No, it’s not always bad news
By Ellsworth Dickson
Advisory company Ernst & Young recently prepared an interesting report entitled: What is driving delisting in the mining and metals sector in Canada? The study focused on the 1,318 companies listed in the mining and metals sector at the end of 2015 on both the TSX and TSXV.
First, the bad news. In 2011, the market capitalization of mining and metals companies listed on the TSX and TSXV was CDN $426 billion. From 2011 to 2015, the market cap of these companies dropped by over 40%, the study noted. Badly burned shareholders fled the mining sector and an overwhelming negative investor sentiment prevailed. Companies cut costs, downsized, placed expensive helicopter-access projects on hold and some went the merger route.
Many junior explorers are nimble and resilient. At first, bearing in mind the four-year downturn in the mining sector, one might think the 140 mining companies that delisted in 2014 and another 172 companies in 2015 represent corporate failures. However, of the 2015 delistings only 9% were due to formal insolvency proceedings and only 14% were due to a failure to meeting continuous listing requirements.
While formal insolvency proceedings doubled from 2014 to 2015, the study indicated that this represented only 16 companies in total. It is not easy to thrive during an extended downturn in the mining sector. It must be noted that not only is it expensive to maintain a listing but some companies have high burn rates to keep their mineral projects in good standing in some foreign countries and remote locations. Then, of course, there is the challenge of launching expensive exploration programs.
However, 40% of the delistings were due to mergers and acquisitions, meaning that these companies carried on in one way or another and did not fail. For example, M&As included Newmarket Gold+Crocodile Gold; Alamos Gold+AuRico Gold; Agnico Eagle Mines+Soltoro; Oban Mining+Eagle Hill Exploration; and OceanaGold+Romarco Minerals, to name a few. These were all good news stories and not corporate failures. This is a good way for a producing mining company to build its ever-dwindling mineral reserves – take over another producer or an advanced-stage company.
These companies represent over 10% of listings on the mining-heavy TSX, TSXV and the CSE. And yes, some companies, particularly juniors, ran out of money resulting in delistings, but 40% of delisted companies voluntarily delisted – not because they failed and were forced to delist. Some did so because they were of the view that another stock exchange in Canada was more appropriate for their listing. Foreign exchanges were sometimes considered more appropriate. During 2015, 11 delisted companies completed reverse takeovers (RTOs), mainly to facilitate a change of business.
Not often, but sometimes companies delist with the purpose of going private because they are sick of the endless regulations and high costs of maintaining a listing.
There are still many junior exploration companies that are low on cash and some are going into debt, struggling to stay in business. The Ernst & Young study noted that in the majority of circumstances, a failure to meet continuous listing requirements was a result of companies failing to file financial statements or management disclosure documents on time. This is usually a sign of companies running low of funds.
As a matter of interest to entrepreneurs out there, there are six ways to list on the TSX or Venture Exchange: Initial public offering; inter-listing (dual listing); capital pool company; reverse takeover; special-purpose acquisition corporation; and graduation from another exchange.
Since the study focused on 2014 and 2015, while enlightening, it can be said that circumstances have recently changed. After the Venture Exchange hit its lowest point on January 28, 2016, there has been a steady climb upwards.
The present rebound in mining stocks has prompted private placees to buy big blocks of shares with a newly optimistic attitude of expected capital gains. Today, there have been many financings at higher dollar figures which bode well for even fewer mining sector failures in the future.