities as the only viable option.

Exhibit 54 Indoor Cultivation Allows Growers to Tightly Control Nearly Every Factor

Source: Pixabay.

Indoor facilities allow the grower to strictly manage the temperature, humidity, light intensity, and length of light exposure. Because growers control nearly every variable, they can achieve optimal growing conditions to maximize potency, yield, and aesthetics (for example, flavor and appearance). In addition, the controlled environment allows growers to more easily protect against exogenous flora and fauna, especially pests. Lastly, because the light cycle is determined by man-made lighting, year-round cultivation is possible, leading to four to six harvests annually.

Indoor cultivation has numerous advantages but comes at a significant cost. The elevated cost structure is largely due to significant electricity costs from artificial lighting. In addition, because constantly running lights cause temperatures to rise in the closed-in facility, facilities incur significant cooling costs to normalize the temperature and humidity.

Page 65 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Greenhouse Cultivation Offers Some of the Benefits of Both Indoor and Outdoor On the spectrum with outdoor on one end and indoor on the other, greenhouse cultivation is in between. Greenhouse cultivation houses plants indoors using clear walls (typically glass), utilizing natural sunlight (like outdoor cultivation) while still protecting the crops from outside environmental factors (like indoor cultivation). Natural sunlight makes greenhouse cultivation comparatively cheaper than indoor, given lower lighting and cooling costs.

However, given that the light cycle is not completely controlled, greenhouse cultivation typically averages three to five harvests per year.

Climate Limits Canada to Higher-Cost Cultivation Methods Canada's climate limits its ability to use outdoor cultivation, leading most production to rely on indoor or greenhouse. There are few implications for its domestic market, as we expect most of the market to consist of recreational demand, and international law prohibits recreational trade. However, this has implications for the international medical market.

Currently, the international medical market is dominated by Canadian producers. Due to the country's early legalization, Canadian producers were first movers for expanded capacity and certification to export into legal markets around the world. However, we expect low-cost production from other countries will emerge as a threat over time. Countries with more favorable climates can use cheaper outdoor and greenhouse production. In addition, cheaper labor will allow these countries to produce at much lower costs than Canadian producers.

We believe Canadian producers largely recognize this, as all four under our coverage—Canopy, Aurora, Tilray, and Cronos—have opened or are opening production outside Canada for the international medical market.

Page 66 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Smoking Flower Remains the Most Popular Form of Consumption, but Vaping Is Growing Fast Cannabis can be consumed in many different forms today. The most common include:

× Flower. The dried and cured flower of the plant, often referred to as the bud (shown in Exhibit 55), can be smoked through pipes, rolling papers, or, to a lesser extent, vaporizers

Exhibit 55 Smoking Dried and Cured Flower Remains the Most Popular Form of Cannabis Consumption

Source: Pixabay.

× Concentrates. Oil or wax typically consumed by vaporizer, dabbing, ingestible oils, tinctures, and so on. × Edibles. Cannabis-infused food and drinks absorbed through digestion. × Topicals. Cannabis-infused lotions, balms, and oils absorbed through the skin.

The form closest to cannabis' natural state, flower reigns as the most popular form of consumption., Nearly 70% of all cannabis consumed in Colorado, Washington, Oregon, and Nevada in 2017 was consumed in the form of flower, shown in Exhibit 56.

Page 67 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 56 Flower Remains the Most Popular Form of Consumption, but Concentrates Are Gaining

Flower Concentrates Edibles Topicals 100% <1% <1% 1% 11% 10% 11% 90%

80% 16% 17% 21% 70%

60%

50%

40% 73% 73% 67% 30%

20%

10%

0% 2015 2016 2017

Source: 2018 Marijuana Business Factbook.

Although flower continues to hold dominant market share, concentrates have grown rapidly. From 2015 to 2017, concentrates' share of consumption rose from 16% to 21%. Growth in the popularity of concentrates most likely stems from the same trend as the growing popularity of e-cigarettes, given the potential health benefits of avoiding smoking during consumption.

The Rising Popularity of Concentrates Has Implications for Cultivation Concentrates are the fastest-growing consumption category for cannabis. Processors take dried and cured buds and extract the cannabinoids and other desired chemical compounds from the flower using butane, ethanol, or carbon dioxide.

The growing popularity of concentrates has significant implications for the cultivation industry. Because this method requires that cannabis be processed into a purified form, the initial quality of the cannabis is less important than it would be if it were to be consumed as flower. A comparable analogy would be single-malt versus blended scotch, as the blending process allow distillers to integrate lower-quality batches with higher-quality batches to create a consistent product.

Marijuana Business Daily17 stated, "Outdoor-grown cannabis is increasingly being sold as a raw material for extracts and infused products rather than as a final product for consumption—meaning it's being sold to processors rather than retailers." As initial flower quality is less important for concentrates, its rising popularity is a potential tailwind for cheaper but lower-quality cultivation methods like outdoor and, to a lesser extent, greenhouse.

17 Source: 2018 Marijuana Business Factbook.

Page 68 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

The shift to concentrates and away from flower is observable across our coverage universe, as the companies have reported or discussed the trend in their sales. Because Canada is largely restricted to indoor production by its climate, we don't see meaningful impact from the growth in concentrates. However, we think the popularity of oils will make low-cost outdoor Western U.S. cultivators' arguably lower quality less important. As a result, following a change to the federal law and the introduction of interstate trade, producers in states like Washington, Oregon, and California should benefit.

