Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Precious Leverage

|Includes: FNV, GDX, GDXJ, RGLD, Wheaton Precious Metals Corp (WPM)

 

 I recently stumbled upon a way to gain leverage to gold and silver. Before I learned of this my best ideas where limited to options, margin, high cost per ounce producers, and explorers. I don't like options because the duration is typically just too short. Margin is simply too risky. I don't like high cost per ounce producers because they too are also too risky. Explorer seems to go bankrupt left and right, how is one to know which one will strike it rich? Yet leverage can be found with our neighbors to the north on the TSX with warrants.

What is a warrant? Well the short and dirty answer is it is a stock option issued by the relevant company rather than an individual. When it is called however, the company does not buy one share at market price and sell to you at the strike price rather it dilutes into existence a new share. The significant difference in not in the mechanics it is in the duration. There are many warrants that don’t expire for several years or more!

I’d like to discuss the warrants of two of my top holdings, Silver Wheaton and Franco-Nevada. Most recently Silver Wheaton (SLW) closed at 16.22 USD. The warrant of my interest (SLW.WT.U) will expire on 09/05/13 with a strike price of 20 USD. The warrant most recently closed at 7.25 Canadian or the equivalent of 6.86 USD.

Potential Gain SLW vers. SLW.WT.U:

Warrant Price

Potential  Share Prices

       

$6.86

 

$15

$20

$30

$50

$80

$125

 
   

-100%

-100%

46%

337%

775%

1431%

Return

Share Price

Potential  Share Prices

       

$16.22

 

$15

$20

$30

$50

$80

$125

 
   

-8%

23%

85%

208%

393%

671%

Return

                 

Remember that the warrant does not expire for well over three years. You clearly need a higher share price to start realizing your gains but once you do your warrant can provide significant leverage to the underlying security.

Next we have Franco-Nevada (FNV.TO). Its most recent price was 28.17 CND. One of its warrants is most interesting mainly because it has an expiration date of 6/16/17. Its strike price is 75 CND and most recent trade of 6.30 CND.

Potential Gain FNV.TO vers. FNV.WT.A:

Warrant Price

Potential  Share Prices

       

$6.3

 

$50

$75

$100

$125

$150

$200

 
   

-100%

-100%

297%

694%

1090%

1884%

Return

Share Price

Potential  Share Prices

       

$28.17

 

$50

$75

$100

$125

$150

$200

 
   

77%

166%

255%

344%

432%

610%

Return

 

There are many PM companies that trade warrants on the TSX. The most important thing to consider is the underlying company. Your warrant will never gain significant valuable if the relevant stock never appreciates. Instead the value of the warrant will slowly decay. Next the duration is important. With a significant duration one can sit back and ride out a significant pullback in PM's unlike a short term option. Warrants can be a great way to leverage yourself to precious metals.

 



Disclosure: Long SLW and Long FNNVF.PK