Leverage Alternatives for Junior Mining Shares

By: Dudley Baker | Tue, May 27, 2008
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Investing in the junior mining shares over the last year or two has been considered risky at best and perhaps insanity by some investors. So, why would we be looking for leverage on the junior mining sector when the shares and the mining indices are hardly keeping up with the price of the bullion, gold or silver? Why not just purchase gold or silver? The simple answer is that many analysts believe the juniors will eventually break out and greatly out perform (as they have historically) and will reward investors beyond their dreams. Currently, there are signs of a bottom forming and thus it is a great time to discuss different forms of leverage for those investors willing to take on slightly more risk than merely purchasing the junior mining shares.

Many readers when they hear the word 'leverage' immediately think of margin, futures, options on futures, etc. Yes, the opportunities are great, but most investors lack the education and perhaps more importantly, the psychology mindset to profitably utilize these forms of leverage.

There are other kinds of leverage which do not require margin and may be better suited to the majority of investors. We are talking about warrants, options and LEAPS, many of which are trading on the junior mining shares and we will briefly discuss the merits of each.

Warrants

Warrants are issued by a company usually in connection with a private placement, a financing arrangement or an initial public offering and many of the warrants issued will remain privately held and will never trade in the open marketplace. Have you ever participated in a private placement of shares in your favorite mining company? If so, you probably received some warrants in this private placement and a good chance you did not even understand what you received.

A warrant is a security (like an option) giving the holder the right, but not the obligation, to purchase the underlying stock at a specific price, within a specified time period. Sounds very much like a call option or LEAPS, doesn't it? Very much so and we will discuss the differences more below.

So, why the interest in warrants? The owner of the warrant receives none of the benefits of ownership of the common stock of a company; he cannot vote, and he does not receive any cash dividends. Therefore, why would an investor want to buy an option (warrant) to buy something instead of buying the thing itself?

The essence of the answer is that the anticipated gain on the warrant must be greater than the anticipated gain on the common stock. Leverage, or at least potential leverage, is the prime reason an investor would be interested in warrants. This more rapid growth in the value of the warrant relative to the common stock is called leverage. Without this possibly of such leverage the investor would buy the common stock.

Fortunately for investors, there are many warrants that trade on the Toronto Exchange and a few in the United States on the NYSE and the AMEX and many others are traded in the U.S. OTC market with assigned symbols. As an individual investor, your objective, in our opinion, should be to trade the warrant, without an intention to exercise the warrant.

Currently there are many warrants trading with expiration dates out to the year 2012 (one out to 2017) and though warrants expiring within, say, 2 years, may possess great upside leverage and potential for gains, they also pose a greater risk. Therefore, we personally suggest that investors focus their attention on those warrants which have a remaining life of at least 2 years before the expiration. Investors must remember, warrants, like options and LEAPS, can expire worthless.

Options and LEAPS

I will discuss options and LEAPS together as they are very similar and both are traded on the Chicago Board Option Exchange, commonly referred to as the CBOE.

Many investors have some knowledge of options as they have been traded for about 25 years and there is much advertising and information available on the internet and by brokerage firms.

Options and LEAPS (Long-term Equity AnticiPation Securities) give the holder the right, but not the obligation, to purchase the underlying security at a specific price and expiring on a specific date in the future. Again, a very similar definition as warrants.

Options and LEAPS are created or written by other investors and the underlying company receives none of the proceeds. Options, more specifically, call options usually have a life of 30 days, 60 days or perhaps 90 days while LEAPS frequently have a life of 1, 2 or 3 years, thus allowing investors much more time for the markets to move in their favor.

There are numerous options and LEAPS trading on the junior mining shares and for subscribers to our service, we provide a table so you can quickly see which companies have options, LEAPS and of course, warrants trading.

We always stress that the most important decision for investors is selecting the junior mining company or companies in which you want to invest. You must like the company, management, earnings prospects, etc. because if the company does not perform and the shares do not go up in price, neither will the warrants, options or LEAPS. The next question then becomes one of time. On your selected company or companies, which of them have warrants, options or LEAPS trading and what is the time remaining before expiration? To put it simply, will the warrants, options, or LEAPS give you the time necessary to allow this bull market in the junior mining shares to unfold?

If you are interested in more information on options or LEAPS, we suggest you visit, CBOE and if you would like more information on warrants we invite you to visit our learning center and website for much more detail, articles and examples of the use of warrants.

In closing, we suggest investors get on board with their favorite junior mining shares soon. Whether you decide to make use of the leverage alternatives and opportunities we have presented above is up to you, but when this party gets started it will be fabulous and one that you will not want to miss.

 


 

Dudley Baker

Author: Dudley Baker

Dudley Pierce Baker
Founder/Editor - Guadalajara/Ajijic, Mexico
CommonStockWarrants.com
A Market Data Service for Warrants

Dudley Pierce Baker is the founder and editor of Common Stock Warrants and its predecessor, Precious Metals Warrants and a 1967 graduate of St. Mary’s University in San Antonio, Texas with a major in accounting.

Disclaimer/Disclosure Statement: CommonStockWarrants.com is not an investment advisor and any reference to specific securities does not constitute a recommendation thereof. The opinions expressed herein are the express personal opinions of Dudley Baker. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.

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