Green Rush Creates Tailwinds in Ancillary Industries, Too Although cultivators, processors, and dispensaries are the obvious beneficiaries of the green rush, numerous ancillary businesses that do not touch the plant also stand to benefit. Ancillary services include law firms, banks, accountants, and marketers, among many others. Ancillary products include cultivation technology and equipment, packaging, processing and testing equipment, and consumption devices. However, as shown in exhibits 57 and 58, the portion of revenue earned from cannabis varies widely.

Exhibit 57 Ancillary Services Provide Some Exposure to the Cannabis Industry… Percentage of revenue derived from cannabis industry

Information services

Professional services

Financial & banking services

Other ancillary services

Average services

0% 20% 40% 60% 80% 100% Source: 2018 Marijuana Business Factbook.

Page 69 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 58 …but Processing and Cultivation Suppliers Provide Even More Exposure Percentage of revenue derived from cannabis industry

Processing & extraction equipment & supplies Other cultivation supplies

Software & technology

Other ancillary products

Surveillance & security equipment

Consumption devices & paraphernalia

Packaging Cultivation, structures, equipment & installations Testing lab equipment & supplies

Average products

0% 20% 40% 60% 80% 100% Source: 2018 Marijuana Business Factbook.

Given the comparably higher exposure to cannabis for cultivation and processing equipment manufacturers, these companies represent the best opportunity for cannabis exposure without touching the plant.

Ancillary Equipment Can Benefit Significantly From Cannabis Market Growth Cultivation and processing equipment is arguably one of the best options for ancillary cannabis exposure. However, because exposure isn't direct, there are a few topics to consider when understanding the impact on equipment.

First, because cannabis remains illegal at the federal level, it generally cannot be traded across state boundaries, even between two legal states. Therefore, cannabis must be cultivated within the state in which it will be sold. However, not all environments can support cheaper outdoor growth, so cultivators in cold climates such as Canada and Alaska must use indoor growing facilities. The current legal situation bars national supply from balancing the market, leading to widely different prices across states, shown in Exhibit 59.

Page 70 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 59 Cannabis Prices Vary Widely Due to Production Differences and Prohibited Interstate Trade Wholesale flower price per pound

Low High $6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0 Alaska California Colorado Nevada Oregon Washington

Source: Marijuana Business Daily: Cultivation Snapshot.

In order to meet our robust demand forecasts, additional cannabis cultivation will need to be opened, benefiting manufacturers of cultivation equipment. However, the magnitude of the benefit will highly depend on the type of cultivation, as indoor cultivation's equipment needs—lighting equipment, ventilation and cooling systems, and hydroponics, for example—are far greater. As shown in Exhibit 60, the magnitude is evident in the difference in startup costs, as it costs roughly 25 times more per square foot to open an indoor facility compared with an outdoor one.

Page 71 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Exhibit 60 Differences in Equipment Needs Lead to Significantly Higher Startup Costs for Indoor Cultivation Median startup costs per square foot

$120

$100 $100

$80

$60 $47

$40

$20

$4 $0 Indoor Outdoor Greenhouse Source: 2018 Marijuana Business Factbook.

Industrial-scale cultivation has only begun to take hold in the last few years as cannabis has shifted from a cottage industry to commercial enterprise.

Our market estimate forecasts nearly 10,000 tons of annual demand. Assuming a split of production of roughly 45% indoor, 30% outdoor, and 25% greenhouse,18 we forecast nearly 100,000,000 square feet of cultivation would be needed, implying significant demand for equipment to meet the production expansion. K

18 Assumption based on average portion of total production when cultivation type used. Source: 2018 Marijuana Business Factbook.

Page 72 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Appendix

Morningstar Equity Research | 25 June 2019 Canopy Growth Corp (CGC)

Last Price Fair Value Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating 40.06 USD 54 USD Very High Standard None Stable N/A

Analyst Kristoffer Inton Five-Star Price 27.00 Estimated COE 7.5% Adjusted P / E (86.5) (116.6) Phone & Email 312-384-4897 Fair Value Estimate 54.00 Pre-Tax Cost of Debt 8.0% EV / Adjusted EBITDA (66.5) (95.3) [email protected] One-Star Price 94.50 Estimated WACC 7.3% EV / Sales 19.4 27.8 Sector Basic Materials Market Price 40.06 ROIC * #VALUE! Price / Book 2.7 3.7 Industry Drug P / FVE 0.74 Adjusted ROIC * 1.5% FCF Yield -3.7% -2.8% Manufacturers - * 5-Yr Projected Average Dividend Yield 0.0% 0.0% (2020 Estimates) (Price) (Fair Value)

3-Yr Forecast 5-Yr All values (except per share amounts) CAGR/AV Projected in: CAD Thousands G 2019 2020 2021 2022 2023 2024 CAGR/AVG Income Statement Revenue 253,431 753,465 1,108,107 1,480,146 1,823,025 2,642,861 Gross Profit 50,916 225,836 461,926 664,895 872,977 1,476,912 Operating Income (308,658) (313,201) (171,588) (109,264) (20,769) 463,865 Net Income (685,438) (280,466) (301,994) (315,017) (300,913) (20,823) Adjusted Income (329,782) (209,925) (159,764) (183,336) (180,692) 86,976 Adjusted EPS (1.24) (0.61) (0.46) (0.53) (0.53) 0.24 Adjusted EBITDA (256,959) (219,372) (15,790) 154,997 333,781 885,760

Growth (% YoY) Revenue 171.2% 225.1% 197.3% 47.1% 33.6% 23.2% 45.0% 59.8% Gross Profit NM 26.8% 343.5% 104.5% 43.9% 31.3% 69.2% 96.1% Operating Income NM 383.8% 1.5% -45.2% -36.3% -81.0% -2333.5% NM Net Income NM 874.3% -59.1% 7.7% 4.3% -4.5% -93.1% NM Adjusted EPS NM 167.2% -50.6% -23.9% 14.8% -1.4% -145.4% NM Adjusted EBITDA NM 523.0% -14.6% -92.8% -1081.6% 115.3% 165.4% NM

