Gold bars and granules are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna October 23, 2012.Heinz-Peter Bader
One of the worst bear runs in gold in nearly two decades that has sent the TSX Venture Exchange to record lows has ignited a frenzy of stock consolidation among junior miners jockeying for fresh but dwindling investor attention amid the downturn.
The share consolidation (also known as reverse stock splits or "rollbacks") at a number of smaller gold companies are intended to broaden interest among investors at a time when the firms are struggling to survive. The S&P/TSX Venture Composite Index hit a record low of 580 on Monday and is down more than 80 per cent since 2007.
Among the exploration companies that have either recently reduced or plan to reduce their outstanding shares are Mission Gold Ltd. (formerly Delta Gold, with a 16-to-one consolidation), Metals Creek Resources (seven-to-one), GPM Metals Inc. (two-to-one), California Gold Mining Inc. (10-to-one) and Aldershot Resources Ltd. (five-to-one).
Share consolidations reduce a company's outstanding shares to increase the value per share, but do not change the value of the company. They can be used to satisfy a minimum listing requirement (5 cents per share for the Venture Exchange), tighten the share structure partly to minimize selling pressure (a smaller float makes it more difficult to borrow the stock to short it), or make a stock more attractive to retail and institutional investors.
"To some degree there's a psychological aspect, and/or in some cases some institutions and investors have guidelines that they can't own shares that are less than a certain amount," said John Turner, a mining lawyer at Fasken Martineau DuMoulin LLP. "There's also a recognition that if they want to raise money going forward – even if people aren't prohibited from buying them – in some cases it's a harder sell to sell a penny stock."
California Gold plans its consolidation to meet the Venture's minimum listing requirement, as well as to be more attractive to retail investors. "When the stock price goes into that range [at Monday's close of 2.5 cents, for example, the stock would be 25 cents, post-consolidation], it becomes much more amenable for retail brokers and potential retail investors to invest than if it's a two-and-a-half cent stock," said Vishal Gupta, president and chief executive officer of the exploration company focused on its Fremont gold project in California's Mariposa County.
When it comes to institutional investor interest right now, Mr. Gupta was blunt about the lack thereof. "We know we are a little too small for our institutional clients to be interested right now," he said. "Most of the institutions who used to invest in high-risk, high-reward junior micro-cap companies have just got a 70-per-cent haircut on their funds because all the investments blew up when the price of gold went down [starting nearly four years ago]."
But consolidations, in theory, will have only a temporary effect unless they are accompanied by a catalyst or significant corporate event, a TMX spokesperson said.
"With any consolidation, you don't want to do it," said Alexander Stares, president and CEO of Metals Creek Resources. "Shareholders don't like it; we don't like it ourselves. However, when push comes to shove, you have to get things done. … Now was the time to do it before we're in trouble for cash and at the mercy of the markets." The company, which consolidated its stock seven for one on June 15 but still needs TSXV approval, announced last Wednesday it completed its drilling on the Ogden Gold project in Timmins, Ont., a property that is held jointly with Goldcorp Canada Ltd.
John Kaiser, an independent mining analyst and editor of kaiserbottomfish.com, says consolidations are unpopular with minority shareholders because the stock usually drops sharply post-consolidation, especially in a weak resource market.
Moreover, he points out, consolidations are often paired with a refinancing by investors close to the company, who are given a better equity position in the company at a more attractive price than what the original shareholders paid. Still further, the price level and smaller float will mean lower liquidity in the open market for meaningful positions to be established.
"That is the natural recycling process in the public resource junior sector," Mr. Kaiser said.
There are 1,914 companies listed on the Venture as of June 30, with 624 of those being gold mining companies and more than 70 per cent made up from the resource sector.
Mr. Gupta says that although 95 per cent of his company is currently tightly held, he says the consolidation should have other investors doing a double-take.
"At the very least, we'll have some new eyes on the stock that were not there before because the stock price will go up and the share structure will be consolidated."