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Source: The Gold Report 11/18/2008
His pitch is irresistible: “Buy a basket of juniors with warrants and it could be the easiest 500% you’ll ever make.” In this exclusive look at one of the most overlooked and misunderstood investment vehicles, Dudley Baker of PreciousMetalsWarrants.com explains to The Gold Report exactly what warrants are and how they increase the odds of winning vastly higher returns. With a little arm-twisting, Baker even reveals some of his most prized “unbelievable” opportunities.”
The Gold Report: Could you start by explaining what a warrant is and how it differs from a futures contract?
Dudley Baker: A warrant is basically a security. It gives the holder the right, but not the obligation, to purchase the underlying stock at a specific price within a specific period of time. It sounds very similar to a call option except that it really is a security and a warrant will trade in much the same way as common shares. A warrant is assigned a symbol and will trade on the exchange or, in the U.S., it will have U.S.-assigned symbol where it can be traded over-the-counter.
TGR: Are all the warrants traded in the over-the-counter market?
DB: No, no. Most will always be private. Many precious metals investors know ‘warrants’ because they are frequently issued in a private placement. But most of those warrants never trade on any exchange and they’re not transferable. On my website only cover those warrants that are trading, the ones you and I could go out and buy. For example, Warren Buffet conducted a private transaction with General Electric and Goldman Sachs. There will never be a market for those. That’s the distinction, whether it’s a warrant with a private placement or an initial public offering. In rare cases a company can get the warrants listed if they were issued in connection with a private placement.
TGR: So Buffet purchases the stock and then is awarded the warrants. Is it GE or Buffet who decides to make those warrants transferable?
DB: In this case it probably would be Buffet. Since he actually owns those warrants it’s his decision.
TGR: Let’s to back to the private placement example. Aren’t warrants used as a sweetener for a private placement investment? In that case, who makes the decision as to whether those warrants are transferable?
DB: The company will make that decision. In Warren Buffet’s case, let’s say that he’s the only holder of the Goldman Sachs and GE warrants. Even if the company said we want these to trade, there’s nobody to trade them because there’s only one guy, Buffet, who owns them and he’s probably not going to trade them. The chances are that he would just convert the warrants or the company would buy them back at some point. But in the case of the private placement of a mining company, there may be hundreds or even a thousand participants. If the company decides to list those warrants, those 500 to 1,000 individuals could decide to trade them. So now we’ve got some liquidity. And we always need that liquidity. So there are a lot of opportunities even for the bigger companies that have warrants trading.
TGR: So when warrants are initially issued, they could be privately placed, or publicly traded.
TGR: Are most of the warrants that are publicly traded related to financial transactions other than mergers?
DB: They could be issued in connection with the financing for an initial public offering. A lot of warrants start with the private placements, the initial public offerings, and mergers. So warrants that are trading come about through a number of different circumstances.
TGR: Given the current stock market and the merger and acquisition environment, would you expect increased interest in the purchase of warrants?
DB: You mean what is the future for warrants?
DB: Let’s put it this way. The most important thing is to have a solid understanding of the underlying fundamentals of the company. Do they have a good story? Is there potential for the stock to greatly increase in value? And then we have to ask, maybe before we buy the commons shares: will trading a warrant give us a lot more leverage? If so, what is the remaining life of that warrant? It is especially important in this environment to have as long a life on a warrant as possible. Many of the warrants in our database have three years or more of a remaining life, which is really great. Some of them have four or five years. One actually has an 8-1/2 years going out to 2017. I see great opportunities going forward.
Are we going to blast off in a rally this week, next week, next month? I don’t know. But I’m very confident that in the coming months and years that gold and the junior mining shares are going much, much higher. So I’m very comfortable buying warrants in the juniors. It is critical to have as long a life as possible. I cannot stress enough how important it is to look at that underlying common stock. If the company’s common stock does not go up, there’s no way the warrants are going up. So we have to be confident that the company will be able to execute its business plan. Then we hope for a skyrocketing market here in the coming months and years.
TGR: So the real advantage of a warrant as opposed to the common shares is the leverage.
DB: Exactly and that’s why we’d start looking at a warrant. It gives us a lot more bang for our buck, a lot more leverage. I’m always looking for a minimum of two times the leverage. So if we’re looking for a common stock to go up 100%, I’m leveraged to make at least 200% by buying the warrant.
TGR: How would you compare a warrant to a call option?
DB: Good question. A call option is just going to trade on the Chicago Board Options Exchange, whereas a warrant is actually going to trade like a common stock on the TSX. The main difference we’ve got is time and we always want as much time as possible. There are so many call options out there on the mining shares, but maybe they’ve got 90 days or 180 days, one year at most. That’s not enough time for me. In this treacherous market environment that we’ve had over the last two years, options are really just speculating. I like to think that if we can find a long-term warrant on a good company that has a two-year minimum life—if not three years or more— now we’re investing. This way, time is on my side. On my website I’ve got some examples of my trades and the common denominator of those that generated roughly 1,000% or more return was the fact that all of those warrants had over a three year remaining life when I bought them. Time is the key to my success with warrants.
TGR: I would think time really plays very well right now with the market being at 52-week, if not 5-year, if not 30-year lows.
DB: Incredible, yes.
TGR: It probably can’t go much lower in the next three years.
DB: That’s exactly how I see it. You can make a blanket statement that nearly all of the juniors and warrants are off by at least 90% in value. Either you believe this is the end of the world and the game is over or this is just a fabulous buying opportunity. I was buying this morning. I’ve usually do several transactions each week, so I just continue to build inventory, accumulate mining shares and warrants, which I’ll sell in the future at substantially higher prices. So, if we can find a warrant that, say, has a three-year or longer remaining life, it’s going to be hard to imagine how high it might go in a few years. It used to be that if a stock were trading for less than 10 cents, you’d be crazy to consider it. In this environment, a lot of juniors are selling for less than 10 cents; good companies with cash in the bank. The opportunities out there today are truly incredible.
