TSE cleaning house, again — Go west

In the aftermath of the Windfall stock trading scandal of the 1960s, Ontario regulators responded by tightening up the rules for junior exploration companies. And the companies responded by going west, to Vancouver or Calgary, homes of the country’s junior venture capital markets. Some westerners say Toronto’s loss — the Hemlo, Eskay Creek, Voisey’s Bay and Lac de Gras diamond discoveries — was their gain.

In the aftermath of the more recent Bre-X Minerals salting scandal, regulators and the folks at Canada’s most senior exchange, the TSE, tightened the rules even further. And another generation of junior explorers will soon be heading west, this time to the merged venture market that will be headquartered in Calgary and housed in Vancouver.

We suppose it was inevitable. When mining is hot, it’s hot. But when it’s not, boy it sure isn’t. And in 1998 and 1999, after a series of major and minor scandals, combined with a major slump in metal prices, things got downright icy. Unless there is a huge turnaround in investor sentiment, it’s safe to say some of the mining companies with TSE listings today won’t have them a year from now.

In early October, TSE officials released details of its new continued listing requirements, which are effective immediately on an interim basis (subject to approval by the Ontario Securities Commission). There will be a 6-month “grandfathering” period for TSE companies to meet the new standards.

To retain their TSE listings, companies will have to meet a minimum market capitalization requirement of $3 million, coupled with an increase in the market value of the public float requirement to $2 million. An increase in company assets to $3 million (from $2 million) and revenues to $3 million (from $1 million) is also required. The companies must also retain “capable and experienced management.”

Those that don’t meet the tougher criteria, or which have “reduced activity levels” or “unsatisfactory financial results” will be invited to go west, or east, if the Quebec government is able to convince regulators there of the need for a venture capital market in Montreal. As the restructuring plan stands, Montreal’s junior mining companies would have to go west, a prospect not politically palatable to some government officials.

The restructuring of Canada’s capital markets has other challenges beyond political ones. For the past several years, junior companies listed on the Vancouver Stock Exchange have complained that regulators there are being too restrictive, too vigilant and too fixated on red tape in their efforts to overcome the stigma of past mining scandals. Of course, others argue that tougher rules and increased vigilance out West are good things and long-overdue.

Clearly, some of the junior companies currently listed on the somewhat lackadaisical Canadian Dealing Network will find major changes in the way they are monitored and regulated. Vancouver has a team of experienced, eagle-eyed regulators who keep a close watch on disclosure practices and trading abuses, and local media that are hip to the tricks played on investors. The bad old days there are probably gone forever.

Alberta regulators, a relatively unknown commodity with a mixed track record, face the biggest challenge of all: building credibility among investors. They haven’t shown much backbone dealing with bad apples in the past, unlike Vancouver, which has sent more than its share of rotters packing. But the national disclosure guidelines, coupled with higher standards for reporting exploration results, should make their job easier and, at the same time, allow investors to breather easier.

American investors have the most to fear, as disclosure and best practices guidelines for juniors listed on American over-the-counter markets are woefully inadequate or, in some cases, non-existent. Regulators there shouldn’t be surprised if a few more bad apples roll their way.