Two firms will give investors a closer look at the commodities-dependent side of Bay Street this week, and the numbers are not likely to be pretty.
Investment bank Canaccord Financial Inc. and asset management firm Sprott Inc. release quarterly reports on Wednesday and Thursday, respectively. Their results will not only detail company health over a three-month span, but will show how volatility in the resource sector is affecting the financial industry.
Between economic trouble in the euro zone, a slowdown in China and a weak recovery in the U.S., global interest in investing in Canada’s mining, oil and gas resources has softened. That continues to send seismic waves through the energy and mining sectors, a bulwark upon which the Canadian financial industry has increasingly relied. As those resource companies await more-stable markets to launch new deals, underwriting and trading volumes have slowed at resource-focused firms like Canaccord.
The S&P/TSX Venture composite index, which is dominated by junior oil, gas and mining companies, has declined 20 per cent this year and a whopping 51 per cent since March, 2011. Even the larger-cap S&P/TSX energy index has lost 25 per cent of its value since last year’s high point.
This prolonged decline has put independent investment banks who rely on commodities companies for financing and M&A business through the wringer over the past five quarters. And there’s one oft-repeated phrase that is becoming troublesome to hear: There’s no sign of improvement.
If the results from GMP Capital Inc. were any indication last week, investors should ready themselves for yet another quarter of disappointment at Canaccord, which draws more than half of its investment baking revenue from the resource sector, despite recent attempts to diversify. Analysts are predicting a loss of 4 cents a share in the quarter, according to Bloomberg, compared to profit of 16 cents last year.
In its last earnings statement, Canaccord maintained its dividend at 10 cents per share, but as Sumit Malhotra, an analyst at Macquarie Capital Markets, said in a recent note, the market isn’t convinced the company can maintain this payment. That’s not helping the stock, which is down 47 per cent this year. “I think the company should consider cutting that dividend in half the way GMP did in May,” he said.
Sprott, which made its name on clever selection of gold and energy stocks, is also expected to have yet another weak quarter. In late July, RBC Dominion Securities analyst Geoffrey Kwan downgraded the company from outperform to sector perform. His view is that assets under management will drop by about 9 per cent and that redemptions would increase because of the limp performance of Sprott’s investments. The Sprott Canadian Equity Fund had lost 36 per cent in the 12 months ended July 31, and most of its hedge funds are deeply in the red in the same time period. Since Sprott generates performance fees from its funds, that’s going to hurt the firm’s performance. At $5.01, the stock is about 40-per-cent lower than a year ago.
Sprott’s continued efforts to diversify its holdings may help prop it up in the long term, but right now, as Mr. Kwan notes, the majority of the assets held are still “largely geared toward its current investment thesis favouring precious metals, energy and agriculture.”
Looking forward, the banking industry has now entered the “summer slowdown” period. But seasonal trends are not the only factor putting pressure on resource-reliant brokerages and management teams in the near term. Canadian commodities players will have to keep an eye on China, too. Softening trade and manufacturing data out of the Asian superpower indicate that imports and exports are both struggling, causing the loonie to drop and pulling down oil and metal prices.
It’s always possible that demand will shift and revenue will bounce back. But it looks like the struggle, for the country’s commodities sector – and the financial companies that serve them – is nowhere near over.