Letting in some light

“Sunshine is the best disinfectant.”

— James Gallagher, first president of the Canadian Trading and Quotation System, in late 2001.

This newspaper was one of those voices that bayed loudest for tight regulation of the junior exploration industry in the months following the Bre-X Minerals scandal and the collapse of the junior-mining investment boom in 1997. Seeing the securities industry, the mineral industry, and the government bodies that regulate them respond with admirable speed to those calls was gratifying; it showed that we do, indeed, work in a business that values honesty and is conscious of the effect scandals will have on the public.

But we all know that the housecleaning — necessary and desirable though it was — did not protect the mineral exploration industry from the bad years that followed. Part of the distemper of those times could be blamed on investment fads and fashions, but part did grow out of investor suspicion — a suspicion that was not all put to rest by the industry’s effort to police itself.

Which brings us to a time, more that five years later, when junior exploration is again enjoying at least a modest revival, and junior companies have projects in need of a drill budget.

Back at the time of the mid-90s boom, companies often began their public life on the Canadian Dealing Network. It was a dealer market, run by the Toronto Stock Exchange, with comparatively easy listing requirements, and it was often a gateway to bigger and better things. It also was the home of some of the era’s smaller embarrassments, such as International Precious Metals and Canadian States Gas.

It wasn’t much of a surprise, then, when the realignment of the Canadian stock exchanges — the birth of the Canadian Venture Exchange and the division of the securities markets into senior, junior, and derivative divisions, each with a single exchange — swept the old CDN away. CDN-listed companies that qualified for a Venture Exchange listing went there; those that didn’t, landed at the Canadian Unlisted Board, a stop-gap measure that really provided no market information to the public.

And many small juniors slowly suffocated, either from a lack of liquidity on the Venture Exchange’s Tier 3, or from a lack of any public profile on the Unlisted Board. Thus was born — or reborn — a Canadian dealer market in the form of the Canadian Trading and Quotation System (CNQ). Juniors should be glad to see it happen.

It is a fact of life that once a private company has exhausted the people-you-know and the people-they-know, it may still not have enough shareholders, issued capital, or money in the treasury to qualify for an exchange listing. But if the exchanges are the only place available to you to raise public money, there develops an unbridgeable canyon between private companies with projects, and public companies with listings, shareholders, and the capacity to raise money in the capital markets.

One effect of that situation is to pump up the value of corporate shells whose only asset is their listing. It’s true that many young listed exploration companies got where they are in reverse-takeover deals, but the supply of inactive public companies is finite and inherently diminishing; not a happy hunting ground for a small enterprise that wants to make the most of its treasury.

Moreover, there are disadvantages to reverse-takeovers (such as the expense of cleaning up old liabilities) that make it desirable to have another road to the capital markets. Dealer markets can be such a road, allowing a junior to make the transition from the private investment sphere to a traded junior market.

CNQ proponents have freely acknowledged that dealer markets have a bad reputation. The principal knock on dealer markets — that clients are at the mercy of the market-makers and cannot get their orders filled except at unfair spreads between the bid and offer prices — gets its answer in the model of a “hybrid” trading system, where trading rules specify that client orders, as well as dealer orders, must show in the market, and that order-filling rules must remain fair. The market-maker exists principally to provide liquidity. A fair trading system will do much to make the new market palatable to the retail investor.

The other side will be improved transparency on the part of both dealers and issuers. CNQ’s market will be visible on the World Wide Web, allowing retail investors to see just what price an order might be filled at; and the issuers will have to meet continuous-disclosure rules that match those applied to exchange-listed companies. The investor safeguards that the industry put into place are not being relaxed to fit the unlisted companies.

A clean market, and a liquid one, and an accessible one. And all in one. Turn your lights on, CNQ.