YM Bioscience another case of TSX/LSE false hope

TSX/LSE Merger Part 10

News item: Merger “would enable Toronto-listed companies to reach investors in London more easily.”

Wednesday’s appearance at the Ontario Select Committee didn’t go as well as the media reports might suggest. When you have an hour of facts to squeeze into an allocated space of ten minutes, you tend to try to accomplish too much, speak too fast, and miss the chance to effectively make a couple of key points. I knew this going in, but still couldn’t help myself.

Indeed, based upon the presentation by the CEO of a 9 person mining exploration company earlier in the afternoon, I was concerned that I might be missing some of the blue sky of the proposed TSX/LSE merger. Frank Smeenk, President of KWG Resources, told the MPPs that the merger was the “best thing that could ever happen for junior mining companies”. Mr. Smeenk was passionate, and came across as a great example of the heart and soul of the Canadian mining exploration community.

Montreal-based KWG is “participating in the discovery and delineation of chromite deposits in the James Bay Lowlands of Northern Ontario” according to its website. With a market cap. of $72 million, and still at the pre-revenue stage, KWG appears to have successfully raised money three times in the last 12 months alone and is trading at 2.3x book value. Last summer, it was to merge with Spider Resources, but that deal fell apart. It appears to have a 1% partnership in a project with Xstrata, so KWG is definitely playing in the big leagues in Northern Ontario.

As small cap stories go, things appear to be going like what one would expect in the early phase of a company’s development; whatever the sector. Thanks to the Queen’s Park hearing, or maybe the surge in the stock market as a whole, share trading volume increased 10x yesterday in the wake of the press coverage of the CEO’s appearance. But the stock price didn’t budge; which is the bane of many a small cap existence.

In order to do a reality check on this “Improved Access to Capital” argument, I called a few more folks on Bay Street yesterday. The very people who, unlike the TSX (which is an exchange and not a promotion vehicle), actually raise capital for early stage companies.

(Notice how none of Canada’s leading independent investment banks have come out in favour of the proposed deal?)

In response to the idea that investors in, say, London were being denied access to the KWG story without the TSX/LSE merger, one financier scoffed: “the mining world already comes to Toronto to raise capital. If you can’t raise it here, you certainly won’t succeed in Europe.”

Said another: “the reason why junior miners list in Frankfurt is ’cause they can’t make it in Canada.”

“Of the last 100 equity financings I’ve worked on, only twice have I ever said ‘Thank God for Europe’. And one of those was back in 2000. Canadian institutional investors wouldn’t touch a deal today if we talked about the AIM. They know its a train wreck [for anything other than mining].” That was the most compelling perspective I heard, and from a fellow who’s been raising equity a lot longer than most.

Wow.

I was reminded of the YM Bioscience (YM:TSX) story. YM BioSciences is a life sciences product development company with hematology and cancer-related products at various stages of development. It is well known to Canadian small cap institutional investors, and what the company’s management team is doing is important.

Back in 2002, YM did a joint TSX/LSE-AIM initial public offering. At the time, “it was only the second firm to mount simultaneous initial public offerings in London and Toronto, following Hemlo Gold Mines in 1987” (hat tip Dealogic).

The deal was priced 1/3rd below the initial marketing range, YM only raised C$15 million, and the cash came in the form of prefs and not common shares, but at least it got done and the company was off to the races.

After a couple of years, YM discovered something. The U.S. was home to 10x as many Equity Research analysts and Institutional Investors with an expertise in anything to do with biotech, drug discovery, healthcare, life science…you name it. Moreover, its investor base was largely Canadian and American, not European. So, YM also listed on the American Stock Exchange (which is now a subsidiary of the NYSE, just as the Vancouver and Alberta exchanges morphed into the TSX Venture Exchange to be the TSX’s junior capital pool).

By 2009, YM delisted from the AIM, just as so many other Canadian firms have done during the past 36 months (see prior post “Presentation to the Ontario Select Committee on TSX/LSE merger“). According to the company:

“YM concluded that the additional costs associated with maintaining a listing on AIM were not justifiable given its North American focused shareholder base.”

Today, the majority of its trading is done on the Amex, in fact.

A nice outcome. When the late (and much missed) Ross McMaster was alive, one of the inside jokes on the institutional sales desk when he was marketing an equity offering was that “Europe was eating it up.” A guaranteed laugh was always that he, or maybe Tony Pullen (a Dean of Bay Street desks), was talking “to a whale in Switzerland” about a lead order on the deal of the day.

YM found, just as Dragonwave did five years later, that there are dozens (if not hundreds) of active, interested American institutional funds and hedgies to call in the hopes of snagging some meetings for your roadshow. With American accounts already representing 40% of the daily trading on Toronto’s institutional desks, they actually place orders, too!

If you can’t raise money on this side of the Atlantic, the past decade has taught most Canadian New Economy i-bankers, Institutional Salespeople and their clients that you’ll do no better across the pond. As for the Canadian junior miner, don’t ever forget that the folks in Africa, Europe and Singapore come to Toronto to raise their exploration dough.

Canada is at the “pot-o-gold end of the Rainbow”; not the other way around.

MRM