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Exploration

Who turned off the tap?

March 1, 2013
by Norm Tollinsky
In: Exploration

Is it high frequency trading, the popularity of ETFs and bullion ownership or general economic malaise?

Financings are becoming increasingly difficult to arrange – especially for grass roots explo­ration projects.

Why are so many junior mining companies having a tough time raising money? And why are their share prices in the doldrums?

In a departure from usual practice, MacDonald Mines president and CEO Kirk McKinnon issued a press release January 11th placing the blame on the federal and provincial governments, the Toronto Stock Exchange and Canada’s financial institutions.

Given the importance of natural resources as a “prime catalyst” for growth in Canada and Ontario, “we wonder why large trading institutions are allowed to impact junior mining stocks with high frequency trading and also receive trading credits from the TSX,” wrote McKinnon.

“Compounding this,” he went on, “large Canadian banks have certainly discouraged, and all but disallowed, any trading in junior mining stocks, making it extremely difficult for their clients to even consider investing in these stocks as part of their overall portfolio or as opportunities for making money.”

As a result, “financings are becoming increasingly difficult to arrange, the stocks are at much lower prices versus historical levels, mostly because credible information and exploration success is not resonating and, consequently, the junior resource stocks have little or no resulting upward movement.

“The consequence of this is that much needed financings for exploration activity are now being transacted at historically low prices, creating an environment of super-dilution and a growing lack of interest for investment in this sector.”

In a blog posted on KaiserBottomFish.com in December, mining analyst John Kaiser warned the situation is so dire that “500 Canadian listed junior mining companies will disappear within the next year unless there is a remarkable turnaround for the resource sector in 2013.”

Kaiser pointed out that as of November 30th, TSX Venture listings raised a mere $3.6 billion through private placements in 2012, with November financings of $179 million being “particularly dismal.”

Much of the blame, he said, lies with the TMX Group, “which in pursuit of short-sighted greed and possibly bankster inspired stupidity has strangled the resource sector as a risk capital allocation arena where investors speculate on fundamental outcomes rather than manufactured volatility.

“The decision to allow short selling on a down-tick and the hookup of algorithmic trading systems to the electronic order book in a regulatory environment where juniors are severely handicapped in helping investors visualize the value of potential outcomes as a project travels from grassroots concept to a production decision has created a one-sided playing field where trading predators systematically harvest capital in-flows from investors placing bets on fundamental outcomes,” complained Kaiser.

Vampire squid

Once they have “sucked up all the new capital possibly generated by a positive research report, a newsletter tout, a favourable mention by a video or audio media talking head or web article, or even a direct pitch made by management to a fund manager or investor group, they lean on the bid side of the order book pounding out stock on a down-tick, triggering instant buyer’s regret among the new shareholders placing bets on fundamental outcomes, and unleashing capitulation among the existing longs, who add their real sell orders into the downtrend…”

It’s the equivalent, said Kasier, “of a vampire squid sucking the life blood out of the junior resource sector.”

With junior mining stocks in the basement and “fundamentals-oriented investors” avoiding the sector, it’s “hard to tell” how much of this “sucking” is going on today, acknowledged Kaiser, but “the TMX Group has created the physical and regulatory infrastructure to facilitate this sort of activity on a massive scale should there ever again be a reason for fundamentals-oriented risk capital to flood into the junior resource sector.”

However, not everyone agrees that high frequency trading is the culprit.

One trader interviewed by Sudbury Mining Solutions Journal doesn’t think it has that much of an effect.

“High frequency trading,” he said, “happens with bigger stocks, not these little junior exploration companies. Their stocks are not liquid enough for electronic traders to work into their algorithms.”

The trader offered a different explanation for the challenges junior mining companies are facing.

“Gold stocks have lagged significantly compared to the price of bullion over the last couple of years,” he pointed out. As a result, “a lot of investors have gone to ETFs or they’re just buying bullion directly instead of buying the company because when you buy a gold mining company, you also run the risk that they don’t execute or you run the risk of political interference as Tahoe (Resources Inc.) is finding in Guatemala, whereas if you really believe that gold is going to $2,500, you buy the bullion and you know that if it goes to $2,500, you’re gonna make some money.”

“It’s a Catch-22,” he said. “Junior mining stocks aren’t doing all that well, therefore people don’t go after them because they say they’re underperforming. It’s kind of a vicious circle, but it generally does correct itself.”

A backdrop of anxiety caused by the U.S. fiscal crisis, the European debt saga and the slowdown in China is also cited as a reason for investors shying away from resource stocks.

For a full airing of the issue, be sure to attend the “Reviving the Juniors International Panel Luncheon,” Tuesday, March 5th at the PDAC, featuring panelists Eric Sprott, Ned Goodman and John Kaiser in a debate moderated by Salman Partners’ Raymond Goldie.

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