Profitability (%) Gross Margin 44.4% 20.1% 30.0% 41.7% 44.9% 47.9% 55.9% 44.1% Operating Margin -78.0% -121.8% -41.6% -15.5% -7.4% -1.1% 17.6% -9.6% Net Margin -126.5% -270.5% -37.2% -27.3% -21.3% -16.5% -0.8% -20.6% Adjusted EBITDA Margin -55.4% -101.4% -29.1% -1.4% 10.5% 18.3% 33.5% 6.4% Return on Equity -8.9% -16.9% -4.1% -4.6% -5.1% -5.1% -0.3% -3.8% Adjusted ROIC #VALUE! 0.2% 0.5% 0.9% 4.5% 1.5% Adjusted RONIC #VALUE! 26.1% 1.2% 2.7% 28.2% 14.5%

Leverage Debt / Capital 4.8% 12.0% 12.4% 27.7% 45.0% 55.4% 48.2% 37.8% Debt / EBITDA NM (1.5) (3.0) (11.5) (177.3) 42.8 12.4 NM EBITDA / Interest Expense (7.9) (2.1) (0.1) 0.5 1.9 NM FCFE / Total Debt NM (1.23) (0.72) (0.86) (0.35) (0.19) (0.09) NM

Cash Flow Dividends per Share 0.00 0.00 0.00 0.00 0.00 0.00 Free Cash Flow to the Firm (1,930,472) (1,227,826) (2,198,052) (1,748,602) (1,277,218) (4,814,946) FCFE (CFO-Capex) (1,164,966) (678,991) (2,115,082) (1,751,877) (1,354,606) (841,218) Dividend Franking 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Page 73 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Morningstar Equity Research | 25 June 2019 Aurora Cannabis (ACB)

Last Price Fair Value Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating 7.54 USD 9.7 USD Very High Standard None Stable N/A

Analyst Kristoffer Inton Five-Star Price 4.85 Estimated COE 7.5% Adjusted P / E (45.1) (58.0) Phone & Email 312-384-4897 Fair Value Estimate 9.70 Pre-Tax Cost of Debt 5.3% EV / Adjusted EBITDA (53.1) (68.2) [email protected] One-Star Price 16.98 Estimated WACC 7.1% EV / Sales 24.6 31.6 Sector Basic Materials Market Price 7.54 ROIC * 0.6% Price / Book 1.5 1.9 Industry Drug P / FVE 0.78 Adjusted ROIC * 1.0% FCF Yield -2.1% -1.7% Manufacturers - * 5-Yr Projected Average Dividend Yield 0.0% 0.0% (2019 Estimates) (Price) (Fair Value)

3-Yr Forecast 5-Yr All values (except per share amounts) CAGR/AV Projected in: CAD Thousands G 2018 2019 2020 2021 2022 2023 CAGR/AVG Income Statement Revenue 55,196 301,409 443,492 621,027 810,680 994,158 Gross Profit 35,593 183,486 288,111 427,160 574,617 726,091 Operating Income (50,584) (203,675) (117,434) 2,436 131,438 266,177 Net Income 71,935 (345,789) (182,397) (99,122) (3,621) 99,066 Adjusted Income 120,562 (163,185) (115,999) (36,949) (250,983) 153,725 Adjusted EPS 0.26 (0.22) (0.12) (0.04) (0.25) 0.15 Adjusted EBITDA (55,198) (139,552) (26,968) 94,572 225,516 362,463

Growth (% YoY) Revenue 205.5% 446.1% 47.1% 40.0% 30.5% 22.6% 78.3% Gross Profit 249.2% 415.5% 57.0% 48.3% 34.5% 26.4% 82.8% Operating Income 538.6% 302.6% -42.3% -102.1% 5295.5% 102.5% NM Net Income -654.7% -580.7% -47.3% -45.7% -96.3% -2835.9% 6.6% Adjusted EPS -777.9% -186.3% -47.8% -68.1% 579.3% -161.2% -9.8% Adjusted EBITDA 515.3% 152.8% -80.7% -450.7% 138.5% 60.7% NM

Profitability (%) Gross Margin 28.6% 64.5% 60.9% 65.0% 68.8% 70.9% 73.0% 67.7% Operating Margin -193.1% -91.6% -67.6% -26.5% 0.4% 16.2% 26.8% -10.1% Net Margin -113.1% 130.3% -114.7% -41.1% -16.0% -0.4% 10.0% -32.5% Adjusted EBITDA Margin -184.1% -100.0% -46.3% -6.1% 15.2% 27.8% 36.5% 5.4% Return on Equity -65.1% 8.1% -10.6% -3.7% -2.1% -0.1% 2.1% -2.9% Adjusted ROIC -28.0% -8.9% -4.8% -2.5% 0.8% 4.1% 7.3% 1.0% Adjusted RONIC #DIV/0! -3.8% -2.4% 22.5% 112.5% 113.1% 117.0% 72.6%

Leverage Debt / Capital 32.8% 11.6% 11.3% 12.5% 14.3% 14.3% 13.3% 13.2% Debt / EBITDA NM (2.4) (3.4) (5.8) 112.0 5.5 2.6 22.2 EBITDA / Interest Expense NM (6.3) (3.9) (2.3) 0.1 2.4 5.2 0.3 FCFE / Total Debt NM (1.08) (0.24) (0.04) 0.05 0.17 0.31 0.05

