What a Week in the Wonderful World of Warrants!

By Lorimer Wilson
PreciousMetalsWarrants.com
Email: lorimer.wilson@live.com

Monday - June 8, 2009

Every investor has a wide array of asset classes and investment vehicles to consider - stocks; bonds; commodities; mutual, closed-end and exchange traded funds; options; LEAPS; etc. and the relatively unknown category called 'warrants'. This article highlights the exceptional performance of the warrants of natural resource companies (i.e. primarily gold, silver, uranium and other metal miners and oil and gas operators) of late relative to some of the aforementioned categories and explains why that is the case.

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Week after week throughout most of 2009 the warrants of mining companies in North America have outperformed, on average, all the various stock market indices hands down and outperformed their associated common stock by even greater margins. To top it off, the situation is even more unbalanced in favour of warrants when compared to gold bullion and silver. It begs the question: What's going on here? There are three over-riding reasons as discussed below.

Americans Investing in Canadian Securities Profiting from Strengthening Canadian Dollar

Part of this resurgence is due to the fact that the U.S./Canadian dollar exchange rate is undergoing a major reversal. Since the beginning of the year the U.S. dollar has weakened 7.2% against the Canadian dollar dropping 2.9% this past week alone.

Most warrants are traded on the Canadian TSX or the CDNX and, as such, in Canadian dollars. This makes it that much more profitable for American investors to own warrants (and their associated stock) than to own U.S. equities, gold and silver which are all priced in U.S. dollars.

True, currency plays can also go the other way, but most economists are of the opinion that the U.S. dollar is in a long-term decline vis-ā-vis other currencies and, in particular, commodity currencies such as the Canadian dollar. Indeed, many economists foresee the Canadian dollar being at par with the U.S. dollar by the end of 2009. That would equate to a further 9.6% appreciation for Americans in the value of their Canadian dollar denominated holdings i.e. a possible 17.5% in additional profits over the course of 2009.

There you have it and it is worth repeating. Americans who used their American dollars to buy Canadian denominated equities at the beginning of 2009 have received a 7.2% greater return on their Canadian investments to date than their Canadian neighbours to the north and, if the U.S. dollar continues its descent as anticipated, will see a further 9.6% return by year's end. That is impressive. It would appear that this is no time to look a gift horse in the mouth!

Indiscriminate Selling in 2008 Presenting Extraordinary Buying Opportunities in 2009

Another reason for the outperformance of warrants is that they declined so dramatically last year from their 2008 highs (i.e. 80.1%) that they have nowhere to go but up and up they are going at a rapid clip.

One of the dirty little secrets about warrants is that they outperform stocks considerably in a bull market and drastically underperform stocks in a bear market and that is just what happened in 2008. That might seem rather disturbing on the surface but it is not actually that concerning because the benefits of investing in warrants are realized over a long time horizon (as much as 8 years in the case of one warrant available on the market today). Indeed, warrants are a true buy-and-hold investment vehicle.

Warrants give the holder the right, but not the obligation, to purchase the common shares of the company at a specific price within a specific time period after which, if not exercised, they expire worthless.

With 50 of the 115 warrants associated with natural resource companies having expiry terms of 24 months or more there are a large number of companies to choose from. Indeed, of the 50 warrants 25 expire beyond 36 months and 12 beyond 48 months. As such, there is ample time for many warrants to work their magic.

Increases in Price of Gold will Increase Mining Company Profits and Share Prices

A third reason that warrants are outperforming all other asset classes is the expectation by most pundits that the price of gold will escalate rapidly in price (i.e. to $1,600, $2500, $5,000 or even more) in the next few years (even by next year, say some). This will have a significant positive impact on the profitability of gold mining companies. For example, if gold were priced at $950/oz., and the cost of production was $400/oz., and two years later gold had risen to $1600/oz., and the cost of production had escalated by 20% to $480/oz. then the mining company's profit margin would have gone up from $550/oz. to $1120/oz. (i.e. from 57.9% to 70.0%).

With the cash flow of a mining company going up dramatically, the size of the resource and the value of a company going up dramatically and the profits of a company going up dramatically as well, one could reasonably expect a dramatic increase in the share price of a mining company's stock. Those understanding this relationship are now aggressively buying warrants which is driving their prices higher.

Investor Advantage Lies with Those who Know the Secret of Warrant Leverage

The above being said, warrants are not to be bought with one's eyes closed. There are many factors to take into consideration before doing so. The three most important considerations, of many, are one's estimation of the future prospects of the mining company of interest and, as such, its projected future stock price; secondly, the duration (i.e. how many months before the warrant expires) of the warrant associated with the mining company; and thirdly, the stated price (referred to as the strike or exercise price) and terms at which the warrant can be redeemed for th e actual stock. If one is of the considered opinion that the share price of the mining company being evaluated will increase sufficiently in price before the warrant expires and that the exercise price of the stock is sufficiently low to exercise the option to buy the stock then major excess profits can be made over-and-above those that would be realized by just investing in the stock itself.

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 a greater understanding as to how to determine which warrants are best positioned to realize over-and-above (i.e. leveraged) gains a twenty dollar investment in the extensive database details and leverage calculations offered by preciousmetalswarrants.com would be money well spent.

The Week that Was in Warrants as Compared to a Variety of Indices and Commodities

What a week (ending May 29th, 2009) it was! The table below tells it all:

What more is there to say? From the above table it is evident that, year-to-date, gold and silver mining companies that offer warrants are up 94.0% and the warrants associated with those stocks are up a whopping 149.0%. Yes, 149%! Silver is up a very respectable 39.2%. And gold? In spite of all the hype recently, gold bullion, in comparison, is up a miserly 10.7%.

Last week's numbers reve al that the strength in mid- to long-term warrants continues. They were up 11.1% and their associated stocks up 9.7%. The micro cap CDNX index, by comparison, was up 'only' 6.3% and the HUI and GDM large/mid/small cap indices up 'only' 5.0%. Silver again showed considerable strength ending up 7.2% on the week. And gold? Just like year-to-date gold trails the field up only 2.3% on the week.

Now that you know what others don't shouldn't you add a few select warrants to the gold ETF and/or gold and silver mining companies that you already have in your portfolio? It's not too late.

Lorimer Wilson is Director of Marketing and Contributing Editor of www.PreciousMetalsWarrants.com and www.InsidersInsights.com.

PreciousMetalsWarrants provides an online subscription database for all warrants trading on mining and natural resource companies in the United States and Canada and offers 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. Lorimer can be contacted at lorimer.wilson@live.com.

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