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On Canada’s upstart exchange: A rose by any other name…

Here Christopher Ecclestone of Hallgarten and Company weighs in the chances the TSX Venture’s chief Canadian competitor gains appeal.

Circumstances brought us, over the last month, to ponder the Canadian Securities Exchange (CSE) for a number of reasons. Not having focused before on the alphabet soup of alternative markets in that country, it came as a bit of a surprise to see that the entity that was known until recently as the CNSX had not started to lift its game and seriously challenge the dominance of the now bank-owned TMX combine. The main motor for this change was the acquisition of 50% of the equity of the CNSX by Ned Goodman, one of the doyens of the Canadian mining investment scene and owner of the mighty Dundee group.

There was much bewailing in 2013 that the old spirit of the Vancouver Stock Exchange had been desexed by the merger with the TSX (though no-one bewailed the demise of the Montreal Exchange). From what we can gather Goodman wants to harvest some of this dissatisfaction and is targeting companies fed up with the TSXV and encouraging them to move the way of the CSE. The rejazzed entity though is not promising the old cowboys their chance at returning to Wild West behavior. Rules are rules and much of the CSE’s rule book mirrors that of the other two exchanges, so those wanting the spirit of Bre-X are likely to be disappointed.

Frankly the incursion of Goodman into this sphere is to be welcomed. The takeover of the TMX in 2012 by a consortium of banks was just about the epitome of what is wrong with modern equity markets. As the 1970s through to the 1990s brought the demutualization of the majority of the world’s principal exchanges with most ending up as listed entities themselves, everyone patted themselves on the back that the old gentlemen’s clubs had been disbanded. Now in a rather short cycle, most of the newly liberated exchanges have been merged into behemoth entities (this being particularly the case in Continental Europe). The TMX deal with the Maple group was one of the few examples (in fact we can’t think of another) where a listed exchange has been taken private. In most places (even the U.S.) some government intervention would have stopped such a manoeuvre.

So is Goodman’s quest a quixotic venture? So far he has been able to lure some companies across the divide, almost all of them from the TSXV. We noted recently that one of the stock we followed in the tungsten space, Woulfe Mining (which has Dundee as its largest shareholder) had made the move. Can we thus expect other companies on the TSX with heavy Dundee presence on their share register to also see the “logic” of a move? Particularly in these days of tough financing, Dundee has some pretty powerful carrots to lure new entrants rather than having to employ any sticks in the persuasive process.

Speaking of financing we would note that with private placings showing some sign of life but the transactions being small, the CSE has the added advantage of not indulging in the “taxing” of placings that the TSX currently imposes. We had been quite shocked to note that the fees on small deals can be as much as 3%. With lower listing fees and a far less cumbersome process, the CSE has various feathers in its cap which the TSX cannot match without torpedoing its own income stream, which would of course make its bank proprietors into unhappy campers. With six new listings in February, the CSE might be seen to be “eating the TSX-V’s lunch… or at least part of it. That brings the total number of issuers to over 200. It is therefore no surprise that the mere mention of the CSE sticks in the craw of the TMX crew.

Some speak disparagingly about the upstart market, but we wonder at what tipping point (in terms of listed names and mix between miners and non-miners) that the CSE will become respectable. That will not be a happy moment for the TSX.

Adapted with permission from Hallgarten and Company‘s latest research report by Christopher Ecclestone. Next, in a forthcoming piece, he talks Crimea, uranium and the US. 

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