The wild west of Canadian stock exchanges had its problems, but it was a place where mining deals happened, which is more than can be said for the current TSX Venture Exchange.
The sorry state of the TSX Venture Exchange, on which hundreds of junior mining stocks are traded every day, has become a pervasive, albeit depressing, subject of watercooler conversations in the offices of Canadian mining companies, especially after the gold price took a tumble in the middle of April. Gold, as most observers who study the Venture know, is the most followed commodity on the exchange as dozens of tiny juniors base their ability to raise cash, along with their trading volumes and their stock prices, on the price of the yellow metal.
Once the beating heart of the junior mining industry, the Venture is going through a rough patch. In the last 12 months, the TSX Venture Composite Index has fallen roughly 30 percent and is now under 1,000 points, bumping along at levels not seen since the recession-ridden doldrums of 2009. One of the chief problems is raising cash. Volatile stock markets have scared retail investors out of the sector, and venture capital, the lifeblood of exploration and other small start ups, has become scarce. Newsletter writer John Kaiser created a stir back in December when he reported that of the 1,803 junior mining companies he was tracking, 632 had less than $200,000 of working capital on hand. If that doesn’t change, hundreds could be culled from the TSXV within a couple of years, Kaiser predicted.
The Venture, of course, is the modern incarnation of the Vancouver Stock Exchange (VSE), which back in its heyday, during the 1980s, was the stronghold of dubious penny stocks, many of them mining related. Started in 1906, the VSE for decades was the exchange to float a small mining company. Fortunes were won and lost, pump and dump schemes were commonplace, but there’s no denying that the Venture was a place to make things happen. A Wikipedia reference notes that in 1991, the VSE had 2,300 stocks listed and traded some $4 billion worth of shares. Love it or loathe it, by the mid-90s, the writing was on the wall for the VSE, and in 1999 it was merged into the Canadian Venture Exchange (CDNX) along with the Alberta Stock Exchange and the Bourse de Montreal. In 2001, TSX Group, now known as TMX Group, purchased the CDNX and renamed it the TSX Venture Exchange. The new entity would co-exist with the Toronto Stock Exchange, the main board that was home to larger, established companies, of which mid-to large-cap mining and energy stocks retained significant weighting.
INN Senior Editor Andrew Topf spoke recently with Christopher Ecclestone, a principal and mining strategist at Hallgarten & Company. Ecclestone believes it’s time to consider recreating the VSE. In the interview below, Ecclestone, a respected analyst whose views are published through Hallgarten & Company’s newsletter, also touches on the lack of institutional investors in the Canadian mining industry, the connection between Vancouver real estate prices and the TSXV and why mining companies should be looking to London, not Bay Street, for their next raising.
AT:It seems that TMX Group is just waking up to the fact that the TSX Venture is in serious trouble. It’s dropped to under 1,000 points, which is its lowest level since 2009. The TMX Group is hosting roundtable discussions on what can be done. What do you think is the biggest problem with the Venture right now?
Christopher Ecclestone: It’s been directed out of Toronto, to suit the interests of the exchange and to become enormously profitable so that it would be taken over, and low and behold that’s what happened. It got taken over by the big banks who never cared about it even in the days of the VSE…
AT: It got taken over by the Maple Group you mean?
CE: Yes but they represent the biggest banks. The banks never cared about the VSE in the old days, they only cared about trading shares of RIM and their own shares and the biggest mining majors. They just saw these juniors as the great unwashed. I don’t think there’s any other solution but to separate the two things (the VSE from the TSXV). I don’t understand what the logic was in putting them together in the first place. The idea presumably was to create two tiers and that people would graduate from one tier to the other but they could always do that. There was no reason for the TSX to own the Vancouver Stock Exchange so it would be better if the thing was separated and returned to its feral origins as a wild west market where stuff happens. The problem is not just with a disinterested owner, the problem is also with the regulators saying we’re going to protect investors, etc.
AT: Right, you have the accredited investor restriction in private placements. But how do you recast the VSE as more than a mining casino?
CE: I agree with investor protection. Sure, if people have $100,000 in the bank and they invest $80,000 in an issue and lose the $80,000, it’s not good. But if you were to say the maximum you can take in an issue from a non-accredited investor is $5,000 or $10,000. That’s how you deal with that, to ensure they’re not betting the farm. The other issue is they should stop for awhile creating CPCs. (Capital Pool Company). CPCs have resulted in too many companies out there and what’s more it devalues the value of already listed companies that have fallen to shell status. In another market the shell companies get used for RTO (reverse take overs), they get recycled, they have a life after death. In Vancouver (where an estimated 1,200 mining companies are domiciled) you’ve got the shells and you’ve got the CPCs coming along and it tends to be the CPCs win out over the shells. That’s one way of making sure investors don’t lose all their money that at least a stock gets recycled at some point if it’s fallen on hard times. That hasn’t happened. The TSX has a big focus on new listings, and says “we’ve had 140 new listings, we’re the most successful market in the world.” Yeah but you also had 200 once viable companies that have become dormant shells. That doesn’t look so good. My feeling is you should have a moratorium on CPCs for two years. If John Kaiser’s correct there’s going to be 600 or so companies turned into shells within the next year. There’s going to be more shells lying around on the TSX than on the beach.
AT: How would we go about reviving the VSE?
CE: This needs to be an initiative of the companies not of brokers. Traditionally brokers have owned exchanges but then they sold out. Who says exchanges have to be started by brokers? Now in the age of dark pools and technology, companies that are fed up with the TSXV should get together and start their own thing. Companies that jump over from one to another could own the exchange.
