Toronto Venture Exchange nears an ‘Event Horizon’
As the risk of perturbing the astrophysicists amongst InvestorIntel’s followers, it has struck me in recent times that the benighted Toronto Venture Exchange is nearing the event horizon of a black hole of its own creation, with potential effects for mining market participants that border on the unearthly.
The definition of the “event horizon” in astrophysics is useful as a starting point: “In general relativity, an event horizon is a boundary in space-time beyond which events cannot affect an outside observer. In layman’s terms, it is defined as “the point of no return”, i.e., the point at which the gravitational pull becomes so great as to make escape impossible. An event horizon is most commonly associated with black holes. Light emitted from beyond the event horizon can never reach the outside observer. Likewise, any object approaching the horizon from the observer’s side appears to slow down and never quite pass through the horizon”.
The implosion of a once-stellar entity sounds like a great euphemism for the Canadian mining equities market since 2008.
Ringing the Alarm Bells
Several months back I received an email from Tony Simon of Seguro Consulting which included an interesting study of the dilemmas facing the TSXV and its denizens. The spur for his study was that close to 600 companies were non-compliant with Continuous Listing Requirements of the TSXV (Policy 2.5, Heading 2.1). It is not a pretty picture with Mr. Simon claiming that there are:
- 600 non-compliant companies
- over $2 billion in negative working capital
- over $5 billion in questionable exploration assets
This pretty much tallies with the educated guess of many market observers and investors. Maybe our calculator is broken but that signifies negative working capital of $3.33mn on average for each of those 600 companies. This I suspect is an exaggeration. It is more likely that the vast bulk of these companies have less than $500,000 in negative working capital and that might leave a few score larger entities with above the average but frankly it is harder for a larger entity to fly on an empty tank than a smaller one.
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To further use an aeronautical analogy the vast bulk of the stricken companies are gliders circling the airfield perpetually waiting for a landing slot while the bigger players are B52s that tend to drop like a stone when the fuel tank is empty. As for questionable exploration assets the truism might be that if the company is bust then basically its assets are probably not realizable either. Most mining companies have several assets all of which would have a stated value on the balance sheet even if they have been found to not have any economic value and are merely window dressing.
That means that companies even in the rudest of health may have overstated NAVs. It is not exactly surprising that the biggest write-offs in recent times have been of producing assets on the balance sheets of cashflowing majors rather than patches of moose pasture embedded in the darkest recesses of Tin Pot Mines. As juniors tend to expire with little more than a puff of smoke to show where they have been and it is rare that extended asset liquidation processes are undertaken, the assets tend to be dropped when renewals come up and there is no recoverable value to them. The perennially struggling junior may not have invested too much in the properties it holds but the average of $8.33mn per miner on the distressed list seems a tad high.
The Incentive to maintain a Holding Pattern
At the control tower of TMX it reputation as an international airport is sustained by the number of successful landings. A history of too many crashes scares away the travelers…
The airport though is happy to see empty planes landing and taking off if it can collect a fee irrespective of whether the airlines are making a buck. With annual fees of between $5,000 and $20,000 per annum collectable (in theory) from the 600 companies in the danger zone the amount of lost revenue is at least $3mn but probably much higher. Beyond that there is the loss of financing fees, which is the real shakedown as these companies pay a disproportionate amount on whatever “widow’s mite” they may be able to scavenge up. Sometimes on a $100K financing as much as 5% can go to the TSXV’s kitty.
Then consideration must be given to the other parties with their hands out, including auditors, lawyers and the registry companies like Compushare. The latter group gets to charge quite amazing fees on transfers and then annually charge a “tax” on downloading the shareholder base for circularization for AGMs. Each of the 600 “zombie” companies has a plethora of other officially sanctioned “mouths to feed”. Nowhere in this cosmos of the TSXV and its satellites does the hard-pressed shareholder get any consideration. He or she (or it) is the one that ultimately pays the price when the light is snuffed out on their investment. One wonders if companies are keep in the land of the living to give this group some hope or merely to fleece them yet one last time as reporting and annual meeting (and paying) season comes along again.
So any Trekkies amongst our readership are going to recognize the allusion when I say that Toronto Venture Exchange is about to go “Where no man has gone before” and frankly where no man would want to go… into a Black Hole.
While it seems like junior mining companies are the ones being drawn into the orbit of the market’s black hole only to disappear into anti-matter on the other side, the TSXV itself may be getting sucked into a black hole of its own creation (stop sniggering in the back row….)..
This creates a vivid image of the Starship Venture loaded with champagne-swilling bureaucrats, lawyers, auditors and registrars paused on their own event horizon — wondering why things have gone so quiet and why the clocks have stop ticking just before they too are sucked to oblivion…. and enter an alternative universe where they have to serve the companies and the investors rather than the other way around.
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>