MINING FINANCE / INVESTMENT
The Gold & Silver Warrants Index (GSWI) in Review
A review of the longer term warrants available for North American gold and silver mining companies - a volatile investment sector which can prove to be particularly rewarding when stocks are advancing.
Posted: Tuesday , 02 Aug 2011
TORONTO (munknee.com) -
Virtually nothing is being written these days on the few long-term warrants associated with gold and silver mining companies. I suppose that is to be expected given that there are only 22 such warrants and they are associated with only 19 companies in total. That is unfortunate because those who are in the know can take advantage of the significant leverage warrants generate in a bull market over investing in physical gold and silver, precious metals company stocks and mutual/exchange traded funds. What am I talking about - and which warrants am I referring to? Let me explain.
(Please note that full attribution must be included in any article reposting with a link to the article source* below to avoid copyright infringement.)
Only 167 warrants were trading on the Toronto Stock Exchange ($TSX) and the Toronto Venture Stock Exchange ($CDNX) in total as of the end of July, 2011. Of those 167 only 22 (13%) are of the long term variety (+24 months to expiry) and associated with 19 gold and silver companies and, as such, constituents of my proprietary Gold and Silver Warrants Index (GSWI).
WHAT ARE WARRANTS?
Warrants are securities which gives the holder the right, but not the obligation, to acquire the underlying associated securities at predetermined (i.e. exercise) prices and within a specified period of time (i.e. term or duration).
THE GOLD AND SILVER WARRANTS INDEX (GSWI)
The 19 companies in the equal dollar-weighted GSWI are primarily involved in gold and silver mining, exploration and royalty stream endeavours and consist of the following particulars:
1. Number of Warrants by Months of Duration
Since all warrants have life durations, and begin to lose value as they approach their respective expiry dates, only the 22 warrants of the 19 companies (3 companies have 2 warrants each) which have at least 24 months term before expiry are included in this analysis. The breakdown by duration of the 22 warrants is as follows:
- 3 (12%) 60+ months (Franco-Nevada wt.A, New Gold wt. A, Crocodile Gold wt.) ;
- 5 (21%) 48 - 59 months (Dundee Precious Metals wt. A, Gran Columbia wt., Primero Mining wt., Rio Novo Gold wt., Sandstorm Gold wt.A);
- 10 (42%) 36 - 47 months;
- 4 (25%) 24 - 35 months
2. Number of Companies with Warrants by Market Capitalization
Most financial writers and advisors are of the mistaken impression that warrants are associated with just penny stocks - the ‘juniors' - but, as the breakout of the 19 gold and silver companies with LT warrants by market cap shows below, that is not entirely the case:
- 5 (25%) large-cap (Kinross Gold; Agnico-Eagle; Franco-Nevada; Silver Wheaton; New Gold)
- 4 (20%) mid/small-cap
- 10 (55%)micro/nano-cap in size
3. Type of Activity by Company with Warrants
Type of activity each company is involved in is as follows:
- 11 (58%) are producers
- 5 (26%) are explorers
- 3 (16%) are royalty stream companies of which
- a) 1 deals exclusively in gold (Sandstorm Gold);
- b) 1 deals exclusively in silver (Silver Wheaton) and
- c) 1 deals in gold and silver plus other commodities (Franco-Nevada).
COMPARING THE PERFORMANCE OF THE GSWI WITH OTHER GOLD & SILVER ALTERNATIVES
The GSWI was up +92% in 2010 (and +140% in 2009!) in U.S. dollar terms which was more than the:
- 55% increase in a basket of mid- and small-cap miners as represented by the GDXJ;
- 33% increase in the HUI and GDX (large/mid-cap gold and silver mining company stocks);
- 30% increase in gold bullion and even the
- 83% in physical silver.
The GSWI has not fared as well - to date - in 2011 but given the optimism expressed in many articles high hopes are anticipated before the year is out for the stocks of gold and silver mining companies. The associated warrants of such companies have historically outperformed the stock of the company in an up-leg by approx. 70% on average (+74.8% in 2010) but, conversely, have underperformed the associated stock by roughly 60% in a down-leg as exemplified by the YTD performance of -36% for the GSWI vs. only -14.5% for its associated stocks. Incidentally, with the exclusion of the LT warrant and stock of Agnico-Eagle, which are each down 53% YTD, the GSWI is down -26% and its associated stocks down -6.3% which is right in line with the HUI/GDX.
As one can see warrants are quite volatile compared to their associated stock but if one truly believes in the future performance of precious metals equities then warrants may well be the place to be and now is the time to get positioned. For interest sake, the performance of large/mid-cap gold and silver company stocks as represented by the HUI/GDX is -5.2/7.5% YTD, that of the mid/small-cap miners as represented by the GDXJ is -9.6% YTD and Rob McEwen's index of non-producers (the McEwen Junior Gold Index) is -11.9% YTD. Incidentally, the aforementioned performances of the various indices shows that, YTD, the larger capitalized the mining companies are the better their performances have been.
