An Inside Look at the World of Gold & Silver Company Warrants
The world of warrants is the best kept investment secret around. No one seems to realize that long-term (LT) gold and silver warrants were up 140% and 92%, respectively, in 2009 and 2010 in U. S. dollar terms. Investment and financial writers go on and on about gold being such a great investment these days but gold was up “only” 24% and 30%, respectively, during the same time frame. Isn’t it time investors, analysts and commentators conveyed the truth, the whole truth and nothing but the truth when it comes to investing in gold bullion and gold-related securities? This article will do just that! Words: 1164
So says Lorimer Wilson, editor of www.munKNEE.com. Please note that this paragraph must be included in any article reposting with a link* to the article source to avoid copyright infringement. Wilson goes on to say:
The world of warrants consists of only 135 stars (i.e. constituents) of which only 32 are associated with 29 commodity-related stocks that have sufficient brightness (i.e. 24+ months duration) to warrant (the pun is intended!) the attention of earthly investors.
Warrants have been the best kept ‘secret’ of the investment world (when was the last time you read an article on warrants or had your financial advisor broach the subject?) until now so pay attention to the particulars provided below, prepare with proper due diligence and enjoy the prospects of future prosperity.
Warrants: A Definition
Before going any further it is important to know that warrants are securities which gives the holder the right, but not the obligation, to acquire the underlying securities at predetermined (i.e. exercise) prices and within a specified period of time (i.e. term or duration).
The Commodity Company Warrants Index (CCWI)
The 32 LT individually tradable warrants of the abovementioned 29 companies (3 companies have 2 warrants each) have been gathered together into an equal dollar-weighted, proprietary basket which I refer to as the Commodity Company Warrants Index (CCWI). To date no ETF exists to take advantage of the leveraged performance of such securities but I believe it is just a matter of time.
The CCWI was up 242% in U.S. dollar terms in 2009 and a further 91% in 2010!
Most financial writers and advisors are of the mistaken impression that warrants are just associated with penny stocks – the ‘juniors’ – but as the breakout of commodity-related companies with LT warrants by market cap below shows that is not entirely the case:
- 5 (17%) are large-cap companies (i.e. >$2.5B);
- 3 (10%) are mid-cap (i.e. $500M – $2.5B);
- 5 (17%) are small-cap (i.e. $250 – $500M);
- 9 (31%) are micro-cap (i.e. $100M – $250M);
- 7 (24%) are nano-cap (i.e. <$100M)
Also, because most investors are more interested in precious metals than other commodities another way to look at the asset class is by the commodity produced as follows:
- 22 (76%) of the companies are gold and silver related
- 4 (14%) are involved in base metal mining;
- 2 (7%) are in oil and gas operations;
- 1 (3%) are agricultural 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 32 warrants is as follows:
- 2 (6%) 60+ months;
- 6 (19%) 48 – 59 months;
- 16 (50%) 36 – 47 months;
- 8 (25%) 24 – 35 months
The Gold and Silver Warrants Index (GSWI)
As a sub-component of the CCWI, the 25 LT individually tradable warrants of the 22 companies primarily involved in gold and silver mining, exploration and royalty stream endeavours, have been gathered together into an equal dollar-weighted proprietary basket which I refer to as the Gold and Silver Warrants Index (GSWI).
The GSWI was up 140% in U.S. dollar terms in 2009 and was up a further 92% in 2010.
The performance of the GSWI compared very favourably with the:
- 55% increase in a basket of mid- and small-cap miners as represented by the GDXJ;
- 33% increase in the HUI and GDX (large/mid cap gold and silver mining company stocks);
- 30% increase in gold bullion and even the
- 83% in physical silver.
Market capitalization of the 22 companies with LT warrants is as follows:
- 5 (23%) large-cap
- 5 (23%) mid/small-cap
- 12 (55%) micro/nano-cap in size
Type of activity each company is involved in is as follows:
- 18 (81%) are miners
- 4 (19%) are royalty stream companies of which a) 1 deals exclusively in gold; b) 2 deal exclusively silver and c) 1 deals in gold and silver plus other commodities.
The breakdown of the months until expiry for each of the 25 warrants is as follows:
- 2 (8%) 60+ months;
- 5 (20%) 48 – 59 months;
- 12 (48%) 366 – 47 months;
- 6 (24%) 24 – 35 months
How Should You Go About Selecting Which Warrants To Invest In?
Now that you know the breakout of warrants by their associated company market caps, the commodities they are associated with and the diversity of warrant durations you must:
- decide which commodities you want to invest in,
- determine which companies are involved in your choice of commodities, if any, (go here)
- determine which companies are in the phase of operations (exploration, i.e. juniors; development, i.e. in production soon; small/mid cap producers; large cap major producers) you are interested in (go here)
- determine which stocks of those companies you are interested in are well priced currently and have bright prospects for the future (go here to conduct your own research – they make it easy),
- determine which of your selected companies offer long-term warrants, if any (go here for all the details),
- determine how widely/thinly traded the warrants you are interested in are (go here),
- determine the leverage of the warrants you are interested in if you are Canadian and intending to buy warrants to take advantage of their leverage potential at time of conversion to the associated stock (the SEC restricts Americans from doing so) by going here
Conversely, 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. As an 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.
Now that the ‘secret’ is out you can’t help but agree that warrants warrant your serious consideration. Will they once again this year outperform their associated stock and the commodity involved? Time will tell but what does it matter if you don’t own any. In stead of focusing on the mantra “Got gold?” the mantra “Got LT warrants?” would be much more meaningful.
Disclosure: Naturally, I own warrants from the above list. With returns like I have outlined above, who wouldn’t! Having said the aforementioned, however, please do your own due diligence or seek the advice of a knowledgeable consultant.