PDAC 2024: Junior miners see short-selling ‘epidemic’

The Prospectors and Developers Association of Canada convention Mar. 3-6, 2024 in Toronto.

Junior miners at this week’s Prospectors and Developers Association of Canada (PDAC) convention say recently proposed new rules on short-selling could help stem the bleeding in their stocks, which are especially vulnerable to the practice.

The January proposal by a Canadian regulator would apply to “hard-to-borrow” stocks like junior miners. Before shorting such securities, traders would be required to confirm there is stock available to borrow or the short sale would be prohibited.

“They’re basically going to hold the brokerage firms accountable,” Kerry Knoll, chairman of Generation Mining (TSX: GENM) said of the proposed amendments by Canadian Investment Regulatory Organization (CIRO).

“People can’t just call up and short and then go looking for the stock,” he said on Monday at PDAC, which runs from March 3-6 in Toronto.

“With juniors, you frequently can’t find the stock to borrow. I have never shorted one, but I’ve tried many times. And when I have tried, I call around and see if anybody can borrow the stock and it’s always ‘no.’”

Shorting is when traders borrow a security to sell into the market, hoping to buy it back at a lower price and pocket the profit before returning the stock to its owner. It’s basically a bet that a stock’s price will go down. Junior mining stocks have been targeted by short-sellers because the market as a whole has been trending downward. However, because of low trading volumes in the sector, shorting can easily devastate a junior’s stock price, leading to calls for different treatment of low-liquidity equities.

Knoll says Generation’s stock price was cut in half over a period of weeks by shorting activity during a time of low trading activity in shares. The company holds the development stage Marathon palladium-copper project in Ontario.

“Suddenly every day with one second to go, somebody sold some amount of stock, maybe 300 shares, 500 shares and closed it down a penny or two,” he said. “This went on for weeks and weeks.” 

Short-sellers want to trade the stock down at the end of the day so they’ll be under less pressure to buy back the stock and cover their position, he said.

Chuck Fipke, who discovered Canada’s first diamond mine Ekati with Stu Blusson, says he’s also noticed unusual trading in his current venture, Cantex Mineral Development (TSXV: CD), and late-day low-ball bids meant to drive down the company’s share price.

Cantex’s Rackla North project in the Yukon hosts North America’s highest-grade silver-lead-zinc deposit. The company discovered early last year it also hosts very high grades of critical mineral germanium, used in solar panels, chips, and military applications, and production of which is dominated by China.

The stock rose, Fipke says, before “short-sellers knocked it down.”

But he admits he can’t prove what he describes as an “epidemic of short-selling” that’s plaguing juniors.

“I’m a geologist, hey, my job is I look for mineral deposits,” he said by phone ahead of PDAC, adding it’s up to the regulators to investigate the issue. “I can’t do everything,” he said, adding he manages drilling of every hole at the project, which has seen 60,000 metres of drilling since 2016. “It’s easy to drill, but it’s hard to drill in the right place.”

Junior market investors say the problem has emerged since Canadian regulators removed the uptick rule in 2012 that prohibited short sales at a lower price than the previous trade.

Save Canadian Mining, started in 2019 by Power Nickel (TSXV: PNPN; US-OTC: PNPNF) CEO Terry Lynch backed by Eric Sprott, Rob McEwen and others, has been trying to uncover proof pointing to illegal or uncovered short-selling.

At a presentation at the Investment Leaders Forum, Lynch noted that only 40% of trading in Power Nickel stock is on the TSX Venture, with 60% taking place on less transparent “dark exchanges” on which institutional investors can trade out of the public eye.

Knoll says the outsized effects legal short-selling has on juniors could easily be remedied by bringing back the tick test. (He also says it’s one main reason Australia, which does have an uptick rule, has a stronger junior mining market than Canada’s; the other reason being the country’s requirement for pension funds to invest in Australian companies.)  But that would be counter to the interests of banks, which make money off every trade – including short sales — on their platforms and have more freedom to trade as they please without it.

CIRO proposal

Amended rules proposed by CIRO would require traders to demonstrate if the stock they want to short is hard to borrow, they’d have to actually show there’s stock available to borrow, or go as far as “preborrowing” the stock. If there is no ‘reasonable expectation” they will be able to settle the trade by the settlement date (within 2 days – on May 27 this changes to within 1 day), they can’t short the stock. As part of this requirement, CIRO sees dealers compiling lists of “easy to borrow” securities.

The proposal is open for comment until April 12.

In addition to the proposal, CIRO and CSA have established a working group looking at concerns raised by commenters through previous consultation, a CIRO spokesperson told The Northern Miner by email.

“This work will assess whether any potential rule amendments would be appropriate in the Canadian context. Any proposed rule changes that results from the working group’s recommendations would be published for public comment in the normal course.”

Elsewhere at PDAC, traffic in the Investors Exchange at the mineral exploration-focused show, which opened on Sunday has been pretty good – even at nickel and lithium juniors’ booths. Both metals sharply declined last year – lithium in the neighbourhood of 80% and nickel 40%.

One nickel junior attributed the steady stream of booth visitors to “bargain hunting,” while a lithium junior expressed hope that the lithium price, which has been rising recently, has bottomed.