Dudley Baker: Common Stock Warrants Will Outperform Equities In Mining Sector

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Includes: GDX, GLD, SAND
by: Palisade Radio

Summary

Just what is a common stock warrant?

What advantages do they have over other securities?

Gaining access to warrants.

Many warrants can outperform options 4 fold.

Gold will come back into favor.

What are common stock warrants? How do they work? Common Stock Warrants can outperform options many-fold with less risk and for less money down. That is according to Dudley Baker, founder and editor of the Common Stock Warrants website and The Warrants Report.

Dudley Baker started out as an I.R.S. agent in 1967 and became a team leader auditing the largest corporations in the world. Now days he has little use for the I.R.S. but this experience gives him a unique insight that he puts to good use with his 40 years experience in trading stocks, options, leaps, futures and warrants, to provide details on all warrants trading on the mining and energy companies.

Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. I am really excited to have a new guest on the program. His name is Dudley Baker. Many of our listeners are probably familiar of his work. He is the founder and editor of www.commonstockwarrants.com and today we are going to have a discussion about warrants. Dudley, welcome to the show.

Founder and Editor of Common Stock Warrants, Dudley Baker: Oh, great to be here, Collin.

CK: Yeah, I want to start off with a very basic explanation of what warrants are. Maybe you can compare them to options which more people are familiar with and we will go from there.

DB: Very, very, very similar to stock options. Basically, the definition of a stock warrant would be it is a security giving the holder the right, but not the obligation, to buy the underlying common shares at a specific price and expiring on a specific date. That is going to sound almost exactly like the definition of a call option except call option is not really a security. You and I and any investor in the world can actually write an option, be the creator thereof. Where a stock warrant is actually issued by the company and will trade as a security on the TSX, the TSX Venture Exchange or even in the United States. That is the basic definition but very, very similar. People should not freak out when they hear a new term because it is so similar to a stock option.

CK: So, Dudley, a warrant comes attached to a new share that is issued by the company when they are raising money, something that happens quite often especially on the venture market in Canada. What is the benefit and why does the company issue a warrant? What is the benefit of having them?

DB: Well, I would go to the point of saying virtually every company out there especially in the resource space probably has issued a warrant. Most of them are issued in connection with a private placement and it is always considered to be like an equity kicker - an additional incentive, if you will, to get that deal done. It has always just been, for decades, has been very, very much a routine within the resource sector as to why it happens. Now each company, the management and their financial advisers can make the decision that they either do or do not want that warrant to trade. Most of the warrants that are issued in connection with those private placements will never trade.

We, in my service, what we are looking for is we are monitoring all the stock warrants that are actually trading that you and I and all the listeners can actually go out and buy on the exchange. Right now we got roughly 200, more or less, stock warrants that are trading. We monitor this list as they come and go and new ones coming and do the leverage calculations and everything for our subscribers. But, basically, to answer your question, it is an equity kicker.

CK: All right thanks for that. Let me ask you a question in terms of warrants that actually trade so they get a symbol and we can talk about an example of one in a short bit. But why and who decides to publicly list the warrant? I guess it typically goes along with the company that has issued the underlying warrant being a sizable company?

DB: Yeah. Now there are a lot of smaller companies though that makes that decision to list as well. Now, frankly, I and you, if we were part of the management team, I can argue this both ways. If I was the president of a resource company do I want the warrant to trade or not? I might lean on the other side to say, "I do not want the warrant to trade. I want it just to remain private and if somebody is interested in our story with our company, then you have to buy our common shares and you can't buy the warrants."

Now, of course, I love the fact that with our service we are following those that are trading, so I can put on a different hat and I can argue both sides. Some of the company- and I know this has to be part of the discussion in these financing arrangements as will or will not these warrants trade? Some of the big players behind the scenes, the Rick Rules of the world, let us say, they are going to have their preference one way or the other as to do we want these warrants to trade?

Collin, I think we are going to talk about an example here in a few minutes. But just to- it is a gold streaming company. They have always made the decision that their warrants will trade. I like this as an investor because as you see it sets an example. It makes a lot of sense. But this is always the decision of management and/or their financial advisers to make that ultimate decision do we or do we not, as a company, want our stock warrants to trade?

