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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Leverage Potential of Many Metals & Mining Sector Warrants Unprecedented

Commodities / Options & Warrants May 29, 2009 - 02:50 PM GMT

By: Lorimer_Wilson

Commodities

Best Financial Markets Analysis ArticleHarold Clifford writes: Extraordinary Times Present Rare Opportunities - The 2008 once-in-a-lifetime general stock market meltdown brought panic and forced liquidationto all market sectors, and in particular pummeled junior mining share prices by 80 – 90% or more, creating once-in-a-lifetime values for discerning investors.


During this monumental sell-off, shares of junior miners that had already succeeded in “building” a valuable, commercially viable asset (mineral deposit or even a new mine) were generally decimated to the same extent as shares of juniors that did not have a commercial deposit or even a significant discovery. Companies that had a solid foundation for development, production and growth were unceremoniously “lumped in” with those more numerous mining juniors that had little more than hopes centered on grass roots exploration “prospects”. As a result of this indiscriminate selling, extraordinary opportunities emerged and, slowly but surely, the market is now separating the wheat from the chaff.

The market recognition of those mining juniors that really do have “the goods” has been dramatic for some and a more gradual and halting process for others owing to the high level of uncertainty and general lack of confidence regarding the ongoing global economic recession and its effects on commodities supply, demand and prices in the near term. For those oversold stocks that are destined to recover to their pre-panic highs, it is important to remember that if a stock simply climbs back to its old high after having lost 90%, it gains 900%. The rallies of 200 – 300% in the past six months for numerous junior mining shares have been impressive indeed, but they might still be in the early stages of their respective long term recoveries. Those oversold mining juniors with warrants available are of particular interest to the aggressive investor/speculator seeking to participate in the inevitable recovery of those severely beaten down stocks that possess demonstrable corporate value and growth potential.

Examples of Compelling Warrant Opportunities

A case in point are the “2013” and “2012” warrants of a mining company (the specific name of the company can not be mentioned due to posting criteria) which trades on the TSX around the $1.60 – $1.65 level and exhibits the four elements that best characterize compelling stock warrant opportunities: (1) A bullish outlook for the Company;(2) a bright long term outlook for the company’s products; (3) attractive warrant terms including duration and exercise price and (4) undervalued common shares and low warrant prices relative to the common shares i.e. leverage potential. Let’s consider these four elements in order:

(1) Bullish outlook for the company

The company being used to demonstrate the secret to realizing over-and-above profits by investing in a company’s warrants rather than in the stock itself has one of the largest and most modern copper-molybdenum mining-milling operations in North America. It is currently producing 25,000 tons per day and planned stage two expansion will see throughput double beyond an anticipated average annual production of 56.4 million lbs of copper, 10.3 million lbs of molybdenum (moly) and 600,000 ounces of silver during the first 10 years of the 25 year mine life. The life-of-mine silver output has already been contracted for purchase at a set price per ounce.

In short, there is every reason to project a long and profitable mining life for this company. The only significant unknown regarding the company’s strength and financial performance going forward is the trend of copper and moly prices, which are discussed below. Were prices to trend significantly lower from here then the company’s growth might well be restricted but if the recent early signs of recovery for the economy continue, and if moly prices remain above $10.00 per lb. in the months ahead, the company will continue to progress favourably. Moreover, when prices more accurately reflect the growing long term demand outlook for moly, the company will thrive as its new mine reaches full fruition.

(2) Bright outlook for the company’s products

Copper is a barometer of economic activity. From its peak above $4.00 in July of 2008, copper slid some 70% to a low of $1.28 in December, 2008, before reversing its downtrend. It has since climbed 70% to the $2.17 level with the best performance of all base metals so far in 2009.

Silver is a minor component of the company’s resources and will not be a significant contributor to the company’s bottom line.

Molybdenum is the key to the company’s value and growth outlook. Moly is an important high melting point alloying metal used primarily in iron and a variety of steels and super alloys to enhance hardening ability, strength, corrosion resistance and durability. Moly prices have averaged $15.00 per pound over the past decade and, when the current recession inevitably gives way to renewed economic growth, that long term average price level appears poised to climb materially owing to rising demand in India, Brazil, China (which has just become a net importer of moly this year), and numerous other countries that are firmly on track to becoming fully developed and industrialized economies. An expected average selling price for moly of over $10.00/lb. in the 2nd half of 2009 and from $12-15 in 2010 is expected to greatly benefit quality moly producers such as the company under review.

In addition to pricing factors there is the matter of supply and demand. When prices for base metals fell to multi-year lows in 2008 the development of several large moly deposits was deferred indefinitely and moly experts now agree that this portends potential supply shortages in the foreseeable future. Several large deposits had been slated to come on stream in 2011-2012 but their contribution to supply will be delayed amidst rising demand in a (hopefully) stronger economy.

(3) Attractive warrant terms

The “2013” warrant

Exercise Price:   One warrant buys one commons share at C$1.00 per share.

Expiry Date:                     January 23, 2013 – 3.7 years (44 months.)

The “2012” warrant

Exercise Price:   One warrant buys one commons share at C$4.00 per share.

Expiry Date:                     February 12, 2012 – 2.75 years (32 months.)

Being a “call” on common shares at a specified price (exercise price of the warrant) until a specific point in the future (the warrant expiry date), it follows that a low exercise price, and a long period to expiry are the two key terms by which a warrant is evaluated. The attractive exercise price and long life of these warrants are attractive if one perceives the company’s common shares to be significantly undervalued. For all intents and purposes, the future performance of a warrant is wholly dependent upon the future performance of the underlying common shares and as the four elements above have shown that seems quite possible (or should I say ‘quite likely’) in this case.

(4) Leverage potential

Assuming one is bullish on the company in question and wishes to capture the leverage inherent in its common stock warrants, the question arises; which of these two warrants should be purchased? At first glance, the “2013” warrant with an exercise price of $1.00 and a 44-month life seems to be more attractive than the “2012” warrant with its $4.00 exercise price and 32-month life. However, the choice is not quite that simple; it depends upon one’s expectations for the company over time.

If one is confident that the company’s common share price will appreciate by 200% i.e. to $4.86 from last Friday’s close of $1.62 (remember the stock traded as high as $12.92 on May 16th, 2008 before it plummeted to $0.29 on December 19th, 2008 with the drastic drop in the price of moly and copper and the ‘throwing out of the baby with the bathwater’ mentality at that time) then owning warrant “2013” has 3.06 times greater leverage than owning the stock. This compares to only a 0.9 times leverage advantage in owning warrant “2012”. But all is not as it appears at first glance. Below are some other leverage numbers at specific stock appreciation points which highlights why warrant leverage is so dependant on the extent of future company success and the resultant future price of the common shares:

Stock

Stock

Warrant

Leverage

Apprec.

Price

wt.A 2013

wt 2012

200%

$4.86

3.1

0.9

250%

$5.67

3.9

2.7

300%

$6.48

4.8

4.5

315%

$6.72

5.0

5.0

460%

$9.07

7.3

10.3

615%

$11.58

10.1

15.8

700%

$12.96

11.6

18.8

As one can see in the above table, if the common stock appreciates by no more than 300% the leverage of warrant “2013” is marginally higher (4.8) than the leverage of warrant “2012” (4.5), rendering the warrant “2013” the best buy for investors who limit their expectations of stock price appreciation to 300%. On the other hand, if one is confident that the company’s bright future will propel its extremely undervalued shares higher by more than 300% before February 12th, 2012, then the above analysis clearly shows that there is more leverage potential in owning warrant “2012”.

Ten-Bagger Potential

As the above leverage analysis indicates, the potential for a proverbial “ten-bagger” return is realized on warrant “2012” with a 460% increase in the price of the common stock – if one had bought warrant “2012” at last Friday’s close of $0.45 – and on warrant “2013” with a 615% increase in the price of the common stock. One might think that projecting a 460% or a 615% increase in the price of a stock is overly ambitious, but with the extent to which the share prices of so many quality junior mining companies were driven down last fall, such increases are not at all unrealistic. Remember, the company in question traded as high as $12.92 in May, 2008 and just to get back to that price again would require a 700% increase. Furthermore, these warrants have 32 and 44 month time horizons so such increases are very possible (dare I say quite likely!) given the fundamental outlook over that lengthy time frame. Ten baggers don’t come along very often but with this attractive company’s oversold stock, its high leverage/low priced, long life warrant and the bullish intermediate term copper/moly outlook; these warrants are the quintessential example of just such an opportunity. 

Buying Warrants is all about Leverage

That is what warrant investing is all about. It’s leverage, plain and simple! If one believes in the long term prospects of a company with warrants and the company provides a long-term warrant and the stock/warrant relationship is favourable there is no question that owning warrants are the best way to maximize one’s returns on the dollars invested. Very few people, be they financial advisors/planners, analysts, financial/investment commentators or do-it-yourself investors truly understand what warrants are all about and the major ten-bagger opportunities that exist in investing in the right warrants at the right time. Now you do!

Leverage Calculation Details

For details as to how the leverage calculations above were arrived at for the above warrants and the other 114 natural resource company warrants on the market today invest in a twenty dollar subscription to preciousmetalswarrants.com (you can also sign up for a free weekly email) 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 investment returns in 2009.

Disclosure: The author owns an assortment of mining company warrants including the company used in the example above.

Harold Clifford is guest contributor to www.PreciousMetalsWarrants.comand www.InsidersInsights.com. PreciousMetalsWarrants provides an online subscription database for all warrants trading on junior mining and natural resource companies in the United States and Canada and a free weekly newsletter. InsidersInsights alerts subscribers when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling. Harold 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.


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