Timing dampens enthusiasm for OSC’s new junior financing policy

Cautious enthusiasm is coming from the mining and investment community concerning the new junior natural resource policy drafted by the Ontario Securities Commission (OSC). If anything, the lack of any real enthusiasm appears to be more the result of the current depressed state of equity markets rather than the policy itself.

The policy is applicable only to issues neither listed for trading on the Toronto Stock Exchange nor with conditional approval for listing on the tse. “It’s an improvement,” Patrick Reid, president of the Ontario Mining Association explained to The Northern Miner. “However, the timing certainly isn’t great,” he added, commenting on the bear market conditions which have put a damper on small equity financings — especially in the resources sector.

The new policy is designed to encourage and stimulate junior mineral exploration financings in the province by improving the fin ancial incentive for the promoters and dealers. Critics of the previous policy claimed that it was onerous and forced the majority of mining promoters to move to the more favorable environment in British Columbia and the Vancouver Stock Exchange.

Effective on April 1, the new policy incorporates the following highlights:

* The maximum seed capital limit has been lowered to $60,000 from $100,000. This must be raised from private investors and spent on the property before a public financ ing is sought.

* Founders of the company may obtain up to 50% of the issued stock after the public financing.

* The maximum commission to dealers will not exceed 45% of gross proceeds. This will be reduced to 40% on the first anniversary date and to 35% on the second anni versary.

* Shares issued in the secondary distribution must be sold at the same price as the primary issue. In the past, the secondary issue was priced much higher than the primary and generated big profits for dealers.

“This is a very positive step,” Rocco Schiralli, well-known mining lawyer and partner in the legal firm of Armstrong, Schiralli and Dunne, said. “I think it will work.” Schiralli was a member of the Thompson Committee which, in 1986, was charged by Premier David Peterson to review and make recommendations on improving the financial mechanism for junior resource companies operating in Ontario. The osc policy incorporates some of the Thompson Committee’s findings.

“This policy is directed towards the promoters and vendors. It also allows the broker-dealers to operate at reduced commissions.” Schiralli explained. Financings completed by broker-dealers, which used to charge up to 50% of the issue proceeds as commission, constitute a small fraction of resource financings completed in Ontario. The majority of financings, in dollar terms, are completed by traditional brokers who operate through the facilities of the tse. These financings usually see more than 75% of the proceeds going to the company’s treasury to fund exploration and development.

The real test of the policy will be just how many new junior issues are completed in the next two years. “Whether or not it (the policy) will get dealers to underwrite these issues will depend on how many promoters are attracted back to Ontario,” Schiralli said.