Gwen Preston writes a newsletter called the Resource Maven. She has shown a lot of courage, starting a business that covers commodities in the worst bear market that I have seen in my 35 year career. The comments below describe how extreme the consolidation in the Market has become.
The List Shrinks Again
News a few days ago that PI Financial is acquiring Wolverton Securities and Global Securities. In other words, three of the few remaining independent Vancouver-based dealers are becoming one, shortening what in the last few years has become a short list of small, resource-focused brokerage shops.
Declining commodity prices did not only hurt miners and explorers: the small banks that advised their transactions, led their financings, and told their stories also took a beating. Salman Partners wound itself up late last year. Dundee Securities left the retail brokerage business, selling its unit to Euro Pacific. Octagon Capital and Jacob Securities went bust amidst compliance violations. Byron Capital, EdgeCrest Capital, and Fraser MacKenzie all went out of business.
In fact, the Investment Industry Association of Canada says 50 small houses, representing a quarter of the banks in the business, have either folded or been acquired in the last three years.
The bigger boys haven’t fared much better. GMP Capital, one of Canada’s largest independent brokerages, announced a major restructuring in January, laying off a quarter of its work force and erasing its dividend. Canaccord Genuity has also laid off staff while seeing its share price crater.
The commodity bear market is one major cause. Technological and regulatory changes are another.
Big banks pushing into the investment banking scene for small and mid-cap companies made a bad situation worse for small houses, who could not tag cheap loans into a finance package the way a big bank can.
As a result, I would say there are now only perhaps eight brokerages left in the junior mining game: PI (with the absorbed Wolverton and Global), Haywood, Leede Jones Gable, Mackie (which already took over Jordan Capital), Sprott, Richardson GMP, Euro Pacific, and Dundee Capital Markets. The bigger houses also play a role – Macquarie, Canaccord, Raymond James, and the big banks – but for reasons ranging from regulatory compliance to risk adversity they are doing less and less on the junior end of the spectrum.
The change matters. For one, with fewer houses competing for business the terms sheets offered companies looking for a financing lead will not be as good. Secondly, the advent of online trading has eroded the importance of the broker-client relationship, cutting off one key transmission route for stock tips and thus limiting the potential for strong share price moves.
Then there’s the simple fact that, without brokers talking up the deals they like, retail just doesn’t hear about mining stocks. Without retail our business cannot succeed, so we need to figure out an answer. Part of that answer is that full service brokers can be very valuable, providing their clients with access to quality deals, research, and financings.
Instead of that, however, many investors are doing their own research and trading through online accounts. That works, but only to a point, for both investors and companies.