By Ryan Irvine | January, 2015
The TSX-Venture Exchange is the ugly stepbrother to Canada’s main stock exchange. Born in late 1999 out of the combination of the Vancouver Stock Exchange, the Alberta Stock Exchange, the Canadian Dealer Network, and the Montreal Stock Exchange, the TSX-Venture recently celebrated its 15th birthday – if “celebrated” is the right word in this context.
The exchange is supposed to be a place where exciting growing businesses from a diverse set of industries meet with growth oriented investors to fund their promising new ventures. Instead, it has become an embarrassment with its composite index setting new all-time lows recently. And this is against a backdrop that has seen almost all North American indices hit all-time highs over the past 12 months.
TSX-Venture Composite Index Chart
Source: TradingView.com. Please use the ‘All’ or ‘5y’ buttons above to view different time periods.
The Venture exchange focuses heavily on highly speculative and very cyclical resource stocks. Yes, Canada is rich in natural resources and, in theory, the Venture exchange should be an excellent place for smart entrepreneurs to access capital and responsibly develop our country?s vast resources. But the theory has diverged widely from what is actually happening. Smart resource-based entrepreneurs are drowned out by poorly run exploration shells that do nothing but fatten the pockets of a few snake oil salesmen. The proof, as they say, is in the results. As the TSX-V continues to facilitate the deployment of capital in highly speculative resource exploration ventures, the exchange continues to destroy capital and sink further to new lows.
Looking back, 2014 was another terrible year for the mining sector in particular and resources in general. Even in a dire year for this segment, 36% of more than $5 billion in capital raised on the TSX-Venture was strictly related to the mining sector and largely to junior exploration companies – most of which never produce an ounce of economic profit. Add in the cyclical oil and gas segment and 67% of the capital raised on TSX-Venture was solely resource related.
The culture of risk capital investing in Canada needs a good smack on the head. To the boutique brokers and promoters who continue to churn out these money making (for them) and money destroying (for you) exploration shells, we say shame on them. Can they not become slightly more innovative and look at funding ABC Technology Corp. or XYZ Manufacturing Co. rather than trotting out the same old CRAP Shell Mining Corp.
The blame also lies squarely in the laps of the individual Canadian investors who keep funding these pieces of garbage. Since my late teens (in the early ’90s) when I learned a quick and painful lesson with a couple of classic Canadian exploration companies I have not put a dime of my hard earned investment dollars towards this segment and that has served me very well.
The solution is very simple – just stay away. If Canadians stop funding these capital-destroying shells they will die and the questionable TSX-Venture players running them will disappear. Brokers and bankers will finally get the message and hopefully look to fund a more diverse set of ventures – perhaps actual businesses that create cash rather than destroy it.
Change will come to the TSX-Venture when Canadians stop funding exploration shells and demand more from their risk capital – diverse businesses with strong growing fundamentals.
Ironically, with blood on the floor of the Venture exchange, now should be a time to pick up some long-term bargains with strong fundamentals in the mining sector. But there are very few worth considering and it is almost impossible for the average investor to sort the wheat from the chaff. Over the long term, we endeavour to stay less exposed to resources in general than the average Canadian investor, due to the significantly cyclical nature of the businesses.
Let’s start funding some actual businesses through our Venture Exchange. The key is to fund a diverse set of industries including knowledge based sectors such as technology and biotechnology or some basic manufacturing businesses that make real products and employ real people. Canada will never become Silicon North but we have some great entrepreneurs in this country and a little diversification outside of our commodity sector would do a world of good.
This would also help diversify our economy and give Canadian investors far more choice in their investment decisions on the home front.
So the next time your broker tries to sell you on the latest exploration play with a moose pasture in Saskatchewan or a huge potential gold mine in Botswana just say no thanks and walk away.