-- Posted Tuesday, 2 June 2009 | | Source: GoldSeek.com
By: Harold Clifford
Extraordinary Times Present Rare Opportunities
The 2008 once-in-a-lifetime general stock market meltdown brought panic and forced liquidation to 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 which trades on the TSX 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 in question has one of the largest and most modern copper-molybdenum mining-milling operations in North America with expectations of 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 future prices of copper and moly which are discussed below.
(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 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, 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
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 the company’s “2012” and “2013” warrants (exercise price of C$4.00 and 32 months duration and C$1.00 and 44 months duration respectively) 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. The four key elements in judging warrant potential, as enumerated above, appear positive in the case of these particular warrants.
(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 the 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% over the course of the next 44 months 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% in the next 32 months, then the above analysis clearly shows that there is more leverage potential in owning warrant “2012”.
Ten-Bagger Returns are Possible
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 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. The company in question traded as high as $13 in 2008 and just to get back to that price again would require a 700% increase from its recent price. Furthermore, these warrants have 32 and 44 month time horizons so such increases are very possible given the fundamental outlook over that lengthy time frame. Ten baggers don’t come along very often but with this particular company’s oversold stock, its high leverage/low priced, long life warrants and the bullish intermediate term copper/moly outlook; these warrants may be viewed as 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 then owning warrants are the best way to maximize one’s returns on the dollars invested. 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 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. 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!
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.com and 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 email. 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
-- Posted Tuesday, 2 June 2009 | Digg This Article
| Source: GoldSeek.com