Cash Flow Dividends per Share 0.00 0.00 0.00 0.00 0.00 0.00 Free Cash Flow to the Firm (578,874) (3,271,839) (99,386) (26,415) (129,095) 153,699 FCFE (CFO-Capex) (218,613) (156,300) (26,996) 43,200 131,800 229,274 Dividend Franking 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Page 74 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Morningstar Equity Research | 25 June 2019 Tilray (TLRY)

Last Price Fair Value Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating 46.81 USD 40 USD Very High Standard None Stable N/A

Analyst Kristoffer Inton Five-Star Price 20.00 Estimated COE 7.5% Adjusted P / E (102.5) (87.6) Phone & Email 312-384-4897 Fair Value Estimate 40.00 Pre-Tax Cost of Debt 10.0% EV / Adjusted EBITDA (298.6) (254.2) [email protected] One-Star Price 70.00 Estimated WACC 7.5% EV / Sales 26.8 22.8 Sector Basic Materials Market Price 46.81 ROIC * 8.1% Price / Book 34.9 29.8 Industry Drug P / FVE 1.17 Adjusted ROIC * 10.9% FCF Yield 3.3% 3.8% Manufacturers - * 5-Yr Projected Average Dividend Yield 0.0% 0.0% (2019 Estimates) (Price) (Fair Value)

3-Yr Forecast 5-Yr All values (except per share amounts) CAGR/AV Projected in: USD Thousands G 2018 2019 2020 2021 2022 2023 CAGR/AVG Income Statement Revenue 43,130 165,581 235,664 318,782 401,683 478,004 Gross Profit 14,275 77,811 116,908 166,079 217,901 261,708 Operating Income (36,662) (30,246) (4,550) 33,515 75,348 111,135 Net Income (67,723) (68,702) (45,745) (11,363) 25,780 58,250 Adjusted Income (42,949) (44,190) (28,748) (1,971) 27,520 52,657 Adjusted EPS (0.52) (0.46) (0.30) (0.02) 0.28 0.54 Adjusted EBITDA (33,100) (14,848) 16,377 61,827 111,253 154,223

Growth (% YoY) Revenue 110.0% 283.9% 42.3% 35.3% 26.0% 19.0% 61.8% Gross Profit 25.5% 445.1% 50.2% 42.1% 31.2% 20.1% 78.9% Operating Income 398.2% -17.5% -85.0% -836.6% 124.8% 47.5% NM Net Income 767.2% 1.4% -33.4% -75.2% -326.9% 126.0% NM Adjusted EPS 329.0% -11.8% -35.0% -93.1% -1496.5% 91.3% NM Adjusted EBITDA 501.2% -55.1% -210.3% 277.5% 79.9% 38.6% NM

Profitability (%) Gross Margin 36.5% 33.1% 47.0% 49.6% 52.1% 54.2% 54.8% 51.5% Operating Margin -58.6% -85.0% -18.3% -1.9% 10.5% 18.8% 23.2% 6.5% Net Margin -85.8% -157.0% -41.5% -19.4% -3.6% 6.4% 12.2% -9.2% Adjusted EBITDA Margin -47.7% -76.7% -9.0% 6.9% 19.4% 27.7% 32.3% 15.5% Return on Equity -7.3% -70.3% -42.0% -42.7% -14.5% 30.1% 45.6% -4.7% Adjusted ROIC -8.1% -17.0% 7.1% 10.9% 11.8% 12.4% 12.3% 10.9% Adjusted RONIC #DIV/0! -22.5% 90.7% 9.2% 12.4% 14.2% 13.0% 27.9%

Leverage Debt / Capital 91.0% 68.0% 76.9% 84.0% 86.2% 82.5% 75.2% 80.9% Debt / EBITDA NM (7.1) (8.3) (56.9) 9.4 4.3 2.9 NM EBITDA / Interest Expense NM (6.5) (1.5) (0.2) 1.3 2.9 4.2 1.4 FCFE / Total Debt NM (0.23) 0.34 (0.21) (0.19) (0.11) (0.02) NM

Cash Flow Dividends per Share 0.00 0.00 0.00 0.00 0.00 0.00 Free Cash Flow to the Firm (112,432) (31,023) (111,080) (98,413) (59,500) (13,228) FCFE (CFO-Capex) (96,446) 148,094 (93,552) (85,427) (51,139) (9,576) Dividend Franking 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Page 75 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Morningstar Equity Research | 17 June 2019 Cronos Group (CRON)

Last Price Fair Value Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating 15.94 USD 10.8 USD Very High Standard None Stable N/A

Analyst Kristoffer Inton Five-Star Price 5.40 Estimated COE 7.5% Adjusted P / E (143.5) (97.2) Phone & Email 312-384-4897 Fair Value Estimate 10.80 Pre-Tax Cost of Debt 5.8% EV / Adjusted EBITDA 1,036.8 701.7 [email protected] One-Star Price 18.90 Estimated WACC 7.2% EV / Sales 90.2 61.0 Sector Basic Materials Market Price 15.94 ROIC * 8.6% Price / Book 1.7 1.2 Industry Drug P / FVE 1.48 Adjusted ROIC * 8.6% FCF Yield -2.0% -2.9% Manufacturers - * 5-Yr Projected Average Dividend Yield 0.0% 0.0% (2019 Estimates) (Price) (Fair Value)

