April 16, 2018 - 9:55pm EST by
2018 2019
Price: 34.84 EPS 1.72 1.92
Shares Out. (in M): 61 P/E 24 20
Market Cap (in $M): 2,125 P/FCF n/a n/a
Net Debt (in $M): 165 EBIT 0 0
TEV ($): 2,219 TEV/EBIT n/a n/a
Borrow Cost: General Collateral

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Have you wondered why the BC and Vancouver real estate markets have become infamous around the world for its ability to continue increasing year after year? Have you wondered who would pay $6.98 million for this shack?


If you are interested in digging into the potential link between casinos, supercars, multi-million dollar mansions, the fentanyl crisis, Marc Cohodes, murder, and money laundering, read on!


Great Canadian Gaming (TSX:GC)

Great Canadian Gaming (“GC” or the “Company”) is an operator of gaming, entertainment and hospitality facilities in the Canadian provinces of British Columbia (“BC”), Ontario, New Brunswick, Nova Scotia and Washington State.

I am recommending initiation of a short position on GC in anticipation of potential headline risk, financial penalties, potential criminal misconduct, and risk associated with losing their casino operating agreement at their flagship property, the River Rock Casino Resort in Vancouver BC.

To understand the investment thesis, a bit of background is required.



In May 2017, BC elected an NDP government after the Liberal party ruled for a period of 16 years (2001 to 2017). It is important to note that the BC constituency has become fed up with housing prices, with it now deemed an “affordability crisis”. This topic has been debated to death (which I will not do here), and this investment thesis is not predicated upon whether or not Canadian housing corrects. Nonetheless, it is important to understand the context to which the NDP government was elected.


Meet David Eby. He is the NDP MLA for the riding of Vancouver-Point Grey. He is a high profile lawyer and an adjunct professor of law at the University of British Columbia. (As an aside, he defeated the sitting Premier of British Columbia, Christy Clark in the 2013 election, four years before the NDP came to power. Christy Clark was forced to ask one of the 49 sitting Liberals to give up their seat for her, so she could carry on her duties as Premier. How embarrassing.)

He was appointed the new Attorney General of BC in July 2017. One of the first projects he was tasked with was to investigate suspected money laundering which was taking place in BC casinos.


The “Vancouver Model” of Money Laundering

Eby got to work quickly and by December 2017, he had done the following:

  • Was keen to point out the hypocrisy of self-regulation in an industry that brings in an estimated $1.3 billion to provincial coffers each year (why bite the hand that feeds?);
  • Appointed Peter German, a former deputy commissioner of the RCMP and Correctional Service Canada, as an independent expert to review money laundering in the gambling industry (Peter German literally wrote the book on money laundering). Peter German was tasked with producing a report with recommendations on how to address these issues specifically in casinos by the end of Q1 2018;
  • Released confidential reports which indicated that suspicious transactions passing through BC casinos in the form of cash and bank drafts, was exceeding $100 million per year;
  • Made interim recommendations to the British Columbia Lottery Corporation (“BCLC”) based on preliminary proposals put forth by German.



The investigation was still unfolding, but David Eby had already been briefed on international intelligence training sessions in which international intelligence members were taught the “Vancouver model of money laundering”.


For full details on how this works, I recommend you read the excellent reporting performed by investigative journalist Sam Cooper (remember that name!) here:


Here is an excerpt of a key chart from Sam Cooper’s article. Essentially, proceeds of crime are brought to BC casinos in cash (in some transactions over $1 million in cash at a time), gambling takes place, and then the gambler cashes out in the form of a cheque from the casino and is free to deposit it in a Canadian bank or elsewhere.

The River Rock Casino Resort


In December 2017, David Eby had come to realize that the center of this alleged malfeasance was the River Rock Casino, in Richmond BC. In fact, a report had previously been commissioned by the British Columbia Gaming Policy Enforcement Branch in July 2016 specifically regarding the River Rock Casino Resort (dubbed the “MNP report”). David Eby’s office made this available to the public  and it can be accessed here (, based on a Freedom of Information request.


