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The shares of every mining company targeted for a takeover in Canada during the past year experienced run-ups, many of them significant, in the days just before the deals were publicly announced, according to an investigation by The Globe and Mail that indicates a pattern of suspicious trading on Canadian markets, despite the efforts of regulators.

The review covered 14 bids. Each targeted firm had a rise in its share price over the five-trading-day period preceding the acquisition becoming public knowledge. The unbroken run of gains in the shares of targeted companies would have the improbable odds of one in 16,384 if it were consecutive heads in the toss of a fair coin.

The striking trading pattern suggests either that some players possess inside information about imminent deals, and are making illegal profits at the expense of others, or that there are savvy investors unusually prescient in figuring out just ahead of time which companies are going to be acquired. The biggest weekly gain was a 38-per-cent advance in the shares of Brazauro Resources Corp. before the public announcement of its takeover by Eldorado Gold Corp.

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The question is whether the increase just before deals "is leakage of information or clever people spotting takeover targets," says Laurence Booth, professor at the Rotman School of Management at the University of Toronto. "You can't really distinguish between the two until somebody comes out and prosecutes somebody for leaking information."

Eldorado vice-president Nancy Woo said the company noted the share increase, but said investor speculation on its intentions for Brazauro wouldn't be surprising because it had previously taken a major equity stake in the company.

But the consistency of the pattern does raise the troubling issue of whether investors on Canadian markets are being had by those with inside information, which is once again in the spotlight because of a number of investigations. The Ontario Securities Commission alleged earlier this month that Mitchell Finkelstein, a rising star at prominent Bay Street law firm Davies Ward Phillips & Vineberg LLP, tipped an old fraternity chum who worked at the CIBC about a number of pending takeover deals. And in the United States, federal agents raided the offices of three hedge funds this week as part of what appears to be a major insider-trading probe.

Canadian regulators, stung by criticism that they don't take insider trading as seriously as the U.S. Securities and Exchange Commission does, have stepped up investigations of suspicious market activity, according to annual summaries on the number of their enforcement activities.

Enforcement actions concluded against illegal insider trading rose to 16 in Canada last year, at least double the pace of each of the preceding two years.

"The OSC takes insider trading very seriously and has a dedicated team in enforcement that specializes in insider trading and market manipulation," said Jill Homenuk, a spokesperson with the commission.

Securities watchdogs declined to comment on whether any cases reviewed by The Globe, which began with the November, 2009, acquisition of Canplats Resources by Goldcorp and ended with the pending deal for Antares Minerals by First Quantum Minerals announced in October, are the subject of ongoing investigations.

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To quantify the extent of the suspicious trading, The Globe had Fatma Sonmez, a finance professor at the Queen's University School of Business, analyze the market action in the 14 target companies in the 30 days before the bids were announced, using a capital asset pricing model.

It's a sophisticated formula that determines whether movements in prices are out of line with what would be expected, given the movements in the broader market. The model calculates the cumulative excess return in a stock, compared to the movement in the market as a whole, adjusted for the volatility of the shares, a factor known formally as its beta. Dr. Sonmez's model also compared the stocks' movements to that of similar mining stocks.

A 5-per-cent gain in a company in advance of a takeover wouldn't raise eyebrows if it matched a market rally and the shares move in line with stocks generally, but it would be if returns streaked well ahead of a moribund or falling market.

According to Dr. Sonmez, there was a pattern of abnormal returns just before nine of the takeovers, or about two-thirds of the deals. Two cases were indeterminate, and three moved in line with what would be expected, given the overall action of the market in the days ahead of their deals.

On average, there was an abnormal return of 8.8 per cent in the deals compared to the gold index. In other words, the stocks gained 8.8 per cent more than would have been expected, given what was happening in the market at the time. (This calculation excludes the Potash Corp. deal, because its peer group is fertilizer producers, not gold miners.) The abnormal return for all the shares in the investigation, including Potash, was 9.4 per cent, compared to the TSX as a whole.

The excess gains started appearing 11 trading days before the bids became public and then grew steadily larger until the takeover announcement, when compared to the TSX. Most of the takeovers in the mining sector have been of junior gold explorers.

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A gain of about 9 per cent over 11 trading days may seem modest, but it is more than an equity investor typically gains in a year. The S&P/TSX composite index has risen about 6 per cent annually over the past 30 years.

"On average, there is some sort of market move before announcements," Dr. Sonmez concluded, although she cautioned that the analysis doesn't confirm anything untoward was occurring - just that there was an unexpected rise in the target's stock price, relative to other stocks.

