Canada’s largest stock exchange is in the midst of a historic dry spell for initial public offerings and it’s unlikely to improve anytime soon.

Just one company has completed an IPO this year on the Toronto Stock Exchange, and without any last minute surprises it will be the first time that’s happened since 1993. Lithium Royalty Corp., which raised $150 million (US$108 million) in March, was the largest deal in 10 months and is the lone deal to make it through in 2023. 

“I don’t think it’s a coincidence that the one deal that got done is a lithium royalty company,” said Grant Kernaghan, chief executive at Citigroup Global Markets Canada, whose team co-led the Lithium Royalty deal. Natural resources stocks have traditionally been a source of strength for the exchange, and, eventually, more battery metals stocks will look to the exchange to raise capital given investor interest in the energy transition, he said.

For now, however, Lithium Royalty is a cautionary tale for potential issuers and investors, as disappointing earnings combined with a souring outlook for natural resources amid a sluggish recovery in China. The company’s shares dropped in their debut and never recovered, closing Wednesday down 37 per cent from their IPO price. Meanwhile, top lithium producer Albemarle Corp. cut its growth projection on Wednesday due to weaker-than-expected demand for the metal used in electric-vehicle batteries.

More broadly, Canada’s stock market continues to face some serious obstacles. The selloff deepened in October, sending the benchmark S&P/TSX Composite Index to a one-year low last week. And while the Bank of Canada kept interest rates unchanged for a second straight meeting last month, the swaps market isn’t pricing a quarter-point cut until the second half of next year. 

“The problem is that right now, we have a lot of voices saying that interest rates are going to stay where they are,” Kernaghan said, which is giving firms pause. Unless an owner is looking for an exit or there’s some other reason pushing a firm to sell shares, “then it makes sense to wait,” he said.

ALTERNATE ROUTES

Despite the dearth of Canadian IPOs, a handful of firms in the natural resources business, including Strathcona Resources Ltd. and Allied Gold Corp., have debuted through reverse takeovers, where private firms buy publicly traded firms and take the stock listing. Many companies have also gone public via special purpose acquisition companies, or SPACs, in recent years. 

“The SPAC frenzy of 2020 and 2021 depleted the pipeline of companies that had any prospects of IPOing in the next few years,” Kernaghan said.

There are some reasons for optimism, he said, with private equity firms pushing to offload their portfolio companies via either an IPO or a sale. 

“They made tons of investments and those are sitting in their portfolios and people are going to start getting twitchy about moving these to market,” Kernaghan said.

John McKenzie, chief executive at TMX Group Ltd., which operates the Toronto Stock Exchange, said on an earnings call Tuesday that the exchange expects equity financings to pick up next year, with as many as 1,500 prospects in its “pipeline.” 

The biggest deal on the horizon is BlackBerry Ltd.’s planned spinoff of its Internet of Things business next year, which could fetch US$1.7 billion. And the local expertise in the natural resource sector will help underpin demand for potential issuers, according to Citi’s Kernaghan.

“In Canada, you can raise money for an early stage mining company,” he said. “The Canadian market is almost the first port of call for companies looking to do that on a global basis.”