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March 10, 2006

Migrating Canadian Companies
by Doug Casey

One of the most frequent questions from U.S.-based investors we get here at Casey Research is: "How do I buy Canadian stocks?"

Approximately 80% of the world's expenditures on mineral exploration are made by Canadian companies. It only follows that the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX-V) are home to most of the companies we follow here at Casey Research. Less frequently, we also follow stocks listed in London (AIM) or Australia (ASX), both markets being home to numerous mineral exploration companies. So our answer is always that a U.S.-based investor who is serious about making serious money should hire a full service broker with substantial experience trading directly on Canadian and other foreign exchanges.

However, there is a growing trend for Canadian companies to "migrate" to U.S. and other non-Canadian exchanges. That is, they retain their Canadian listings, but obtain a second listing in the U.S. (or even a third listing elsewhere, such as in Germany). Why? For starters, a U.S. listing exposes the company to the many U.S. institutions that otherwise would not be allowed to invest, no matter how attractive the stock might be. The desirability of a U.S. listing is a no-brainer based on simple demographics: the U.S. has ten times the population of Canada and perhaps one-tenth as many publicly traded mining companies. Access to that many more investors in a market with so few competitors has obvious advantages -- but it has costs as well.

Until recently, a U.S. listing meant taking on regulatory burdens more onerous than those in Canada, particularly some of the more draconian portions of the U.S. Sarbanes-Oxley legislation. However, Ontario -- where the TSX and TSX-V are located -- recently imposed its own SOX-like law. Furthermore, Canadian companies with a significant U.S. shareholder base are already forced to comply with many U.S. requirements. Nevertheless, the more exchanges you ask to regulate your company, the higher your compliance costs. Our friends at one junior explorer have told us they are considering getting an AMEX (American Stock and Options Exchange) listing, but are hesitating because of the extra cost and regulatory burden. For example, their director and officer insurance would go from about C$40,000 to C$250,000 overnight.

And you have to qualify. To gain an AMEX listing, a company must satisfy one of a number of initial listing criteria sets. For example, if stockholders' equity is below US$4 million, you must have a market cap of US$75 million or have total assets and total revenue of $75 million in the last fiscal year (or two of the three last fiscal years). Such requirements put an AMEX listing out of reach for many juniors, and, of course, the requirements to list on the NYSE are even more stringent.

The Upside to a U.S. Listing

Challenges and costs aside, the results achieved by companies that have migrated to the U.S. market are hard to argue with.

On December 19, 2005, one of our favorite project generators, started trading on the AMEX. Since then, the stock has gone from US$1.60 to US$3 -- and at the same time from C$1.85 to C$3.45 on the TSX. And average daily volume went from tens of thousands of shares to over 100,000 shares. The investor relations officer of another explorer with several large, advanced projects tells us that both the company's share price and volume doubled within a year of getting an AMEX listing in late 2003. A China play we've been following started trading on the AMEX on November 22, 2005. Shares have gone from US$1.40 to US$2.51 and C$1.56 to C$2.94, also with substantial increases in volume. There are many more examples than we have space for in this article, but you get the idea.

Looking farther back into the past, a gold "land bank" company we follow started trading on the AMEX over ten years ago. Management reports that the U.S. listing has served the company well. Their shareholder base has shifted to where it is now mostly U.S.-based, and the greater volume brings more support and less volatility. Today, the company trades 100,000+ shares a day on the AMEX, but only 10,000 to 15,000 on the TSX.

A silver land bank company we follow trades on the NASDAQ and provides an even more salient example. Management tells us that when the company joined the NASDAQ small-cap tier (which requires a share price of $4, a higher hurdle than the AMEX threshold) in August of 1996, volume "exploded" from 30,000 shares per day to over a million shares per day. It settled back from there, but even now, on a typical day when the company might trade a half a million shares in the U.S., only about 25,000 shares will change hands in Canada. The company graduated to NASDAQ's national listing tier (for larger companies) in late 2004, and shares have since gone from under US$13 to over US$18.

Of course, all these companies advanced their projects after they listed in the U.S., and all could be said to be tracking gold and silver to varying degrees. However, other companies that have made solid technical progress but are not tapping into the U.S. market have not generated nearly the same trading volumes nor had similar price appreciation. The logic is clear: expose a good company with good news to ten times more investors ... and magic can happen.

Other Markets

To us, the case for entering the U.S. market is quite compelling -- but that's not the only market a Canadian company might migrate to. With gold rising against most currencies, including the euro, interest in gold stocks is increasing around the world. Case in point: Frankfurt, Germany, where listings by two Casey-watched Canadian juniors paid off big time. Both saw huge volumes on the Frankfurt Exchange in January of 2006, and big price gains to go along with them. However, merely listing a resource company in Frankfurt isn't enough. Hundreds of such companies are listed there, the difference in performance being the Promotion factor: both companies received recommendations from a couple of prominent German financial analysts right before their shares shot up.

Conclusions

Once the millions of U.S. investors with online trading accounts get serious about building gold stock portfolios -- just as they once did with dot-com stocks -- it will be like trying to squeeze the contents of the Hoover dam through a garden hose.

The implications are clear. Get positioned in quality Canadian juniors now, then urge management to list in the U.S. If a Canadian company tells you it's seeking a U.S. listing -- or even announces that it's been approved for one and soon will start trading in the U.S. -- that alone might be a reason to buy.

Also, be sure that quality companies already listed in the U.S. make up a sizable portion of your speculation portfolio, perhaps between 30% and 50%. While they may already be running ahead in terms of valuation, they'll receive the most buying pressure when the big rush into junior resource stocks begins.

Why not put more into companies with U.S. listings? Because that would mean missing out on the still developing pure Canadian stories -- the companies that are still too early stage or too small to make the jump. Those companies will almost certainly offer the biggest overall gains, eventually made even bigger by a transition to U.S. markets down the road. It's not just the geese that prosper by flying south.

DOUG CASEY is the author of Crisis Investing which spent 26 weeks as #1 on the New York Times Best-Seller list. He is also editor and publisher of the International Speculator, one of the nation's most established and highly respected publications on gold, silver and other natural resource investments. Doug has made his subscribers millions with his in-depth research, right-on perceptions and contrarian attitude. To learn more about becoming a subscriber to the International Speculator, click here.

Doug Casey, Chairman
Casey Research, LLC.

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained herein is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the publisher and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. Doug Casey, entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications. Corporate policies are in effect that attempt to avoid potential conflicts of interest, and resolve conflicts of interest that do arise in a timely fashion. No portion of this web site may be extracted or reproduced without permission of the publisher.

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