EDITORIAL PAGE — The value of risk capital

An interim report from the commission probing both the Vancouver Stock Exchange and the British Columbia Securities Commission (BCSC) provides interesting and, dare we say, encouraging insights into the west-coast venture-capital market.

On the positive side, it was found that investors are well aware of the venture-capital nature of the exchange. For example, most held their shares for less than a year; most viewed their holdings as outright gambles or speculations, not investments; and 80% felt their VSE holdings were more a “production of promotion than of substance.”

To our way of thinking, these findings show that most VSE investors are rather sophisticated, or at least sober-minded, about their shareholdings. The exchange is a venture-capital exchange, by and large, and a good deal of risk accrues to such holdings. That’s a given. Thankfully, the commission has found investors are fully aware of this.

The exchange would really be in trouble if most investors thought they were buying blue chips and blindly plonked down their life’s savings. This, to us, is an informed speculative investor, fully cognizant of the high-stakes nature of the enterprise. (By the way, investor response was so weak to the commission’s request for written submissions on the ills of the VSE and BCSC that a telephone survey was initiated.)

According to the interim findings, then, average VSE investors are properly skeptical, if not cynical, about their VSE holdings. After all, risk is the name of the game, as proved by a report submitted by the British Columbia and Yukon Chamber of Mines. The report estimated that, in the past 85 years, only 129 of the 4,000 speculative mining stocks that have traded (or continue to trade) on the VSE were successful in finding mines (104 mines in total). That’s a meager 3% success rate.

But such a low mine-finding ratio nevertheless contributed mightily to this country’s wealth — an enormous $42.5 billion in mineral revenue from those 104 mines. Some are still producing and can boast an aggregate $40 billion in reserve value. (With these figures in mind, one wonders why governments sometimes seem so hostile to the exploration fraternity.)

For that kind of revenue-generating power, the country can thank the VSE, the brokers and promoters and — most important of all — the wary, but still game, risk investor who is willing to gamble on a big payoff. But the commission also found both the VSE and the BCSC are not viewed with much confidence by investors. About two-thirds of respondents felt the exchange operates for the benefit of its members, not the investors. Only 16% felt the BCSC was up to snuff in its role as securities enforcer. (Oddly, the low confidence rating bears an inverse relationship to actual VSE trading volumes. Trading levels for the first eight months have surpassed last year’s total share volume and value. The 3.9 billion shares valued at $3.6 billion that changed hands during all of last year were surpassed in August of this year. This probably is more a product of rising gold prices and diamond-stock speculation than investor confidence.)

Clearly, the commission must come to grips with this low confidence. But it must do so without seriously tampering with what is a successful mine-financing structure. It is with trepidation and hope that we await the final report and recommendations of the commission.