TSX Venture Landscape: Time To Eat The Zombies

Cejay Kim August 19, 2015 Category: Research

No one wants to buy TSX Venture-listed companies. The numbers speak for themselves, from 2011 the total shares traded dropped from 64.5 billion to a measly 18.5 billion year-to-date. And the total value traded in those shares was down from C$42.5 billion to C$5.6 billion.

You can thank the junior miners for that, who comprise 60% of the TSXV, or 1,154 of the 1,914 TSXV-listed companies. And of the 1,154 companies, it is estimated that around 600 are so called 'zombies', companies stuck in a vicious circle of illiquidity. Companies are unable to raise money because of the risks associated with exploration, and unable to de-risk projects because of the inability to raise money.

We are definitely not the first to say the TSX Venture has become a zombie wasteland. However, we are first to say that it is not a bad thing. Investor confidence at an all-time low and according to Tony Simon, co-founder of the Venture Capital Markets Association, the 600 zombie companies are not in compliance with listing requirements and should be de-listed. The TSX Venture will hold off for as long as it can, however, the market has a habit of staying irrational longer than expected.

The TSX Venture will have to pull the trigger sooner than later and commence the great purge.

When all the zombies are gone, investor will begin to feel more confident in the Venture again; both liquidity and capital will return.

In the meantime, there are some zombies that are actually ripe for the picking. These companies share the same traits as regular zombies, and are lumped together with the other zombies by investors. However, there is one enormous difference; they have cash, and a lot of it.

Companies struggling to raise money in these markets are quickly realizing that it's actually cheaper to acquire a cashed-up zombie, many trading under its cash value, than braving the markets and significantly diluting its share base.

One recent example, Northern Dynasty Minerals' (TSX:NDM) announced acquisition of Cannon Point Resources (TSXV:CNP). In the deal, each share of Cannon Point will be exchanged for 0.376 of a Northern Dynasty common share based on 39.9 cents per Northern Dynasty share. In the end, NDM ponied up C$5.1 million in shares for CNP, or more importantly, CNP's C$4.8 million cash reserves. While there was a slight premium to what NDM acquired, in these markets this is a huge discount compared to the actual cost of raising money.

Brokers are taking up to 12% to find company investors. Tack on legal and accounting, the 7% NDM paid for CNP's cash is looking cheap.

Another deal that took advantage of cashed up zombies was the historic five company merger spearheaded by Osisko Gold Royalties. In a deal quarterbacked by Oban Mining, a company founded by Osisko, Temex Resources, Ryan Gold, Eagle Hill Exploration, and Corona Gold were all acquired in friendly, all-stock offers.

Within this deal, the cash corner stones were Corona Gold and Ryan Gold, bringing C$30.2 million to the table. Oban acquired them by issuing C$30.6 million in shares. Due to the wheeling and dealing by the Osisko team, Oban was able to acquire the cash for what it was worth, testament to the strength of the team and general sentiment of zombies on the TSX Venture.

The Cashed Up Zombies

So before the purge, let's take a look at other zombies that will probably be eaten beforehand.

We found this list by screening for companies on the TSXV whose net cash (cash - total liabilities) is greater than its market capitalization. This will look familiar to some; the enterprise value of a company is normally calculated in the reverse way. The cashed up zombies we are looking for have negative EVs.

To further refine our search, we only took companies whose net cash is greater than its market cap by ~$1 million. The top three include: investment vehicle, FCF Investment, with an EV of -C$22.45 million; mining company, Adriana Resource, with an EV of -C$16.75 million; and mining company Black Iron, with an EV of -C$10.18 million.

The others are: