Warranting for a Great Spring

The New Year has started off with a bang for commodities as oil has passed the psychological number of $100 and gold has surpassed its old high of $850 an ounce set back in 1980. A number of factors have fueled this 2008 blast off including unrest in Pakistan, further rate cuts expectations by the US Fed and a recent OPEC announcement stating that will not be able to meet production goals by 2024. This New Years rally is confirmation that the Resource Bull Market is intact and ready for another spring run.

One way to get extra leverage to this springs resource run is through warrants. A warrant is an option provided by a company to purchase shares at a set price. There are two types of warrants: free trading and non-trading. Free trading warrants can be bought through any brokerage and trade just like stocks. Warrants are usually offered as "sweeteners" during private placements to reward investors for participating in the offering. They became very popular with Canadian Mining companies after the Bre-X debacle and the subsequent bear market in commodities. It was one way to entice investors to give their hard earned money to these struggling mining companies. Fast forward ten years and we are now entrenched in a "hot" commodity market where mining companies are being given much more attention by the investment world. Old habits don't change and thus companies are still offering warrants to investors as "sweeteners".

There are a few of drawbacks to free warrants being thrown around by mining companies. One is that it adds to dilution of the share value in the stock. The other is that warrants can hold the share price of a stock back until they are exercised as people don't want to race into buying a stock that will have a whole bunch more of shares free trading. Finally, warrants trade like options in that they have a set lifespan which is usually 18-24 months from the date of issue. Thus they can expire worthless if they are not in the money (stock must be above the exercise price).

So why invest using warrants if there are drawbacks to it? Leverage! That's right, warrants allow you to make more money on a stock than you would if you were just holding its shares. Warrants provide this leverage by allowing you to buy more with less. This can also limit your downside if a stock unexpectantly crumbles. Thus, it is my belief that warrants are another very effective and lucrative way to gain a larger exposure to the resource bull market occurring right now.

Here are a few guidelines to assist you when investing in warrants:
1/ Take a Macro Look at the investing world and choose a sector that is hot (ex. commodities)
2/ Research the companies in that sector and choose your favorites based on production, exploration potential, management, etc.
3/ Check to see if the company has free trading warrants (some warrants are not free trading)
4/ Find out what the exercise price of the warrant is (price that the stock must be at to exercise the warrant)
5/ Find out the expiry date of the warrant (more time is always better)
6/ Check the chart of the stock and make sure that the warrant follows the stock

Here is a link to assist you in your research:

http://www.financialpost.com/markets/market_data/group-warrants.html


Here are a few of my favorite warrants right now:

Yamana Gold A Warrants (YRI.wt.a)- is a Canadian gold producer with significant gold and copper-gold production from seven operating mines in Brazil, Chile and the U.S., as well as gold development stage properties, exploration properties, and land positions throughout North and South America. The company is in the right industry, unhedged and is increasing production. They have a few warrants that are free trading. My favorite is the A Warrant that is currently trading at $6.50. Two weeks ago it was trading below $5. The YRI.wt.a warrants have an exercise price of C$2.50. On exercise the holder would receive 0.6 of a Yamana share. These warrants expire on November 20, 2008. These related to previously existing warrants of Desert Sun Mining. We reccomend this as a strong buy as you get access to a mid-tier gold company at a junior price.


Breakwater Resources Warrants (BWR.wt)-Breakwater is a mineral resource company engaged in the acquisition, exploration, development and mining of base metal and precious metal deposits in the Americas. Breakwater has four producing zinc mines: the Myra Falls mine in British Columbia, Canada; the Langlois mine in north western Quebec, Canada; the El Mochito mine in Honduras; and the El Toqui mine in Chile. They have great cash flow (a recent UBS report has them increasing cash flow by 130 million in 2008) and have lots of growth upside through exploration and a possible takeover premium. The BWR.wt warrants have an exercise price of $1.00. The warrants are good till January 2009.


Baja Mining Warrants (BAJ.wt)- Baja Mining Corp. (“Baja”) owns a 100% interest in El Boleo Project, an advanced polymetallic (copper, cobalt, zinc, manganese) property located in Baja California Sur, Mexico. Baja has assembled an exceptional management team who are developing Mexico’s largest copper-cobalt deposit. Baja should be producing by July 2008. The stock price should increase as they get closer and closer to production. The Baj.wt warrants have an exercise price of $1.25. The warrants are good till April 2009.


European Minerals A Warrants (EPM.wt.a)-European Minerals is a mineral exploration and development company that is developing an open pit mine at the Varvarinskoye gold-copper deposit in Northern Kazakhstan.

Independently assessed proven and probable reserves at Varvarinskoye are currently 2.2 million ounces of gold and 254 million pounds of copper at metal prices of US$525/ounce for gold and US$1.30/pound for copper. The Varvarinskoye project shows strong project economics with an initial mine life of 17 years and production is expected to commence in October 2007. With its first gold pour occurring weeks ago, European Minerals is poised to take full advantage of a gold run to $1000. The EPM A warrants have an exercise price of $1.20. The warrants expire in April 2010.

The companies above represent a variety of commodity producers and geographic regions. I prefer producers over exploration companies for warrants as their positive cash flow can outweigh some of the drawbacks mentioned above.