Starting from the late 19th century, many new mining companies were introduced to the financial markets in Canada. They looked to secure money from investors in Toronto and Montreal in order to explore and develop mines elsewhere in the country. However, investments in mining companies, especially those engaged mostly in exploration, are very risky though they admittedly may have the potential to deliver huge returns. Unfortunately, investor protections were quite weak in Canada until the mid-20th century as regulations developed slowly, in part because encouraging investment in speculative mining operations was seen as good for the development of Canada. This meant frauds and manipulation were common.

Mining Company Shares

            Mineral and oil exploration and production have been significant parts of the Canadian economy for well over a century. The activity has also shaped the development of the financial system. Mineral exploration in the 1890s, primarily in British Columbia and northern Ontario, gave rise to trading in speculative new mining companies. Exchanges, most notably in Toronto and Montreal, listed what were often mining company ‘penny stocks’, those trading at below $1 a share, often an indicator of the most speculative securities. These were listed alongside more established investments in banks, insurance companies, railroads, and utility companies, but their lower share prices attracted smaller investors to the shares.

            In contrast to the ‘majors’, large mining companies with vast operations, many new mining issuers were ‘juniors’ engaged largely in exploration with little exposure to producing mines. In the 1920s, investment in these ‘junior’ mining companies boomed, driven in large part by aggressive sales practices, false or misleading claims, and share price manipulation. By the late 1930s, the misuse of prospectors’ reports and the outright fabrication of mineral finds, such as by the ‘salting’ of drill hole cores with valuable metals, had become public knowledge and tarnished the market’s reputation.

Toronto Stock Exchange (c. 1937-39), Source: Alexandra Studios available at Wikimedia Commons

Early Approach to Regulation

            At this time, many speculative securities issued by Canadian mining companies were marketed in the United States by means of letters and telephone calls, dubbed ‘the Canadian problem’ in the U.S. securities business at the time. Recognizing that losing American interest in its markets would be costly, the government of Ontario did put in place some regulatory measures starting from the late 1920s and created the Ontario Securities Commission (OSC) in 1932. Still, the almost equally newly formed Securities and Exchange Commission (SEC) in the U.S. embarked on a publicity campaign to discourage investors from heeding the recommendations of mining company shares flowing south from Canada.

            Canadian government, whether federal or provincial, was generally uninterested in replicating the regulatory structure implemented in the United States after the Stock Market Crash of 1929 and the onset of the Great Depression. They were unwilling to severely restrain speculative resource extraction industries since these were important to the development of Canada. Of course, there was some regulation. Besides provincial governments, the stock exchanges in Toronto and Montreal themselves regulated listed securities while the over-the-counter market was self-regulated by the Broker Dealers Association. These private bodies did much of the regulating in this era.

            Mandatory disclosure of exchange-listed company financial information came a decade later in Canada than in the United States. The Royal Commission on Mining recommended its introduction in 1944 and the following year, the government of Ontario passed its Securities Act (1945). Still, the OSC remained underdeveloped and limited in function compared to the SEC. Through the 1950s, stock exchanges were subject to less regulation and there was no securities regulation at the federal level.

Toronto Stock Exchange

           One of the earlier major actions taken by the OSC was to merge the ignoble Standard Stock and Mining Exchange with the more respected Toronto Stock Exchange with the goal of cleaning up the market. Still, the rules of the combined exchange allowed manipulative behavior. For example, a practice prohibited on other exchanges, the continuation of a primary distribution of shares after secondary market trading between investors was already underway encouraged share promoters to manipulate the share price on the secondary market to encourage more people to buy shares from the issuer’s bankers.

           The Toronto Stock Exchange’s listings of speculative mining shares of often dubious merit earned the exchange some bad publicity. Still, in the 1950s, the Toronto Stock Exchange became the leading exchange for mining and oil company stocks in North America. It was not as tightly regulated as the stock markets of the United States.

           Further, listing fees on the exchange were lower for mining companies than industrial companies and regularized lot sizes and commission rates were also favorable to mining issuances, all relics of the 1934 merger with the Standard Stock and Mining Exchange. In any case, mining and oil company securities made up 40% of trading by 1961. So dominant was Toronto in this area that a mining stock listed only on another exchange was almost certainly likely to remain only a local issue, with a regional rather than national investor-base. The Toronto Stock Exchange had decisively overtaken that of Montreal and the regional exchanges in Calgary, Vancouver, and Winnipeg were tiny by comparison.

            Remarkably, much of the growth in the market was driven by penny stocks. Between the Toronto and Montreal exchanges, which together accounted for 97% of all trading at the time, one-third of shares listed on at least one of the two exchanges were trading at a share price of $1 or less in 1958. This compared to just 0.1% on the New York Stock Exchange; even in the case of the more speculative American Stock Exchange, only 3.4% of listed shares were penny stocks. Mining and oil company shares also traded more frequently. This meant that Toronto had a rather high share-turnover ratio; put differently, shares listed on the Toronto Stock Exchange tended to change hands more frequently. This ratio was 30% in Toronto as compared to 12% for the New York Stock Exchange and 16% for the American Stock Exchange.

            Despite the exchange’s reliance of questionable mining shares, listed shares were still subject to much less regulation by the Ontario Securities Commission than the unlisted, over-the-counter market. Most other provinces also granted exemptions to regulation on listed issuers. The stock exchange was entrusted to regulate itself to a considerable degree. Still, just because a mining company was listed on the Toronto Stock Exchange did not mean it should have been and certainly did not mean investors could not be abused.