AT: Have you brought your idea forward to anybody?
CE: The idea is floating around already in Vancouver and I think it’s long overdue. There needs to be a mechanism that is more responsive to the needs of the companies rather than the needs of brokers. I don’t think even brokers in the TSXV sphere are making any money either. The volumes are way down and the deals are virtually non existent. They’re dying just as much as the companies are.
AT:Would it be a split-off from the Toronto Venture or a completely separate exchange?
CE: There are two things that Toronto can do. It can go with the reality and recreate the TSXV, or it could have the decision taken away from it by having disgruntled companies ganging up with someone who will provide them with the trading technology. And then make blandishments to the existing companies and say your listing fees are going to be lower, for example. The fees on a financing right now are 3 percent to an exchange, even if you’re doing a non brokered financing. That’s a lot of money. On a half a million dollar raise you’re paying $15,000. The lifeblood of TSXV companies is raising money.
AT:So a Vancouver Exchange could compete with the TSXV by charging lower fees?
CE: Yes. Things have moved on from the days when you had to have a big building, a trading floor, a whole lot of flunkies running around on the trading floor. Now it’s all electronic an exchange can be virtual.
AT:When you look at major institutions investing in mining in Canada, you make the point there’s really only a handful of companies making those investments. What happened to cause so much consolidation?
CE: At the height of the Canadian financial system in Toronto there were big banks, big trust companies, big insurance companies that invested their money in stocks. They owned shares of Hudbay, Inco, Noranda, Falconbridge etc. and the riffraff of a few hundred companies were left to retail investors. Now the riffraff is something like 2,000 companies. Something has not happened. You don’t hear about mutual funds being big in Canada as they are in the US and the UK and you’ve ended up with a strange situation. There’s this personalized thing in the market. You’ve got these three wise monkeys that represent an institutional market. Why isn’t there a Putnam, or a Fidelity or an MNG, one of these faceless institutions buying and selling mining shares? That’s the real sign of an institution where it’s buying and you don’t know who’s buying. Institutions are bland and faceless but they also tend to be big. Canada’s somehow evolved in the mining space where the institutions are doing something else- industrials or the very biggest miners, and the rest are left to retail or these three wise monkeys.
AT:So with retail investors investors basically out of the Venture right now, what can be done to attract more institutional investors?
CE: I think they’re in the Venture, they’re trapped in there like in a burning disco. Someone shouts fire they find all the doors are bolted and they’re going down with the ship. The retail investors are in the TSX, they can’t get out. They’re not making any money anymore and they’re not inclined to put any more money in. I believe that there’s a strong correlation in the TSXV between the rise of property prices in Vancouver over the past 15 years and the rise of the TSXV.
AT:I find that very interesting. What’s the connection?
CE: It’s feel-good factor. Your house price goes up you go and sell your car and buy a new car. Your house is worth 20 percent more than last year and the savings are in the houses. It means that more of your disposal income instead of going into a saving account or a govt bond goes into the equity market. If you were investing in the TSXV for your retirement it would be looking like a really bad investment at the moment. And so investors have to think once the perpetual motion machine (property) stops going up, it stops making money automatically.
AT: Is there that much of a concentration of TSXV investors in Vancouver?
CE: I think so. If you look at somewhere like Calgary, the mood is set by oil and gas prices. If you gave them a choice of two horses to bet on, an oil and gas stock or a gold miner, they’d say give me the oil and gas stock any day. There are investors on the East Coast but there’s a pool of capital there on the West Coast that gets recycled in and out of these stocks.
AT:You’ve said the London capital market is the 800-pound gorilla with respect to mining finance. What do you mean by that?
CE: It’s where the institution are and institutions that are prepared to look at all the markets. The Canadian players people like Sprott etc. they look virtually solely at Canadian stories. The London people sit there and look at everybody’s stories, that’s the difference. You’ve got bigger institutions. Hedge funds in New York are bigger but they’re not investing in mining because they don’t have the skillset. The people in New York are more prone to investing in a deal and flipping the deal rather than hanging around in it.
AT:You’re suggesting then that mining companies and juniors go to London to try to raise financing?
CE: I think so. I think that they would be better to look outside the fishbowl. Duluth Metals has got 50 percent of its shareholders here in London. Why should that be? Well it’s a nickel story. You start talking about nickel in Toronto and they all fall down on their desks asleep. That wasn’t the case when Inco was there people would get up every morning and look at the nickel price. Now there’s no Inco so what interest do they have in nickel? In London the CEO of Royal Nickel is living in London now even though the project’s in Canada.
AT:For those companies that do make the trek to London to try to secure financing, what’s the most important piece of advice you’d give them?
CE: Come early. Come now if you want to do a financing six months from now. Do not come next week because you’ve run out of money. Merely because you came and you did a road show without looking for money implies that at some point in future you’ll come back. The key things is to look like you’re a stayer, and that you’re not just there for a quick-buck financing, never to be seen again.
AT: Christopher, thanks for your insights. I’m sure our investor audience will find them very helpful.
CE: Thank you as well.
Securities Disclosure: I, Andrew Topf, hold no investment interest in any of the companies mentioned.
Interviews conducted by the Investing News Network are edited for clarity. The opinions expressed in these interviews do not reflect the opinions of INN and do not constitute investment advice. All readers are encouraged to perform their own due diligence.