CK: All right, so let us talk about this example. It is Sandstorm Gold (NYSEMKT:SAND) and as you just told me before the call it recently listed. What can you tell us about this example?

DB: Well, when you start talking about stock warrants the question is why would you want to buy a stock warrant the same why would you want to buy a stock option why would you want to buy a stock warrant? The same why would you want to buy a stock option? It is for the leverage. It is for the upside leverage. Obviously, your timing needs to be right. You have to have a lot of time to execute on their plans and for the market to perform like you want, so I kind of think that timing is really great here on the Sandstorm Gold. This warrant came out I think it was like November 3rd so less than one month ago. It has got a five year life so this warrant is going to go out to November of 2020, an incredibly long life on a big name company like Sandstorm Gold.

What they did is they peg the exercise price here in US dollars. Sandstorm is a Canadian company but trades on the TSX as well as on the New York Stock Exchange under the symbol SAN for sand. Now they peg the exercise price at USD$4. I am going to keep my example here in US dollars to make this simple. It recently, as of yesterday traded, closed at $2.73 with a $4 exercise price. I am thinking, "Man, this is pretty cool." And you have five years. Right now that warrant, in US dollars, is thinly traded but it is available. In US dollars, it would cost us about $0.60 cents to buy one warrant.

Now here would be the example that I give you. What it is with stock warrants it is all about, to me, playing the "what if" game. What if Sandstorm common goes up to $10, what does the warrant do? This is basically a mathematical calculation. This is what we do for all of the warrants in our database. If the stock goes to $10, what is going to happen? Your return from those numbers I just mentioned at $2.73 from the common to $0.60 for the warrant right now, your return on the common would be 266%. That would be great. The warrant though would return you 1000%. This is with no premium; this is just true net worth, which would mean what I call a leverage of 3.7 times. The warrant will outperform the common 3.7 times which is great.

I am always looking myself, as an investor, of a warrant anywhere from 1.7 to 2 as a bare minimum. In other words I want to be rewarded for taking extra risk buying a warrant. The risk, basically, is just if you have a shorter life. With a five-year warrant this is a no-brainer. Now it is almost the same example if it went to $15 and right now you would think, "Oh, my goodness! Sandstorm to go $2.75 to $15 is a stretch." But, actually, Sandstorm hit a high in US dollars in 2012 of $15. If we got another rip roaring bull market going here the next few years, to me, this is very likely that we are going to see $15 or more on Sandstorm. At $15, the common stocks get a return of 450%, which is great. The warrants can actually return you 1833% -- four times leverage.

In either event the question I always like to pose to all investors is that if you are looking at any company, whether that is Sandstorm Gold or any company; always ask the question before you buy the common shares, "Does this company have a warrant that is free?" If so, you want to look at what are the details. If it has a life until expiration that you are comfortable with, which to me is always, say, two years or more, then I have got to say why would you not want buy that stock warrant? In this case you have significantly less money on the table buying a warrant at $0.60 cents versus a common up here $2.73. You have less money on the table, less risk, let us say, and greater upside potential. I always want to say it is a win-win. If we find the right company, the right warrant - all the stars align, so to speak - in our analysis, man, it makes it a really easy decision in my opinion that investors should be seriously looking at these stock warrants.

CK: Yeah and many of the best-known speculators in the mining space I can think of Rick Rule, Doug Casey, Marin Katusa, they were relying on these warrants and always have to really go from making 10 or 20 times your money in a bull market to maybe a hundred times or more. The interest thing about your service Common Stock Warrants is you have built this database whereby people, even US investors that do not have access to Canada, can find warrants that are publicly traded. They do not have to participate in private placements which as you and I know has restrictions associated to it based on being accredited and being able to even open a Canadian brokerage account as a US citizen. But I want to ask you looking at all the common stock warrants available for gold right now are you finding the discount that you just outlined with Sandstorm is present with most of them? Is it making sense to buy the warrants rather than the shares in most cases?

