Bracing for the extinction of 500 juniors or an entire institution? – by John Kaiser (Kaiser Research Online – December 2, 2012)

During my travels the past couple months I have been repeatedly surprised by declarations from others that about 500 Canadian listed resource juniors will disappear within the next year unless there is a remarkable turnaround for the resource sector in 2013. These numbers have their origin in my May 23, 2012 Kaiser Blog post Staving off Mass Extinction with the Big Anomaly which provided the grim statistics on which this now widely circulated warning is based. Since then the situation has worsened, as is evident in the figures as of November 30, 2012 which active KRO members can see updated on a regular basis in KRO Key Charts.

Kaiser Research Online tracks all companies listed on the TSX and TSXV who appear to be involved with resource sector exploration, development or mining, as well as a handful of former resource juniors which have shifted their focus to energy or other arenas. We do not track the capital pools until they have made a qualifying transaction involving the resource sector, but we do track resource juniors that have abandoned their projects, reorganized, and are shells looking for a new focus.

Currently we have 1,803 companies that are trading. The Working Capital Distribution chart above shows the percentage trading in each of the 12 price categories, the median working capital for each price range, and the average working capital. It also shows separately compiled figures whose particulars KRO members can peruse using our KRO Search Engine or by clicking the links in the table below.

The latest batch of figures do not yet include the September 30 quarterlies whose filing deadline was November 29 and which KRO will have updated by the end of December. Given that there are more than 900 companies for whom the latest balance sheet is dated June 30, I can guarantee you that the numbers will be worse, especially in light of the weak financing conditions in 2012.

As of November 30, 2012 TSXV listings have raised only $3.6 billion through private placements in 2012, the lowest since 2004 when $3.7 billion was raised. November 2012 was particularly dismal in that only $179 million was raised, the lowest since May 2009. While normally 75% of the funding is for resource sector listings, during 2012 a higher proportion went to energy and other sector listings. Should we enter a dry period such as prevailed from 1998-2002, the TSXV as a junior resource sector financing institution will undergo terminal collapse.

In that event much of the blame for handing the future of high risk high reward resource exploration and development to the Australian Stock Exchange can be laid at the feet of the TMX Group which in pursuit of short-sighted greed and possibly bankster inspired stupidity has strangled the resource sector as a risk capital allocation arena where investors speculate on fundamental outcomes rather than manufactured volatility.

The decision to allow short-selling on a down-tick and the hookup of algorithmic trading systems to the electronic order book in a regulatory environment where juniors are severely handicapped in helping investors visualize the value of potential outcomes as a project travels from grassroots concept to a production decision, has created a one-sided playing field where trading predators systematically harvest capital in-flows from investors placing bets on fundamental outcomes.

Thanks to high speed connections that feed market depth data to powerful computers on a real time basis a new reality has been created whereby the TSX/TSXV market for resource listings can be likened to a vast information web on which lurk spiders monitoring for the slightest quiver that signals anomalous inflow of capital not emanating from fellow spiders.

Like spiders sensing an ensnarled fly these traders race toward that stock’s electronic order book and start feeding sell orders to match the incoming buy orders, displacing long shareholders by inserting their orders ahead of manually placed orders, or at the same price in the multitude of order execution platforms whose existence is touted as some sort of ode to competition and liquidity but which in reality fragments the market, violates the first come first serve principle that retail investors assume, and creates a two-tiered transparency where the professionals see the order book consolidated while the rest see only the TSX/TSXV order book unless they pay extra.

For the rest of this very insightfull commentary, please go to the Kaiser Research Online website: