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Apr 2012 - TSX ??

Are you sure you want to join the TSX

This report is based on observations that we have made, in that many non-Canadian companies have joined the TSX (Toronto Stock Exchange) for access to funding and potential rerating of their stocks. However, for many it has been a share price blip, while acquiring the NI (National Instrument) 43-101's "ball and chain", and additional or replaced reporting.

A TSX listing means that it is easier for North American funds to invest in say an Australian company. It also means the North American brokers are more inclined to follow the stocks and when they analyse stocks they apply multiples to their valuations. Such multiples depend on what group the share falls into (by production, exploration, resulting market cap etc).

Originally (in the late 1980's / early 1990's) Canadian funds could only invest ~10% of their funds in gold stocks that were not listed on the TSX, and many North American funds would only invest in stocks that were listed in North America, which due to a weight of money argument produced an overweight distortion in favour of North American stocks. This then flowed into the global index weighting which added another distortion favouring North American stocks.

Hence with the multiples there is the "North American Premium" that companies not listed on the TSX try to achieve when joining the TSX. However, the largest Australian gold company, Newcrest has not joined.

This of course all sounds "nice and rosy". Listing on the TSX usually means a Canadian director is added to the board that ideally has the capability to present the company in a very professional North American way (as seen at the Denver Gold Show). Shares are usually issued as part of the listing, which means more shares listed at a discount for the North American investors, but in reality, shareholder loyalty is as fickle as ever. In anticipation of the listing, often share prices fall knowing that shares are to be issued at a discount for additional funds.

And as seen in Figure 1, the listing for many stocks has been a blip. There are successful takeover stories such as Red Back and Andean, but they seem to be few and far between.

ASX releases have to comply with the TSX to be released too and timed, which sounds simple, but adds time. There are a number of extra releases to be made in significantly greater detail than the ASX requires. Some of the detail is useful, however, a lot of it appears to be repetition.

The company cannot simply state to the ASX that a broker's or individual report is now on its website, because investors have to obtain the report from the individual North American broker, with just the broker's contact details on the website.

And then there is the NI 43-101 compliance, which appears for some companies to be a bit of initial pain in that it requires a description of the orebody's geology etc, individually for each project, something like an IPO, unless of course it involves mine production. The NI 43-101 sounds comprehensive and to some degree is, but it often raises more questions.

If a company is bringing a new mine/project into production, then from what we have seen, it has to supply a 43-101 with a forecast of that production over the mine's life. If it increases the resource(s) then a new production forecast is required within a certain time.

The problem with the production forecast is that it can be very outdated by the time the mine starts production, for example Alacer's Copler mine was expected to start production and build up to ~15,500tpd (5.6mtpa) at grades of ~1.2g/t (as per the November 2008 43-101), whereas instead the first gold was poured in December 2010 and by JQ 2011 the early stack rate was closer to 23,000tpd (and expected to settle closer to 18,000tpd) at grades closer to 1.7g/t. But share prices and expectations were based on the compliant 15,500tpd and 1.2g/t, and some of the models still reflect this expectation.

It appears that most North American analysts simply plug in the given model (quite understandable given the detail provided [see Extorre's latest PEA-3] and the analyst's reputation is on the line if they are wrong and the provided model is more correct). The result is little difference between one stockbroker and another's expectation of production by the company, apart from the gold price forecast used and the perceived multiplier on top of the calculated share price.

This often appears to result in understated expectations of individual companies in terms of production, costs, potential life and underlying value. And for the companies, reporting compliance appears to be far harder with more regulatory detail than the ASX.

Extorre (XG.TO) for example has produced PEA's (provisional economic assessments) for its Cerro Moro project in Argentina. The BCSC (British Columbia Securities Commission) complained to the company that parts of its second PEA (which includes a detailed model of yearly production, costs, capex, finance etc) were of a higher standard closer to a PFS than required in a PEA.

So Extorre had to release a statement on 24 February 2012 that its PEA was a PEA and not a PFS and hence it had not been economically proven because it is a PEA. Any components in the report that were above PEA standard were not to be considered as altering the stated PEA report into a PFS.

A typical comment from Australian funds is that the problem with TSX companies is that they keep raising money and/or placing shares, even when they don't appear to need it, all to satisfy investment demand from a broker's clients. Whereas the broker's clients should be buying the shares on market and hence increasing the share price if they want a position, under the laws of supply and demand.

So it can be seen that there are pitfalls to joining the TSX and you should revisit that suggested consideration (to join the TSX) as it could prove not to be in your company's best interest.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. Two companies that have listed on the TSX (Perseus and Mariana )

  • Written by: Keith Goode
  • Sunday, 01 April 2012