Canada's stock exchanges favour natural resource issuers
Canada is a natural resource rich country. This is reflected in not only its GDP, but also its capital markets. This article provides an overview of the representation of natural resources on Canada's major stock exchanges and discusses contributing factors to such representation.
This article is part of the global guide to equity capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/equitycapitalmarkets-guide.
Home country bias, and administrative difficulties created by jurisdiction specific corporate laws and market rules, have historically given stock exchanges a monopolistic position in providing listing services to domestic companies. However, as companies become more global in their capital raising and investment strategies, and investors become more sophisticated in the diversification of their portfolios, foreign stock exchange listings are now a more strategic issue, one that companies are increasingly prepared to dedicate resources to.
When considering a foreign stock exchange listing, companies will need to analyse a number of factors in the particular jurisdiction, principal amongst those include:
Ability to satisfy listing requirements. Stock exchanges require that companies meet certain minimum standards (including financial, operational and capital structure requirements) to qualify for a listing. A company's operational stage may make meeting the requirements of certain stock exchanges more feasible than others. For example, a company focused on exploration or in the development phase may be more likely to satisfy requirements on stock exchanges that offer asset test financial requirements rather than profit test requirements.
Location of industry peers. Companies concentrating on the production of particular commodities, or on products for a particular industry, may be more prevalent on certain stock exchanges. Industry concentration in one jurisdiction often facilitates an environment where more favourable valuations may be had because of focus by particular investors and analysts. Similarly, investor appetite for the stage of development or risks associated with particular assets can differ market-by-market and may create an environment more conducive to the trading in the stock of particular types of companies.
Depth of analyst coverage. The depth and quality of a particular capital market's financial analyst community is important. Knowledgeable analysts can affect access to equity finance and the terms at which it is available by reducing knowledge asymmetries in the primary market. As key informative intermediaries, analysts facilitate the operation of a well-functioning market and can increase overall trading volume.
Quality of institutional investors. Institutional sponsorship is believed by many stock observers to send a strong message about a company's health and financial future. Because institutions are the largest force behind supply and demand in securities markets, they perform the majority of trades on major stock exchanges and greatly influence the prices of securities. Stock exchanges in countries with a good mix of both traditional (that is, pension funds, investment funds (including mutual funds) and insurance companies) and alternative investors (that is, sovereign wealth funds, private equity, hedge funds, and exchange-traded funds), with specialists in particular industries, provide an environment conducive to strong institutional sponsorship.
Regulatory environment. Securities laws and regulations remain an important determinant of where securities are issued, how they are valued, who owns them, and where they trade. An over-regulated capital market will result in a higher cost of capital when raising funds. On the other hand, a jurisdiction with weak regulatory oversight may result in a company being undervalued by investors because of concerns relating to the credibility of the stock exchange or a lack of investor protection.
This article will examine a number of the above considerations in relation to Canada's principal stock exchanges, with a particular focus on location of industry peers as a differentiating feature. While there is a wide range of industries represented on the Canadian stock exchanges, each stock exchange has a significant representation of natural resource issuers. Canada is recognised as one of the world's leading capital market for natural resource companies, with its exchanges listing over half of the world's public mining companies and over one-third of the world's public oil and natural gas companies. Although the London and New York stock exchanges are homes to some of the largest natural resource companies in the world, the Canadian stock exchanges are the preferred choice of the junior and mid-cap issuers. As a result, Canadian stock exchanges present not only a recognised destination for foreign companies to raise capital, but also a significant source of acquisition targets and merger partners for international major and mid-cap natural resource companies.
Canada's stock exchanges
There are currently four recognised stock exchanges in Canada. The two principal stock exchanges (the Toronto stock exchange (TSX) and the TSX venture exchange (TSXV)) are owned by the publicly-traded TMX Group Inc. Two smaller alternative stock exchanges are the Canadian stock exchange (CSE) and the Aequitas NEO exchange (Aequitas). Canada also has a number of alternative equity trading systems, including:
Nasdaq CXC Limited.
