Why Warrants ? -- Why Now ? (Part 2)

By: Dudley Baker | Wed, Jan 18, 2006
Print Email

Our original article was published on September 27, 2005 and with the recent explosion in the mining stocks and warrants we thought it timely to revisit our original article as many new investors are now becoming aware of the precious metals stocks and their potential with the news that gold has broken into 25 years highs.

We realize each day that many investors, the investment community and many, if not all of the investment newsletters and analysis are not educated on the subject of warrants. Therefore, our mission, so to speak, has become one of educating the world on this exciting investment vehicle thought our articles.

More background on investing in the precious metals stocks and/or warrants for U.S. investors:

A substantial number of the precious metals stocks and warrants are Canadian based companies and therefore an investment therein by U.S. investors has yielded (and we believe will continue to yield) gains on two fronts, as a "Currency Play" on the U.S. Dollar and also the capital gain potential on the rise in the price of the stocks or warrants. Remember, when you invest in the Canadian stocks or warrants, you are now making an investment out of the U.S. Dollar and into the Canadian Dollar. The Canadian Dollar has recently proven to be one of the strongest currencies in the world, perhaps due to the large natural resources in Canadian both in the commodity sector and in the energy sector.

(Beautiful uptrend and currently close to highs)

(U.S. Dollar under serious long-term pressure)

We understand that many U.S. investors are not aware of the implications (as yet) as to the effects of the value of the U.S. Dollar on their investments. For those investors living outside of the United States, the "Currency Effect" is very simple. These investors deal with currency translations on a daily basis and seem to have a better grasp and understanding of the "Currency Effect" on their investment decisions. It is important for all investors to understand this concept and the effects the currency in which you are invested will affect your investment outcome.

Now let us get back to our main subject, Why Warrants? - Why Now?

So exactly what is a warrant?

Most investors are familiar with options on stocks, calls and puts, right? I, like many of you, realize this is a very dangerous game for most investors. An option gives you the right, not the obligation, to acquire the underlying security/stock at a specific price and expiring at a specific date in the future. However, options are very short term, usually 30 - 90 days, so you have to be not only correct with respect to your timing but also with respect to the direction of the stock market. Perhaps you are a better market timer than I but it does not work out well for most investors.

A warrant is very similar to an option but with one major difference, TIME! Warrants are usually issued with a minimum of 2 years to 5 years of life.

This means we as investors have the right to acquire the underlying stock at a specific price (determined by the company) and expiring at a specific date in the future. Warrants are usually issued by companies in connection with a financial arrangement and/or public offering and are a "kicker" to sweeten the deal. As investors in warrants our objective is to only trade the warrants with no intention of ever exercising them.

Warrants are all about Leverage . Leverage is why an investor should be interested in warrants. If your favorite mining stock has a warrant trading you should take a serious look to see if they fit your investment criteria which means "how long does the warrant have until expiration and does it provide good leverage?" It is not always easy to find all the facts on the warrants for some companies but you should always do your homework.

What does leverage mean? Leverage means getting the maximum return with the least amount of your investment capital at risk.

Without mentioning any specific names, let's illustrate why warrants can be very profitable. One large gold company trading on the TSX and the American Exchange has two warrants which trade on the TSX. The most recent warrant issued has an exercise price of C$12.10 and expires on 7-January-2008.

Closing price of the common stock



Closing price of the warrant


C$ 3.74

Say you were interested in buying 1,000 shares of the common stock which would cost you C$12,500. You could instead purchase 1,000 warrants at C$3.74 for a total cost of C$3,740.

Cost of the common stock (1,000 shares)


Cost of the warrants (1,000)

(C$ 3,740)

Your savings

C$ 8,760 

Now you control the same 1,000 shares and have saved a lot of money.

Not only do you save money, if the common stock goes to say C$25 (a return of 100%), the warrant will be worth at least C$12.90 or a total of C$12,900 on your investment of C$3,740, reflecting an incredible return of 245%. Leverage is therefore, 2.45:1 over the common stock.

This means will make 2.45 times MORE by investing in the warrants of this company.

What if, instead of buying 1,000 shares of the common stock you invested the entire amount in the warrants; you could actually purchase 3,342 warrants for the same total cost of C$12,500. Again, if we get a move in the common stock to C$25 (a 100% return), the warrants will be worth at least C$12.90 or a total of C$43,111 (3,342 wts @ C$12.90), for a return of 245%. The same leverage as above of 2.45:1.

This is not rocket science by any means; you just have to do the math.

With spot Gold currently at $554.00 as I write this article, many analysts believe we have broken out and are looking for $600 - $900 gold by years-end. There can be little doubt that eventually all mining shares will be in a rip roaring bull market. An investor should consider all the ways to participate in this bull market including adding warrants to their portfolio. All we ask is, "Why not attempt to maximize your investment returns?"

Of course, warrants do not come without some risk. If the underlying stock is trading below exercise price on the expiration date, the warrant will be worthless which is why we strongly recommend that investors focus on warrants that have a remaining life of at least 2 years.


Dudley Baker

Author: Dudley Baker

Dudley Pierce Baker
Founder/Editor - Guadalajara/Ajijic, Mexico
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.

Copyright © 2005-2016 Dudley Baker

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com