McEwen Mining: What Would NYSE Delisting Mean For Investors?
Jul. 12, 2015 11:55 PM • mux
- Benefits and costs of MUX delisting from NYSE to OTC markets.
- Should investors be concerned about MUX's potential delisting?
- What does this mean for MUX going forward?
There remains a seemingly anxious buzz surrounding McEwen Mining (NYSE:MUX )- specifically the share price and the recent news of a NYSE de-listing announcement within 6-months if the share price does not recover to above $1 a share. The relentless selling of MUX these past couple of weeks makes it seem a delisting is in fact guaranteed. As of Friday, Mux's share price was at $.78, a 52-week low and a price not seen since 2008. It's been a tough time for shareholders as of late but the delisting may not necessarily be 100% negative for them going forward. Let's explore what the costs and benefits are of listing on the various exchanges, include NYSE, OTCQX and OTC-Pink, here's a quick summary of what we found through our brief research:
NYSE Delisting Benefit
What you'll find above is the immediate benefit of a major cost reduction from not listing on the NYSE. As of now, MUX pays $1.1m per year just to have a 'MUX' ticker on the NYSE. There are also other various filing fees that MUX incurs throughout the year but largely the listing fee is where most of the expense burden comes from.
MUX should expect -$1m to their SG&A costs, a nice benefit that MUX will realize straight to its bottom-line AND cash flow which will allow management additional flexibility. All financial metrics will improve as a result. Net good!
The rest of the listing differences are costs to MUX but they're not as bad as you might assume!
NYSE Delisting Costs
First thing to note, listing on the OTC market DOES NOT preclude MUX management from being held responsible for fraudulent, misleading or criminal activities. They still have to follow the rules of a publicly traded company - including IFRS accounting - if they fail to follow these standards it would be a major consequence to them personally (via fines or prison sentences) and to MUX corporately. There is nothing about OTC that necessarily says 'riskier' from an accounting perspective, but let's dig in deeper to better understand what the key differences mean.
Market Structure Differences: Liquidity, Bid Ask Spread & Options
OTC markets are not electronic in the same sense that NYSE is, meaning trades are pushed through human market makers or brokers. Most of the activity through NYSE is performed by computer based market making.
This isn't necessarily a net bad to MUX shareholders or traders but it does mean that orders and trades of various sizes will be much harder to fill at reasonable prices which will be evident through a large bid x ask spread. This is an implicit cost that shareholders pay that used to be passed through to MUX as a listing cost through the NYSE that would have produced a tighter spread.
Options will no longer be available to investors, market makers or dealers. This has a direct impact on hedgability & liquidity which makes it difficult for market makers or dealers to take a position in options or the underlying without the direct ability to hedge. Market Makers are typically net neutral on the position - if they sell a share of MUX they buy a call to offset the position. This offsetting provides liquidity in two markets, the common stock and the options market. Without the options market, the market maker can't offset a sale or buy - they'll rely heavily on an 'inventory' they accumulate which they'll receive additional compensation for holding an inventory position (which is risky) through a larger bid x ask spread.
Shareholder Reporting Requirements:
The NYSE requires extensive shareholder reporting. In the most basic sense, they are required to file a quarterly and annual report that reports upon the financial position of the company, previous results and expectations of the future results of the company.
The primary difference between the NYSE and the OTC markets is that the OTC market doesn't necessary require a quarterly or annual report - in the Pink Sheet market, companies may not even have a formal report to provide to shareholders! Again, this doesn't mean to suggest that not filing is a direct result of fraudulent or misleading activities.
You might find this strange but companies who choose to IPO through the OTC market may not have the resources (accounting, management, internal control processes) to handle the difficulties that come with extensive financial reporting. For example, a company with 15 employees that generates almost no revenue just does not have the capacity to effectively report upon the company's position - additionally they may have nothing (new) to report making the cost of performing such activities a major strain or distraction on the company itself.
We should NOT expect this type of illusive or lack of financial reporting from MUX, they have the infrastructure in place and a long-standing reputable CFO whose skill set is more than qualified to perform the quarterly/annual reporting that investors desperately want to see and digest. Expect no change in the quality or quantity of reporting from MUX - the benefit shareholders receive from the reporting also helps management understand their own performance and financial positioning. Net good for everyone if MUX continues their quality reporting - expect nothing short of excellence from MUX management in this area.
Unfortunately a big consequence of not being listed on a major exchange is the lack of institutional buyers - this is a direct result of the financial reporting requirements and the fiduciary responsibilities asset managers are required to follow. The lack of consistent reporting would mean an institutional investor is not exercising the prudence required to make sound investment choices for their clients. This is a primary reason why there is a lack of institutional buying in the OTC market - it's unfortunate but understandable. We should expect a discount on the share price for this reason - it's likely that the share price falling below $1 has already seen a significant portion of asset managers selling their positions as they front-run the future potential delisting.
An additional consequence of lack of institutional presence is a lot less liquidity as retail buyers will make up the majority of the trading which historically is a smaller percentage of the overall market.
The lack of institutional presence also means that raising capital is significantly more difficult - not impossible but much more difficult and should result in an overall increase in the cost to raise capital.
While the share price has left a bad taste in investors' mouth recently, a delisting should not have an overall adverse impact on the company, operations, management or quality of reporting. The main consequence is a change of the actual market structure where MUX shares are traded - possibly a new ticker symbol as well. This will be a cost that shareholders will bare until MUX is able to achieve the minimum price per share that the NYSE requires but should not concern investors enough to not hold a position if they're bullish on the fundamentals.
Disclosure: I am/we are long MUX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long MUX common, hedged with short calls and long puts. Exposure to MUX is currently $0