The dire predictions that hundreds of junior miners would be delisted from the TSX Venture Exchange this year have turned out to be dead wrong, despite the continuing downturn in the sector, which began in 2011.
Of the more than 2,000 companies listed on the Venture Exchange, only 20 have been “involuntarily delisted” this year, says the exchange’s president, John McCoach.
“The number doesn’t really change a lot in good markets and bad markets,” he said, adding that the prediction of “hundreds” was based on assumptions that juniors low on capital would not access financing or reduce costs.
But penny pinching may only have delayed the inevitable for some companies, says Quinton Hennigh, president and CEO of Novo Resources (NVO-C).
“I think 2014 is going to be the critical year, personally,” says Hennigh, who is also a geologist and a contributor to Brent Cook’s popular Exploration Insights newsletter. “I talk to a lot of people and I know the state of a lot of these junior companies, and they are hurting now. There are going to be a lot of companies that don’t make their filings and we’re going to see some of them disappear.”
There’s another alternative that Dundee Corp.‘s Ned Goodman and Caldwell Financial founder Thomas Caldwell would like struggling juniors to consider: listing on the CNSX, an exchange in which both financial industry heavyweights have recently invested.
“There’s supposedly 2,000 listed juniors on the Toronto Venture Exchange,” said Goodman on a recent appearance on BNN, when he was asked about the rough shape of the junior mining sector. “If I have my way, they’re all going to fall off the map and they’re going to go to a different exchange. Will they do better on that exchange? They will have an easier time to do better.”
Recently surpassing 200 listings, the CNSX or Canadian National Stock Exchange, or which has been a recognized stock exchange since 2004, has less than a tenth of the 2,150 listings on the TSX Venture Exchange.
But both Goodman and Caldwell have been aggressively promoting the CNSX and leading a revamp of the exchange, to make it more competitive with the Venture.
Caldwell’s Urbana Corp. (URB.A-T) bought a 49% stake in the CNSX at the end of 2012, with Caldwell joining the CNSX board as chairman.
In September, Goodman’s Dundee Corp. acquired a third of the exchange under terms that were not disclosed and Goodman joined the CNSX board as deputy chairman. Urbana retains a third of the exchange, as do the CNSX’s previous shareholders.
“The reason we bought in is we like the exchange business and there’s a tremendous opportunity in Canada, even though Venture and particularly mining companies are having a very difficult time and the companies that finance them are having a difficult time,” said Caldwell, an expert in capital markets and a seasoned investor in stock exchanges.
“So it’s cost-effective and it’s time-effective. I think that’s a big hole in Canada’s capital market structure – we’re absolutely strangling new entrants.”
With junior miners – who make up the majority of the companies listed on the Venture – continuing to struggle to raise money, the CNSX could find a receptive audience.
The CNSX charges a flat initial listing fee of $12,500 but since mid-July has offered a reduced fee of $5,000 for a 60% discount to companies that switch to the CNSX from another exchange in Canada. (The offer expires Dec. 6). It charges a $500 flat monthly filing fee.
Listing on the TSX Venture can cost between $7,500 (for non-trading companies) and $40,000, with monthly fees of $750, plus filing fees. The Venture also takes 0.5% of any financings under $6 million.
Hennigh, whose company is listed on the CNSX, says he was considering switching to the Venture Exchange about a year and a half ago, but the meltdown in the mining industry made him reconsider.
“Every time I thought, ‘Let’s make the move,” I stepped back and looked at the CNSX and I said ‘Well, we’re spending a lot less money,’” Hennigh says. “Probably 40% or 50% less on a yearly basis.”
Hennigh says some of Novo’s shareholders urged him to make the move, arguing that trading volumes are lower on the exchange than on the TSX Venture board, and because of the perception that the exchange is second-best to the more established Venture Exchange.
But even through Novo, which is earning a 70% stake in two gold properties in Australia, is in good financial shape compared to the majority of juniors (the company had $8.3 million in its treasury in September and has attracted Newmont Mining [TSX: NMC; NYSE: NEM] as a major shareholder), he’s not sure there’s really an advantage to switching to the Venture exchange.