Interestingly, Great Canadian Gaming (the owner operator of the River Rock), filed a petition in the BC Supreme Court, asking a judge to bar the disclosure, citing that “GCGC will suffer irreparable harm if the phase two disclosure is released without (the company) being provided with an opportunity to make the representation it is statutorily entitled to make.” (Source:


This MNP report is pretty damning, stating that approximately $13.5 million in $20 dollar bills was accepted at the River Rock Casino Resort (RRCR) during July 2015. Law enforcement intelligence indicates that this currency may be the direct proceeds of crime:


The report even concludes by stating that the RRCR has developed “a culture accepting of large bulk cash transactions”:

FINTRAC, Canada’s financial intelligence unit with a mandate to detect, prevent, and deter money laundering, had scathing allegations that 80% of the staff at RRCR had limited knowledge of money laundering and were unaware of suspicious transaction indicators:

Interim Regulatory Changes

By March 2018, there were a number of interim changes implemented, based on Peter German’s recommendations, with the final report due at the end of the month. These include:

  1. Casino operators must complete Source of Funds reporting for cash, bond, and draft cash-ins of $10,000 or greater. At a minimum, the declaration must outline a customer’s identification and provide the source of their funds, including the financial institution and account from which cash or bond was sourced.

    If gamblers make two transactions of greater than $10,000 in a row, casinos “can only accept the funds once it has been determined that it is not of a suspicious or illegal nature”.

    Great Canadian Gaming’s updated disclosure states that: All cash, bank drafts and certified cheques of $10,000 (ten thousand dollars) or more, in one or more transactions over a 24-hour period, require a bank receipt. The original receipt must be from the same day of the transaction and display the financial institution, branch number, and account number. This information is required prior to a customer’s buy-in and is subject to daily BCLC review.

  2. A Gaming Policy Enforcement Branch investigator will be on-shift and available to high-volume casino operators in the Lower Mainland on a 24/7 basis.

  3. Established new service agreements for casino operators, giving the BCLC more authority to ensure compliance and security, including progressive disciplinary measures.
  1. BCLC given powers to impose fines directly, suspend commission payments, and suspend operating licenses.
  2. According to media reports, police had to be involved for penalties to occur under the old operating regime.

Sources ( and


Early Data Shows Significant Decline in Suspicious Transactions

On March 27th, Attorney General David Eby testified to a House of Commons standing committee reviewing Canada’s Proceeds of Crime and Terrorist Financing Act. The entire testimony along with question period can be viewed here and is fascinating to watch (;%20Intel%20Mac%20OS%20X%2010.12;%20rv:59.0)%20Gecko/20100101%20Firefox/59.0).


David Eby noted that the interim regulatory changes to set a hard cap at $10,000 for buy-ins, requiring a Source of Funds declaration, and having Gaming Policy Enforcement Branch staff on-site has had dramatic impact already. Notably, suspicious transactions dropped from $20 million in July 2015, to $200k in February 2018.



Showing strong political will, David Eby has also stated “It’s both hypocritical and self-defeating to spend public money fighting gang crime on one hand, while pocketing the proceeds of gang crime at casinos with the other hand.”  To indicate that the provincial government is tackling this problem head on, the 2018 budget includes a projection that gambling revenues could decrease by approximately $30 million as a result of these actions, based on an independent report prepared by HLT Advisory Inc. (Source:

Peter German’s Final Report has Been Delivered

On Tuesday April 3rd, Peter German delivered his final report to the Attorney General’s office. The report is 250 pages long, and has 48 specific recommendations. David Eby had the following to say:

A phone call to the Attorney General’s office confirms that they intend to make this report available to the public at a later date, once the AG has had a chance to review and come up with governmental responses.

Marc Cohodes is Onto This

Guess who paid a visit to Marc Cohodes (of Home Capital short selling fame) in California recently? Sam Cooper! See Cohodes’ video tweet here:

Cohodes calls Sam Cooper his “favourite, or second favourite Canadian”, then asks him about what his most memorable story was. Cooper replies that it is the “casino stories”. They then discuss it in depth, they talk about David Eby’s testimony on casino money laundering in Ottawa. This video is definitely worth a watch.  

