More than half of the junior mining companies listed on the Toronto Stock Exchange and TSX Venture Exchange have negative working capital, and some have been in the negative for as long as nine years, according to a new analysis by Vancouver resource retail investor and zombie-company hunter Tony Simon.
But junior mining isn’t the only sector that has spawned a legion of walking dead. Simon has now found zombies in other sectors as well, including oil and gas and high tech.
Last year, Simon compiled a list of 589 junior mining companies listed on the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V) that, according to his calculations, had negative working capital totalling $2 billion.
He recently released an updated and expanded list that includes sectors other than mining and exploration. He found an additional 512 companies that he calculates also had negative working capital adding up to $2.1 billion.
In other words, the dearth of new investment capital in Canadian markets is not limited to the junior mining sector.
Because the exchange makes its money from collecting various fees from its listed companies, critics say there is no incentive for the exchange to delist them. As long as the company can continue to pay its fees, it doesn’t much matter to the exchange if the company is a financial spectre.
As for the companies themselves, management will still collect salaries, even if their projects fail. The listing fees may be high, but a TSX Venture listing gives their companies enough credibility to continue to attract the occasional investor willing to make a private placement or buy stock.
Simon wonders how some companies listed on the TSX Venture Exchange keep their listings, given how long they have been running on borrowed time. He has identified 320 companies that have had negative working capital for three years or more. Two dozen have had negative working capital for more than nine years.
John McCoach, president of the TSX Venture exchange, who plans to retire at the end of this year, suggests Simon’s latest analysis should be taken with a grain of salt because his report last year contained a number of errors.
“I wouldn’t accept the number at face value, particularly based on the number of errors that were in last year’s Tony Simon report,” McCoach said. “Some of the companies weren’t even listed on either of our two exchanges. There were some of the companies that were on that list that were already on the NEX board.”
The NEX is the exchange’s bottom tier, where failing companies can park, while paying minimal fees, and try to recover.
While nearly 200 junior mining companies that made last year’s list have fallen off – either because they delisted or managed to turn things around – another 270 made it onto this year’s list.
At the end of March, there were 1,749 companies listed on the TSX-V. According to Simon, who is a chartered professional accountant and longtime retail investor, 910 companies have negative working capital amounting to $4.2 billion.
Simon’s goal in publishing his zombie-companies list is to call attention to what he and other retail investors and analysts believe is a dereliction of duty by the exchange.
That so many publicly listed companies have had negative working capital for so long suggests that the exchange has not been enforcing its own continuous listing requirements, according to Simon.
For TSX-V resource companies, that includes having at least $50,000 in working capital, and spending at least $50,000 a year on exploration, or $100,000 over two years.
“Any company that has negative working capital – that is not a large, complex company – basically is scrambling around trying to finance their debt,” he said. “It’s basically out of business. It has no right to exist any longer.”
But McCoach said working capital is not the only measure the exchange uses to determine if a company should remain listed.
And he points to a rally that has resulted in a 40% increase in the S&P TSX Venture composite index since January as proof that investment in venture-listed companies is coming back.
“The venture exchange, since the beginning of this year, has outperformed every market in the world,” McCoach said. “When this market comes back, it comes back in a flurry.”
While Simon’s new list may add some weight to the argument that a cull is needed, it also lends some weight to the TSX’s position that it should not be too hasty or heavy-handed.
As Simon’s own analysis shows, 72 companies that made his list last year have since turned things around. Four were acquired, while 68 managed to turn negative into positive working capital.
It appears from Simon’s latest list that the exchange may have been taken some of Simon’s criticisms to heart because 23 companies that appeared on last year’s zombie list have since been delisted.
Another 72 were bumped down to the NEX, where companies can go into hibernation and try to restructure and recapitalize.
Don Mosher, a partner in B&D Capital Partners, thinks the best solution for the exchange would be for it to put a moratorium on new initial public offerings and end the capital pool company (CPC) program, which allows new companies that have cash but no assets to go public.
There are hundreds of companies on the NEX, and Mosher believes they should be used up first in reverse IPOs before any new ones are allowed.
“I say suspend any program that creates new vehicles for the venture board and force them to use companies on the NEX board,” Mosher said.
McCoach called that suggestion “ridiculous.”
“We, as an exchange, should not be telling companies how to go public,” he said.
Nor does he believe placing limits on how long a company can remain in suspended animation on the NEX is a good idea. Simply giving them the boot would leave many shareholders empty-handed without the chance of recovering some of their investment.
More than 300 companies that were on the NEX have moved back up onto the upper tiers, McCoach said. That represents “tens of thousands of shareholders who would have another chance at building wealth,” he said.
“If we go with Mr. Simon’s view that we should be aggressively culling these companies, I don’t think we’ve a service to the market.”