3-Yr Forecast 5-Yr All values (except per share amounts) CAGR/AV Projected in: CAD Thousands G 2018 2019 2020 2021 2022 2023 CAGR/AVG Income Statement Revenue 15,703 58,246 93,247 133,863 174,385 210,491 Gross Profit 8,049 32,541 57,492 89,269 120,858 150,963 Operating Income (17,089) (15,651) (1,965) 23,394 48,921 73,708 Net Income (18,970) 443,430 15,061 40,095 65,286 89,223 Adjusted Income (18,144) (36,676) 6,651 24,636 42,800 60,502 Adjusted EPS (0.11) (0.15) 0.02 0.08 0.13 0.19 Adjusted EBITDA (14,579) 5,065 20,276 47,277 74,575 101,259

Growth (% YoY) Revenue 284.7% 270.9% 60.1% 43.6% 30.3% 20.7% 68.1% Gross Profit 294.2% 304.3% 76.7% 55.3% 35.4% 24.9% 79.7% Operating Income 214.5% -8.4% -87.4% -1290.6% 109.1% 50.7% NM Net Income -861.5% -2437.5% -96.6% 166.2% 62.8% 36.7% NM Adjusted EPS 203.4% 40.0% -113.9% 270.4% 73.7% 41.4% NM Adjusted EBITDA 228.5% -134.7% 300.3% 133.2% 57.7% 35.8% NM

Profitability (%) Gross Margin 45.7% 51.3% 55.9% 61.7% 66.7% 69.3% 71.7% 65.0% Operating Margin -298.4% -108.8% -26.9% -2.1% 17.5% 28.1% 35.0% 10.3% Net Margin -91.5% -120.8% 761.3% 16.2% 30.0% 37.4% 42.4% 177.4% Adjusted EBITDA Margin -216.7% -92.8% 8.7% 21.7% 35.3% 42.8% 48.1% 31.3% Return on Equity -5.2% -12.7% 26.9% 0.5% 1.3% 2.1% 2.7% 6.7% Adjusted ROIC -11.5% -7.5% 0.7% 4.2% 9.2% 13.1% 16.1% 8.6% Adjusted RONIC #DIV/0! -5.6% 10.6% 32.5% 54.6% 53.5% 52.1% 40.7%

Leverage Debt / Capital 8.5% 9.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Debt / EBITDA NM (1.4) 0.1 0.1 0.0 0.0 0.0 0.1 EBITDA / Interest Expense 43.1 145.8 197.0 143.7 401.2 660.0 906.2 461.6 FCFE / Total Debt NM (5.88) (43.94) (3.53) 2.66 9.85 16.84 NM

Cash Flow Dividends per Share 0.00 0.00 0.00 0.00 0.00 0.00 Free Cash Flow to the Firm (128,732) (125,979) (28,189) (13,939) 2,632 18,673 FCFE (CFO-Capex) (124,146) (104,715) (8,419) 6,327 23,462 40,119 Dividend Franking 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Page 76 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Morningstar Equity Research | 19 June 2019 Curaleaf Holdings (CURLF)

Last Price Fair Value Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating 7.75 USD 10.6 USD Very High Standard None Stable N/A

Analyst Kristoffer Inton Five-Star Price 5.30 Estimated COE 7.5% Adjusted P / E (105.8) (144.7) Phone & Email 312-384-4897 Fair Value Estimate 10.60 Pre-Tax Cost of Debt 5.3% EV / Adjusted EBITDA (92.9) (128.9) [email protected] One-Star Price 18.55 Estimated WACC 7.4% EV / Sales 20.2 28.0 Sector Basic Materials Market Price 7.75 ROIC * -0.4% Price / Book 2.5 3.5 Industry Drug P / FVE 0.73 Adjusted ROIC * -0.7% FCF Yield 3.3% 2.4% Manufacturers - * 5-Yr Projected Average Dividend Yield 0.0% 0.0% (2019 Estimates) (Price) (Fair Value)

3-Yr Forecast 5-Yr All values (except per share amounts) CAGR/AV Projected in: USD Thousands G 2018 2019 2020 2021 2022 2023 CAGR/AVG Income Statement Revenue 77,057 161,773 332,085 409,184 467,405 635,804 Gross Profit 45,885 63,415 153,589 201,034 244,325 354,234 Operating Income (26,854) (64,063) (30,829) 5,737 37,899 92,465 Net Income (56,467) (36,252) (23,471) (9,224) (827) 18,812 Adjusted Income (29,209) (32,547) (18,738) (5,132) 2,726 24,729 Adjusted EPS (0.07) (0.07) (0.04) (0.01) 0.01 0.05 Adjusted EBITDA (9,865) (35,110) 3,589 48,034 88,265 154,234

Growth (% YoY) Revenue 299.0% 109.9% 105.3% 23.2% 14.2% 36.0% 52.5% Gross Profit 299.9% 38.2% 142.2% 30.9% 21.5% 45.0% 50.5% Operating Income 230.6% 138.6% -51.9% -118.6% 560.6% 144.0% NM Net Income 1903.8% -35.8% -35.3% -60.7% -91.0% -2373.5% NM Adjusted EPS 403.6% -0.6% -48.0% -72.6% -153.1% 807.0% NM Adjusted EBITDA -361.1% 255.9% -110.2% 1238.3% 83.8% 74.7% NM

Profitability (%) Gross Margin 73.0% 59.5% 39.2% 46.3% 49.1% 52.3% 55.7% 48.5% Operating Margin -35.9% -34.8% -39.6% -9.3% 1.4% 8.1% 14.5% -5.0% Net Margin -29.4% -73.3% -22.4% -7.1% -2.3% -0.2% 3.0% -5.8% Adjusted EBITDA Margin -8.0% -12.8% -21.7% 1.1% 11.7% 18.9% 24.3% 6.9% Return on Equity -7.9% -20.7% -4.0% -1.7% -0.7% -0.1% 1.4% -1.0% Adjusted ROIC -36.8% -10.9% -9.2% -2.2% 0.6% 2.4% 4.8% -0.7% Adjusted RONIC #DIV/0! -14.0% -4.9% 10.9% 15.9% 16.0% 16.1% 10.8%