The shares having abnormal returns before announcements (with the acquirer or potential acquirer in brackets) were: Andean Resources (Goldcorp); Antares Minerals (First Quantum); Brett Resources (Osisko); Brazauro Resources (Eldorado); Capital Gold (Timmins Gold); Red Back Mining (Kinross); Corriente Resources (CRCC-Tongguan Investment); Chariot Resources (China Sci-Tech); and AuEx (Fronteer Gold).

Acquisition targets typically surge on the day that news of a deal comes out, but in the Chariot case, most of the juicy gains happened before the announcement. The shares rose 28 per cent in the week before the deal became public, but only 5 per cent in the session after executives formally revealed they'd inked a deal.

Those without abnormal returns were Marathon PGM (Stillwater Mining); Comaplex (Agnico-Eagle) and Canplats (Goldcorp). The trend couldn't be determined for Underworld Resources (Kinross) and Potash Corp. (BHP Billiton).

The review looked at all mining takeovers, except cases where pre-deal share prices were being skewed upward by a logical explanation: open market purchases in targets by the acquiring companies.

The Globe sought comments from participants in each takeover. Generally, officials who responded said they detected nothing exceptional in the pre-deal trading patterns.

"Our corporate development people are confident that there was nothing unusual," said Jeff Wilhoit, vice-president at Goldcorp. Goldcorp has been approached by regulators looking at trading after each of its takeovers in the past three years, but Mr. Wilhoit characterized the inquiries as "matter of course" reviews.

Shares of Capital Gold rose 7.2 per cent in the week before it received a merger bid from Timmins Gold in late September. But Timmins CEO Bruce Bragagnolo said he didn't view the rise as unusual because it occurred around the time of the Denver Gold Show, an annual promotional event that draws speculators to junior gold miners.

Any rise in price before a deal is announced undermines the position of the company doing the acquisition by making the takeover premium look less generous, he said, giving a strong financial incentive to have everything kept under wraps. "It's in our best interest to keep it real quiet," he said. "We definitely don't want to let it out to anybody."

A spokesman for Potash Corp. said the 9.6-per-cent rise in its shares in the two weeks before BHP's takeover bid reflected market interest in fertilizer producers because shares in competitors also rose. BHP did not respond to requests for comment.

While regulators are supposed to be watchdogs on suspicious trading, one company, Brett Resources, itself took action to protect shareholders.

Officials at Brett Resources worried that word of the company's impending takeover by Osisko might have leaked out in the middle of confidential negotiations on the deal. The shares closed at $1.98 on March 16, and then the next day they suddenly jumped to $2.09, at which point trading was halted in the early afternoon at Brett's request. The halt lasted until March 22.

Ronald Netolitzky, Brett's chairman, said the "little wobble" in the share price made him nervous. "It could have been just a normal pattern. We could have waited it out, but I consider it unfair to shareholders that sell," Mr. Netolitzky said.

He said the exchange initially balked at the company's request for a trading halt. "We actually had to call them and kind of push them," Mr. Netolitzky said. "They really don't like having longer halts… We basically said: 'This is critical. We can't do this with a one-hour halt because we don't have the deal.' " The shares rose to $2.82 when trading resumed after the two sides completed the transaction. (TSX spokesperson Carolyn Quick said it doesn't comment on listed company matters.)

It is standard business practice on deals to require all those involved, from boards to lawyers and investment bankers, to be aware of confidentiality requirements about material, non-public information and to sign non-disclosure agreements, according to company officials. Trading in advance of important information or tipping others about it is a violation of securities law, a fact that is well known throughout the investment community.

"We have very robust sets of policies and safeguards to prevent any leaks by our own people and by the outside consultants who we engage, " says Steve Mitchell, Kinross Gold Corp. vice-president of corporate communications.

In addition to standard non-disclosure policies, Kinross takes such steps as maintaining lists of everyone in the company who knows about any companies reviewed as possible acquisition targets, and doesn't allow those executives to trade in the securities.

Mr. Mitchell says Kinross in its takeovers of Underworld and Red Back was approached by the Investment Industry Regulatory Organization of Canada (IIROC) for trading information, a review he characterized as standard procedure by the organization after mergers and acquisitions.

"We fully responded to those inquiries and there has been no further requests from regulators," he said.

But some of those involved in takeovers suggested it becomes increasingly difficult to keep deals secret as the circle of those in the know expands from a handful of senior executives and board members to include the phalanx of investment bankers, securities lawyers, and other hired help swarming each of two separate corporate teams working on typical transactions.

Ulli Rath, Chariot's president at the time of the acquisition, said he kept a tally of everyone working on the deal for his company but "stopped counting above 50."

"It's initially a pretty small group but at some point there is an ever-widening circle of individuals that seem to be involved one way or the other," he says.

He says he still has no idea why the shares of the company surged during confidential talks. "If I knew, then I would be able to tell market surveillance. I really don't know."

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