The venture segment of the Toronto Stock Exchange has suffered immensely over the past six years on the back of ailing commodity prices. After a two-year period of growth, which followed the 2007-2008 financial crisis, the S&P/TSX Venture Composite Index entered a prolonged period of decline. Between March 2011 and February 2016, the index lost more than 80% of its value. The index has recovered some of that territory over the past 12 months. However, over the past 15 years, it has shown a negative return of about 20%. This compares to the positive 105% return for the S&P/TSX Composite Index over the same period.
To find how the Canadian venture market is surviving this unprecedented downturn, the New Pathway turned to Cathy Hume, CEO of CHF Investor Relations (CHF), one of the most experienced investor relations firms on Toronto’s Bay Street.
Cathy Hume: Base and precious metals stocks were the first to take a big hit starting in April 2011. Financings dried up, especially for the juniors, and there wasn’t even a lot of restructuring and M&A activity going on in the mining sector. It was such a severe drop that brokerage houses started to close and a lot of mergers happened in the securities industry as well. Ian Russell, chief executive of the Investment Industry Association of Canada, has been quoted saying that over 25% of investment firms in Canada has vanished with more than 50 boutique firms that have either disappeared or merged during the past three years. During the same time that the mining stocks were getting obliterated, there was a big decline in the oil price a couple of years ago. That brought all the oil and oil service stocks down to their knees. The oil juniors were not the only shares to drop, the senior players, especially in the oil patch in Calgary, which really depended on much higher oil prices, suffered huge drops.
New Pathway: Do you remember a similar decline in the Canadian venture stock market’s history?
Cathy Hume: No. There have been other big corrections over the years. One of the more recent examples, a decline in the late 1990s that started with the Bre-X scam (a Calgary-based gold exploration company Bre-X Minerals collapsed losing its entire $6 Billion market capitalization after its gold samples were found to be a fraud in 1997 – the largest scam in Canadian history at the time – NP). That scam caused a long depression in the mining sector which lasted for a few years. It ended with the dot-com bubble burst after which investors started paying more attention to the mining companies. But the latest decline, from my standpoint, was definitely the most severe and damaging of any downtrends in the market since the late 1960s.
New Pathway: The S&P/TSX Venture Composite Index bounced up from its historic low in January 2016 and was going up until August. Since then, the index has moved down again. What was the reason for the renewed weakness of the index?
Cathy Hume: First, there still has been a great deal of uncertainty about the oil price which was not able to break through the $50/barrel barrier for a long time. Then, there was a very sudden and precipitous drop in the gold price from mid-September to January 2017, from the US$1,367/ounce level to as low as US$1,127 this month. That decline caused a lot of junior gold stocks to drop in half while bigger gold companies dropped by 20%-30%.
New Pathway: How have the junior exploration companies survived the downturn and are they going to resume exploring any time soon?
Cathy Hume: Many mining and oil and gas juniors have wound up and got delisted from stock exchanges. The juniors have to be pretty resilient and creative to withstand all those long-term downward trends. The resource companies have had to cut their general and operating costs and become leaner plus the improvement in technologies helped them cut their capital and operating costs significantly.
There has been an uptick in interest in pure exploration companies over the last couple of months. An analyst from one of the institutional boutiques told me last week that they financed a junior exploration company operating in the Val-d’Or area that had good results from just one good drill hole. This is great news. Most of the interest in the gold sector lately has been with either gold producers or emerging producers due to the recovery of the gold price. However, there is also renewed interest in such commodities as zinc and copper because inventories are very low due to mine closures and declining inventories. We hope this optimistic trend continues for several years at least.