THE GSWI CONSTITUENT COMPANY SPECIFICS
The constituents of the GSWI are listed below with the following information presented as follows: Company Name; market capitalization; TSX/TSXV warrant symbol; (U.S. Pink Sheets** symbol); warrant expiry date; warrant CUSIP* Number; web site URL:
(* CUSIP stands for the Committee on Uniform Security Information Procedures of the American Bankers Association which established a format of unique codes for all North American stocks, bonds, puts, calls, warrants, etc. as assigned by Standard and Poor's. The CUSIP number consists of a combination of 9 characters, both letters and numbers, which act as a sort of DNA for the security uniquely identifying the company or issuer and the type of security. The first 6 characters identify the issuer and are assigned in alphabetical order; the 7th and 8th characters, which can be alphabetical or numerical, identify the type of issue; the last digit is used as a check digit. The use of such numbers is imperative for non-Canadians when placing orders with a broker to avoid any confusion related to specifically which warrant is being requested to be bought or sold.)
(** Pink Sheets is the registered name for a privately owned company that operates a centralized quotation service that collects and distributes market maker quotations for securities traded in the over-the-counter market. The service is named for the color of the sheets on which the National Quotation Bureau originally distributed bid and ask quotations for OTC securities. In 1999 Pink Sheets introduced its Electronic Quotation Service, which provides real-time quotes for OTC equities and bonds. The .pk behind a stock simply means the stock in question is traded on the pink sheets. It is a 5-alpha symbol ending in ‘F' for Foreign).
- Agnico-Eagle; $11B; T.AEM.wt.U; December 2013; 008474140; www.agnico-eagle.com
- Augen Gold; $54M; V.GLD.wt; October 2014; 05104R120;www.augengold.ca
- Astral Mining; $3.5M; V.AA.wt; October 2014; 046349130; www.astralmining.com
- Bridgeport Ventures; $32M; T.BPV.wt; October 2014; 108404112; www.bridgeportventures.net
- Brigus Gold; $189M; a) T.BRD.wt; November 2014; 109490110; b) T.BRD.wt.A; November 2014; 109490136; www.brigusgold.com
- Crocodile Gold; 24M; T.CRK.wt; March 2016; N/A; www.crocgold.com
- Dundee Precious Metals; $623M; T.DPM.wt.A; (DNPMF.pk); November 2015; 265269134; www.dundeeprecious.com
- ECU Silver; $203M; T.ECU.wt; February 2014; 26830P121; www.ecu.ca
- Endeavour Mining; $309M; T.EDV.wt.A; February 2014; G3040R133; www.endeavourminingcapital.com
- Franco-Nevada; $3.6B; a) T.FNV.wt.A; June 2017; 351858139; www.franco-nevada.com
- Gran Colombia; $283M; T.GCM.wt; August 2015; 38501D113; www.grancolombiagold.com
- Kinross Gold; $12.3B; a) T.K.wt.C; (KNRSF.pk); September 2013; 496902172; b) T.K.wt.D; September 2014; 496902180; www.kinross.com
- New Gold; $2.5B; T.NGD.wt.A; (NGDAF.pk); June 2017; 644535122; www.newgoldinc.com
- Northquest; $8M; V.NQ.wt; December 2014; 666676119; www.northquest.biz
- Primero Mining; $456M; T.P.wt; July 2015; 74164W114; www.primeromining.com
- Rio Novo Gold; $156M; T.RN.wt; March 2015; G75700123; www.rnovogold.com
- Sandstorm Gold; $187M; a) V.SSL.wt; (SNXXF.pk); April 2014; 80013R115; b) V.SSL.wt.A; (SDXXK.pk); October 2015; 80013R123; www.sandstormgold.com
- Silver Wheaton; $8.5B; T.SLW.wt.U; (SLVWF.pk); September 2013; 828336149; www.silverwheaton.com
- U.S. Silver; $68M; V.USA.wt; July 2014; 90343P119; www.us-silver.com
WHICH WARRANTS SHOULD YOU INVEST IN?
Now that you know which companies constitute the LT warrant asset class, which commodities they are involved in, when their warrants expire and what their respective symbols and CUSIP numbers are, all you need to start investing in them is to decide on your approach. Warrants perform in relationship to that of their associated stock so their purchase should not be done without considerable research.
a) Given the fact that no warrant ETFs are available to buy you could buy a basket of warrants consisting of an equal number of warrants from every company mentioned above. A purchase of just 100 warrants of each LT offering would amount to approximately $6,000 at today's prices, plus commission expenses.
b) You could do your own due diligence of each of the 19 companies and decide which company or companies are to your liking and purchase their associated warrants accordingly.
c) You could restrict your selection of companies early on by:
- management experience/reputation;
- specific products (gold or silver);
- business emphasis (producers, developers, explorers or royalty streamers);
- market capitalization (large, mid/small, micro/nano);
- geographic location (world-wide, excl. Africa, excl. Columbia, etc.);
- stock /company fundamentals;
- technical analysis of stock;
- expiry date of warrant (minimum of 1.5 years duration, 2 years, 5 years, etc.);
- price volatility of stock/warrant;
- degree of liquidity of stock/warrant;
- trading depth of stock/warrant;
- currency in which stock/warrant trades (US or Canadian dollar)
d) You could do b) or c) above and then, and only then if your primary intent is to hopefully be in a position to exercise your warrants and acquire their associated stock at some future date (this option is generally not available to U.S. residents), finally restrict your purchases to those warrants that provide the best value related to their future leverage potential based on specific appreciation of their associated stock and the number of months duration remaining for the warrants under consideration.