TGR: You have some mid-market producers trading under a dollar and they have cash flow.
DB: It’s just unbelievable. I’m probably one of the more optimistic guys. I am very positive about where we’re going. It may not be next week, but in the coming two to five years it’s going to be a totally different game. We are just building inventory getting set here for what’s coming.
TGR: How do our readers discover what warrants are out there, particularly in precious metals?
DB: I would suggest that they visit my website, PreciousMetalsWarrants.com. I’ve put together a learning center over the last several months. After I created the database listing all of the companies in the natural resource sector that have warrants trading in the U.S. and in Canada, I realized that a lot of people don’t even know what warrants are. So I built the learning center to answer a lot of basic questions.
Warrants actually go back to the 1920s, so they’ve been around for a long time. Options and futures have gotten all the publicity in the past five to ten years. I’m dusting off the term ‘warrants’ again and bringing it back into play so that investors can see the possibilities. Now that Warren Buffet has reintroduced the word ‘warrant’, it’s great for me. The more people we educate about warrants, the better it is for all of us.
TGR: More liquidity, more traders.
DB: Exactly, exactly.
TGR: Can you share with us some of the companies that you particularly like who are trading warrants?
DB: Let me start with some that are your sponsors. I’m not too knowledgeable about the companies and the leverage fluctuates, so we always have to take a look. I like to think that’s why subscribers need me. I’ve got some special leverage calculations that I do. What may be a good deal tomorrow is not necessarily a good deal next week. I calculate the pricing and the relationship of the warrant to the common shares.
Franco Nevada Corp. (FNV.TO), a royalty and investment company, has a warrant extending to 2012. I’m not suggesting that you run out and buy this warrant, but it does look interesting. Do your own due diligence. See what the leverage looks like and whether you want to get involved. Another one—I don’t know of another analyst that follows this and I have minimal knowledge myself—is Colossus Minerals Inc. (TSX:CSI). It has a warrant out to 2011. So that’s quite a few years. They have gold properties in Brazil. The situation looks interesting.
I like Piedmont Mining Co. (OTCBB :PIED). It’s a small junior exploration company and all of its properties are in Nevada. Robert Shields is president and I feel very comfortable with the management. The price has been decimated, as has most of the sector. But I believe it will be a great opportunity. Another one that you don’t hear much about is Vangold Resources (TSX.V:VAN). It is amazing. I’ve got a small position in it myself. It’s got gold, oil and gas, and beryllium. Again it’s selling literally for pennies and you’ve just got to scratch your head and ask how can this be. A lot of your sponsors are great companies and I just have to believe that virtually all of them present buying opportunities.
The last one is Great Panther Resources (TSX.V:GPR). I love the company and its location. I live in Mexico – just outside of Guadalajara, so it’s about a 3-1/2 hour drive from my home. This is one of my favorite silver companies. I’ve visited Bob Archer, the president, several times and have seen the properties. They’re going to be mining silver way after all of us are gone from this planet. It’s a great operation selling for 10% of its all time high. There are so many wonderful stories out there that will become incredible opportunities in the coming months and years. You just hope that investors realize what they’re looking at because it’s going to be unbelievable. I always say buying a basket of the juniors today or a basket of the long-term warrants is probably the easiest 500% you’ll ever make in your life.
TGR: I liked the idea that warrants allow a company the time to grow because no one really knows when to call the bottom. Is it going to be this quarter, next quarter; will it turn around in 2009? But everyone’s saying in a couple of years we’re going to look back and say, wow, that was cheap back then.
DB: There’s one warrant that just started trading. I bought it for 10 cents. It has over a 4-1/2 year remaining life. I plan on selling it for dollars, many dollars. It’s almost like a giveaway. Maybe it’s just my attitude. I have such strong beliefs about where we’re going. Yes, the draw down that we’ve got right now bothers me, but I’m focused on the longer term. So this is just giving us opportunities to continue to buy at these ridiculously low prices.
TGR: Can you share with us this ridiculously low-priced warrant you bought today?
DB: You’re going to put me on the spot, huh? Okay, the name is Gold Wheaton Gold Corp. (GLWGF) (TSX.V:GLW). Everybody knows Silver Wheaton. This is a totally different company with totally different management but essentially the same business model. Gold Wheaton stock is probably trading around 33 cents. The exercise price is one dollar.
So you ask why in the world would I want to buy this warrant that has a one-dollar exercise price when the common stock is now selling for, say, 30 to 35 cents? The reason is that we’ve got a 4-1/2 year remaining life and the leverage is going to return much better than a 2:1. I have my database and I’ve got leverage calculations on another spreadsheet showing different price points going forward. This is how I look at a warrant. I ask how is this warrant going to perform if the common stock doubles, triples, quadruples, or goes up ten times? I’m looking at the underlying leverage. Is that going to give me my 2:1 or better opportunity? So this morning the Gold Wheaton warrant just started trading. It looks good to me. Who knows? It could go down a little bit more from where what it started trading. But we’re somewhere around the 10 to12 cents range, which just sounds unbelievable when we’ve got a 4-1/2 years or more remaining life. So you buy it, you put it away, and know it’s going to be easy money.
TGR: Dudley, this has been very interesting.
The Gold Report has worked out a special deal with Dudley Baker of Precious MetalsWarrants.com to offer our readers a free 30-day look at his database—full access to his personal portfolio—or what he calls a “Look Over My Shoulder.” You can see everything he owns and get an email any time he does a transaction. Sign up now.