EDITOR: | May 19th, 2015 | 11 Comments

Toronto Venture Exchange nears an ‘Event Horizon’

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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. Event-Horizon

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.

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.

Conclusion

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

Editor:

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>


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Comments

  • Peter Clausi

    Hi, Chris. It`s hard to argue with you. The demutualizing of the Toronto Stock Exchange, leading to the elimination of the smaller exchanges across Canada, may have been one of the worst financial disasters in Canada`s history. I can see why it was necessary and it probably was inevitable. But, the inability of juniors to raise capital is indirectly linked to that loss of competition.

    May 19, 2015 - 9:40 AM

  • Jack Lifton

    I think what has disappeared not only from the TSX but from all of the world’s share trading exchanges is the original idea for them. It was to raise capital for ventures that might take a long time to produce a return on that capital but that in the long term would be profitable and beneficial to the original risk-taking investors. Such investors were “in” for the long term.
    Today, without exception, the share exchanges are managed by and for “financial engineers” whose purpose is solely short-term gains at no risk. Thus the financial “service” leeches, lawyers, brokers, fund managers, and the like who siphon money “off the top” enable the traders to reap enormous gains by robbing the low information investors, the LIIs, with “valuations” that pour billions into the financial services industries as their “take” from originating and “servicing” shares in IPOs that promise to be nothing more than fiat money the valuation of which is done entirely by the “insiders.”
    It is “actually producing something” that has long since moved past the event horizon.
    Buried in the junior mining bullshit was the fact that the “standard” plan of the business-lite geologist managers of the “juniors” was to develop a project only so long as it wasn’t yet sold to a “major.” As the majority of the rare earths, lithium, and graphite projects have long since proven by the lack of interest from the “majors” they were almost without exception just exploration projects slavishly following the outline set forth by the rules of National Instrument 43-101 with no firm target for production or profitability.
    At this point in time I expect that those projects deemed most likely to be economical in the next 25 years will be acquired by the “majors” or their surrogates and, as the Chinese have begun doing, be put into reserve for when they are needed.
    Just a very few rare earth, graphite, lithium, and minor technology metals juniors will go forward now. All will have it in common that they are going to be the lowest cost producers of critical materials or critical forms of materials with end-use customers either directly or contingently involved.
    The rest have already passed over the event horizon of history.

    May 19, 2015 - 12:56 PM

  • Hugh Sid Nielsen

    Being a small mine contractor I was stung by a group of companies being for lack of a better word Managed ,from Vancouver. They Hired me to do the work and pay few First Nations for some work and then didn’t pay my company the time or expenses that I built up,
    It all hinged on raising money from a new junior company that never got listed.
    Quite a mess and some very unscrupulous, greedy, and frankly dishonest promoters in Vancouver.
    Hind site being 20 20 if I had known what Mr Tony Simon has so acrurately described. I would have been well for warned. Thank you Mr Simon for bring this to light.

    May 19, 2015 - 3:24 PM

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    May 20, 2015 - 12:28 AM

  • Gord Glenn

    Well written commentary on state of junior markets Christopher. That said I’m not sure the Trekies reference is entirely accurate as I recall it as….BOLDLY go where no man has gone before… which has a much more positive feel versus the decline (demise?) of many TSXV co’s which you point to. No worries – let’s agree to disagree. Keep up the good work.

    May 20, 2015 - 3:48 AM

  • Dan GORSKI

    Great and timely. The idiotic 43-101 requirements insure that none of the many economically viable vein type deposits will ever be brought to production.

    May 20, 2015 - 8:39 AM

  • Michael Schuss

    I am 58 and went to my first mining property with my father when I was 5. I began prospecting in 1979 and worked for a brokerage firm in 1980-83 during the Hemlo rush on the old VSE and started my first junior mining deal in 1983 and been in the listed exploration company biz since since then.
    My first comments is obviously things have gotten pretty onerous on the regulatory side but so has everything else so get used to it. The TSXV is dying because the banks want it to die as well as any independent brokerage firms that are left. There is an alternative and thats the CSE which will eventually be where all junior exploration companies will be listed. Yes the markets bad but I have gone thru the 1984 hangover after Hemlo, the first crash in 1987 which didn`t recover till the Diamet discovery in 1991 almost 5 years. Bre-X hit in 1997 and we didn`t recover til 1993 almost 6 years. The rest I think everyone knows.
    As for graphite, specialty metals and REEs the reason there has been no takeovers by end users is 99% are refractory or too far from infrastructure. The Japanese in the 1980-90s have already gone through the list of known deposits that have been dusted off by promoters and know the metallurgy is refractory. As for 43-101 I have gone through most of the “name” deposits reports bibliography’s and all don`t list work done by Sumitomo. I assume its because the author didn`t have access to it. Investors would if they knew that the Japanese and Molycorp had evaluated their project when it was open for staking and no one in the mining industry had any clue what REEs were and walked. A good friend of mine Tony Mariano always says to me “Mike I know these guys have to promote to raise money but they do they have to lie?” I had a call on a graphite property we staked by a CEO of a large private 120 year old graphite company and he said he had never heard of the property. I`m sure the company who has operations all over the world has a pretty good exploration data base. Sounds like hes looked at everything else again when no one in the industry even knew what graphite is and didn`t bite. In 2000 we had a group of prospectors, geologists and engineers doing security in the movie industry in Vancouver. It was long 12 hour night shifts and lots of time to discuss we would never work again in exploration and movie industry paid well and most of the time we were on some set in the mountains of the North Shore so still get in some “bush” time. Beware of “its different this time” My take is there will be much less juniors with much better projects especially on the exploration front. I`m staking projects I have waited 35 years to come open. Yes the market doesn`t care right now but I predict when it does there will be more money than ever and will be chasing a much smaller group of companies. Valuations are so low when the market moves and blows through the computer shorts the gains will bring back the greed. In 2011 I was talking to “investors” who knew nothing about exploration stocks other than they always go up and bet heavy and win big. Love to say when but it will happen
    Mike Schuss
    Canadian International Minerals Inc

    May 20, 2015 - 10:06 AM

  • Paul

    Sadly, this is the best article I have seen on the TSXV in a long time. Kudos to Chrisopher (and Jack L.) for saying things that need to be said…and heard. All in all, I believe that clearing out the detritus will likely be a good thing. The current situation certainly makes going private an attractive option for those with the means to do so. The TSX and the regulatory authorities have been doing (or arguably, overdoing) their parts to make a bad situation even worse. The notion of fewer employed bureaucrats is not one that causes me any alarm.

    May 20, 2015 - 1:21 PM

  • Michael Schuss

    If you read TMXs latest Q1 report they make a big deal that headcount for employees is down but wages and benefits are up. The usual get rid of the underlings who actually push the paper through and reward management that came up with the idea

    May 20, 2015 - 1:34 PM

  • charles.1

    The NI43-101 system is a significant value-add to the TSX and provides the appropriate protection to investors. It will be part of the reason that the market will survive. Vein deposits don’t fit well in public companies as resources/reserves cant be adequately established at a reasonable cost. They work best in the hands of private equity and family companies where the risk can be better managed. The abuse of the NI43-101 system by companies not reporting in Canada of greater concern.

    The industry is its own worst enemy and needs a dose of professionalism. The constant flurry of vacuous press releases on break-throughs, milestones and two rocks in a forest from Vancouver companies wishing to mine the market has caused understandable investor fatigue. The industry is only as good as its weakest links, and until the TSX gets tough and cuts 100’s of companies, those links will remain very weak.

    May 21, 2015 - 8:48 AM

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