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TSX Ventures into new territory
Cannabis and blockchain have transformed Canada's investing landscape

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Saturday, January 13, 2018 – Page B12

There's life on the Venture.

In a corner of the Canadian public market still darkened by the commodity downturn, the mania for all things marijuana and cryptocurrency has ignited a spark.

Frenzied trading in pot stocks and blockchain companies has abruptly transformed the TSX Venture Exchange from a market almost wholly dependent on natural resources into a clearinghouse for some of the hottest trends in investing.

Concerns about investor euphoria and speculative bubbles notwithstanding, the recent action has brought about a much-needed revival of the exchange and may represent early progress in reducing the small-cap market's vulnerability to commodity prices.

"This is a phenomenon," said Darrin Hopkins, director and cohead of the public venture capital division of Richardson GMP.

"There is a ton of money coming into these names. Now what we need is for that capital to spill over into everything else on the Venture exchange."

Currently, Canada's publicly traded venture market in general is hitched to the vagaries of two very hot sectors.

Starting just before Christmas, a fresh round of investor euphoria for cannabis stocks saw the S&P/TSX Venture Composite index rise 15 per cent in just two weeks of trading. The top-five movers over that time were all cannabis companies, with shares of Newstrike Resources Ltd. - the company backed by band members of the Tragically Hip - rising almost sixfold. Those stocks, and the index, have since cooled off over the past few trading days.

Prior to that, blockchain stocks represented the primary fixation of many Venture investors. Best known as the digital ledger technology on which bitcoin is built, blockchain companies have proliferated on Canadian exchanges in recent months as cryptocurrencies have captured investors' imaginations.

Several blockchain names were introduced to the Venture last year and quickly saw their valuations rise by six times or more. The biggest among them is Hive Blockchain Technologies Ltd., a cryptocurrency miner backed by Vancouver-based mining magnate Frank Giustra.

After going public via reverse takeover in September, Hive commanded a valuation of $1.2billion in less than two months.

Even after moderating in price through the end of the year, it remains the third-most valuable stock trading on the Venture with a market cap of $988-million.

But like several other blockchain names, Hive does not yet have enough of a trading history to qualify for inclusion in the S&P/TSX Venture Composite index, meaning the small-cap space has been even stronger than index performance would indicate.

As Canada has become a hub for marijuana and blockchain stocks, the Venture exchange has not been the sole beneficiary. The Canadian Securities Exchange, generally considered a tier below the Venture, emerged last year as a serious contender for small-cap cannabis listings.

The total value of stocks traded on the CSE quintupled in 2017 over the prior year, led overwhelmingly by trading in the cannabis sector. On Monday, the exchange's biggest listing, medical-marijuana producer CannTrust Holdings Ltd., ended the day with a market capitalization in excess of $1-billion - the CSE's first 10-figure close.

Across all Canadian exchanges, the total market value of listed cannabis companies now totals at least $25-billion. "The public markets funded an entire new industry," said Richard Carleton, chief executive officer of CNSX Markets Inc., which operates the CSE. "We're now seeing that in the crypto and blockchain space."

And those fast-moving sectors are changing the very makeup of the small-cap market.

The most recent cyclical peak in the main Venture index was hit in 2011, which was also when global commodity prices started to tip into a downturn.

At that point, energy and materials stocks together accounted for more than 90 per cent of the Venture's market value. That share has since declined to less than 60 per cent. The health-care sector, made up mostly of marijuana companies, now makes up about 20 per cent. And factoring in the blockchain names sitting outside the index would easily bring technology's market share into double digits, up from a 2-per-cent share five years ago.

Nevertheless, the Venture will remain dominated by junior miners, said Brady Fletcher, head of the TSX Venture Exchange. "We are the world's best at growing those sectors."

He also noted that the mining sector has benefited from rising metals prices of late as well as soaring demand for battery metals such as lithium and cobalt. "But yes, I think we're reducing dependency on the resource sector," Mr. Fletcher said.

In a white paper published in 2015, TMX Group Ltd., which runs both the Toronto Stock Exchange and the Venture, identified improving the diversity of listings as a key priority.

Being excessively resource-oriented mostly paid off through the commodity supercycle but backfired when the global commodity complex turned bearish.

Starting in early 2011, the bloodletting in small caps began. Over the ensuing five years, the Venture Composite index declined 80 per cent.

Retail investors, money managers, analysts and brokerages alike all fled from the small-cap market.

On a calendar-year basis, 2015 was the Venture's lowest point.

By then, total value traded and financing activity had fallen by 70 per cent to 80 per cent from 2011 levels.

The Venture's rally point coincided with the bottom in global crude oil and metals prices in early 2016.

Beyond resources, however, a revival in the Canadian tech sector also started to take hold.

Domestic startups began to attract considerable capital, albeit mostly from private sources. "It has been a challenge to convince people from the technology sector to look at public finance as opposed to private," Mr. Carleton said.

"There was a whole generation of entrepreneurs that weren't coming into the public capital markets."

In that regard, the onslaught of cannabis stocks in Canada has helped set something of a precedent for the public smallcap market, Mr. Carleton said.

Now the blockchain space is blazing down the same trail.

"We're going to see a lot of investment in this space and a lot of new companies accessing the market this year," he said.

But in both sectors, valuations have become difficult to justify.

As recently as Wednesday, Canopy Growth Corp. had a market cap of $8-billion, making it more valuable than both Air Canada and RioCan, Canada's largest real-estate investment trust. Over the last 12 months, Canopy's adjusted revenue amounted to $58-million, compared to Air Canada's $15.9billion.

As for blockchain stocks, simply adding the word to a company's name has proven sufficient to tap into investor exuberance. In December, U.S. beverage maker Long Island Iced Tea changed its focus and renamed itself Long Blockchain Corp., bringing about an initial spike in its shares of 300 per cent.

In the emergence of blockchain and cannabis sectors, small caps have captured the attention of the average investor, said Peter Imhof, portfolio manager at AGF Investments and a veteran small-cap investor.

"The enthusiasm from the individual investor is coming back," Mr. Imhof said. "But these things typically don't end well for the individual investor."

As for the Venture exchange itself, it is on the lookout for egregious attempts to freeload on hot investing trends, Mr.

Fletcher said. "We make sure there is a legitimate business there, that they're not just doing a name change," he said.

"We've got to dig a little bit deeper in euphoric phases. We recognize that retail capital is not always sophisticated." Even a reverse takeover triggers a full due diligence process that new companies must meet, he said.

Despite the risks and the bubble fears, the new money flowing to Canadian small caps is a positive, so long as a decent amount of that capital is ultimately redeployed into other sectors and other names on the Venture, Mr. Hopkins said. "The concern is that if this is fast money, and the euphoria cools off, there could just be a stampede for the exit."

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