Why warrants are the worst of wagers
First a note from Dudley Pierce Baker, Founder-Editor of Common Stock Warrants.
The title of Mickey’s article caught my attention and at first I was greatly upset. But Mickey, a geologist, is focusing on warrants issued in connection with private placements and I can agree with many of Mickey’s comments. With stock warrants, like options, or LEAPS, it is all about the underlying company. If a company does not execute on its plans or the markets do not cooperate, it is impossible for these financial instruments to increase in value. Here is Mickey’s closing comments on his article (below).
“….I will still consider a financing that features warrants but it must be a compelling story with a group of strategic investors who are demonstrably committed to the company and an orderly market that responds positively to exploration success.
Otherwise, for any story I like, I can purchase free-trading shares on the open market.”
So with hope and perhaps a prayer (if you are religious), the jury is still out on six warrants.
That said, of the 17 warrants that are said and done, only four were exercised and sold at a profit; that’s less than 25% winners!
Rest assured that I am not alone in my recent history of junior resource speculations. In several discussions with other professional speculators, we reached a general consensus that only one in every four or five warrants are in-the-money and exercised prior to expiry.
So let’s explore some reasons for this abysmal record. Certainly, macroeconomic factors have been important:
- Junior resource stocks peaked in Q1 of 2011, declined in a bear market thru Q1 of 2016, and broadly mimicked the gold price until mid-Q2 2019. Despite a 17% gain in gold since mid-May, the bad market for juniors is unabated with the TSXV Index hitting a year-to-date low at Friday’s close.
That said, the price of gold and the performance of the junior stock market are merely a part of this story.
I submit there is a fundamental flaw in the standard equity financing model and structure that demands private placement units include a share and a warrant. My reasoning is outlined below:
Folks, the gist is this: Private placement warrants seldom reward speculators with the opportunity they envision. Moreover, unexercised warrants often present a significant hindrance to a junior company’s share price, share structure, and future financial fortunes. .
At this juncture, I am only interested in early-stage financial opportunities in properly-constructed private startups, clean shell companies with well-constructed structures, and/or reverse takeovers of the above.
I assume significant risk with a five-plus month trading hold on every private placement. For the reasons outlined above, I do not want a warrant attached on the term sheet. If you really want to attract my hard-earned American dollars, I strongly suggest financing at significant discount to the market price.
To wit: Warrants are often the worst of wanton and wasted wagers and seldom have future value.
I will still consider a financing that features warrants but it must be a compelling story with a group of strategic investors who are demonstrably committed to the company and an orderly market that responds positively to exploration success.
Otherwise, for any story I like, I can purchase free-trading shares on the open market.
Ciao for now,