Great Canadian Gaming Asset Detail

The chart below shows the Company’s assets in Canada and the US, along with the number of slot machines, table games, and the date of expiry for key operational service agreements. Note that the RRCR is the largest property by far, with 1,123 slot machines and 135 table games. The operational services agreement for the RRCR with the BCLC expires June 23, 2024.

Great Canadian Gaming is Heavily Concentrated in British Columbia and River Rock in Particular

As shown in the chart below, the River Rock is GC’s largest single asset, comprising 28% of revenues and 34% of EBITDA. As a whole, BC casinos represent 58% of GC’s revenues and 66% of EBITDA.  

Source: author’s estimates

Estimating Impact of Reforms to Great Canadian Gaming

I classify the potential impact of government and regulatory reforms on Great Canadian Gaming into three parts:

  1. The reduction/loss of gaming revenue from “VIP” customers after the implementation of new Source of Funds verifications in February 2018. The scenario assumes that these customers are either actively engaged in criminal activities and are thus unable to provide a Source of Funds verification, or are legitimate people but do not want be subject to the Source of Funds process.
  2. Probability and magnitude of financial penalties placed upon Great Canadian Gaming by the BCLC for failure to adhere to regulations regarding money laundering.
  3. Probability and magnitude of the River Rock Casino Resort not being able to renew its operating license.


I will now go over each of these in turn.


First Impact – Reduction/Loss of Gaming Revenue

This analysis is based upon HLT Advisory’s report, which was commissioned by the BCLC, in order to assess the potential impact of restricting the acceptable of table game cash buy-ins of more than $10,000.


You can read through the HLT Advisory report yourself on their methodology, but they looked at the top five casinos in BC that offer High-Limit tables and looked at their actual transaction history for the last 12 months. They found that $585 million had been gambled at these casinos where the buy-in was greater than $10,000. They then used this transaction data to evaluate two scenarios:

  1. “Max Scenario”: assumes that all buy-ins from cash buy-ins greater than $10,000 will be lost (i.e. customers who currently play at that level will no longer play once a Source of Funds verification is required);
  2. “Min Scenario”: assumes that all players who have cash buy-ins at $10,000 or greater will continue to visit casinos, however their daily buy-in would be capped at $9,999.


HLT estimates that between $15.2 million and $38.6 million of revenue would be lost by the casino operators.  Unfortunately, the allocation between the various casinos has been redacted.


To make matters a bit more difficult,  Parq, Grand Villa, and the Starlight casinos are currently private companies. I have attempted to allocate the $15.2 - $38.6mm between the top five casinos using government disclosures on their relative contribution to Local Government revenues.

Source: author’s estimates


On this basis, Great Canadian is at risk of losing between $7.4mm and $18.7mm of revenue. To be clear, these restrictions on Large Cash Transactions has already been implemented as of February 2018, and David Eby has testified in the House of Commons stating that there has been a dramatic decrease in suspicious transactions in BC from $20 million a month to $200,000 a month.


We can also look to historical results to reality-check our assumptions. Back in Q3 2015, the BCLC implemented a set of limited measures to restrict VIP high limit play at the River Rock Casino Resort. Specifically, the BCLC introduced Source of Funds verification requirements for “certain VIP players” in BC.  Great Canadian Gaming had the disclosure below in their 2015 Annual Report, notably they estimated that the “certain VIP players” contributed $20 million to revenues for the 12 months ended Sep 30, 2015. The new Source of Funds verification requirements implemented in Feb. 2018 affects all VIP players, so I think my estimate of $7.4mm to $18.7mm is reasonable.

Note that River Rock’s table drop took a precipitous decline in the next several quarters after these measures were implemented in 2015. River Rock’s table hold has never recovered. And this is just for measures on “certain VIP players”. The new Source of Funds requirements affects all buy-in transactions over $10,000.

Second Impact – Potential Financial Penalties

As previously noted in this write-up, the BCLC has recently been given new powers to implement progressive disciplinary actions against casino operators to ensure compliance and security.