Leverage Debt / Capital 11.4% 16.1% 8.6% 8.8% 11.9% 19.9% 30.1% 15.9% Debt / EBITDA NM (4.2) (2.9) (21.7) 4.5 4.0 3.9 NM EBITDA / Interest Expense NM (2.7) (3.4) (0.5) 2.2 2.5 2.5 0.7 FCFE / Total Debt NM (0.94) 0.89 (1.68) (0.90) (0.41) (0.36) NM

Cash Flow Dividends per Share 0.00 0.00 0.00 0.00 0.00 0.00 Free Cash Flow to the Firm (145,031) (890,901) (222,750) (166,314) (132,619) (188,452) FCFE (CFO-Capex) (78,960) 113,791 (215,156) (160,619) (133,380) (209,799) Dividend Franking 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Page 77 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Morningstar Equity Research | 6 June 2019 Scotts Miracle-Gro (SMG)

Last Price Fair Value Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating 91 USD 88 USD High Standard Narrow Negative N/A

Analyst Seth Goldstein, CFA Five-Star Price 52.80 Estimated COE 9.0% Adjusted P / E 20.7 20.0 Phone & Email +1 (312) 384-5506 Fair Value Estimate 88.00 Pre-Tax Cost of Debt 6.5% EV / Adjusted EBITDA 14.0 13.7 [email protected] One-Star Price 136.40 Estimated WACC 7.8% EV / Sales 2.4 2.3 Sector Basic Materials Market Price 91.00 ROIC * 21.0% Price / Book 7.8 7.5 Industry Agricultural Inputs P / FVE 1.03 Adjusted ROIC * 16.8% FCF Yield 5.1% 5.3% * 5-Yr Projected Average Dividend Yield 2.5% 2.5% (2019 Estimates) (Price) (Fair Value)

3-Yr Forecast 5-Yr All values (except per share amounts) CAGR/AV Projected in: USD Millions G 2018 2019 2020 2021 2022 2023 CAGR/AVG Income Statement Revenue 2,663 3,022 3,085 3,168 3,261 3,357 Gross Profit 865 1,000 1,106 1,176 1,227 1,274 Operating Income 199 417 489 535 558 577 Net Income 64 444 302 335 352 366 Adjusted Income 60 249 302 335 352 366 Adjusted EPS 1.05 4.40 5.34 5.92 6.24 6.48 Adjusted EBITDA 482 508 581 630 656 675

Growth (% YoY) Revenue -0.8% 0.8% 13.5% 2.1% 2.7% 2.9% 2.9% 4.7% Gross Profit -1.6% -11.1% 15.7% 10.5% 6.4% 4.3% 3.8% 8.1% Operating Income -8.8% -54.1% 109.7% 17.1% 9.4% 4.5% 3.3% 23.7% Net Income -26.4% -70.8% 596.3% -31.9% 10.8% 5.3% 3.9% 41.9% Adjusted EPS -25.7% -74.1% 317.8% 21.4% 10.8% 5.3% 3.9% 43.8% Adjusted EBITDA 13.3% -6.1% 5.4% 14.4% 8.3% 4.2% 2.8% 7.0%

Profitability (%) Gross Margin 35.1% 32.5% 33.1% 35.8% 37.1% 37.6% 37.9% 36.3% Operating Margin 13.9% 7.5% 13.8% 15.8% 16.9% 17.1% 17.2% 16.2% Net Margin 7.7% 2.4% 14.7% 9.8% 10.6% 10.8% 10.9% 11.3% Adjusted EBITDA Margin 19.4% 18.1% 16.8% 18.8% 19.9% 20.1% 20.1% 19.1% Return on Equity 30.4% 11.9% 81.9% 42.7% 41.6% 38.6% 35.9% 48.1% Adjusted ROIC 13.7% 11.7% 13.5% 16.7% 17.7% 17.9% 18.1% 16.8% Adjusted RONIC 49.5% -6.6% -10.8% 116.7% 58.6% 25.3% 25.8% 43.1%

Leverage Debt / Capital 71.4% 82.8% 73.4% 70.9% 68.1% 65.4% 63.0% 68.2% Debt / EBITDA 4.1 7.1 2.4 3.1 2.9 2.8 2.7 2.8 EBITDA / Interest Expense 5.9 3.3 9.8 7.2 7.6 8.0 8.2 8.2 FCFE / Total Debt 0.16 0.14 0.14 0.19 0.20 0.21 0.21 0.19

Cash Flow Dividends per Share 2.03 2.23 2.46 2.70 2.97 3.27 Free Cash Flow to the Firm (185) 431 351 376 388 399 FCFE (CFO-Capex) 274 263 339 364 379 390 Dividend Franking 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 182.0% 28.4% 46.0% 45.6% 47.7% 50.5%

Page 78 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Research Methodology for Valuing Companies

Overview At the heart of our valuation system is a detailed projection of a company's future cash flows, resulting from our analysts' research. Analysts create custom industry and company assumptions to feed income statement, balance sheet, and capital investment assumptions into our globally standardized, proprietary discounted cash flow, or DCF, modeling templates. We use scenario analysis, in-depth competitive advantage analysis, and a variety of other analytical tools to augment this process. Moreover, we think analyzing valuation through discounted cash flows presents a better lens for viewing cyclical companies, high-growth firms, businesses with finite lives (e.g., mines), or companies expected to generate negative earnings over the next few years. That said, we don't dismiss multiples altogether but rather use them as supporting cross-checks for our DCF-based fair value estimates. We also acknowledge that DCF models offer their own challenges (including a potential proliferation of estimated inputs and the possibility that the method may miss short-term market price movements), but we believe these negatives are mitigated by deep analysis and our long-term approach.

