Vancouver loses in TSE-CDNX deal

A venture capital market is much more than its buildings and brokers, or even its listings and trading volumes. It’s a bastion of free enterprise, a launching pad for entrepreneurs willing to put their dreams to the reality test, and a venue for adventuresome investors hoping to beat the long odds and make the big score. Above all, it’s a high-risk, high-reward marketplace, entirely unsuitable for widows and orphans, and perhaps even unsuitable for anyone who values the proverbial bird in the hand over two in the bush.

It’s not hard to understand, then, why concerns have been raised about the Toronto Stock Exchange’s (TSE’s) proposal to acquire the Canadian Venture Exchange (CDNX). Granted, most market participants recognize that it will proceed as planned. Powerful forces — not excluding Canada’s big, bank-owned brokerage firms — are backing the deal, and a few negative-nelly missives by newspaper columnists aren’t likely to derail the TSE’s offer to pay about $50 million for the 131 outstanding shares of CDNX. What’s more, TSE and CDNX officials are positively giddy about the business benefits for their member firms.

What remains to be seen is whether the TSE’s efforts to improve its global image as a senior exchange will come at the expense of the CDNX’s entrepreneurial spirit. Proponents say the TSE’s acquisition of CDNX will strengthen Canadian capital markets, “while retaining all the unique attributes of both the junior and senior markets.” They also say it will “ensure a strong domestic business able to compete in an increasingly global marketplace.”

We heard similar assurances back in early 1999, when the TSE, the Vancouver Stock Exchange (VSE), the Alberta Stock Exchange and the Montreal Exchange agreed to restructure Canadian markets. The deal called for Toronto to focus on senior securities, Montreal to handle derivative products, and the CDNX to house junior securities, including those previously listed on the Canadian Dealing Network (CDN) and the Winnipeg Exchange. But from a mining industry perspective, more has been lost than gained, which doesn’t bode well for chapter two of the capital markets restructuring story.

Let’s hark back a few years to the days when the TSE was promoting itself as “the mining finance capital of the world.” The Bre-X boondoggle was a setback, to be sure, but the TSE seems to have lost interest in pursuing this objective. It cleaned mining companies from its house with a vigor not seen since the Windfall trading scandal of the late 1960s. Companies that couldn’t meet stringent new listing requirements were sent packing to the CDNX, which picked the best and ignored the rest. CDN juniors that couldn’t meet the CDNX requirements were sent to wither away in the Canadian Unlisted Board (CUB), a no-man’s-land in cyberspace lacking public dissemination of even basic trading data.

Seizing the moment, London pulled out all the stops to attract mining companies to either its senior exchange, or its Alternative Investment Market (AIM). And they came, not just from North America, but from Australia, South America and Africa as well.

“London has re-established itself as the most important mining financial centre,” said Martin Rosser of The International Mining Review during a recent mining conference in Africa. “Toronto has now faded, while claims of Vancouver, Johannesburg and Sydney are purely parochial.”

Rosser isn’t the only one singing London’s praises. Canadian mining executives who made the trek over the pond have joined the chorus. One TSE-listed company noted that its new AIM listing offered it the benefits of the London Stock Exchange’s “reputation, prestige and expertise,” as well as an alternative access to venture capital.

TSE and CDNX officials say their alliance will bring similar benefits to junior companies. CDNX listings will have the benefit of an indirect association with the TSE, Canada’s respected senior exchange. It isn’t a bad thing, say some pundits, to increase the distance between Canadian juniors and the lingering stigma once associated with the Vancouver Stock Exchange.

Utter nonsense, that. In its glory days, Vancouver was Canada’s most successful venture capital market. In its glory days, it was anything but parochial. In its glory days, VSE-listed junior mining companies created enormous wealth for the nation through the discoveries of the Hemlo gold camp, the spectacular Eskay Creek gold mine, and the rich Pierina and Bulyanhulu gold deposits, to name but a few. Northern Canada gained a valuable new diamond mining industry, complete with spinoff cutting and polishing, while Newfoundland and Labrador gained a huge nickel deposit at Voisey’s Bay.

Unfortunately, a byproduct of the VSE’s success was an influx of dubious promoters from all over the world. The VSE had its scams, to be sure, but they pale in comparison to those perpetrated on American markets (who can forget Ivan Boesky, Michael Milken and the Savings and Loans scandals?) or the Bre-X swindle played out on the ASE and the TSE. What’s more, the VSE long ago shut down the “desert-dirt” scams that are still being perpetrated in the southwestern United States on American equity markets.

The VSE scams got plenty of attention because the city had some of the best investigative reporters in the world. The bad apples came all right, but they were quickly exposed by a vigilant press and, to some extent, by vigilant regulators. But all that’s moot, because the VSE no longer exists. Some of the bones and flesh are still there — transported to Calgary for the most part — but its venture capital spirit is almost gone, at least from a mining perspective.

In its glory days, the VSE nurtured junior mining companies. That can’t be said of the CDNX, which has touted itself as “Nasdaq of the North” and focused mostly on technology listings. Junior mining companies are taken for granted, if they are thought of at all. We hear complaints day in and day out about the length of time it takes to get a mining deal done, about the increasingly restrictive listing requirements for mining companies, and about the general lack of attention paid to timely service. Small wonder most financings are done by private placements these days; windows of opportunity are closing faster than CNDX officials can approve a simple transaction.

We can’t blame CDNX management for heeding the siren song of the technology boom; that’s where the action was — and still is, to some extent. But mining has been the cornerstone of western equity markets since they began, a fact that seems to have been forgotten by some of the newcomers running the show at CDNX.

Some of the blame also belongs to British Columbia’s New Democratic Party government, aptly described by Canaccord Capital Chairman Peter Brown as “nine years of the most incompetent government in the history of this country.” Not once, in its unparalleled reign of incompetence, did the government raise its voice to show support for an institution that put Vancouver on the global venture-capital map.

Vancouver has been the biggest loser of capital-market restructuring and, if present trends continue, London will be the biggest winner.