enture exchange bouncing back

Up 18.6% this year

David Pett, Financial Post Published: Tuesday, March 31, 2009

Nothing ventured, nothing gained is proving more than a cliche for investors in the TSX Venture exchange this year. The resource-laden junior Canadian index is up nearly 20% year-to-date and gaining traction as perhaps the best way to play the most talked about investing strategy of the moment: the reflation trade.

"The smaller the company is, the more closely tied is its performance to changes in commodity prices," says Benjamin Tal, economist at CIBC World Markets. "The Venture has definitely benefited from some of the increases over the past few months and as commodities slowly rebound it should continue to perform well."

Many investors are turning to resource stocks as either hedges against, or potential beneficiaries of the yet-unrealized rescue efforts to inflate the ailing global economy.

As a result, the Venture exchange, made up predominantly of junior gold, copper and energy explorers, is up 18.6% since the beginning of the year. In comparison, the S&P/TSX composite index, the country's main exchange, has lost 4.4% so far in 2009 despite the recent bear-market rally. In fact, as of yesterday's close, Brazil's Bovespa stock index, up 8.26% year-to-date, is the only major benchmark in the world with positive returns so far this year.

Of course, the recent success of the Venture exchange follows on the heels of an absolutely horrible 2008, that saw the junior benchmark take a 70% haircut from its peak of 3173.67 on Nov. 6, 2007, on the monumental collapse in commodity prices last summer.

"It became extremely oversold because people were worried about the survival of these companies, especially given their total dependence on the capital markets to raise funds," said John Lee, hedge fund manager with Mau Capital Management in Vancouver.

"Towards December. I could name 20 or 30 names that were trading at 50¢ to the dollar," he added, noting for example, Serengheti Resources Inc., one of his biggest holdings, was trading at 10¢ or a market cap of $5-million in the last month of the year, even though it has $12-million in the bank.

But after hitting its current bear market low of 684.31 on Dec. 5, many investors, including insiders, took another look at the Venture, exactly because of the sheer number of companies trading at such drastic discounts, especially those who have sizable cash balances and minimal debt burdens.

"It becomes a very attractive proposition and I think a lot of people came in and scooped up shares on the cheap," he said. M&A speculation has also helped boost valuations, as large cap producers look to build their asset base through a cheap takeovers.

Gold juniors, which make up roughly 30% of the Venture exchange, have benefited from gold prices that have climbed on their "safe haven" status and hedge against the precarious U. S. dollar.

In March, copper names also got into the mix, as copper prices rose 19%, but with the threat of base and precious metal prices taking a breather, Mr. Lee thinks energy stocks will likely take up leadership on the Venture.

Overall, Mr. Lee remains slightly positive on the exchange over the rest of the year, but warns investors that commodity prices are bound to stay volatile and won't fully recover until further signs of an economic recovery.

Investors should also take note of the warning that applies to all junior exchanges: look carefully to separate the legitimate names from those with more risky profiles.

[email protected]