Once seen as an attractive capital source for Australian companies, regulatory hurdles in Canada combined with depressed global markets have dampened enthusiasm for dual listings.
Many local resources companies that raised money at home through the Australian Securities Exchange during the past decade considered the Toronto Stock Exchange an avenue to bolster cash balances, thanks to more confident and cashed-up North American investors.
But guests at a Business News boardroom lunch this week with Kevan Cowan, president of TSX Markets and group head of equities at TMX Group, indicated that accessing those funds had become a much more complex task – to the point that some companies had decided against looking overseas for capital.
And it’s not just a result of the lull in investor confidence affecting other international markets, but also regulatory uncertainty that has companies drowning in paperwork and unable to see a way out.
Positive for Paladin
Uranium producer Paladin Energy was an early success story, as an ASX-listed company going abroad to seek funds via a dual listing on the TSX.
Non-executive chairman Rick Crabb said the company reaped significant rewards from its 2005 listing on the Canadian market, which he said had a better understanding of uranium.
“The Australian market subsequently caught up (to that understanding of the product),” Mr Crabb said.
The benefit of the dual listing prevailed when the uranium price dropped significantly towards the end of 2007.
“The Australian market tapered off a bit then but the Canadian market, again with their deep understanding of uranium, kept things going,” Mr Crabb said.
Other attendees at the lunch agreed that Canadian investors had a reputation for increased understanding of commodities that might be considered obscure in the local setting.
They were more confident about investing in companies their Australian counterparts might have considered a risky bid.
Bannerman Resources, Mirabela Nickel and Troy Resources were other early movers into the Canadian market, listing there before the GFC.
There was a lull when markets crashed, but 2010 marked a resurgence of Australian companies listing on the TSX, phosphate explorer Minemakers among them.
Chief executive Cliff Lawrenson said it was the Canadians’ understanding of the phosphate and fertiliser market that prompted the board to pursue a dual listing in 2010.
“The perception is that North America has a much better understanding of the commodity as compared to in Australia, where people don’t really know the difference between potash and phosphate for example, just because it’s not been around all that long,” Mr Lawrenson said.
Minemakers is yet to see any benefit from its dual listing, however, having simply undertaken a compliance listing and refrained from raising any capital.
“Getting down to it, we need to pay fees,” Mr Lawrenson said. “Do we pay the fees and stay cross-listed or do we not?”
The answer from the lunch was a resounding yes to staying listed, for reasons that centred on the benefit of tapping into different markets at different times.
It was advice Mr Crabb agreed with, despite stating that the benefits from dual listing had subsided for Paladin.
“We have subsequently found that our trading in Canada has dropped from about 50 per cent to about 15 per cent,” he said.
The growing trend for Asian investors to invest through the Australian market was, in part, responsible for that shift, Mr Crabb said, but so too were “significant regulatory differences”.
“There are some rather old-fashioned principles in the Canadian model where you have to go to the exchange for approvals for certain things and it sort of slows the whole process up,” he said.
In contrast to Paladin’s perseverance, nickel-focused Western Areas launched a dual listing in 2005, only to delist last year because of a lack of shares take-up.
Copper producer Tiger Resources has followed suit, announcing its intention to delist from the TSX last week because of low trading volumes.
Regulation
DW Corporate’s Dennis Wilkins, who has advised several TSX-listed companies, said Canadian regulation had become so cumbersome it threatened to derail capital raisings.
“Our experience (in a number of cases) was that the regulation, when you get to the point of signing up for the financing, was all-consuming,” Mr Wilkins said.
He said in many cases companies found themselves agreeing to what would have been considered unreasonable requests, in the interests of keeping the transaction afloat.
“You concede because, in the absence of conceding, the financing goes away because the timeframe swings out,” Mr Wilkins said.
Others at the forum believed Canada’s regulatory requirements had been ramped up in response to instances such as the Bre-X and Sino-Forest fraud scandals, and while it was prudent and effective through the GFC, it had now become a significant burden.
Mr Wilkins said Canadian securities regulators also had a lot to answer for.
“Their impact on the paperwork requirement has been quite significant for the last couple of years … that regulatory hurdle seems to be escalating rather than declining and there doesn’t seem to be an efficient fix to it or open discussion around it,” he said.
Partner and head of mining at Toronto-based law firm Bennett Jones, Sander Grieve, likened working with the regulators to playing roulette.
“They want a lot of things but they’re not going to tell you what they want to know until you’ve filed a prospectus, and then you have hours to answer the question instead of days to prepare your disclosure, ” Mr Grieve said.
“We need to have a moment of truth with the regulators to say that we need to reintroduce the level of predictability the market was used to.”
Easy route
The result of increasing regulation in Canada has been Australian companies shying away from the market in favour of the domestic market, according to Macquarie Capital director Stuart Moran.
“When a company has a choice of raising money in either market they’ll go the easy route … you’re seeing a lot of people opting for the less uncertain route,” Mr Moran said.
