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Why Warrants ?
-- Why Now ? (Part 2)
January 18,
2006
Our
original article was
published on September 27, 2005 and with the recent explosion in
the mining stocks and warrants we thought it timely to revisit
our
original article as many
new investors are now becoming aware of the precious metals
stocks and their potential with the news that gold has broken
into 25 years highs.
We realize each
day that many investors, the investment community and many, if
not all of the investment newsletters and analysis are not
educated on the subject of warrants. Therefore, our mission, so
to speak, has become one of educating the world on this exciting
investment vehicle thought our articles.
More background
on investing in the precious metals stocks and/or warrants for
U.S. investors:
A substantial
number of the precious metals stocks and warrants are Canadian
based companies and therefore an investment therein by U.S.
investors has yielded (and we believe will continue to yield)
gains on two fronts, as a “Currency Play” on the U.S.
Dollar and also the capital gain potential on the rise in
the price of the stocks or warrants. Remember, when you invest
in the Canadian stocks or warrants, you are now making an
investment out of the U.S. Dollar and into the Canadian Dollar.
The Canadian Dollar has recently proven to be one of the
strongest currencies in the world, perhaps due to the large
natural resources in Canadian both in the commodity sector and
in the energy sector.
(Beautiful
uptrend and currently close to highs)
(U.S. Dollar
under serious long-term pressure)
We understand
that many U.S. investors are not aware of the implications (as
yet) as to the effects of the value of the U.S. Dollar on their
investments. For those investors living outside of the United
States, the “Currency Effect” is very simple. These investors
deal with currency translations on a daily basis and seem to
have a better grasp and understanding of the “Currency Effect”
on their investment decisions. It is important for all
investors to understand this concept and the effects the
currency in which you are invested will affect your investment
outcome.
Now let us get
back to our main subject, Why Warrants? – Why Now?
So exactly what
is a warrant?
Most investors
are familiar with options on stocks, calls and puts, right? I,
like many of you, realize this is a very dangerous game for most
investors. An option gives you the right, not the obligation,
to acquire the underlying security/stock at a specific price and
expiring at a specific date in the future. However, options are
very short term, usually 30 – 90 days, so you have to be not
only correct with respect to your timing but also with respect
to the direction of the stock market. Perhaps you are a better
market timer than I but it does not work out well for most
investors.
A warrant is
very similar to an option but with one major difference, TIME!
Warrants are usually issued with a minimum of 2 years to 5 years
of life.
This means we
as investors have the right to acquire the underlying stock at a
specific price (determined by the company) and expiring at a
specific date in the future. Warrants are usually issued by
companies in connection with a financial arrangement and/or
public offering and are a “kicker” to sweeten the deal. As
investors in warrants our objective is to only trade the
warrants with no intention of ever exercising them.
Warrants are
all about Leverage.
Leverage is why an investor should be interested in warrants.
If your favorite mining stock has a warrant trading you should
take a serious look to see if they fit your investment criteria
which means “how long does the warrant have until expiration and
does it provide good leverage?” It is not always easy to find
all the facts on the warrants for some companies but you should
always do your homework.
What does
leverage mean?
Leverage means getting the maximum return with the least amount
of your investment capital at risk.
Without
mentioning any specific names, let’s illustrate why warrants can
be very profitable. One large gold company trading on the TSX
and the American Exchange has two warrants which trade on the
TSX. The most recent warrant issued has an exercise price of
C$12.10 and expires on 7-January-2008.
Closing price
of the common stock (13-Jan-2006) C$12.50
Closing price
of the warrant (13-Jan-2006) C$ 3.74
Say you were
interested in buying 1,000 shares of the common stock which
would cost you C$12,500. You could instead purchase 1,000
warrants at C$3.74 for a total cost of C$3,740.
Cost of the
common stock (1,000 shares)
C$12,500
Cost of the
warrants (1,000)
(C$ 3,740)
Your
savings
C$ 8,760
Now you control
the same 1,000 shares and have saved a lot of money.
Not only do you
save money, if the common stock goes to say C$25 (a return of
100%), the warrant will be worth at least C$12.90 or a total of
C$12,900 on your investment of C$3,740, reflecting an incredible
return of 245%. Leverage is therefore, 2.45:1 over the common
stock.
This means will
make 2.45 times MORE by investing in the warrants of this
company.
What if,
instead of buying 1,000 shares of the common stock you invested
the entire amount in the warrants; you could actually purchase
3,342 warrants for the same total cost of C$12,500. Again, if
we get a move in the common stock to C$25 (a 100% return), the
warrants will be worth at least C$12.90 or a total of C$43,111
(3,342 wts @ C$12.90), for a return of 245%. The same leverage
as above of 2.45:1.
This is not
rocket science by any means; you just have to do the math.
With spot Gold
currently at $554.00 as I write this article, many analysts
believe we have broken out and are looking for $600 - $900 gold
by years-end. There can be little doubt that eventually all
mining shares will be in a rip roaring bull market. An investor
should consider all the ways to participate in this bull market
including adding warrants to their portfolio. All we ask is,
“Why not attempt to maximize your investment returns?”
Of course,
warrants do not come without some risk. If the underlying stock
is trading below exercise price on the expiration date, the
warrant will be worthless which is why we strongly recommend
that investors focus on warrants that have a remaining life of
at least 2 years.
January 18,
2006
Dudley Baker
Email:
info@preciousmetalswarrants.com
Website:
PreciousMetalsWarrants
Dudley
Baker is the owner/editor of Precious Metals Warrants, a market
data service which provides you with the details on all mining
& energy companies with warrants trading on the U. S. and
Canadian Exchanges. As new warrants are listed for trading we
alert you via an e-mail blast. You are provided with links to
the companies’ websites, links to quotes and charts, tips
for placing orders and much, much more. We do not make any specific
recommendations in our service. We do the work for you and provide
you with the knowledge, trading tips and the confidence in placing
your orders.
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Disclosure/Disclaimer Statement
PreciousMetalsWarrants.com is not an investment advisor and any reference to specific securities does not constitute a recommendation thereof. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.
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