Once again, the mineral exploration sector is rapidly contracting. And it has been dragging venture companies and the Exchange down with it.
The TSX Venture has lost nearly 20% of its value since the start of September. Given that roughly 60% of all companies which trade on the TSXV are in the mining sector, it’s obvious why this index has been quickly descending for more than a month now.
1 Month Chart for the TSX Venture Index
Many junior exploration companies, as you know, have been hanging on by a financial thread since mid-2013. As we enter the final cleansing phase for this sector, things are getting ugly. Even many of the strong companies in the mining/exploration sector (companies with healthy treasuries and great assets) are hibernating. The exploration industry will likely remain in this funk for another year. Of course, there will be isolated cases of success in the junior mining sector, but, by and large, it has run out of steam and is in the midst of a historic consolidation that will take several more months to play out.
What TSX Venture companies are Fundable?
There is virtually no appetite for grass roots exploration plays right now (and there hasn’t been for nearly two years). However, despite the lack of capital being invested in exploration companies at the moment (which will inevitably create a mother of a bull market in a couple years), many small-cap Canadian investors haven’t changed their strategy from the first decade of this millennium. Call it conviction, stubbornness or good ol’ fashioned Canadian patriotism (we love natural resource investing) – either way, it’s a strategy with poor odds if you’re looking for near-term upside potential.
Unless an investor is willing to sit on exploration stocks for a couple years, his risk capital is better invested in innovative companies that are attracting large funders (there are many opportunities like this on the Venture).
Many energy and technology companies have been leading the Venture in 2014; and I believe technology will outperform all other sectors well into 2015.
Tech and O&G have been providing investors with that 10-bagger potential we all seek, despite rather dim overall Venture market sentiment over the past three years (click here to read my article from January which foreshadowed a shift to tech). But, with only about 12% of the Venture weighted in tech, and another 12% in oil and gas, the general focus from retail investors remains on mining. That needs to change…
One firm in Vancouver, which has been funding mining plays for the better part of the past decade, is no longer looking at financing exploration opportunities – full stop. They are out of that game, at least for the time being. Top management has told the firm’s employees to look at the tech sector for opportunities. This is a firm, bear in mind, which built its name on the back of the mining sector…
Innovative companies on the TSXV are the ones garnering interest from institutions and venture capitalists.
Funding is needed in order for startups to create positive development. Without positive development, which leads to growth and news releases, stock prices contract. Small-cap investors are impatient right now and they need to see continual progress in order to stay put (remain long). It’s very simple. So what sector will give them that consistent development?
The sector known for innovation…
I can tell you from being in meetings with VCs and brokers this year, particularly since May, that they are interested in funding innovative tech and production scenarios. In other words, deals need to be incredibly unique, generating revenue or disruptive.
The Proof is in the Numbers
The collapse of the mining sector has resulted in two common themes on the Venture this year. First, volume has dried up. Second, fundraising has contracted and shifted.
MiG, (Market Intelligence Group), in my opinion, provides the best analytics for the TSX Venture. (here is a link I recommend bookmarking so you have access to this timely information) Comparing MiG’s YTD reports published this September and from September 2011 provides a clear picture of what has been happening on the Venture; it also shows exactly how influential mining is in Canada’s small-cap space.
I use 2011 as a comparable because it was the year the Venture began its long slide down. 2011 marked the end of the mining bull, and the start of this bear.
How Far have TSX Venture Mining Companies Fallen Since 2011
In 2011, a year which saw the Venture take a hit, the mining sector was still rather vibrant; and despite the start of a new mining bear in the second half of that year, mineral exploration companies were responsible for the lion’s share of capital raised by Venture issuers.
As is the case today, in 2011 mining companies accounted for approximately 58% of all issuers on the Venture, according to an MiG report (click here to view reports – see December 2011).
In 2011, according to MiG, junior mining companies were responsible for approximately 58% of all the money raised by issuers on the TSXV. This was virtually perfectly proportioned to the sector’s percentage of overall issuers on the Venture.
An MiG report also documented that from January through to August 31st 2011, roughly $8.2 billion had been raised by companies on the Venture Exchange. Compare that to 2014, when, during the same time period (Jan. through Aug. 31st), only $3.5 billion (approx) had been raised. That’s a whopping 57% decline.Click here to read MiG’s recent report.
