13-October 2008
Do you remember
the most important investment decision? It is picking the
company you like, with good management and properties and then
look to see if that company has long-term warrants trading.
Under normal
circumstances, I would virtually always recommend buying the
long-term warrants on a company that you like as opposed to the
common shares. The reason is the increased leverage of the
warrants over the gains in the common shares. This strategy has
worked very well for me in the past and will again in the
future.
We can all
agreed, these are anything but normal circumstances
and I would like to suggest a slight deviation in our ‘normal
investment strategy’.
I am going to
present three companies to explain my approach. You may or may
not agree and that is okay. All three companies will in my
opinion be big winners in the coming months or years.
If you own
warrants on any companies, perhaps think if this approach would
work for you.
Investing Ideas in a Depressed Market Environment
First Majestic Silver
Great company
right? If you own the warrants now you should be holding the Wt
A which expires 25 Mar 2010 with an exercise price of $7. With
the downturn in the markets we have the common shares at $1.48
and the wt A at $0.19.
Let’s say you
had purchased 5,000 of the warrants A at $1.00 for a total of
$5,000.
You are very
confident that you have picked a good company that will perform
well in the future but what if the warrants expire before then
or something else side tracks our plans, a merger or buyout at
less than the exercise price.
Why not at this
time purchase some common shares at these bargain prices? In
effect, we would be hedging our bets. We would still be on
board with the warrants but now we also have a position in the
common shares. We would suggest a plan to at a minimum breakeven
on our entire position with this company or preferably a
slightly larger common share purchase.
I would look
for a minimum price on the common of say $6 and we can now
purchase it at $1.48.
Why not
purchase 1,000 or 2,000 common shares, thus feeling very
confident of your overall position in First Majestic being a
winner in the future?
Great Basin Gold
Same scenario;
great company and you know that in time the company and its
shares will be a big winner. But what if the warrants expire
worthless on 19 April 2009? A great company but a lost
opportunity.
Let’s assume
you had purchased 10,000 warrants at a price of $0.75 for a
total of $7,500.
Currently the
common shares closed at $1.40 and the warrants closed at $0.15.
The warrants expire on 19 April 2009 with an exercise price of
$3.50. We have to be thinking realistically that we may loose
our investment in the warrants. We are still hopeful, but we
have to take our emotions (hope) out of this equation.
Again, I would
be looking for the common to eventually go much higher than $6
but let’s use that figure as a minimum target price.
Under these
circumstances, we would suggest you consider purchasing 2,000 of
the common shares and thus having a high probably of being in an
overall winning position with Great Basin Gold.
Mega Uranium
Same scenario
guys. A good company with cash in the bank and numerous uranium
properties in the world. When uranium shares come back and we
believe they will, Mega will once again be a great performer.
In the case of
Mega Uranium, we are looking at the Wt (not the Wt A) which has
an exercise price of $6.00 and expires on 12 February 2012. The
difference here is we still have lots of time remaining before
expiration and you may just wish to hold the warrants and not
purchase common shares.
However, say,
you hold 1,000 warrants which you had purchased at $4.00 for a
total of $4,000.
Currently the
common shares are at $0.94 and the warrants at $0.13.
The common has
traded over $8.00 per share in the last 2 years and perhaps will
reach or exceed this level again in the future. So, I ask
again, why not, purchase 2,000 or 3,000 common shares at these
low prices and be “assured” of an overall winning position with
Mega Uranium?
To Summarize
If you have
some capital available, we are suggesting you take advantage of
the low prices on companies that you really like and consider a
strategy similar to that outlined above.
The great thing
about warrants is the increase leverage, the worst thing about
warrants, like options and leaps, is that they can expire
worthless. If you loose with warrants, you might be totally
disenchanted with warrants, when in essence, you had picked a
great company but the time ran out on you.
You would hate
to say you lost money on First Majestic or Great Basin when you
know these company’s will be great performers in the future.
These are
challenging times which require making some good decisions and
having the patience to see our convictions pay off in the
future.
With a strategy
similar to the above, we are trying to get you into an overall
winning position on as many of our companies as possible.
Dudley