To estimate the potential impact from progressive disciplinary actions, I have focused my analysis on the River Rock Casino Resort, where media reports suggest the bulk of the alleged money laundering was taking place. I took the RRCR’s 2017 gaming win (i.e. gaming win after paying out player prizes), and then looked at three scenarios with various reductions in the commissions paid to the operator (i.e. Great Canadian’s share of the gaming win). Note that the BCLC keeps the remainder of the gaming win.

  1. Scenario A: assumes a 5% decrease in the commission for table games;
  2. Scenario B: assumes a 5% decrease in the commission for table games and slot machines;
  3. Scenario C: assumes a 10% decrease in the commissions for table games.

Source: author’s estimates


Third Impact – Potential Loss of Operating License

The casino operating agreement on the RRCR is due to be renewed in June 2024. Given the level of alleged misconduct taking place on the property, there is a possibility that Great Canadian Gaming will have difficulty renewing this license in its current form. Instead, the BCLC may run an RFP process (similar to how they award a new casino operating license), possibly with a portion of the winning “bid” passed along to Great Canadian as compensation for prior capital expenditures.


Before dismissing this scenario as being extremely remote, note that there is some precedence for this “compensation for loss” mechanism being employed by gaming commissions. In 2013, the Ontario Lottery and Gaming Corporation gave $81 million to its operating partners for scrapping a slot machine program at horse race tracks. Notably, Great Canadian Gaming received $31.5 million in this particular case. It is also worth stating that the OLG reimbursed these amounts as they changed their vision for gaming in the province going forward (focusing more on casinos, rather than horse race tracks with slot machines), after the operators had already incurred expenditures to build the facilities. In the case of the RRCR, the scenario we are contemplating is based on inability of an operator to deliver compliance and security measures, as per its casino operating agreement.


We have a few datapoints to point to for a potential compensation amount. As a starting point, the company’s 2005 equity issuance prospectus states that the total construction cost for the RRCR is approximately $200 million.


It is also important to point out here that the BC operating environment offers casino operators a Facility Development Commission, or “FDC (formerly called “FDIF”). This basically gives the casino operator a capital expenditures reimbursement in the form of an extra 3-5% of the gross win amount to incentivize facility development. Amounts expended are sent to the BCLC for approval, and if approved they are “earned” back through this additional 3-5% of gaming win until the account is depleted again.


Great Canadian has noted in their 2005 prospectus that they expect “to be reimbursed for a substantial portion of the construction costs for its casino developments in British Columbia”.


Based on Great Canadian’s public disclosures, it appears that they have recouped approximately $169.5 million of their investment in the RRCR already. Therefore, their compensation for loss (assuming a scenario where they lose the RRCR) is equal to approx. $30.5 million.

Source: author’s estimates

Summary Impact

The table below summarizes the risks to Great Canadian. Note that in the “Loss of Operating License” scenario, the RRCR generated $82 million of EBITDA in FY2017.

Source: author’s estimates

This next table puts the values on a per share basis, and assigns probabilities for the Bull, base, and Bear cases. Note that the scenarios are independent of each other (i.e. Great Canadian faces risk from a decline in VIP gamblers AND the risk of losing their operating license), and therefore do not add to 100%.  

Source: author’s estimates


In summary, I believe GC stock should be down $3.00 - $5.40/share to reflect the probabilities of these negative events unfolding.  

In the worst case outcome, GC could lose the River Rock Casino which represents 34% of EBITDA. This would reduce the share price by over $10.00. I am not saying that this is a high likelihood outcome, but investors should be pricing this risk.


Another Financial Issue

In performing my research, I found it interesting that GC choses to include their FDC capex reimbursements as part of the company’s revenue. Most analysts appear to value GC using an EBITDA multiple of approximately 8-8.5x. Capitalizing the FDC amount inherently assumes that it is perpetual, when in reality GC’s FDC account currently stands at $278 million.

If I instead DCF the future FDC, I get to a value of $192.5 million, compared to a capitalized value of $312.8 million, a difference of approximately $2.00 / share.  

