Canada's small-cap market stung as credit shrinks

The Toronto Stock Exchange (TSX) logo in a file photo.

TORONTO (Reuters) - Once-abundant cash is drying up for Canada's small-cap companies, as trading volumes dwindle and lenders seek safer bets in a shrinking pool of venture capital.

One year after the U.S. subprime mortgage crisis, the fallout has hit the TSX Venture Exchange composite index .SPCDNX hard, likely forcing some firms to slow exploration or development.

The firms, with shallower pockets than their elders on the Toronto Stock Exchange's main index, the S&P/TSX composite .GSPTSE, will face tougher hurdles raising money as concerns over the global economic outlook nag, analysts say.

"The amount of speculative capital that is typically available is just not available," said Wendell Zerb, a metals and mining analyst at Canaccord Adams in Vancouver. "It's in people's back pockets, under mattresses."

The sector also faces sparse trading volumes, said Robert Jennings, chairman of Jennings Capital Inc, based in Calgary. In hard economic times junior stocks "really become orphans."

"Because they are ignored, the bids dry up and the stocks start falling," said Jennings.

The Venture composite is home to more than 450 companies -- out of about 2,200 on the broader exchange -- with market capitalizations ranging from C$1.8 million to C$2 billion. Nearly half of the firms on the exchange are mining companies, according to TMX Group Inc (X.TO), which owns the junior exchange and the TSX.

The Venture composite index is down about 30 percent so far this year, with a marked drop since the beginning of the summer, when the key energy and materials sectors started sagging on the senior index.

But Jennings said it's possible for investors with a big appetite for risk to find good buys.

GETTING SQUEEZED

July figures showed Venture Exchange trade volumes down 19 percent from July last year, while total financings slumped nearly 35 percent. The value of transactions fell 39 percent.

And analysts say many firms may have few options but to hunker down until the coast is clear.

"You reduce your activities and you get into a cash conserving mode," said Mario Caron, chief executive of Axmin Inc (AXM.V), a junior gold exploration company.

Toronto-based Axmin mainly operates in Africa and usually slows operations during the rainy summer months. But the economic slump means the company is holding off to see what the market is going to look like in the fall, he said.

For most, the question is how long the slowdown will last, and if small-cap companies can survive the waiting.

"The market situation and conditions in commodity prices that we're seeing now does tend to weed out a lot of companies that aren't sitting on solid assets," said Andrew Swarthout, president of Vancouver-based mineral exploration company Bear Creek Mining Corp (BCM.V), which focuses mainly on gold and silver projects in Peru.

"At the end of all of this you'll see a much smaller field of players."

SURVIVAL OF THE FITTEST

Most analysts expect more mergers among the Venture exchange companies, as firms seek to cut costs.

"It is really a survival of the fittest business," said Rob Moss, oil and gas analyst at Acumen Capital Partners, in Calgary.

Mark Brennan, chief executive of mineral exploration company Largo Resources Ltd (LGO.V) admitted he was surprised there had not been more bankruptcies or mergers "out of desperation" among the small-cap firms.

"There have been a number of them but not to the extent that one would anticipate," he said.

Some firms will succeed, but others will not.

"If you have a good management team and a good asset, and they can hold their breath, fine. But there is a whole bunch of Venture guys that don't fit in that category," said Bill Harris, portfolio manager at Avenue Investment Management.

($1=$1.07 Canadian)

(Additional reporting by Leah Schnurr; editing by Janet Guttsman)