John Kaiser: Can the TSX Venture Be Saved? – The Gold Report – February 15, 2013)

Is the end near for the TSX Venture Exchange, the victim of “algo traders,” low volume and lack of institutional investors? If newsletter writer John Kaiser is right, as many as 500 of the 1,484 resource companies listed on the Venture Exchange will go under this year due to lack of money in the bank. In this Gold Report interview, Kaiser suggests that a crowdsourced valuation system may give the investors the information they need to invest with confidence and fend off the proprietary traders.

The Gold Report: John, at the Cambridge Conference in Vancouver, you spoke about visualizing an alternative to “zombie land,” the zombies being the 1,000+ companies in the resource sector trading at less than $0.20/share, which include a good number of the more than 600 companies with less than $200,000 in the bank. You predicted at least 500 would go out of business in the next year. Is this a more dire scenario than before or are there just more companies?

John Kaiser: In the junior sector, 1998–2002 was a very difficult period. Metal prices, especially gold, were weak. The Bre-X Minerals betrayal in 1997 had shattered investor confidence in the exploration acumen of the resource juniors. New and interesting exploration plays were few and far between. Area plays were dead on arrival. And the siren song of the dot-com bubble sucked away whatever risk capital remained in the hands of retail investors. That five-year bear market was a very dark time for the industry, but it survived to experience a phenomenal bull market during which TSX Venture (TSX.V) juniors raised $57 billion ($57B) and over 200 Canadian resource juniors disappeared in takeover bids worth $115B.

TGR: So with only two years into the current bear market, why the fuss?

JK: Something is disturbingly different this time. In 2008, the resource sector was blindsided by the financial crisis, followed by a sharp rebound in 2009 and 2010. A lot of companies with projects in midstream revived themselves, helped by the unexpected recovery in base metal prices and the fully expected rise in precious metals prices. Some 98 juniors were taken over in 2009–2012 through bids worth $51B. But we have been in a resource equities sector bear market since Q2/11 despite persistently high copper, gold and silver prices. Unlike 1998–2002 when the resource juniors were indeed a wasteland, today I see numerous juniors with advanced projects that should have much higher valuations if we assume today’s metal prices as the new minimum reality. I also see many interesting exploration plays in whose substantial upside potential I can place bets almost for free.

So when you ask about 500 juniors disappearing, it strikes me as the wrong question. I believe a purge of 500 juniors would be a very healthy culling. What worries me about this second dip is that it could unleash systemic destruction of the remaining juniors, in effect the entire junior resource sector.

TGR: Before you explain your bigger concern, can you elaborate on why you seem eager to see 500 distressed juniors disappear?

JK: The TSX.V has a culture where resource juniors recycle themselves through reverse splits when their projects fail, their issued stock becomes unwieldy, and they run out of money. These rolled-back juniors refinance themselves and get a new project to start the exploration cycle all over again. Sometimes it is with the same management team; other times a new group takes over. I like this because it gives existing shareholders a shot at getting their money back and sometimes more. Over time there have been more surviving juniors than delisted defunct juniors.

These juniors used to start as an initial public offering (IPO) with a so-called project of merit. But over the last decade the Canadian brokerage industry shifted its focus to a different type of IPO called a capital pool. Since January 2000, the TSX.V listed 1,135 new capital pool companies. Many of them acquired advanced resource projects during the super-cycle boom of the last decade. Many of these companies disappeared through takeover bids. But many also acquired mediocre resource projects that had almost no chance of yielding a new discovery or were so marginal not even super-cycle metal prices could help them. Now the funding for the resource sector has dried up. Between the old group of recycled juniors and this newer crop of former capital pools, we have a glut of resource juniors.

Each one of these companies uses up about $200,000 a year in overhead just to exist as a public company. While I am fairly adept at distinguishing the pretend juniors from the serious ones, I’ve spent 30 years focused on this sector to acquire this skill. To quote the statistician Nate Silver, the noise is drowning out the signal for less specialized audiences. The disappearance of 500 companies would be good for the sector. It would allow investors to focus on the serious companies.

For the rest of this interview, please go to The Gold Report website:

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