Restructuring Time for Venture Markets?
In Shakespeare’s Julius Caesar, Mark Antony offers the immortal lines “There is a tide in the affairs of men, which taken at the flood, leaves on to fortune, omitted, all the voyage of their lives is spent in shallows and in miseries”.
I could not help thinking of these lines last week as I sat through a presentation by representative of the Canadian Securities Exchange, the challenger market in the Canadian capital markets. As we all know the TMX Group has come in for scathing criticism over the last four years as it has essentially sat out the mining sector crisis allowing the Toronto Venture Exchange to wallow in misery with something of a “deer in the headlights” attitude towards the challenges faced. Accomodations offered to the hard-pressed corporates listed on the exchange were few and far between.
Part of the problem goes back to the conflicted nature of the TMX Group. Its first internal conflict is between the fact that it was firstly a mutual owned by brokers, then a public company with a principal profit-motive as its driver and now it’s owned by a more select group of banks that don’t necessarily have mining as a first consideration, or indeed any consideration. The second internal conflict is that the TMX Group is like a retail chain that has an upmarket department store and a down market outlet. One might compare it to the famed Boston department store, Filene’s, where its off-brand “Basement” became a by-word for bargain hunters. Ultimately the two businesses proved to be incompatible within the same corporate structure. This we would sustain is the case at TMX Group. What should be a situation of competitive tension with the TSX trying to poach larger companies from the TSXV has become a sort of Mexican stand-off with none of the aggressive poaching of larger caps to the senior market that existed in the past. Upgrades happen but certainly it would appear that it’s no longer a corporate priority.
Essentially, a sensation of stasis and lack of competitive dynamism has settled over the organization. It has the feel of a government department.
Meanwhile, in a not so stealthy way the CSE is eating the TMX’s lunch. One almost gets the sensation that the TMX thinks that if CSE takes part of the action then there will be less pressure on it to shape up.
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In the chart below, sourced from the presentation that the CEO of the CSE gave to the Investorintel Cleantech and Technology Metals 2016 conference, one can see that listings at the CSE have been on somewhat of a tear. Just this week I received the monthly stats email of the TMX Group that cited 30 new listings on the TSXV up to the end of April. The latest stats showed 1,734 listed companies at the end of April, of these 1,030 were classified as being Mining Sector.
What was not clear was how many companies had been delisted from the TSXV, because the attrition rate must be accelerating with the lack of funds to complete 2015 financials sending more of the mining juniors into the penalty box (and oblivion). We suspect the “net” at the TSXV would have been negative in 2016.
While a market recovery in miners made lead to some more listings at the TSXV, the repurposing of old shells is more likely. We can already see this in the Lithium space with companies being repurposed for the flavour of the day. There are also many oil & gas stories on the TSXV that could become mining stories if push came to shove.
In a response to a question I proffered to the CEO of the CSE at the conference, we received a response that gave the distinct impression that overtures had been made by the CSE to the TMX Group and that these had been rebuffed. Maybe they were just playing hard to get.
How It Might Play Out
A sale by the TMX Group of the TSXV to the CSE could be a transformative event for Canadian capital markets. It would involve a certain rebalancing between the two major financial centres for mining. It would probably result in the TSX making a grab for some of the larger listed TSXV names, and that would not necessarily be a bad thing. Some of them should have flown from that nest a while back but over-stayed their welcome in the “looser” regime that the TSXV operates.
The TMX Group might even consider “selling” only the listed miner part of the TSXV and keeping the other categories/industries. Though that would not be in the interests of the CSE promoting itself as a broader market.
The current time would be a good moment for a transformative transaction. After four years of the mining tide being out, the flood tide might be coming in again. It should lift all boats (though not those that are irrevocably holed). It cannot be business as usual again though. The old model was broken even before it started to go sour in terms of volumes and financings. It had within it the seeds of its own destruction. The TMX Group bought a blue-chip market’s mentality to the operations of the old Vancouver Stock Exchange and the result was, for better or worse, the loss of the “edge” that the old VSE had in generating exciting stories that actually got somewhere.
The CSE has used the “downtime” of recent years to hone its own product line and administration. Two years ago we would have said it would have been a stretch for it to absorb the Toronto Venture but now we have no doubts it could handle it in a relatively seamless transaction.
The TSXV is not only mining though and we suspect that the TMX Group has wanted to hang onto the market for its tech aspects and other industrials rather than its mining component. But then again neither is the CSE.
Maybe the TMX Group will end up as a minority shareholder of the CSE and a great reorganization of Canadian capital markets will be achieved. Now is the time to make this happen. We find it difficult to imagine that there would be too many that would oppose such a realignment and the attendant reinvigoration of the market for junior miners.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>