Toronto Bankers Feel Pain From Mining Slowdown

Toronto Bankers Feel Pain From Mining Slowdown: Corporate Canada

The downturn in the mining industry is beginning to ripple through brokerage firms and investment banks in Canada.

One small brokerage firm, Fraser Mackenzie Ltd., closed earlier this year. Casimir Capital Ltd., a closely held investment bank, has cut jobs on its mining team and is shifting its focus to energy companies.Bill Vlaad, a financial services recruiter, says requests to find bankers to work with mining and natural resources companies are drying up. Those searches now represent less than 10 percent of his business, down from half of his work three years ago. Mark Morabito, chairman of Canadian mining company Alderon Iron Ore Corp. (ADV), says he’s getting a steady stream of e-mails from bankers who are getting fired.

“I’m now dealing with the top guys, the global heads of mining, because the guys in between are all gone,” Morabito said in an interview. “Toronto is just a dead zone.”

Though the job cuts have been relatively small so far, many in the finance industry expect a bigger wave of reductions as well as consolidation, especially among boutique financial firms. If the number of such firms shrinks, mining companies could find it even harder down the road to finance exploration drilling and mine development.

Metals Slump

During the multiyear boom in commodity prices that followed the global financial crisis, these securities firms grew as mining companies easily tapped the Canadian stock markets for financing. About half the world’s mining companies have their headquarters in Canada — producers of copper, gold, iron ore and zinc — and most of the industry’s stock sales go through Toronto.

Equity financing, one of the few options for speculative companies searching for the next big mine, is now shrinking amid a slump in metals prices. Gold futures in New York have dropped 21 percent this year while copper is down 13 percent.

The total value of mining equity sales in Canada declined in 2012 and fell more sharply in the first part of this year, particularly among the small and midsize explorers and developers.

Financial firms that serve these companies are under pressure. The picture will “probably get uglier before it gets better,” for securities firms, said Michael Graham, who worked in institutional equity sales at Stonecap Securities Inc., in a June 13 phone interview.

Fewer Deals

“Everybody is talking to everyone in terms of do we get together, do we fold?” he said. “I think the reality is that everybody is going to cut people.”

Graham left Stonecap, a Toronto-based investment dealer, in early June to help with an initial public offering for a small energy company and plans to reassess his options at the end of the summer.

The number of employees at securities firms in Canada fell in the first quarter to its lowest level since 2006, according to the Investment Industry Association of Canada, which represents the nation’s securities firms. Ian Russell, the association’s chief executive officer, said in April that more than a third of Canada’s 185 boutique firms had lost money in the last two years.

Their revenue from financing of natural resources companies is dwindling. The number of equity offerings by mining companies in Canada peaked in 2011 at 858 and fell to 451 in 2012. There have been just 119 deals this year, raising $856.6 million, compared with $6.5 billion in the whole of 2012 and an annual peak of $13.5 billion in 2009, according to data compiled by Bloomberg News.

Distressed Situations

Valuations in the industry have suffered at the same time. The S&P/TSX Global Mining Index of 112 companies has dropped 25 percent this year.

“You’ve just seen a complete collapse in expansion, project development, capital raising,” Russell said in a July 4 telephone interview.

Fraser Mackenzie, which employed as many as 80 people, probably won’t be the last firm to close, said Vlaad, the recruiter.

“For the smaller firms, the ones that have been focused in mining and oil and gas, the word on the street is it’s even more draconian than just cutting a body,” he said.

Fraser Mackenzie considered merging with another firm before announcing it would fold on April 29. Mark Polubiec, its CEO, said most of his competitors were in distressed situations and he didn’t want to be the “sugar daddy” to prop up another’s balance sheet.

‘Absolutely Decimated’

“We were losing money like everybody else on the street as it relates to the small-cap resource market,” Polubiec said in a telephone interview after the announcement. “This is the first time in a long time, in my 33 years in the business, that I’ve essentially been unable to feel any certainty whatsoever when things will change.”

Casimir cut 18 jobs, or about half the workforce, including a “significant chunk” of its mining group, said acting CEO Adam Thomas. He’s part of an employee group that agreed to buy 75 percent of the investment bank in Canada.

“The mining sector has just been absolutely decimated,” Thomas said by phone yesterday. “I’m an oil and gas guy, I’ve never touched mining and I’m kind of grateful to be in this space right now.”

Toronto-Dominion Bank, Canada’s second largest lender by assets, has moved bankers from resources into areas such as real estate investment trusts and utilities, Patrick Meneley, head of global investment banking at the lender’s TD Securities Inc. unit, said in a June 5 interview.

Mining Stocks

Securities firms, banks and law firms may be reluctant to cut jobs rapidly from their natural resources groups because of what happened during the global financial crisis. Commodities prices plunged and pulled down mining stocks, but the rebound in share prices and financings was swift and strong, said Andrew Pollard, president of the Mining Recruitment Group in Vancouver.

“I think 2008 is still really in the minds of executives,” he said in a June 11 phone interview, “and they are doing what they can to just sort of hunker down and get through it without having to make the same sorts of cuts,”

Signs of strain extend well beyond the lawyers, accountants and bankers that help with financings, said Michael White, CEO of IBK Capital Corp., a closely held investment bank.

“It’s also the drillers and geophysical companies, consulting companies, the engineering companies,” he said. “Everybody’s feeling it.”

To contact the reporters on this story: Liezel Hill in Toronto at lhill30@bloomberg.net; Doug Alexander in Toronto at dalexander3@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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