As explained, mining/exploration companies make up roughly 60% of the TSX Venture. However, from Jan. 1 through Aug 31, 2014, mining companies were only responsible for raising roughly 32% of the total funds raised on the Venture, according to the recent report from MiG.
Mining companies on the Venture only raised roughly $1.12 billion between January 1st and August 31st, 2014… in 2011, MiG reported that they raised just over $4.8 billion during the same period.
A Shift in Volume and Venture Capital
In 2011, a very tough year for the TSX Venture, from Jan. 1 to August 31st, 48.9 billion shares were traded, according to MiG’s report.
In 2014, during the same period, MiG reported that only 26.5 billion shares had traded on the Venture.
According to the recent MiG report, the oil and gas sector has been responsible for roughly 23% of the TSX Venture’s share volume this year, despite only having roughly 12% of the TSXV’s issuers.
Mining companies account for roughly 60% of the Venture’s issuers. They have been responsible for roughly 54% of the share volume this year, according to MiG.
Technology companies (I include companies in Clean Tech & Renewable Energy, Life Sciences, and general tech when I reference the ‘tech sector’ in this report) account for approximately 12% of the Venture’s issuers; but, similar to oil and gas, they have been punching above their weight in terms of volume. Tech companies attributed to near 16.5% of the TSXV’s share volume in 2014 (from Jan. 1 to Aug 31), according to MiG’s recent report.
The oil and gas and technology sectors have approximately 24% of the issuers on the Venture Exchange, yet they’ve been responsible for nearly 50% of the share volume in 2014…
As mentioned, tech companies (Clean Tech & Renewable Energy, Life Sciences and general technology companies) make up approximately 12% of all issuers on the Venture. However, they were responsible for roughly 24% of all the money raised from Jan. 1 to Aug. 31st 2014, according to the recent MiG report.
In 2011, the tech sector, during the same period mentioned above, raised about $335 million, according toMiG’s reporting. Fast forward to 2014, during the same period, and MiG reports that tech companies have raised roughly $822 million. That’s a 140% increase in the amount of capital invested in tech companies (via private placements, IPOs etc.). And there were 12 more technology-based companies on the Venture in 2011 than in 2014…
If you evenly spread out all the money raised by tech companies on the Venture among its 253 issuers, that’s an average of just over $3.2 million raised per company. Do the same for mining, and there is roughly $950,000 per company. What a difference…
The numbers are indisputable and point to a shift in institutional and venture capital interest in Canada. As I outlined in my article published in January of this year, interest in tech has risen substantially in Canada’s small-cap space (click here to read the report).
I recommend taking a look at MiG’s latest report for more pertinent information on the TSX Venture. Click here to read it.
TSX Venture – By the Numbers
$822 million: The approximate amount raised by technology-based companies on the Venture in 2014 (Jan. 1 through Aug. 31). source: MiG report
253: Number of technology-based companies on the Venture.
source: MiG report
1,220: Number of mining/exploration companies on the Venture.
source: MiG report
235: Number of oil and gas companies on the Venture.
source: MiG report
19%: Roughly how much the Venture Exchange has lost since the start of September.
140%: The approximate increase in capital raised by technology companies from January 1 until the end of August 2014 compared to the same period in 2011.
26.5 billion: The approximate amount of shares traded on the Venture in 2014 (as of Aug 31).
source: MiG report
66: The total months past since the Venture was last this low.
$3.5 billion: The approximate dollar figured raised by Venture listed companies from January through August 2014, according to MiG.
Many of the brightest stars on the TSX Venture this year have been in the oil and gas or technology sectors. This can be attributed to mining’s collapse and, more importantly, their ability to raise proportionately significant amounts of capital in a difficult market environment.
At the end of the day, when investing in small-caps, I want to go where the big money is headed. Because without that money, news flow stagnates and investors get skittish, which almost always correlates into a declining share price. Follow the funding and you’ll find the news.
From our family to yours, have a wonderful, and hopefully relaxing, Canadian Thanksgiving weekend.
All the best with your investments,
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This article represents solely the opinions of Aaron Hoddinott. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
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