‘Walking dead’ on the TSX Venture Exchange: How are ‘zombie’ companies surviving?

BEN NELMS for National Post Tony Simon, co-founder of the Venture Capital Markets Association is pictured in their offices in Vancouver.

Management at the TSX Venture Exchange would probably appreciate it if Tony Simon just shut his mouth for a while.

As the co-founder of the Venture Capital Markets Association, Mr. Simon is an unlikely torchbearer for the theory that Canada’s market for junior resource stocks is broken and the Venture Exchange is part of the problem. But he has assumed that role with gusto in the past few weeks as his thoughts have reached an increasing number of ears. It is hard to imagine that anyone else is causing more headaches for the Venture Exchange these days.

Mr. Simon, for his part, thinks he is just stating the obvious.

“This is not something that’s an unknown problem,” the Vancouver-based entrepreneur said.

The Venture management team has fired back, completely denying his claims that they are not doing their jobs properly.

However one feels about the debate, all would agree that Mr. Simon’s research paints a frightening portrait of Canada’s junior exploration sector. It raises questions about how hundreds of tiny resource companies can continue to exist. Sources said that auditors are offering these companies cut-rate fees to maintain their viability.

The controversy started in February, when Mr. Simon published research suggesting there are about 600 “zombie” resource companies on the TSX Venture Exchange that are not meeting listing requirements and should be de-listed. His report has spread around, even getting picked up by Zero Hedge, the influential U.S. financial blog.

The big numbers are grim: by Mr. Simon’s calculation, these “zombies” have combined negative working capital of greater than $2 billion. Raising money has become impossible for many of these junior firms as market conditions have deteriorated over the past few years. Now they are just “walking dead” companies with no serious prospects that pose a threat to investors looking at the sector, he said.

So why are they still around? Mr. Simon noted that TMX Group Inc. is a profitable corporation that relies on listing fees for revenue. He believes the exchange is failing to enforce its own rules, and also blames auditors and securities regulators for not doing enough to crack down on these companies and protect investors.

There are plenty of others who believe the Venture should purge these weaker firms.

“It tarnishes the viability of the [stronger] companies there, and it turns the exchange into a laughingstock where very few people will go to invest,” said Bill Sheriff, the opinionated chief executive of Till Capital Ltd.

Mr. Simon’s research points out numerous companies that are in appalling financial positions. For example, Bluenose Gold Corp.’s latest statements show the company had $3,491 of cash and receivables at the end of December, compared to $2.6 million of accounts payable and accrued liabilities. Xiana Mining Inc. had $6,954 of current assets as of Oct. 31, compared to $1.7 million of current liabilities.

In some cases, the accounts payable in these tiny companies are owed largely to insiders, which shows they are putting their own money in to keep the firms going.

There is a legitimate debate to be had on whether it is in the interests of investors to have companies such as these on the public markets. But in the Venture Exchange’s view, there is no debate that it is upholding its standards. In an interview, Venture president John McCoach defended his company’s practices and accused Mr. Simon of selectively choosing data for his study.

“The one thing that jumped out at me is his allegation that we were intentionally turning a blind eye [to non-compliant companies] or changing our practices. Which is totally without any basis, and in fact it’s absurd,” he said.

“Our continuing listing standards have been applied the same way as long as anybody here can remember in at least 10 years.”

For example, on the issue of negative working capital, Mr. McCoach noted the rules give the exchange some discretion to keep companies listed if their capital position is weak because of seasonal or temporary conditions. And he said working capital is not necessarily the best tool to judge these companies, since the nature of mineral exploration is that you spend your money on drilling and then go raise more of it (if you can).

Mr. McCoach said 27 of Mr. Simon’s 600 companies were previously bounced to the NEX board, which is for Venture companies with little-to-no corporate activity (Bluenose Gold is one of those). The Venture Exchange then took a sample of 135 of the other weakest companies on Mr. Simon’s list, and determined that 30 may not be meeting listing requirements. “Extrapolating that out, we would end up with a number far less [than Mr. Simon],” Mr. McCoach said.

For the past few years, numerous experts have predicted there will be a purging of these companies. They are seen by some as a relic of the mining bull market from last decade that no longer have a reason to exist. But despite their struggles to raise capital, they have shown an ability to hang in, and Mr. McCoach thinks the vast majority of them will continue to do so.

THE CANADIAN PRESS/Aaron Vincent ElkaimThe Toronto Stock Exchange Broadcast Centre is pictured in Toronto.

The question becomes: How are they doing that? Auditing fees alone can cost upwards of $25,000 a year for a small junior mining company, experts said, while listing fees are a minimum of $5,000 to $6,000. And that does not even account for legal fees and transfer agent fees.