Principal stock exchanges
The TSX, also known as the "senior Canadian board", is based in Toronto, Ontario, with regional offices across Canada. The TSXV, or the "junior" or "venture board", is based in Western Canada, with principal offices in Calgary, Alberta and Vancouver, British Columbia. As at 30 November 2016, there were a combined total of 3,140 listed companies on both stock exchanges. The TSX and TSXV are also significant stock exchanges for international capital, with 240 international companies listed as at 30 November 2016 (all data related to the TSX and TSXV is provided by the Market Intelligence Group, TSX).
TSX. As at 30 November 2016, there were 1,486 issuers listed on the TSX. The TSX provides a market for well-established, growth-oriented companies with strong performance track records. The average market capitalisation for listed companies on the TSX is CAD$1.5 billion, with a number of issuers having a market capitalisation of over CAD$100 billion. The TSX is the 10th largest stock exchange in the world in terms of market capitalisation and the 6th largest stock exchange in the world in terms of equity capital raised.
TSXV. As at 30 November 2016, there were 1,654 issuers listed on the TSXV. In contrast to the TSX, the TSXV is a venture capital marketplace intended for early-stage growth companies and junior issuers aiming to raise capital to develop and market their products, properties and services. The average market capitalisation on the TSXV is notably smaller than the TSX at CAD$12.9 million. The TSXV seeks to provide investors with opportunities for ground-floor investments in growth companies. This model has worked extremely well for many junior issuers by giving smaller companies access to public growth capital. Some issuers on the TSXV do choose to eventually graduate to the TSX once they are able to satisfy the senior board's minimum listing requirements. The two stock exchanges have integrated rules and regulations which are also designed to facilitate movement of issuers from the venture board to the senior Canadian board as they grow and mature.
The table below highlights how the TSX and TSXV compare against other major global stock exchanges as at 30 September 2016.
Number of issuers listed
Quoted market value (US$ trillions)
Equity capital raised year to date 30 September 2016 (US$ billions)
Value traded year to date 30 September 2016 (US$ trillions)
Alternative stock exchanges
Canadian stock exchange (CSE). The CSE is a stock exchange which began operations in 2003 and was formally recognised by the Canadian securities regulatory authorities in 2004. 312 issuers are currently listed on the CSE representing a broad range of industries. However, mining and technology are the more prevalent, with mining issuers representing 37% and technological and innovative sector issuers representing 18% of all issuers. Oil and natural gas represents 5% of issuers on the CSE. Generally, the CSE targets small-cap companies, with most issuers having a market capitalisation of under CAD$50 million.
Aequitas NEO Exchange. Aequitas launched in March of 2015. This stock exchange provides listing services and facilitates trading in securities listed on Aequitas, TSX and TSXV. Aequitas secured its first listing in January 2016 with an exchange-traded fund (ETF) listing. Aequitas has not yet completed a corporate listing. Aequitas has stated that it intends to seek out additional ETF listings, initial public offerings, and target small to medium-sized firms looking to move from the TSX or the TSXV. Aequitas is currently in the development stage of the listing business and does not target specific industries. Representatives state that the ideal market capitalisation for Aequitas' listing services is CAD$50-400 million. Aequitas has promoted itself as having several advantages over the TSX/TSXV, including lower listing fees and annual fees, lower fees for generating real-time market data and enhanced liquidity.
TSX and TSXV
The following provides additional information in respect of Canada's principal stock exchanges, the TSX and TSXV. As noted earlier, while there is a wide range of industries represented on the TSX and TSXV, each has a significant representation of natural resource issuers. Below is a graphic representation of the industries represented on the TSX and TSXV.
The mining sector in Canada, while comprising approximately 10% of the TSX and TSXV's listings (based on market capitalisation), is in fact home to more listed mining companies than any other stock exchange in the world, with 229 issuers listed on the TSX and 974 issuers listed on the TSXV. This equates to 62% of the world's public mining companies. Similarly, there are more oil and natural gas companies on the TSX and TSXV than on any other stock exchange. The TSX has 81 oil and natural gas issuers and 43 issuers in energy services, and the TSXV has 156 oil and natural gas issuers and 27 issuers in energy services. Combined, the number of oil and natural gas issuers listed on the TSX and TSXV equates to 30% of the world's public oil and natural gas companies.