Morningstar's equity research group ("we," "our") believes that a company's intrinsic worth results from the future cash flows it can generate. The Morningstar Rating for stocks identifies stocks trading at a discount or premium to their intrinsic worth—or fair value estimate, in Morningstar terminology. Five-star stocks sell for the biggest risk-adjusted discount to their fair values, whereas 1-star stocks trade at premiums to their intrinsic worth.

Morningstar Research Methodology

Source: Morningstar.

Four key components drive the Morningstar rating: (1) our assessment of the firm's economic moat, (2) our estimate of the stock's fair value, (3) our uncertainty around that fair value estimate, and (4) the current market price. This process ultimately culminates in our single-point star rating.

Economic Moat The concept of an economic moat plays a vital role not only in our qualitative assessment of a firm's long-term investment potential, but also in the actual calculation of our fair value estimates. An economic moat is a structural feature that allows a firm to sustain excess profits over a long period of time. We define economic profits as returns on invested capital (ROIC) over and above our estimate of a firm's cost of capital, or weighted average cost of capital (WACC). Without a moat, profits are more susceptible to competition. We have identified five sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale.

Companies with a narrow moat are those we believe are more likely than not to achieve normalized excess returns for at least the next 10 years. Wide-moat companies are those in which we have very high confidence that excess returns will remain for 10 years, with excess returns more likely than not to remain for at least 20 years. The longer a firm generates economic profits, the higher its intrinsic value. We believe low-quality, no-moat companies will see their normalized returns gravitate toward their cost of capital more quickly than companies with moats.

To assess the sustainability of excess profits, analysts perform ongoing assessments of the moat trend. A firm's moat trend is positive in cases where we think its sources of competitive advantage are growing stronger, stable where we don't anticipate changes to competitive advantages over the next several years, or negative where we see signs of deterioration.

Page 79 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Estimated Fair Value Combining our analysts' financial forecasts with the firm's economic moat helps us assess how long returns on invested capital are likely to exceed the firm's cost of capital. Returns of firms with a wide economic moat rating are assumed to fade to the perpetuity period over a longer period of time than the returns of narrow-moat firms, and both will fade slower than no-moat firms, increasing our estimate of their intrinsic value.

Our model is divided into three distinct stages:

Stage I: Explicit Forecast In this stage, which can last 5 to 10 years, analysts make full financial statement forecasts, including items such as revenue, profit margins, tax rates, changes in working capital accounts, and capital spending. Based on these projections, we calculate earnings before interest, after taxes (EBI) and net new investment (NNI) to derive our annual free cash flow forecast.

Stage II: Fade The second stage of our model is the period it will take the company's return on new invested capital—the return on capital of the next dollar invested (RONIC)—to decline (or rise) to its cost of capital. During the Stage II period, we use a formula to approximate cash flows in lieu of explicitly modeling the income statement, balance sheet, and cash flow statement as we do in Stage I. The length of the second stage depends on the strength of the company's economic moat. We forecast this period to last anywhere from one year (for companies with no economic moat) to 10–15 years or more (for wide-moat companies). During this period, cash flows are forecast using four assumptions: an average growth rate for EBI over the period, a normalized investment rate, average return on new invested capital (RONIC), and the number of years until perpetuity, when excess returns cease. The investment rate and return on new invested capital decline until a perpetuity value is calculated. In the case of firms that do not earn their cost of capital, we assume marginal ROICs rise to the firm's cost of capital (usually attributable to less reinvestment), and we may truncate the second stage.

Stage III: Perpetuity Once a company's marginal ROIC hits its cost of capital, we calculate a continuing value, using a standard perpetuity formula. At perpetuity, we assume that any growth or decline or investment in the business neither creates nor destroys value and that any new investment provides a return in line with estimated WACC.

Because a dollar earned today is worth more than a dollar earned tomorrow, we discount our projections of cash flows in stages I, II, and III to arrive at a total present value of expected future cash flows. Because we are modeling free cash flow to the firm— representing cash available to provide a return to all capital providers—we discount future cash flows using the WACC, which is a weighted average of the costs of equity, debt, and preferred stock (and any other funding sources), using expected future proportionate long-term, market value weights.

Uncertainty Around That Fair Value Estimate Morningstar's uncertainty rating captures a range of likely potential intrinsic values for a company and uses it to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The uncertainty rating represents the analysts' ability to bound the estimated value of the shares in a company around the fair value estimate, based on the characteristics of the business underlying the stock, including operating and financial leverage, sales sensitivity to the overall economy, product concentration, pricing power, and other company-specific factors.

Analysts consider at least two scenarios in addition to their base case: a bull case and a bear case. Assumptions are chosen such that the analyst believes there is a 25% probability that the company will perform better than the bull case and a 25% probability that the company will perform worse than the bear case. The distance between the bull and bear cases is an important indicator of the uncertainty underlying the fair value estimate.

Our recommended margin of safety widens as our uncertainty regarding the estimated value of the equity increases. The more uncertain we are about the estimated value of the equity, the greater the discount we require relative to our estimate of the value of the firm before we would recommend the purchase of the shares. In addition, the uncertainty rating provides guidance in portfolio construction based on risk tolerance.