By law, an auditor cannot start a new audit for a company until it has been paid for the prior one. Companies with minimal cash and negative working capital should not be able to pay that money. Company insiders won’t foot the bills forever.

But sources said some auditors are offering very low rates to keep these companies from folding — in some cases less than $10,000. One source said he knew of a case in which an auditor settled up with a company at a lower-than-expected-rate, just to ensure it got paid quickly.

“A lot of the auditors have given them a lot of slack,” said Mr. Sheriff.

The miners themselves are always trying to find ways to ease the burden. Tony Drescher, an entrepreneur involved in many small mining companies (including Xiana), said he does as much of the administrative work as possible in-house to control fees. “It would be very difficult if we had to contract this stuff out,” he said, adding companies are always finding creative ways to lighten their fee load.

But insiders wonder how long the survival can last. Junior exploration companies have, for the most part, been in a bear market since 2007. They have managed to defy the doubters and keep the lights on year after year as they hope and pray for better market conditions. It is not a scenario that can go on indefinitely. However one feels about the listing debate, at some point it may make more sense for a lot of companies to just die than to be part of Tony Simon’s Walking Dead.

‘Walking dead’ on the TSX Venture Exchange: How are ‘zombie’ companies surviving?

@CondorGoldPlc La India project sees ounces increase after Whittle optimisation study, hoping will tempt someone to make a bid

$CNR.L Whittle optimisation study works wonders at Condor Gold’s La India project

Within the trade, the benefits of the employing Whittle Consulting to enhance the economics of a planned mine have long been recognised.

Jeff Whittle founded his first mine optimisation business way back in 1984, sold it, and then developed another one along similar lines.

It’s all about using the proprietary Whittle optimisation software to enhance the economics of a mine by modelling pit design, scheduling and a host of other features.

But because the main customers tend to be the major mining companies, it’s not often that the full impact of a Whittle study can see the light of day.

Condor Gold (LON:CNR) is one recent exception, and Condor’s chief executive Mark Child is in no doubts about the improvements Whittle optimisation have made to Condor’s plans for the La India gold project in Nicaragua.

“The results have stunned us,” he says. “They are far better than we thought they would be.”

And on many levels too.

Condor’s original pre-feasibility and preliminary economic studies were prepared by SRK Consulting back in December 2014.

These studies outlined three potential development scenarios: a mining project solely focussed on an open pit at La India, a mining project centred on La India but incorporating satellite pits too, and a project incorporating both open pit and underground mines.

Whittle went to work on all of these scenarios, and the results are startling.

The basic open pit, which was originally modelled around 674,000 contained indicated ounces has now been upgraded to 866,000 ounces. Under the Whittle optimisation it will now produce an average of 91,000 ounces over the first five years of production, instead of the 76,000 ounces that was originally modelled.

That’s a production improvement of 20% per annum. over the first five years on a theoretical reserve basis. If a a small amount of inferred material and production is included it rises to 101,000 ounces from a single pit

But there’s more.

The production improvement for the combined open pit plus satellite operations adds up to an even better 25%, as contained ounces jump from 827,000 ounces to 1.06mln ounces, and average annual gold production over the first five years jumps from 94,000 ounces to 118,000 ounces.

For the open pit and underground combined operation the improvement is back at 20%, based on an increase in contained ounces from 1.3mln to 1.55mln and an increase in production over the first five years from an originally projected 138,000 ounces to a newly modelled 165,000 ounces per annum.

How has this all been achieved?

Ah, that would be telling, and the precise workings of Whittle’s software remains a closely guarded secret. They utilise 10 techniques across the mining value chain.

But the modelling is clear enough, the data is held by Condor, and the improvements are there to be made.

Whittle, explains Child, has simply taken ten existing studies and re-worked them with an unremitting focus on the economics.

Thus, under the Whittle modelling although recoveries may not be at their maximum potential, from a cost point of view varying the ratio of recoveries to grinding costs can make a lot of sense.

In the case of Condor’s project, there are several such examples.

“Whittle do their own pit planning and pit phasing,” says Child. “The pit shells have gone deeper. They’re now 30% bigger. Why? – because we’ve got an average 3 gram open pit material that increase in grade at depth. What was previously deemed high grade underground is now open pittable.”

But he emphasises that in spite of the increases in size and mooted output, several other key metrics remain the same.

“The capex is the same,” he says. “The opex is the same. The all-in sustaining cash cost is the same at under US$700 per ounce. An incremental 20% to 25% more gold production per annum goes straight through to the bottom line. The life of mine extends because there is 30% more contained gold. It’s all optimised to money and NPV.”

It is fairly obvious there have been material increases in the NPVs and IRRs, although Child doesn’t quote numbers.

All of which sets Condor up nicely for the ongoing sales process, which the company has initiated and is likely to take 4 to 6 months.