The table below illustrates the global distribution of public mining companies on the TSX and TSXV compared to all other major stock exchanges over the five-year period from 2010 to 2015.
The table below illustrates the global distribution of public oil and natural gas companies on the TSX and TSXV compared to all other major stock exchanges over the five-year period from 2010 to 2015.
The TSX and TSXV also accommodate a proportionately larger number of public companies in the energy sector (oil and natural gas and energy services companies combined) compared to other major stock exchanges, as seen in the table below.
Total number of listed companies
Total number of listed energy companies
(oil and natural gas and energy services)
As at 30 November 2016, the TSX had 106 international listed issuers. The US was the largest source of international issuers at 49%, followed by the UK and Europe at 14%. There was also representation from Australia/New Zealand/Papua New Guinea (8%), Asia (8%) and Latin America (7%). Of the international issuers listed on the TSX, 49% were mining issuers and 10% were oil and natural gas related issuers.
As at 30 November 2016, the TSXV had 134 international issuers. The US was the largest source of international issuers on the TSXV at 53%, followed by Asia at 17%, Australia/New Zealand/Papua New Guinea at 6% and the UK and Europe at 7%. Of the international issuers listed on the TSXV, 37% were mining issuers and 14% were oil and natural gas related issuers.
The TSX and TSXV have undertaken several partnerships with international stock exchanges, including Colombia's stock exchange (Bolsa de Valores de Colombia) (BVC) and Norway's Oslo stock exchange (Oslo Børs) (OB). In each case, the respective stock exchanges committed to promote dual-listings and mutual co-ordination to facilitate additional liquidity for their listed members. Research has shown that a company typically more than doubles its capital raising capabilities by listing on multiple exchanges. The BVC was chosen by the TSX/TSXV due to the large number of Canadian natural resource companies operating in Colombia. The OB was chosen due to the large number of energy service companies listed on that stock exchange.
In addition, a unique partnership exists between the TSXV and the Santiago exchange, venture (SEV) in Chile. The TSXV assisted the SEV in establishing its venture stock exchange based on its own model. The exchanges work together so that issuers listed on the TSXV automatically qualify for a dual listing on the SEV. Through a listing on SEV, issuers also have access to the Latin American Integrated Market (Mercado Integrado Latinoamericano) (MILA), a strategic partnership between the countries of Chile, Columbia, Mexico and Peru, where each country's stock exchange is accessible as one integrated board. Issuers in each jurisdiction have access to investors of the other three countries through a single registration in MILA. In this way, an issuer choosing to take advantage of the TSXV/SEV partnership can also gain access to the Peruvian, Columbian and Mexican markets with relative ease. Each of these capital markets have experienced a notable increase in both mining and oil and gas activity over the last decade, and the TSX/TSXV sought to capitalise on its expertise in these areas in partnering with the SEV.
Natural resources expertise
Because of the concentration of natural resource issuers in Canada, the TSX and TSXV staff have developed a corollary expertise and specialised knowledge with respect to these sectors. To meet oil and natural gas disclosure obligations required of issuers under Canadian securities laws, the TSX and TSXV retain reserve auditors who review oil and gas disclosure, and reserve evaluation reports which are filed with the TSX and TSXV in connection with public disclosure, initial listings, and property acquisitions. To meet mining disclosure obligations, the TSX and TSXV similarly retain qualified geologists who review geological reports filed in connection with public disclosure, initial listings, and property acquisitions. The technical experts at the TSX and TSXV work in tandem with the Canadian securities regulators to ensure that both:
Investors are provided with accurate and complete disclosure pursuant to listing and continuous disclosure obligations imposed on listed issuers.
The markets are able to fully understand the underlying assets and business objectives of issuers.
The two groups also work to ensure that their respective rules and regulations complement each other and reduce duplication in disclosure and review requirements.
In addition, listing standards for the TSX and TSXV offer financial tests specifically applicable to mining and oil and natural gas companies. These industry-based requirements can be particularly attractive to newly producing companies or companies in the exploration or development stage that may not yet be able to satisfy financial tests based on profits or revenue. Detailed listing requirements for each of the TSX and TSXV can be found at: www.tsx.com.