Source: author’s estimates


Interestingly, Great Canadian is currently under audit with the Canada Revenue Agency over this very matter. The CRA has said that since GC includes the FDC as revenue, they should include it in income and therefore pay taxes on it. GC is taking the opposite position to this, stating that it is a “reimbursement related to property, plant and equipment”.


There are headline risks in a potential short of Great Canadian. Potential short sellers should be aware of the following:

GC has recently been awarded a number of new casino “bundles” in the province of Ontario:

  1. Aug 2017: the OLG awarded the “GTA Gaming Bundle” to a partnership consisting of Great Canadian Gaming and Brookfield Business Partners (Ontario Gaming GTA L.P.).  The assets here comprise of Slots at Woodbine Racetrack, Slots at Ajax Downs, and Great Blue Heron Casinos. Analysts are estimating a purchase multiple of ~6.0x, with partnership EBITDA of $130 million.
  2. Dec 2017: the OLG awarded the “West GTA Gaming Bundle” to a partnership comprised of Great Canadian Gaming and Clairvest Group.  The Wes GTA Gaming Bundle consists of four properties (Casino Brantford, Mohawk Raceway, Famboro Downs, and Slots at Grand River Raceway). GC will hold a 55% stake in the partnership. Analysts estimate this will generate $45 million of EBITDA for the partnership, and that the partnership will pay 7.0x EBITDA for the assets.  
  3. April 2018: Ontario Gaming GTA L.P was given permission to relocate Casino Ajax to a major entertain complex called Durham Live. This is expected to be a $1.3 billion development.
  4. GC is the running for additional OLG bundles: Central Bundle, and Niagara Bundle. If successful, the company intends to be the sole owner and operator of the gaming operations for both bundles.


It is important to note that these bundles are “purchased”, albeit they have significant redevelopment potential as the province of Ontario looks to maximize revenues with an ever-increasing debtload. Thus, sources of upside for GC include valuation accretion if they purchase these assets below ~8.0x, as well as value creation if they can “develop” incremental EBITDA cheaper than ~8.0x. Few details are currently available, and it is expected that the company may announce further info with their Q1 results.

Redevelopment Potential at West GTA Bundle

Source: TD Securities Equity Research (Dec 19, 2017)


Redevelopment Opportunity at GTA Bundle

Source: RBC Capital Markets Equity Research (Apr 3, 2018)


It is also worth noting that the Ontario Progress Conservatives are fiercely against awarding these bundles to Great Canadian, with MPPs calling for the province to halt the deal while the situation in BC is investigated. See article here:

I think how this plays out is that if Peter German’s final report states that the RRCR and GC should be investigated for aiding in illegal money laundering, it is possible that GC will also lose their Ontario bundles.



While this is a fascinating situation and makes for very interesting news headlines, I also wanted to point out the human cost of the hundreds of millions that the River Rock has generated for the BCLC and various levels of government. There has been convicted murders taking place near the River Rock Casino. Apparently, there was loan shark activities taking place at the casino as well, which resulted in a woman loan shark who “worked” out of the River Rock Casino, being  punched in the head and dragged into a van,  and then strangled to death with a leather belt. Cell phone records indicate her murderer was in the vicinity of the River Rock Casino on the night of her death. Her body was found at a nearby public beach, in a shallow grave:

It is pretty incredible that this type of operation is allowed to run with not only government support, but with the government being the direct monetary beneficiary of crime. Hopefully Attorney General David Eby has the political wherewithal to bring about real change.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


An independent report on criminal money laundering taking place in BC casinos has been submitted to the Attorney General. The AG is currently reviewing and is due to release the report shortly, along with proposals for reform. These reforms could have negative consequences for Great Canadian including:

  1. Headline risk
  2. Loss of "VIP gambler" business as those folks are either unable (or unwilling) to provide Source of Funds verification
  3. Potential financial penalties placed upon Great Canadian Gaming
  4. Potential inability to renew their Casino Operating and Services Agreement at their flagship property, the River Rock which is the alleged center of casino money laundering in Canada
  5. Potential risk on Great Canadian's Ontario growth properties if they are subject to any regulatory or criminal investigation
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