ANALYSIS-Canada's small-cap market stung as credit shrinks

By Jennifer Kwan

TORONTO, Sept 2 (Reuters) - Once-abundant cash is drying up for Canada's small-cap companies, as trading volumes dwindle and lenders seek safer bets in a shrinking pool of venture capital.

One year after the U.S. subprime mortgage crisis, the fallout has hit the TSX Venture Exchange composite index .SPCDNX hard, likely forcing some firms to slow exploration or development.

The firms, with shallower pockets than their elders on the Toronto Stock Exchange's main index, the S&P/TSX composite .GSPTSE, will face tougher hurdles raising money as concerns over the global economic outlook nag, analysts say.

"The amount of speculative capital that is typically available is just not available," said Wendell Zerb, a metals and mining analyst at Canaccord Adams in Vancouver. "It's in people's back pockets, under mattresses."

The sector also faces sparse trading volumes, said Robert Jennings, chairman of Jennings Capital Inc, based in Calgary. In hard economic times junior stocks "really become orphans."

"Because they are ignored, the bids dry up and the stocks start falling," said Jennings.

The Venture composite is home to more than 450 companies -- out of about 2,200 on the broader exchange -- with market capitalizations ranging from C$1.8 million to C$2 billion. Nearly half of the firms on the exchange are mining companies, according to TMX Group Inc (X.TO), which owns the junior exchange and the TSX.

The Venture composite index is down about 30 percent so far this year, with a marked drop since the beginning of the summer, when the key energy and materials sectors started sagging on the senior index.