The Canadian capital markets
Enhanced analyst coverage
Financial analysts are one of the cornerstones of financial markets. As key information intermediaries, analysts facilitate the operation of well-functioning markets and contribute to pricing accuracy.
The analyst community in Canada is sophisticated, and most banks and other intermediaries providing these services have a number of specialists on staff, including specialists with mining and oil and natural gas training. Specialists engender more accurate and reliable forecasting and provide an added intelligence to analyst reporting.
Issuers listed on the TSX and TSXV receive significant analyst coverage. Specifically, the mining sector has over 300 equity analysts, while the oil and natural gas sector has over 200. The market coverage is widely regarded as mature and over 50% of the analysts covering the Canadian natural resources sector reside in Canada.
Active Canadian investor base
Natural resource extraction is capital intensive, and as the industries comprising the sector have grown, requirements for capital has grown in step. Canada is consistently, year over year, the worldwide leader in mining financings and oil and natural gas financings, meaning that the natural resource sector has consistently been successful in accessing the public markets in Canada for cash to fund growth.
Canadian investors (both institutional and retail), are very active in trading natural resources equities. While second to financial services on the TSX and TSXV in terms of market capitalisation, natural resources accounts for the highest percentage of trading volume. Specifically, the mining sector has the highest volume traded on the TSX, trading 33.1 billion shares year to date as at 30 November 2016. This is followed by oil and natural gas trading 17.8 billion shares over the same period. The mining sector is also the leader in volume traded on the TSXV, trading 25.7 billion shares year to date as at 30 November 2016, while oil and natural gas traded 3.8 billion shares over the same period.
A contributing factor to the prevalence of natural resources in the Canadian capital markets, and the Canadian investor's predilection for investment in the sector, is that the natural resource industry forms a substantial portion of the Canadian workforce and economy. In 2015 (which, by all accounts, represented a severe global recession in the natural resources sector), the natural resources sector was responsible for 1,750,000 jobs in Canada, representing approximately 10% of Canada's total workforce. The economic size of the natural resources sector is even greater, as it was responsible for 17% of Canada's gross domestic product in 2015. Between 2010 and 2014, the natural resources sector netted Canadian governments no less than an average of CAD$27 billion in annual revenue (source: Government of Canada, "Key Facts and Figures on the Natural Resources Sector" (24 October 2016) and Statistics Canada, "Portrait of Canada's Labour Force" (15 September 2016)).
Canadian investors have also proven receptive to geographical risk. Of the nearly 10,000 mining projects held by TSX and TSXV companies, approximately half are outside of Canada and a third outside of North America, including Mexico and Central/South America, Africa, Asia, Australia and Europe. Of the 237 oil and natural gas issuers listed on TSX and TSXV as at 30 November 2016, 124 have operations outside of Canada. 85 of these issuers have operations outside of North America in regions including Mexico and Central/South America, Africa, Asia, Australia and Europe. 51 issuers have operations in multiple geographic regions.
Integration of US investors
Canadian stock exchanges are uniquely positioned in North America to access the US capital markets and a significant part of the daily flow of trading comes from US-based investors. The depth of the US capital markets provides additional liquidity for companies listed on Canadian stock exchanges. In addition, the Canadian securities regulators and the United States Securities and Exchange Commission (SEC) adopted a multi-jurisdictional disclosure system (MJDS) in 1991 in an effort to reduce the barriers to cross-border financings between Canada and the US. The MJDS permits eligible Canadian issuers to access the US markets and publicly offer securities in the US while relying on a Canadian-compliant prospectus that is reviewed only by Canadian securities regulatory authorities. Similarly, MJDS permits a US issuer to access Canadian capital markets by complying with US disclosure obligations for public offerings with its offering document being subject to the primary review of the SEC.
The rationale underlying MJDS is that each country's regulations are sufficiently similar to the others, and both country's capital markets are so interrelated, that duplicate regulation is considered inefficient and unnecessary.