It’s not a given that the company will be sold, but Child has always emphasised that he and his team are not developers.

And having sent out teaser documents soliciting declarations of interest, the Takeover Panel has declared the company to be in an Offer Period.

So be it.

Child doesn’t deny that the company’s for sale.

Indeed, at this point in time a sale is the outright preference compared to some of the other potential scenarios under which La India might get built such as a joint venture or a potentially dilutive equity raise.

“Our focus is on selling the company,” he says. “But there are a number of potential outcomes. We always said we’d probably sell, but we’re not desperate to sell.”

Indeed, there’s money in the bank, and a renewed confidence in the quality of the asset following the Whittle study.

That speaks of a certain strength in depth, especially considering that a number of confidentiality agreements are already in place and a major shareholder has recently topped up its stake.

What happens over the course of the next few months is likely to be very interesting indeed.

Whittle optimisation study works wonders at Condor Gold’s La India project - Proactiveinvestors (UK)

#Mining and the new Liberal government in #Canada from The Northern Miner

What Miners Can Expect From a Liberal Government in Canada

Posted: 10/21/2015 2:17 pm EDT Updated: 10/21/2015 2:59 pm EDT

John Cumming

Editor-In-Chief, The Northern Miner

T·The stunning return of the Liberal Party of Canada to majority status in the federal election held October 19 surprised most people in Canada who had expected, at best, a surge to minority government from third place behind the ruling Conservative Party of Canada and the New Democratic Party of Canada.

Instead, Canadians woke up to a new political landscape, with voters having taken the middle ground by rebuking the worn-out, pro-big-business Tories, but not wanting to roll the dice on the more left-leaning, inexperienced NDP.

Shown the door were the two most recent ministers of natural resources -- Conservative Greg Rickford lost his seat in Kenora, Ont., to Liberal Bob Nault, who had a close race with the former provincial NDP leader Howard Hampton; and previous Minister of Natural Resources and current Finance Minister Joe Oliver lost his seat in Toronto. Nault was quick to give some credit for his victory to First Nations communities in the the Kenora region, who mobilized to support him.

Indeed, one theme of the election was the growing political strength shown by aboriginal communities in Canada, with a record 10 indigenous people elected as members of Parliament, up three from 2011, and with a shift to Liberal from Conservative and NDP.

What should miners expect from a Liberal government?

With regard to corporate taxes, the Liberals have pledged to keep them at current levels andretain the 15 per cent flow-through credit for mineral explorers. Most of the taxation changes will come at the personal level. For example, Canadians with taxable income between $44,700 and $89,400 will see their federal income tax rate fall to 20.5 per cent from 22 per cent, while those making more than $200,000 will see it rise to 33 per cent from 29 per cent. ‌

Perhaps the biggest change that mine developers will see with the new government is the Liberals' determination to reverse the Conservatives' streamlining of environmental approvals by skipping the federal approval process, if the project had already met environmental approvals at the provincial level.

The Conservatives saw the two-stage approval process as an expensive and time-consuming duplication of effort, while the Liberals and NDP saw it as necessary oversight, with the federal government not being subject to the more parochial political pressures sometimes applied to provincial regulators.

Another change miners might see is an improved relationship between the federal government and aboriginal communities in Canada, who need to be on-side for many resource development projects to proceed in remote parts of Canada. But it's hard to generalize on the topic, as relationships can vary from community to community across the country.

The new Liberal government has pledged to allow members of the federal civil service to speak out and attend conferences, in contrast to the much-resented muzzling of federal scientists and related bureaucrats under the Conservative regime. (Here at the Miner, in the early years of the Harper government, we'd repeatedly get federal scientists eagerly offering to write op-ed pieces or serve as expert interviewees, only to have them come back months later frustrated and embarrassed upon learning they were not permitted to talk to us. As the years passed, the emails and phone calls from federal scientists stopped completely.)

It's hard to say if the Liberals' pledge for a new round of massive spending on infrastructure will benefit miners (beyond aggregate miners), as most of the plan relates to public transit, social housing and green infrastructure.

Another development we might see is the retabling in a new form of the private member's bill by then-opposition Liberal MP John McKay (who was just re-elected) to strengthen federal government oversight of the corporate social responsibility activities of Canadian mining companies operating overseas.

In naming a cabinet, we strongly recommend that newly elected Liberal MP Maryann Mihychuk in Winnipeg be considered for Minister of Natural Resources. Mihychuk is a professional geoscientist and businesswoman who served with distinction as Manitoba's Mines Minister and Minister of Intergovernmental Affairs in the early 2000s. More recently she has been director of regulatory affairs for the Prospectors & Developers Association of Canada, as well as a consultant to mining firms such as Hudbay Minerals and Carlisle Goldfields, among her many mining endeavours.