TMX turmoil turns explorers to energy minerals

By Laura Syrett
Published: Wednesday, 24 February 2016

Canadian bourse struggles with mining slump; companies reorganise businesses to survive.

Resource sector issuers on Canada’s leading stock exchanges are expected to endure another tough year in the capital markets as investors continue to shun the mining industry, while the bourse itself is also facing straitened circumstances.

TMX Group Ltd, comprised of the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V), on a combined basis, remains the world’s leading hub for mining finance, with 1,318 listed mining companies out of a global estimate of 3,300 listed entities as of 31 December 2015. 

This is compared with 651 miners listed on the Australian Securities Exchange (ASX), 170 on the London Stock Exchange (LSE) and its second tier Alternative Investment Market (AIM) and 43 on the Johannesburg Stock Exchange (JSE).

Its bias in this direction has meant that TMX Group has suffered disproportionately from the collapse in the commodities industry and its financial position is continuing to erode.

In the fourth quarter of 2015, the group’s revenue fell to Canadian dollar (C$) 177.1m ($128.6m*) from C$182.7m in Q4 2014 and it recorded a diluted loss per share of C$2.92, compared to earnings per share of C$0.76 for the same comparative periods.

Part of TMX’s problem stems for the fact that investors were too bullish about commodities during the recent mining supercycle and significantly overvalued the exchange. In September 2012, a consortium of 13 major Canadian financial institutions, comprising the Maple Group Acquisition Corp., completed a C$3.8bn purchase of TMX Group – a deal which has now come back to haunt the company.

"In accounting for the Maple transaction, all of our assets were recorded based on fair value in Q3/12 and at a time when the resource sector was much more robust," TMX said in its fourth quarter 2015 earnings report. 

"While our revenue and customer base are somewhat diversified, a significant portion of our issuers come from the resource sector. The valuation of goodwill and intangible assets was established near the peak of the commodity cycle. Since that time, the impact of lower commodity prices and the downturn in the resource sector has significantly impacted financing and trading activity. Specifically, the TSX-V market and the smaller market cap listings on TSX have been negatively impacted, and this has contributed to the impairment in the value of goodwill and intangible assets attributed to certain cash-generating units," it continued.

"The TMX finds itself in a perfect storm where commodity markets have collapsed and volumes have dried up on most exchanges," Ian Russell, CEO of the Investment Industry Association of Canada, told the country’s Financial Post (FP) in February. "It’s not so much an identity crisis as much as it may be a struggle for survival."

As the FP report noted, the group’s business formula prescribes a continued focus on resource listings, with a few major blue chip financials, such as banks, telecommunications and transport giants mixed in for balance.

This situation has unnerved some of the exchange’s observers, but most agree that TMX cannot afford to shun mining, but rather needs to be more innovative about the way it handles these listings – perhaps by promoting a stronger relationship between resources and the group’s emerging breadwinner, technology.

Companies evolve to survive

For mining companies listed on the TMX exchanges, particularly those on the TSX-V junior tier, the immediate priority is finding ways to survive the downturn.

Spotting a positive trend in demand for, and investor interest in, so-called energy metals and minerals (namely lithium, graphite and cobalt), businesses with the capacity and agility to maximise their exposure to this sector are doing so with gumption.

In September last year, Vancouver-based Global Cobalt Corp. announced it would spin out a new company named Global Energy Metals Corp. (GEMC) "as a vehicle for the acquisition and development of battery metals projects".

"The mining sector was, and remains, caught in an unparalleled downward trend," Mitchell Smith, CEO of GEMC, told IM. "Despite this downturn, we believed that waiting was no longer a viable strategy and needed to take action to keep our business and projects moving forward."

"We opted to break from convention and disrupt the company’s trajectory. This transaction allows GEMC to examine other acquisitions in the battery metals space. There are unique opportunities to acquire stakes on the project level from companies that have been unable to advance projects due to a lack of available funds and to move forward a strategy to be a bank for these unique projects," Smith explained.

Starting from a focus on cobalt, GEMC is looking to expand its portfolio to cover other energy metals and to grow its business by exploring joint ventures with strategic partners.

GEMC is not alone in shifting and sharpening its focus. TSX-listed Avalon Rare Metals Inc., whose previous top targets include rare earths and tin and which delisted from the New York Stock Exchange at the end of last year to conserve cash, has said that it now intends to prioritise development of its Separation Rapids lithium project in Ontario.

Vancouver headquartered Prima Diamond Corp. (formerly Prima Fluorspar) said in February it intends to buy the Green Energy lithium property in Utah, US and is one of a number of Canadian companies jumping into lithium properties just a truck drive away from Tesla Motors Inc.’s lithium-ion (Li-ion) Gigafactory in Nevada.

Industry observers, while viewing such moves with a healthy dose of cynicism, admit that these strategies are probably the only way of staying afloat. 

Jonathan Lee, president of New York-based consultancy, JGL Partners LLC, which helps companies raise money on North American exchanges, agrees with GEMC’s Smith on the opportunities offered by the rout in listed explorers. 

"Mining finance is dead," Lee told IM. "It’s a restructuring effort now and guys that know bankruptcy and assets should do well, as they can get certain claims on property fairly cheaply."

For his part, Smith is confident that, for battery minerals, the only way is up. "Macro drivers are set to propel demand for battery metals including lithium, cobalt and graphite, as energy storage demand rises and end usage applications grow," he said. "Now that the spinout has been finalised, we’re convinced that the new organisational structure was the correct strategy."

*Conversions made February 2016