Efficient regulatory environment
While a detailed discussion of securities legislation in Canada is beyond of the scope of this article, a brief overview of certain features of its capital markets regulation is warranted. As noted earlier, issuers have an incentive to raise capital in jurisdictions whose regulatory regime facilitates a lower cost of capital. Overall, Canadian capital markets are efficient in many respects and measure up well when compared with those of other countries of comparable size.
A foreign issuer can be listed on a Canadian stock exchange in one of the following ways:
An initial public offering (IPO).
A non-offering direct listing.
As the Canadian capital market is governed by a disclosure based regulatory regime, companies wanting access to financing in the public marketplace must disclose all material information to the market. In all three cases, the issuer will be required to prepare a prospectus or prospectus-like disclosure document and have current audited financial statements.
Initial public offering (IPO). In respect of an IPO, the foreign issuer will become a public "reporting issuer" in Canada through an offering of new securities under a prospectus. In Canada, a prospectus must contain "full, true and plain disclosure of all material facts relating to the securities being issued" and must follow the detailed disclosure rules set out in the securities legislation.
The issuer, once a public reporting issuer in Canada through the clearing of a prospectus, will concurrently make an application to a Canadian stock exchange to have its securities listed. The procedure for a foreign company seeking to list shares on a Canadian stock exchange is generally the same as the process for a domestic Canadian issuer, although emerging market issuers are subject to certain additional requirements. Detailed requirements relating to the listing process can be found at: www.tsx.com.
Upon becoming a reporting issuer and obtaining a listing for its securities, the foreign issuer will then need to be able to satisfy the reporting and public company obligations established by the Canadian securities regulators and the relevant stock exchange.
Non-offering direct listing. In a non-offering direct listing, the foreign issuer will become a reporting issuer in Canada through the filing and clearance of a non-offering prospectus. Concurrently with the clearance of the non-offering prospectus, and the issuer becoming a public reporting issuer in Canada, an application will be made to have its securities listed on a Canadian stock exchange. Non-offering, going public transactions are not common in Canada, though several do occur each year. They are usually undertaken to provide a trading market for the issuer's current shareholders as opposed to raising capital, and may have the effect of increasing the issuer's number of shareholders. Like the IPO process, upon becoming a reporting issuer and obtaining a listing for its securities, the issuer will need to be able to satisfy the reporting and public company obligations established by the Canadian securities regulators.
Dual-listing. Issuers already listed on a foreign stock exchange can apply to be dual-listed on a Canadian stock exchange if they meet the applicable listing standards. For issuers listed on other stock exchanges, dual-listing on a Canadian stock exchange offers access to additional liquidity and an additional marketplace for securities to be traded, as well as access to the Canadian capital markets.
The process for dual-listing involves submitting the required applications, including listing and supporting documents, with the applicable stock exchange. An acceptable principal listing document for applicants seeking direct listing on the TSX includes documents or forms from other jurisdictions which include similar information as the Canadian "annual information form". The information provided must be dated within one year of the listing application submission and must be pre-cleared by the TSX. For listing on the TSXV without a prospectus offering, the TSXV Application Form must be completed. However, based on the regulatory framework of the applicant's home market, the length of time the applicant has been trading, and whether the applicant has substantially changed its business recently, the TSXV may require prospectus-level disclosure or other additional disclosure.
There are no unique requirements in respect of financial statement disclosure for international dual-listed issuers. The TSX requires all applicants listed on another exchange to file audited financial statements for the most recently completed financial year and unaudited financial statements for the financial quarter, depending on the jurisdiction. The financial statements must be prepared in accordance with either:
International Financial Reporting Standards, subject to certain exemptions, including US generally accepted accounting principles (GAAP) for issuers with US registered securities.
Accounting principles that cover substantially the same core subject matter as the Canadian GAAP (for certain designated international jurisdictions), with a reconciliation to the Canadian GAAP.
Natural resource specific disclosure requirements. If a foreign oil and natural gas issuer intends to become listed in Canada or issue securities to the public by way of a prospectus, it will also need to comply with National Instrument 51-101 "Standards of Disclosure for Oil and Gas Activities" (NI 51-101) of the Canadian securities regulators. NI 51-101 requires the company to prepare and disclose estimated oil and gas reserves data and other relevant information as at its most recent financial year-end in a prescribed form in connection with the filing of a prospectus or the filing of annual financial statements. The statements must be prepared or audited in accordance with the standards of the Canadian Oil and Gas Evaluation Handbook.
