Canada’s junior stock exchange continues to plumb new depths that would have seemed unimaginable even a few years ago.
The S&P/TSX Venture Composite Index sunk below 500 points for the first time on Monday, hitting a record low of 495.14 before closing at 496.18. To put it in context, the Venture is down 29 per cent since the start of the year, and a staggering 85 per cent since its peak in 2007.
What may be most distressing is the way it has dropped. Since mid-2011, the index has been in a slow and relentless downward trend as investors have gradually capitulated and moved their money elsewhere. There was never any sign that a recovery was imminent. By comparison, the index fell much harder and faster during the financial crisis in 2008, but it bounced back rapidly the following year.
The problem is that the index is weighted down by the zombies
The awful performance of the Venture index illustrates just how hopeless market conditions have become for small-cap resource companies. Most of these firms are unable to raise capital due to plunging commodity prices and an overall lack of investor interest in speculative stocks. The weakest ones are struggling just to keep the lights on and pay their listing fees. More than 70 per cent of stocks on the Venture exchange are mining and energy plays and they account for 60 per cent of the weighting of the index.
No one disputes that market conditions are terrible, but critics say TMX Group Inc. should be doing more to improve the investment environment on this exchange. Some experts are calling for a mass delisting of hundreds of “zombie” companies that have almost no cash and no ability to create value for shareholders.
“The problem is that the market is weighted down by the zombies,” said Rick Rule, chief executive of Sprott US Holdings Inc.
“The higher quality issuers have bottomed as a whole and started to head up. But the zombies are trying to head to their intrinsic value, which is zero.”
Some companies are delisting from the Venture exchange, but the number is relatively small. There were 1,820 companies on the exchange as of Oct. 31, compared to 1,987 companies on the same date last year. That is a drop of 8.4 per cent.
The more disturbing trend is the decline in financing. Venture-listed companies raised $2.9 billion of equity capital in the first 10 months of 2015, according to Market Intelligence Group, down 33 per cent from the same period a year ago. And that number masks the deeper weakness. A whopping 80 per cent of the $2.9 billion was raised through private placements, meaning that public offerings raised less than $600 million.
Additionally, the total number of financings dropped 23 per cent in the first 10 months of the year, and trading volume fell 15 per cent.
TMX Group does acknowledge that the Venture needs help. This month, the Toronto-based company announced it would introduce several measures to “revitalize” the junior exchange. The tactics will be laid out in a whitepaper early next year, but TMX has already said its goals are to reduce the “administrative burden” on listed companies, expand the investor base and liquidity on the exchange, and diversify and grow the stock listings.
Canadian securities regulators have made some proposals designed to help struggling micro-cap firms stay afloat. Notably, Ontario and four other provinces have opened the doors to crowdfunding, with rules coming into effect next month.
But it is unclear how much anything can help the Venture exchange as long as the resource sector remains in the dumps.
“The reality is that until metal prices go up, nothing (positive) is going to happen,” said Brent Cook, publisher of Exploration Insights.
