 Migrating Canadian Companies
By Doug Casey
Chairman, Casey Research, LLC.
The
International Speculator
March 9, 2006
One of the most frequent questions
from U.S.-based investors we get here at Casey
Research is: "How do I buy Canadian stocks?"
Approximately 80% of the world's
expenditures on mineral exploration are made by Canadian companies.
It only follows that the Toronto Stock Exchange (TSX) and the
TSX Venture Exchange (TSX-V) are home to most of the companies
we follow here at Casey Research. Less frequently, we also follow
stocks listed in London (AIM) or Australia (ASX), both markets
being home to numerous mineral exploration companies. So our
answer is always that a U.S.-based investor who is serious about
making serious money should hire a full service broker with substantial
experience trading directly on Canadian and other foreign exchanges.
However, there is a growing
trend for Canadian companies to "migrate" to U.S. and
other non-Canadian exchanges. That is, they retain their Canadian
listings, but obtain a second listing in the U.S. (or even a
third listing elsewhere, such as in Germany). Why? For starters,
a U.S. listing exposes the company to the many U.S. institutions
that otherwise would not be allowed to invest, no matter how
attractive the stock might be. The desirability of a U.S. listing
is a no-brainer based on simple demographics: the U.S. has ten
times the population of Canada and perhaps one-tenth as many
publicly traded mining companies. Access to that many more investors
in a market with so few competitors has obvious advantages -
but it has costs as well.
Until recently, a U.S. listing
meant taking on regulatory burdens more onerous than those in
Canada, particularly some of the more draconian portions of the
U.S. Sarbanes-Oxley legislation. However, Ontario - where the
TSX and TSX - V are located - recently imposed its own SOX-like
law. Furthermore, Canadian companies with a significant U.S.
shareholder base are already forced to comply with many U.S.
requirements. Nevertheless, the more exchanges you ask to regulate
your company, the higher your compliance costs. Our friends at
one junior explorer have told us they are considering getting
an AMEX (American Stock and Options Exchange) listing, but are
hesitating because of the extra cost and regulatory burden. For
example, their director and officer insurance would go from about
C$40,000 to C$250,000 overnight.
And you have to qualify. To
gain an AMEX listing, a company must satisfy one of a number
of initial listing criteria sets. For example, if stockholders'
equity is below US$4 million, you must have a market cap of US$75
million or have total assets and total revenue of $75 million
in the last fiscal year (or two of the three last fiscal years).
Such requirements put an AMEX listing out of reach for many juniors,
and, of course, the requirements to list on the NYSE are even
more stringent.
The Upside to a U.S. Listing
Challenges and costs aside,
the results achieved by companies that have migrated to the U.S.
market are hard to argue with.
On December 19, 2005, one of
our favorite project generators, started trading on the AMEX.
Since then, the stock has gone from US$1.60 to US$3 - and at
the same time from C$1.85 to C$3.45 on the TSX. And average daily
volume went from tens of thousands of shares to over 100,000
shares. The investor relations officer of another explorer with
several large, advanced projects tells us that both the company's
share price and volume doubled within a year of getting an AMEX
listing in late 2003. A China play we've been following started
trading on the AMEX on November 22, 2005. Shares have gone from
US$1.40 to US$2.51 and C$1.56 to C$2.94, also with substantial
increases in volume. There are many more examples than we have
space for in this article, but you get the idea.
Looking farther back into the
past, a gold "land bank" company we follow started
trading on the AMEX over ten years ago. Management reports that
the U.S. listing has served the company well. Their shareholder
base has shifted to where it is now mostly U.S.-based, and the
greater volume brings more support and less volatility. Today,
the company trades 100,000+ shares a day on the AMEX, but only
10,000 to 15,000 on the TSX.
A silver land bank company
we follow trades on the NASDAQ and provides an even more salient
example. Management tells us that when the company joined the
NASDAQ small-cap tier (which requires a share price of $4, a
higher hurdle than the AMEX threshold) in August of 1996, volume
"exploded" from 30,000 shares per day to over a million
shares per day. It settled back from there, but even now, on
a typical day when the company might trade a half a million shares
in the U.S., only about 25,000 shares will change hands in Canada.
The company graduated to NASDAQ's national listing tier (for
larger companies) in late 2004, and shares have since gone from
under US$13 to over US$18.
Of course, all these companies
advanced their projects after they listed in the U.S., and all
could be said to be tracking gold and silver to varying degrees.
However, other companies that have made solid technical progress
but are not tapping into the U.S. market have not generated nearly
the same trading volumes nor had similar price appreciation.
The logic is clear: expose a good company with good news to ten
times more investors and magic can happen.
Other Markets
To us, the case for entering
the U.S. market is quite compelling - but that's not the only
market a Canadian company might migrate to. With gold rising
against most currencies, including the euro, interest in gold
stocks is increasing around the world. Case in point: Frankfurt,
Germany, where listings by two Casey - watched Canadian juniors
paid off big time. Both saw huge volumes on the Frankfurt Exchange
in January of 2006, and big price gains to go along with them.
However, merely listing a resource company in Frankfurt isn't
enough. Hundreds of such companies are listed there, the difference
in performance being the Promotion factor: both companies received
recommendations from a couple of prominent German financial analysts
right before their shares shot up.
Conclusions
Once the millions of U.S. investors
with online trading accounts get serious about building gold
stock portfolios - just as they once did with dot-com stocks
- it will be like trying to squeeze the contents of the Hoover
dam through a garden hose.
The implications are clear.
Get positioned in quality Canadian juniors now, then urge management
to list in the U.S. If a Canadian company tells you it's seeking
a U.S. listing - or even announces that it's been approved for
one and soon will start trading in the U.S. - that alone might
be a reason to buy.
Also, be sure that quality
companies already listed in the U.S. make up a sizable portion
of your speculation portfolio, perhaps between 30% and 50%. While
they may already be running ahead in terms of valuation, they'll
receive the most buying pressure when the big rush into junior
resource stocks begins.
Why not put more into companies
with U.S. listings? Because that would mean missing out on the
still developing pure Canadian stories - the companies that are
still too early stage or too small to make the jump. Those companies
will almost certainly offer the biggest overall gains, eventually
made even bigger by a transition to U.S. markets down the road.
It's not just the geese that prosper by flying south.
-Doug Casey
The
International Speculator
DOUG CASEY is the author of Crisis
Investing which spent 26 weeks as #1 on the New York Times Best-Seller
list. He is also editor and publisher of the International Speculator,
one of the nation's most established and highly respected publications
on gold, silver and other natural resource investments. Doug
has made himself and his subscribers millions with his in-depth
research, right-on perceptions and contrarian attitude. To learn
more about becoming a subscriber to the International Speculator, click
here.
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