“You’re dealing with the same fundamental regulators, the cost is lot cheaper (on the CNSX) and we’ve demonstrated that the volumes are similar,” he says, adding that Novo’s trading volumes are higher than a lot of TSX Venture-listed juniors. “So I’m not itching to move at this point.”
CNSX vs. TSXV
Part of the reason the CNSX is less expensive is because it was developed in and for the Internet age of online trading and easy access to company information. The exchange tries to keep regulatory layers to a minimum says exchange president Richard Carleton.
“The philosophy was we were really not in a position to be second-guessing or reviewing management’s business judgment,” he says. “We believe passionately that that’s something the market should be doing, not exchange personnel.”
On a practical basis, that means the CNSX does not employ geologists, accountants or other professionals to pore over filings and OK them, as the Venture does.
Hennigh describes the filings as “less of a headache,” but not less rigorous than TSX Venture filings.
“(The CNSX) is a far more efficient and cost-effective, and customer friendly way of raising money in the public markets,” Caldwell says. “It’s a lot cheaper to get on the CNSX and it’s a lot cheaper to stay on it.”
For the record, Caldwell says it’s as little as a third of the cost of listing and staying on the TSXV.
“And it’s not only cost structure, it’s attitudinal,” he adds. “We see these people as our customers, we don’t see it as doing them a favour.”
While Caldwell, a former governor of the Toronto Stock Exchange, says he’s not an enemy of the organization, many juniors get that feeling from the Venture and have come to the CNSX because of frustration with the Venture exchange.
“We don’t have to do anything different to be competitive – we are competitive, and not only at the dollar cost level, but the time and aggravation level, which also represents a cost.”
The CNSX’s attempt to cut red tape and eliminate regulatory duplication is something that strikes a chord with juniors who feel squeezed by an ongoing lack of capital and what they see as expensive over-regulation.
Don Mosher is a cofounder of the Venture Capital Markets Association, which has been organizing the junior mining industry and advocating for lower costs, less onerous regulation for juniors, and for investors to have better access to juniors. Mosher says the TSX Venture Exchange is not just more expensive, but filing approvals also take longer because of the extra layer of regulation.
“The TSXV claims they are doing the clients a favour by looking out for their welfare,” he wrote in a response to emailed questions. “The other argument would be an environment that until recently was almost a monopoly that has led to the abuse of their clients simply to generate revenue.”
But while the CNSX treats issuers like “an adult with a board that is liable for decisions,” as Mosher puts it, it does require more disclosure from companies — the equivalent of an informal management discussion and analysis every month.
Some issuers grumble about the monthly requirement, others use it as an investor communications tool, says Carleton, who also notes that the policy results in reduced costs and other benefits for issuers.
“From a business risk perspective, we focus very much on company disclosure and allowing the market to price the security accordingly,” Carleton says. “What that translates into is the listings process can proceed much faster than it does on other markets. It also means that any kind of subsequent financing or transaction isn’t going to take the amount of time and it doesn’t have the level of uncertainty that it might again on another exchange group in Canada.”
Lower fees make listing viable for companies that aren’t able to raise gobs of money right off the bat. The only mining initial public offering to take place in Canada in the first quarter of the year was a “micro-IPO” of $250,000 by Loma Vista Capital (CNX: LOV), which has the Dorothy Lake project in Ontario, on the CNSX. Loma Vista’s fees to go public were only $60,000.
Room for improvement
Aside from its relative lack of profile, the CNSX has other shortcomings its revamping effort — which will incluce a new name and relaunch of its web facilities — will address.
Some investment funds have internal rules that prevent them from trading CNSX-listed companies, says Hennigh, whether that’s because of liquidity or other concerns.
But Caldwell says if funds can’t trade CNSX-listed stocks, it’s because they don’t deal in small-cap stocks, not because of the exchange itself.
“If that is a policy, then it’s part of a bigger policy not to trade more speculative securities, I don’t think it’s about the exchange per se,” Caldwell says, adding that the changes under way at the CNSX will bring more funds in.
