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Warrants: The Devil is in the Details – A Follow-up

InvestorEducation / Options & Warrants May 11, 2009 - 06:19 PM GMT

By: Lorimer_Wilson

InvestorEducation

Best Financial Markets Analysis ArticleThis is the promised follow-up to my earlier article entitled “Warrants: The Devil is in the Detail” regarding the merit of my decision to forego buying a particular warrant at the time of issue. What can I say other than that I was dead wrong in my assessment of the buying opportunity it presented. It has turned out to be a ‘grand slam’ of an investment rather than the possible ‘bunt’ that I feared.


This Warrant is Special
The warrant (use of the specific company name is not allowed) is associated with a micro-cap company ($134 million) that mines zinc (65%), copper (11%) and more or less equal parts gold, silver and lead from mines in North, Central and South America. They had just listed an attractively priced warrant that would not expire for 5 years i.e. not until April 9th, 2014 (i.e. a 5-year term). I thought that was most impressive given that, of the 100 or so natural resource companies with warrants, only 4% have a term of 5 years or more, 8% have a term of 4 years or more and 20% have a life of 3 years or more. I sourced the aforementioned information from preciousmetalswarrants.com which provides the most comprehensive database of natural resource companies (gold, silver, uranium, copper, zinc, and diamond mining; oil and gas operations; etc.) with warrants trading on the Canadian and U.S. stock exchanges.

The Advantage of Long-term Warrants
Warrants, as you may well know, give the holder the right, but not the obligation, to purchase the common shares of the company at a specific price within a specific time period after which, if not exercised, they expire worthless.

As such, long term warrants are imperative these days given the current fiscal and economic environment, the considerable amount of time needed for a company to benefit from an improved credit environment, a higher stock market, an increase in the price of zinc, copper, gold bullion, silver and lead and renewed strength in the Canadian dollar. All these conditions are necessary to ensure that a company has a good chance of a profitable future and, as such, a much higher stock price and warrant price.

Major Return on Investment
In the ”Devil” article I conveyed my assessment of the reasons ‘why’ and the reasons ‘why not’ for investing in the warrant at that particular time. The ‘why not’ reasons (15 in all) out-weighed the few ‘why yes’ reasons, in my opinion, causing me to conclude that it would be prudent to wait and assess the extent to which the underwriters exercised their option to buy up their allotment of warrants (which expired on May 8th, ’09) before making my purchase decision. That decision has caused me thousands of dollars in paper profits but the more I analyze these warrants the more I realize an investment in them will likely generate a major return on my investment.

Favorable Future Prospects
I had assumed that if the underwriters of these warrants did not exercise their right to buy up a sizeable portion of their maximum allowable allotment of warrants it would indicate a lack of faith in the long-term prospects of the company which is currently suffering from a dramatic decline in the price of most of the commodities it mines, a lack of available credit, an extremely depressed stock price, a reduction in mining operations and unprofitable operations. If, on the other hand, they did buy up much or all of their allotment of available warrants it would be an endorsement by apparent insiders who would surely know more than me about the company’s future prospects. Well, the proof is in the pudding, as they say.

A Grand Slam Investment
I had concluded my original article by saying “Perhaps I’m crazy not to take advantage now of this warrant’s very attractive price relative to the exercise price and its long-term duration but to do so might prove to be a ‘bunt’ as opposed to the ‘grand slam’ I am looking for.”  I guess I’m crazy. This warrant issue has proven to be a ‘grand slam’ home run if ever there was one.

Risk versus Opportunity
It goes without saying that every investor must evaluate the risks and opportunities associated with one’s investments and on the day of my original article I perceived more risk than opportunity. My associate at preciousmetalswarrants.com, Dudley Baker, however, assessed the situation differently than me and bought the warrants that same day at a price of $0.065. Interestingly, Dudley saw opportunity while I saw risk.

A 1-Month Return of 208%
The warrant was issued on April 9th, ‘09 at $0.06. On the last day of the underwriters’ buy-in date of May 8th the volume popped up by almost 500% and the price rose 46% to $0.185 representing a 1-month increase of 208%. There you have it!  A 1-month return of 208%!!!

Leverage Favors These Warrants
From the above I can only conclude that those in the know are of the firm opinion the company in question has the distinct potential of again escalating rapidly in price as it did over the 2-year period from July 15/’05 to July 19/’07 when it appreciated 923% from $0.35 to $3.58. A similar 923% increase in the stock from the April 9/’09 price of $0.11 would put the stock at $1.13. As such, were I to buy the warrant at $0.185 and the stock were to indeed rise to $1.13 within the next 59 months I would realize 1.6 times more profit by investing in the warrant.

That is what warrant investing is all about. It’s leverage, plain and simple! Why settle for a potential 276.67% return in the common stock from today’s price when you would realize a potential 448.6% return by investing in the company’s warrants? What if the stock only goes up another 67% to only $0.50? Not a problem! By investing in the warrant your investment would still go up 1.6 times more than were you to invest in the stock instead i.e. a 108.1% return vs. a 66.67% return. There you have it! If you believe in the long term prospects of a company with warrants and the company provides a long-term warrant there is no question what you should do to realize maximum returns on the dollars invested. Buy the warrants!

Leverage Calculation Details
For details as to how this “leverage” calculation was arrived at for this warrant and the other 100 natural resource company warrants on the market today you can invest in a one month trial subscription to preciousmetalswarrants.com for less than twenty dollars and get the inside track on the secret to realizing over-and-above profits by investing in a company’s warrants rather than in the stock itself. Many investors lost a considerable amount of money in 2008 and this is an excellent way to maximize your investment returns in 2009.

    Lorimer Wilson is an economic/market analyst and commentator who has written numerous articles on the major economic and financial crises (past, present and impending) of our times, investing in times of crisis, commodities, market timing and other investment philosophies. He is a Contributing Editor to www.preciousmetalswarrants.com and contributor to a large number of other precious metals, financial, economic, investment and op/ed sites. He can be contacted at lorimer.wilson@live.com .

    © 2009 Copyright Lorimer Wilson- All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Lorimer Wilson Archive

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