Page 80 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

Our uncertainty ratings for our qualitative analysis are low, medium, high, very high, and extreme. × Low: Margin of safety for 5-star rating is a 20% discount and for 1-star rating is a 25% premium. × Medium: Margin of safety for 5-star rating is a 30% discount and for 1-star rating is a 35% premium. × High: Margin of safety for 5-star rating is a 40% discount and for 1-star rating is a 55% premium. × Very high: Margin of safety for 5-star rating is a 50% discount and for 1-star rating is a 75% premium. × Extreme: Margin of safety for 5-star rating is a 75% discount and for 1-star rating is a 300% premium.

Morningstar Equity Research Star Rating Methodology

Market Price The market prices used in this analysis and noted in the report come from the exchange on which the stock is listed, which we believe is a reliable source.

For more details about our methodology, please go to https://shareholders.morningstar.com.

Morningstar Star Rating for Stocks Once we determine the fair value estimate of a stock, we compare it with the stock's current market price on a daily basis, and the star rating is automatically recalculated at the market close on every day the market on which the stock is listed is open. Our analysts keep close tabs on the companies they follow and, based on thorough and ongoing analysis, raise or lower their fair value estimates as warranted.

Please note, there is no predefined distribution of stars. That is, the percentage of stocks that earn 5 stars can fluctuate daily, so the star ratings, in the aggregate, can serve as a gauge of the broader market's valuation. When there are many 5-star stocks, the stock market as a whole is more undervalued, in our opinion, than when very few companies garner our highest rating.

We expect that if our base-case assumptions are true, the market price will converge on our fair value estimate over time, generally within three years (although it is impossible to predict the exact time frame in which market prices may adjust).

Our star ratings are guideposts to a broad audience, and individuals must consider their own specific investment goals, risk tolerance, tax situation, time horizon, income needs, and complete investment portfolio, among other factors.

Page 81 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

The Morningstar Star Ratings for stocks are defined below:

QQQQQ We believe appreciation beyond a fair risk-adjusted return is highly likely over a multiyear time frame. Scenario analysis developed by our analysts indicates that the current market price represents an excessively pessimistic outlook, limiting downside risk and maximizing upside potential.

QQQQ We believe appreciation beyond a fair risk-adjusted return is likely.

QQQ Indicates our belief that investors are likely to receive a fair risk-adjusted return (approximately cost of equity).

QQ We believe investors are likely to receive a less than fair risk-adjusted return.

Q Indicates a high probability of undesirable risk-adjusted returns from the current market price over a multiyear time frame, based on our analysis. Scenario analysis by our analysts indicates that the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Risk Warning Please note that investments in securities are subject to market and other risks, and there is no assurance or guarantee that the intended investment objectives will be achieved. Past performance of a security may or may not be sustained in the future and is no indication of future performance. A security investment return and an investor's principal value will fluctuate so that, when redeemed, an investor's shares may be worth more or less than their original cost. A security's current investment performance may be lower or higher than the investment performance noted within the report. Morningstar's uncertainty rating serves as a useful data point with respect to sensitivity analysis of the assumptions used in our determining a fair value price.

General Disclosure

Unless otherwise provided in a separate agreement, recipients accessing this report may only use it in the country in which the Morningstar distributor is based. Unless stated otherwise, the original distributor of the report is Morningstar Research Services LLC, a U.S.-domiciled financial institution.

This report is for informational purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This publication is intended to provide information to assist institutional investors in making their own investment decisions, not to provide investment advice to any specific investor. Therefore, investments discussed and recommendations made herein may not be suitable for all investors: Recipients must exercise their own independent judgment as to the suitability of such investments and recommendations in the light of their own investment objectives, experience, taxation status, and financial position.

The information, data, analyses, and opinions presented herein are not warranted to be accurate, correct, complete, or timely. Unless otherwise provided in a separate agreement, neither Morningstar, Inc. nor the Equity Research Group represents that the report contents meet all of the presentation and/or disclosure standards applicable in the jurisdiction the recipient is located.

Except as otherwise required by law or provided for in a separate agreement, the analyst, Morningstar, Inc., and the Equity Research Group and their officers, directors, and employees shall not be responsible or liable for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses, or opinions within the report. The Equity Research Group encourages recipients of this report to read all relevant issue documents (e.g., prospectus) pertaining to the security concerned, including without limitation, information relevant to its investment objectives, risks, and costs before making an investment decision and, when deemed necessary, to seek the advice of a legal, tax, and/or accounting professional.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability, or use would be contrary to law or regulation or which would subject Morningstar, Inc. or its affiliates to any registration or licensing requirements in such jurisdiction.

Where this report is made available in a language other than English and in the case of inconsistencies between the English and translated versions of the report, the English version will control and supersede any ambiguities associated with any part or

Page 82 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

section of a report that has been issued in a foreign language. Neither the analyst, Morningstar, Inc., nor the Equity Research Group guarantees the accuracy of the translations.

This report may be distributed in certain localities, countries and/or jurisdictions ("Territories") by independent third parties or independent intermediaries and/or distributors ("Distributors"). Such Distributors are not acting as agents or representatives of the analyst, Morningstar, Inc., or the Equity Research Group. In Territories where a Distributor distributes our report, the Distributor is solely responsible for complying with all applicable regulations, laws, rules, circulars, codes, and guidelines established by local and/or regional regulatory bodies, including laws in connection with the distribution third-party research reports.

Conflicts of Interest × No interests are held by the analyst with respect to the security subject of this investment research report.

× Morningstar, Inc. may hold a long position in the security subject of this investment research report that exceeds 0.5% of the total issued share capital of the security. To determine if such is the case, please click http://msi.morningstar.com and http://mdi.morningstar.com.

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Page 84 of 84 Basic Materials Observer | 27 June 2019 | See Important Disclosures at the end of this report.

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