The TSX Venture Stock Exchange has been The Worst Performing Index on the Planet for 12 Months

Nearly all of us invest in the juniors on the TSX Venture Exchange. We love the ponies. In a commodity bull-market, there isn’t any better exchange to play than the TSX Venture. When timed right, the returns on exploration stocks can be unbeatable. However, when the Dow is flirting with all-time highs, during a time when the TSX Venture is on a rapid 12 month decline, a longer-term investment approach is needed with exploration stocks.  

TSX VENTURE 12 MONTH CHART BELOW - ouch!

Because a longer-term investment approach is needed, it’s time to dump the grass roots plays from your portfolio before you’re diluted out of a position. These companies don’t have a hope in hell of raising capital in this market without extreme dilution. 

Just last week I was talking to a friend who has been very successful raising capital for mining companies over the last 20 years. He was telling me that most of these junior explorers now have to raise flow-through capital at market prices!!!  Flow-through financing is typically raised at a premium to the current share price because of the tax benefits for investors. And even then it can be harmful to the current shareholders of the company looking for capital (because of the tax benefits - see here: http://www.milliondollarjourney.com/how-flow-through-shares-work.htm). 

If some of these grass roots juniors start raising flow-through capital at market prices, you know the well has run dry. Their current shareholders are going to be in for a beating in 4 months when those flow-through shares come free trading.  

When the TSX Venture Exchange goes through a broad based 12 month sell-off (losing 60%) and the Dow continues its ascent to all-time highs, we have a serious problem. 

If the Dow collapses to 10,000 (and it will, just probably not in 2012), what do you think is going to happen to the TSX Venture?

Many grass roots explorers, looking to raise capital for their next drill program, will be walking Howe Street or Bay Street with a hat in hand. We saw it in 2008 and we’ll certainly see it again.

Not to be all doom and gloom, but one has to be realistic. I think there are some fantastic opportunities right now trading on the TSX Venture, but you have to do your homework. Cash is king on this exchange right now. If you own a grass roots company in need of capital, I’m afraid you’re in for a bumpy, downhill ride.  The brokerages and other institutional investors are calling the shots once again. They know exactly how desperate some of these grass roots companies are for cash. When that is the case, it’s the current shareholders that end up getting screwed.

Good night,

Aaron

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This article represents solely the opinions of Aaron Hoddinott. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof.  Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations.