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Gold and Silver Warrants: an Insider’s Insights

Commodities / Gold and Silver 2011 Dec 08, 2011 - 02:15 AM GMT

By: Lorimer_Wilson

With a tsunami of interest in the future prospects of gold and silver mining companies (and their stock prices as a result) I am publishing an updated version of my one-of-a-kind proprietary index of commodity-related companies with long-term warrants (CCWI) and its sub-category of just gold and silver companies with long-term warrants (GSWI). This article gives you some insights into the ‘secret world’ of warrants and slices and dices the make-up of both indices identifying the constituents of each for your edification.

The “wee world of warrants” is so limited that its constituents have traded under the radar of almost all investors. Indeed, in past articles I have made reference to this sector as the “secret” world of warrants.

As of the close of business on November 30, 2011:

• there were 151 warrants listed on TSX/TSXV (98 and 53 respectively)
• 105 of those 151 warrants (i.e. 70%) are associated with commodity-related stocks, excluding funds and merchant banks
• 38 of those 105 warrants have a duration of 24+ months duration before expiry, i.e. long-term (LT), which is considered the minimum investment term
• those 38 LT warrants are associated with 34 different companies (4 companies have two warrants each)
• 20 of those 34 companies are involved in the mining, exploration or royalty aspect of the business
• 14 of the 34 companies are involved in base metal, oil and gas and agricultural business pursuits.

Warrants: A Definition

A warrants is a security that gives the holder the right, but not the obligation, to acquire the underlying (associated) security at a predetermined (i.e. exercise or strike) price and within a specified period of time (i.e. term or duration).

The Commodity Companies Warrant Index (CCWI)

The 38 LT warrants of the abovementioned 34 companies are all included in a proprietary equal dollar-weighted Commodity Companies Warrant Index (CCWI) which I have been maintaining, primarily for personal use, over the past 6 years.

Surprisingly to most financial writers and financial advisors/planners not all warrants are associated with penny stocks – the ‘juniors’ – although they do account for 85% of the total as the breakout by market capitalization shows below:

• 4 are large-cap companies (i.e. >$2.5B);
• 1 is mid-cap (i.e. $500M – $2.5B);
• 2 are small-cap (i.e. $250 – $500M;
• 10are micro-cap (i.e. $100M – $250M);
• 17 are nano-cap (i.e. <$100M)

In addition, while the majority of warrants are associated with companies involved in some aspect of precious metals activity (58%), other commodity-related companies also have associated warrants as shown below:

• 20 of the companies are gold and silver related (22 warrants);
• 8 are involved in base metal mining (9 warrants);
• 5 are in oil and gas operations (6 warrants);
• 1 is agriculture related

All warrants have life durations and begin to lose value as they approach their respective expiry dates. As such, only warrants with at least 24 months term before expiry are included in this analysis. The breakdown by duration of the 38 warrants is as follows:

• 2 of 60+ months duration;
• 11 of 48 – 59 months duration;
• 14 of 36 – 47 months duration;
• 11 of 24 – 35 months duration

The Gold and Silver Warrants Index (GSWI)

As a sub-component of the CCWI the LT tradable warrants of the 20 companies primarily involved in gold and silver mining, exploration and royalty stream endeavours have been gathered together into an equal dollar-weighted proprietary index named the Gold and Silver Warrants Index (GSWI).

Market capitalization of the 20 companies with LT warrants is as follows:

• 4 are large-cap
• 4 are mid/small-cap
• 12 are micro/nano-cap in size

Type of activity each company is involved in is as follows:

• 11 are producers,
• 7 are explorers (i.e. juniors),
• 2 are royalty stream companies of which
• a) 1 deals exclusively in gold;
• b) 1 deals in gold and silver plus other commodities.

The breakdown of the months until expiry for each of the 22 warrants is as follows:

• 2 have 60+ months duration;
• 6 have 48 – 59 months;
• 11 have 36 – 47 months;
• 3 have 24 – 35 months

Index Constituent Companies

The constituents of the GSWI sub-component and the entire CCWI are as follows with the large cap companies underlined for easy identification:

a) Gold and Silver Warrants Index (GSWI) Constituents

1. Agnico-Eagle (warrant expires in December)
2. Armistice Resources
3. Astral Mining
4. Bridgeport Ventures
5. Brigus Gold (2)
6. Crocodile Gold
7. Dundee Precious Metals
8. Endeavour Mining
9. Franco-Nevada
10. Golden Minerals
11. Gran Colombia
12. Kinross Gold
13. Lupaka Gold
14. New Gold
15. Northquest
16. Primero Mining
17. Rio Novo Gold
18. Sandstorm Gold (2)
19. U.S. Silver
20. Vista Gold

Below are the 14 commodity-related companies with LT warrants that are involved in oil and gas operations, agriculture and base metal mining and/or exploration which complete the full complement of constituents in the CCWI:

b) Oil and Gas Constituents

1. Compton Petroleum
2. Manas Petroleum
3. PetroAmerica Oil (2)
4. Petromanas Energy
5. Petro Magagdalena Energy

c) Agricultural Related Constituents

1. Prima Colombia Hardwood

d) Base Metals Constituents

1. Formation Metals
2. Lipari Energy
3. Mega Uranium
4. Noront Resources
5. Oceanic Iron Ore (2)
6. Pacific Coal Resources
7. West African Iron Ore
8. Zasu Metals

Which Warrants Should You Invest In?

Warrants perform in relationship to that of their associated stock so their purchase should not be done without considerable research.

a) Given the fact that no warrant ETFs are available to buy you could buy a basket of warrants consisting of an equal number of warrants from every company mentioned above. For example, if you were to restrict your warrants portfolio to just those of gold and silver companies, and just 100 warrants of each LT offering, it would amount to approximately $8,000 at today’s prices plus commission expenses.

b) You could do your own due diligence of each of the 34 companies and decide which company or companies are to your liking and purchase their associated warrants accordingly. (Go here and read Gold & Silver Warrants: What are They? Why Own Them? How are They Bought & Sold? to learn exactly how to go about placing orders to buy and sell warrants – and much more.)

c) You could restrict your selection of companies early on by:

1. management experience/reputation;
2. industry sector (oil and gas, precious metals, base metals, etc.);
3. specific products (gold, uranium, crude oil, etc.);
4. business emphasis (producers, developers, explorers or royalty payers);
5. market capitalization (large, mid/small, micro/nano);
6. countries of operation (world-wide, excl. Africa, excl. Venezuela, etc.);
7. stock /company fundamentals;
8. technical analysis of stock;
9. expiry date of warrant;
10. price volatility of stock/warrant;
11. degree of liquidity of stock/warrant;
12. trading depth of stock/warrant;
13. currency in which stock/warrant trades

Conclusion

Now you some insights into the ‘secret world’ of warrants and those very few companies with LT warrants that make up the constituents of the two indices of that asset class, the CCWI and GSWI. To keep informed of changes on a weekly basis subscribe here or come back here to read my year-end report on new additions/deletions to, and the annual performance of, the two indices.

Please feel free to share the contents of this article with your financial advisor. It will be a revelation to him/her and prove to be invaluable as the commodity bull, particularly in gold and silver, unfolds in the years ahead.

Lorimer Wilson is editor of www.munKNEE.com (Your Key to Making Money!), publisher of a daily FREE Financial Intelligence Report which can be subscribed to here and a frequent guest contributor to www.PreciousMetalsWarrants.com which also offers a FREE newsletter (sign up here) and a subscription service (see details here).

Disclaimer: Please understand that the above is just the opinion of a small fish in a large sea.  None of the above is intended as investment advice, but merely an opinion of the potential of what might be.  Simply put:

The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.

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