“I think the ASX has shown a lot of innovation in the last five years … and you can go and have a conversation with them and actually seek relief and waivers.”
Allen & Overy partner Geoff Simpson agreed the open line of dialogue with the ASX was a positive.
“They’re very open about talking to the smaller and mid-tier players about how they can make life easier,” Mr Simpson said.
“The bleatings (in Australia) aren’t about regulatory issues – they’re about the state of the markets at the end of the day and the ability to raise capital – rather than it being stopped because of regulatory issues.”
Limited options
While the ASX has been held in higher regard for its less cumbersome regulation, it has left companies with the problem of where to turn to raise money, given the local market’s lack of depth.
GMP Securities corporate finance director Alex Volante said enthusiasm for listing on the TSX would remain subdued in the current environment without strong investor confidence in any global markets – unless there was a commercial advantage.
“Paladin – that went to the TSX in 2005 – I think there’s probably a commercial advantage to go to the TSX in that instance,” Mr Volante said.
“The depth of funds in North America will return in time and with a bit of help from the TSX in terms of narrowing the differences between raisings in the ASX and TSX, it could become an appealing market again.”
Macquarie Capital's Mr Moran said the TSX and ASX would remain “head and shoulders” above other potential markets such as those in Hong Kong and Singapore in terms of raising money for resources for some time. Thus, companies are left with little choice in terms of where to raise cash.
But he said the funding market specifically for resources companies had become increasingly globalised and ASX-listed companies could tap into most of the key investors.
“If you’re listed here you can access all the names in Toronto and Vancouver, now the counter probably can’t be said for listing in Toronto and accessing a lot of Australian investors,” Mr Moran said.
“Most institutional investors can go cross-border now so you don’t have to be listed on the ASX or TSX necessarily to tap those global investors, but to get the local investors – the local mums and dads – you do have to be in those markets.”
But he said what dual listing gave companies was “optionality” when different markets were performing better than others, and advised Mr Lawrenson to retain Minemakers’ compliance listing because of that. Mr Moran said such flexibility had benefited Equinox Minerals, which listed on the TSX in 2004 and was acquired by Barrick Gold in 2011 for $7 billion.
“Equinox couldn’t raise a dollar in Australia and had to go and incorporate in Canada before it could raise a dollar and then it came back here and listed in Australia,” he said. “Not all of the markets are going to be open at the same time.”
On the ground
In response to the concerns raised at the lunch, TSX Markets’ Mr Cowan said a dual listing needed a certain strategy in order to be successful.
“We’ve always felt that the hallmark of a successful inter-listing is number one to raise money in the other jurisdiction and then, secondly, to commit to an investor relations program,” he said.
“Without the first one it’s extremely difficult and without both of them, from our perspective, you’re not optimising your opportunity.”
Nailing that on-the-ground presence has proved to be a challenge for Australian companies in a logistical sense and was also complicated by what Hartleys director Grey Egerton-Warburton said was a different culture around company promotion.
“Many TSX companies spend 25 per cent of the money they have in the can in any given year on promotion – Australians would spend 2 per cent of the money on promotion … (they) put a lot more money in the ground,” Mr Egerton-Warburton said.
“So when you’re Western Areas, they were up there every quarter and raised money up there and all those things but they just couldn’t ever promote well enough in that market because they were competing with people who were promoting daily.”
In contrast, Aurora Oil and Gas has been highlighted as the current success story of an Australian company operating with a TSX listing since 2011.
Aurora has the benefit of operating in a stronger market and also has its assets in Texas, making it a more appealing proposition for North American funds.
But GMP Securities' Mr Volante said it had also committed to having senior decision makers on the ground promoting the company to North American investors.
“These guys see thousands of companies… if you want to differentiate yourself from the pack you need an on-the-ground presence and to be articulating your investment proposition to them,” he said.
Hill to climb
Information provided by the TSX confirmed the rate of Australian companies listing in Canada had reduced in recent years.
Mr Cowan said there were still new listings last year despite the number being down on the years immediately after the GFC.
“It did accelerate through the commodities boom for sure but it hasn’t fallen right off,” he said.
From a TSX perspective, he said the exchange strived to strike a balance between regulation and an accessible market.
“As exchange operators, what we’re always trying to do every single day is find that right balance between enough regulation to promote long-term sustainable investor integrity so that investors keep coming back but, on the other hand, to make rules not so ‘overburdensome’ so that you don’t have access to capital,” Mr Cowan said.
In reference to the concerns held about involvement from securities regulators, Mr Cowan said the exchange was facing similar challenges.
“In a sense they’re going to school on us and it sounds like they’re going to school on you,” he said.
“We are in an era where we’re finding securities commission staff asking a lot of questions without giving a lot of direction.
“A lot of us are labouring under this ‘how much is economic over-hang and how much of it is things like regulatory burden’ question
“If you put the two together, it’s a heck of a hill to climb, so we’ll be looking for every opportunity we can to make those burdens a little bit easier.”