           Nonetheless, many ‘junior’ mining companies were not listed at all and nonetheless found an ample eager market as securities traded over-the-counter, that is to say, as securities sold to investors by dealers out of their own inventories of securities rather than on a liquid market. While not subject to the regulations of an exchange, these issues were still subject to some governmental oversight, but that was insufficient at the time.

Later Approach to Regulation

            A series of speculative frenzies and outright frauds, particular among mining or financial firms, gave rise to public complaints about the stock market. Unscrupulous brokers from the U.S. set up operations in Canada to benefit from its lighter regulations. The SEC lobbied the Canadians to expand their regulation of the market but authorities were fairly resistant. Still, there was growing belief in both countries that the market’s participants and their private bodies could not self-regulate themselves.

            In one particularly notorious instance, a certain Windfall Oils and Mines was formed around the spring of 1964 to buy up mineral rights near Timmins, Ontario, in the vicinity of those held by a larger American company Texas Gulf Sulphur, which had recently announced discoveries there. Shares in Windfall received tremendous speculative attention driven by rumors and the actions of its managers.

           In the end, the drill cores came up with nothing of value but news was delayed plenty long enough for insiders to sell at high prices. When the findings became public knowledge weeks later, the share price collapsed. In a sign that ethics in the American markets, for all the pontification of the SEC, was little stronger, Texas Gulf Sulphur was itself implicated in an insider trading scandal over the same Ontario operations as involved Windfall.

            In any case, believing these activities deterred investment, larger and more well-respected mining companies threatened to move from Toronto to the New York Stock Exchange if the government did not do something. In 1964, there were several public inquiries into the financing of mining exploration occurring simultaneously. The result was that regulation of Toronto’s securities market did increase in the 1960s, specifically with the enacting of the Securities Act (1966). For its part, the Toronto Stock Exchange also increased its own requirements for listing on the exchange.

“we have confined ourselves to considerations of the public interest in the protection of the investing public (which is within our jurisdiction) and have excluded considerations of the interests of a different and wider public in the discovering and bringing into production of new mines (which is outside our jurisdiction)”

Ontario Securities Commission’s decision in ‘Maybrun Mines (1969)’ in which the OSC rejected a company’s application to be exempted from filing a prospectus

Shortcomings

            While better regulation should have helped, the fragmented nature of the Canadian system meant dodgy issuers and the dealers in their securities could just relocate in an act of regulatory arbitrage. They found a new home in British Columbia’s ‘venture exchange’ in Vancouver. Trading on the Vancouver Stock Exchange rose from 21.3 million shares to 755.7 million shares between 1960 and 1969, driven by mining company shares. This business was not taken up only by local firms, major Canadian brokerage companies also bought seats on the exchange.

            New scandals came, most notably with Bre-X, a firm looking for gold in Indonesia. This company had reportedly discovered gold at a site previously abandoned by a more established Australian mining company. How could the Australians have missed the gold? In any case, shares in Bre-X rose from C$0.51 in 1993 to a peak of C$286.50 in 1996. After an initial listing on the minor Alberta Stock Exchange, it cross listed on the Toronto Stock Exchange and the NASDAQ. Unfortunately, the finds turned out to be bogus.

Today

            The Canadian market is still shaped by small mining companies. Even by around 2010, 57% of the world’s public mining companies were listed on the Toronto Stock Exchange or other TMX Group exchanges. This share was more than twice that of the nearest competitor, the Australian Stock Exchange. These numbers were still largely driven by ‘junior’ mining companies, both smaller and more speculative than larger firms which are more likely to list on exchanges larger than Toronto’s. While in the early 2010s, the average market capitalization of a mining company listed in New York or London was C$11.3 billion and C$3.4 billion respectively, the average on TMX Group exchanges was just C$0.4 billion.

Lesson

            When a particular market is shaped by trading in a single type of security, the market tends to be shaped by the characteristics of that industry. In Europe in the 19th century, and even the very early 20th century, the principal stock exchanges primarily traded in government bonds, making them rather staid places hardly suitable for the listing of novel securities like shares in speculative firms. Regional or secondary markets, like the provincial exchanges of Britain or the Coulisse of France, were better homes for those listings. Similarly, Canadian exchanges were shaped by mining company issuance. This made them beehives of only lightly-restricted speculation until well into the 20th century when the mining industry itself began to mature and the larger firms within it came to demand better regulation.

More from the Tontine Coffee-House

           Read about the regional stock exchanges of Britain and America and secondary exchanges within financial capitals like Paris and New York. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.      Armstrong, Christopher. Moose Pastures and Mergers: The Ontario Securities Commission and the Regulation of Share Markets in Canada, 1940-1980. University of Toronto Press, 2001.

2.      Majury, Niall. “‘Trusting the Numbers’: Mineral prospecting, raising finance and the governance of knowledge.” Transactions of the Institute of British Geographers, vol. 39, no. 4, 25 Oct. 2013, pp. 545–558.

3.      Michie, Ranald C. The Global Securities Market: A History. 1st ed., Oxford University Press, 2006.

4.      Walter, James E., and J. Peter Williamson. “Organized securities exchanges in Canada.” The Journal of Finance, vol. 15, no. 3, Sept. 1960, pp. 307–324.

External links to recommended reading are affiliate links. When you click on links to various merchants posted here and make a purchase, this will result in The Tontine Coffee-House earning a commission.

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