DB: Well, there are a few of the bigger companies as well that have the warrants that are trading. Now, again, the clock is starting to tick down on some of these. Sandstorm has another warrant that is outstanding, it is a warrant B. But it is going to expire in I believe it is October of 2017. Right now we are inside of two years, and it has actually got an exercise price up around the $14, $15. We got to hoof it pretty good to make that one work. If Sandstorm performs, man, there has got to be a lot of money to be made on that warrant because you probably picked that up at $0.10 to $0.15 US dollar today. But it is a higher risk because if these markets go flat and we do not perform greatly within this remaining period of time, then that warrant will expire worthless, and that is never a good place to be. But nobody has a crystal ball.

But I think we are going to be rocking and rolling way before that 2017 day comes along. It is just a matter of how much we perform here. But some of the other ones have come down where the common share price is selling way below the exercise price like that recent example I gave you on Sandstorm, the last one. That is where the risk comes in. Even though you got two years of life, man, we have got to go so far now. The stock has got to go 3, 4, 500% just to get us back to exercise price.

There has just been very few. You know in these quiet markets that we have had in the resource space it has not been the best environment for a company to come in and do financing. We have had very few warrants issued here over the last six months, let us say, in the resource sector that are trading. Sandstorm, I mean I was so excited when they came out with this deal just a month ago because this is a great opportunity with a good company. Ask everybody, I always say, "Do your own due diligence on the transaction," but in my mind this is one of the cooler opportunities right now in the warrants space. I always say, too, it is like a lot of the warrants, just like a lot of the smaller companies, are rather thinly traded.

We want to make sure when you plan this game to use limit orders. That way there is no surprise, unifying the price, and you put it in. Even when I think I am going to get an execution on day one, I put it in as a good till cancel order. If I do not get a complete fill on that first date, then it cost any more money to do that and I just put it in as a good till cancel order. But definitely you always want to use limit orders on these smaller companies and in particular these stock warrants.

CK: All right and the last question I want to ask you. You are pretty entrenched in the mining space. It has been a rough few years. Everybody knows that. You were just mentioning before the call kind of your hopes that gold would quickly take a dip down and that would allow us to start this new bull market. But that would be good in theory. What do you actually see happening over the next couple of years?

DB: Well, you know, right or wrong, I guess I have always been in the bullish camp. We probably follow a lot of the big players. We have got to be very close to the low in the bottom at least on a calendar of this down wave bear market that we have been in. But I think we are going to go up at a minimum, approach the old highs of the $1900 probably take it out and to go higher. Why is that going to happen? I do not have all the answers to this, but I have got a feeling this is going to place from the monetary situation in the US dollar. There is so much risk in the whole damn world. We are just on the downside of this now.

I have got to believe the day will come soon that gold will be back in favor and we will once again be the choice of many, and high probability the banks and everybody, we are all going to be on the same page this time instead of them being on the short side. I would love to be on the same side with these guys if we drive things up to substantially higher prices. I see good things and, again, when you come in to the- but whether that's buying the mining shares, resource company or the stock warrants it is all about timing when you enter this party.

For listeners who still have some funds available this is a great opportunity. Whether we are at the bottom today or be at the bottom a week from now I think we are damn close and we should be exploring these opportunities today and preparing for the next several years with some great investments. The main thing is make sure the companies that you buy have got some cash in the bank and not going to disappear on you. That is the main thing: good properties, good management, cash in the bank to survive.

Before we close I will mention that in our warrant database what we did about a year and a half, two years ago, we have expanded everything as well into the United States. There are 150 companies, I guess, that are actually in the biotech space, in the pharmaceutical space. A lot of the big banks have got stock warrants that are trading and there is really a big list of great opportunities. For those that are not 100% on board with the resource we have got some great diversification here within our common stock warrants database. Anyone who is into trading, US or Canada, regardless of the sector that they are in are included in our database. I would like to say there is something here for everybody. We welcome everybody. Just visit our site the www.commonstockwarrants.com. Check us out and see what we have got to offer.

CK: All right, Dudley, thank you for doing my work for me there. That is www.commonstockwarrants.com. Hopefully, we will get you back on the show in the new year.

DB: Okay, great. Great to talk to you.

Dudley Baker started out as an I.R.S. agent in 1967 and became a team leader auditing the largest corporations in the world. Now days he has little use for the I.R.S. but this experience gives him a unique insight that he puts to good use with his 40 years experience in trading stocks, options, leaps, futures and warrants, to provide details on all warrants trading on the mining and energy companies.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.