The statements must be supported by a report on reserves data prepared by a qualified independent reserves evaluator or auditor, who must in aggregate have evaluated or audited at least 75% of the future net revenue attributable to proved plus probable reserves and reviewed the balance. The evaluator or auditor must possess appropriate professional qualifications and experience and be a member in good standing of a recognised professional organisation (for example, the Association of Professional Engineers and Geoscientists of Alberta or other provincial equivalent). Only Canadian professional organisations were initially recognised and foreign evaluators needed to apply for recognition. Orders have subsequently been granted recognising a number of US and UK associations as acceptable professional organisations.
In the case of mining companies, the technical information on properties material to the company contained in a prospectus or in annual financial statement filings must be based upon a "technical report" prepared by or under the supervision of a "qualified person" in accordance with National Instrument 43-101 "Standards of Disclosure for Mineral Projects" (NI 43-101). Technical reports under NI 43-101 must be prepared for all material properties of the company. The materiality of a property is determined on both a qualitative and quantitative test.
The technical report must be prepared in compliance with NI 43-101, and disclosure of reserves and resources must conform to the definitions adopted by the Canadian Institute of Mining and Metallurgy (CIM) or certain permitted foreign standards, including the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code), the South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC Code) and the SEC Industry Guide 7 (provided a reconciliation to the CIM standards is provided).
Continuous disclosure. Under rules adopted by all of the Canadian securities regulators to encourage foreign companies to access the Canadian capital markets (in particular, National Instrument 71-102 "Continuous Disclosure and other Exemptions Relating to Foreign Issuers"), relief is granted from virtually all of the formal requirements of the Canadian continuous disclosure regime for "designated foreign issuers".
To qualify as a designated foreign issuer, a company must first of all be incorporated under the laws of a foreign jurisdiction and not be in substance a Canadian business (which for the purposes of the definition will occur if more than 50% of the voting securities are held by Canadian residents and one of a number of other conditions, such as a majority of Canadian directors, is satisfied). The second branch of the designated foreign issuer test requires that the issuer:
Does not have a class of securities registered under section 12 of the Securities Exchange Act of 1934 (1934 Act) in the US and is not required to file reports under section 15(d) of the 1934 Act.
Is subject to the disclosure requirements under the laws of a designated foreign jurisdiction (which includes: Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, The Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland, the United Kingdom of Great Britain and Northern Ireland).
Has a total number of equity securities owned, directly or indirectly, by residents of Canada that does not, as of the first day of its financial year, exceed 10% (on a fully diluted basis) of the total number of equity securities of the company.
Provided that a foreign company satisfies these tests, it can essentially comply with the Canadian financial reporting requirements, material change, shareholder meeting and proxy solicitation requirements and similar matters by complying with the rules of its home jurisdiction. Documents filed with the foreign regulators must be filed concurrently with the Canadian securities regulators and Canadian shareholders must be provided with the same information as other shareholders of the company. There are certain additional formal requirements (such as the inclusion of certain additional information regarding currencies, and an annual statement in a public document relating to qualification for the company as designated foreign issuer), but these will be unlikely to impose any material additional burden on the company.
From a global perspective, prices for natural resources, including both oil and natural gas and metals and minerals, are projected to rise in 2017. This recovery is likely to require additional access by oil and natural gas and mining issuers to public capital markets, of which the Canadian markets are well positioned to participate. Canadian stock exchanges provide listing standards that favour natural resource issuers, provide sophisticated analyst coverage and access to quality institutional investors, all within a well-regulated and efficient capital market.
Darrell Peterson, Partner
Bennett Jones LLP
Professional qualifications. Alberta, Canada 1995
Areas of practice. Corporate finance; mergers and acquisitions; securities.
James Bartlett, Associate
Bennett Jones LLP
Professional qualifications. Alberta, Canada 2013
Areas of practice. Corporate commercial; corporate finance.