BC Business
Mining finance | BCBusiness
Junior mining companies and the brokerages that raise financing for them are facing unprecedented challenges that threaten the existence of the industry, according to finance and mining veterans who gathered at the Capital Ideas 2013 conference last fall.
Brokers, investors and junior-mining executives singled out automated trading programs and consolidation among brokerage firms as contributing to the potential death of junior mining.
The numbers paint a dire picture. Mining financings on the Venture Exchange were down 52.2 per cent through the first eight months of 2013 (the most recent numbers available), compared to the same period in 2012, at $889.2 million. And 2012 was already a dismal year for junior financings: at $2.8 billion, the total was less than half that of the previous year.
Bill Whitehead, a senior investment adviser at Vancouver brokerage PI Financial Corp., points to the dwindling number of independent brokerages as a threat to the survival of B.C.’s mining industry. These small brokerages are the vital link between junior exploration companies and retail investors who are willing to take flyers on them, he says. Whitehead notes that 10 years ago there were approximately 30 independent brokerages in Vancouver, while today there are eight. “If you can’t raise the money to start the process, then I don’t see how they’d ever get big enough for the bank-owned firms to raise $50 million or $100 million for them,” Whitehead says.
Whitehead points to automated computer trading as another factor contributing to the dwindling number of retail investors on whom junior miners depend. He describes a typical scenario: when he places an order, it triggers an automated trader’s algorithm, which in the blink of an eye places a handful of orders before Whitehead’s order even registers. These high-frequency traders, who typically benefit from differences of pennies between bid and ask quotes, are shutting retail investors out of the market, Whitehead maintains.
John McCoach, president of the TSX Venture Exchange, mentions that even though financings are down significantly, only a handful of companies have actually dropped off the exchange.
As for automated trading, McCoach says it’s far less prevalent on the Venture Exchange than is widely rumoured. Although the number of such trades is impossible to quantify definitively, McCoach says, the exchange’s best estimate is that between one per cent and four per cent of the total trading volume can be attributed to this kind of high- frequency trading.