“Before the end of the year, we’ll start to see a stream of information coming out and the funds that don’t trade on CNSX, they will eventually if there’s an opportunity.”
Caldwell does acknowledge that the exchange has to improve liquidity. With about a tenth of the listings, daily trading volumes were around 4 million on the CNSX during the first quarter of 2013, compared to around 170 million on the Toronto Venture Exchange.
While Carleton argues that liquidity is more a function of how well a company is communicating its story to investors, rather than the exchange on which they’re listed (he says there’s no material difference in trading volume when companies switch over to the CNSX from the Venture, and vice versa), several planned improvements to the CNSX are expected to boost liquidity.
In the near-term, the CNSX is merging the two trading platforms it currently uses: PureTrading, which trades TSX and TSX Venture-listed stocks, and its own CNSX exchange.
“We will be in the next few weeks actually shutting down one of those systems and trading all of the stocks on a single system,” Carleton says. “That will reduce the costs for dealers and vendors to connect to us, it would also increase the visibility of CNSX stocks.”
Carleton says that adding CNSX data to the PureTrading platform, which has a broad following, will substantially increase the number of people that are able to access the real-time data.
It is also initiating a market-making program for its issuers – something that TSX-listed companies have access to but TSX Venture Exchange companies lack.
“We want to formalize a market-making program so that each of our issuers has a formalized relationship with a market maker to assure a continuous two-sided market in reasonable size with a reasonable spread,” Carelton says. “We believe that’s an important measure to help with liquidity.”
Lastly, Caldwell says the CNSX is fighting to get discount trading firms to allow their clients directly access the CNSX.
“We’ve had some significant pushback from the banks who won’t allow their discount clients to trade directly online on the CNSX,” Caldwell says.
Currently, these clients have to call in and pay the higher cost of a person to person transaction.
“The CNSX is a legitimate, registered exchange in Canada. Period,” Caldwell says. “This is purely anti-competitive because the banks own the Toronto Stock Exchange.”
The the exchange is taking the issue to the Ontario Securities Commission and then to court, if necessary, Caldwell says.
So far, only a few companies have made the switch to the CNSX from the TSXV. Carleton says four have actually listed, and that the exchange has other applications in hand.
But the TSX Venture Exchange isn’t responding directly to the CNSX’s marketing efforts, which emphasize its lower cost and simpler regulations. TSX Venture Exchange president John McCoach says the organization is continuing to provide the same value it always has to issuers, and finding ways to enhance that.
“There are a lot of junior companies in the mineral exploration space that are having a very challenging time right now. I don’t want to diminish that at all, but they recognize the value of being on an exchange that has an international reputation of being credible,” he says.
When asked if the exchange was concerned about competition from the CNSX, McCoach said: “I think it would be a serious mistake for our business — but more importantly for the capital markets in Canada, for the mining industry in Canada — to get in a race to the bottom. Because if you start losing investor confidence, it doesn’t matter how inexpensive it is to list a company, you’re not going to get liquidity and you’re not going to raise capital.”
However, McCoach points to several TSX Venture past and future initiatives that are aimed at helping juniors. These include the exchange making it easier for companies to do a share consolidation, lowering minimum pricing requirements in some financings, and automating filing processes – a new initiative that should save issuers both money and time when it is launched in mid-2014.
The exchange has also been advocating to allow existing shareholders who are not accredited investors to participate in prospectus-exempt financings without the company having to provide additional disclosure. The Canadian Securities Administrators (CSA) is currently seeking comments on a proposal to do just that.
Regardless of which exchange proves more attractive to small-cap issuers, both the Venture and the CNSX are likely to have a tough 2014 – as long as the juniors continue to suffer.
The downturn has companies taking a hard look at the fundamentals of being listed, Hennigh says.
“They’re looking at the benefits and the costs – costs are a huge issue,” Hennigh says. “But I think if we see another boom, you will see a lot of companies that either form or regroup on the CNSX and you might see it be a more formidable exchange.”