Why warrants are the worst of wagers
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
A warrant is a common financial instrument designed to entice speculators’ participation in a company’s private placement. It grants the participant a fixed price option to acquire another share in the company at a future date. Private placement units commonly consist of a share and a half or full warrant with a one- to a five-year expiration date.
I opine that a warrant is a financial instrument that in the vast majority of cases has zero value. There are some obvious reasons why this is true and I detail them in the missive below.
But first, I present my own anecdotal evidence:
From 2013 to the present, I participated in 35 junior resource company private placements; 23 included an attached warrant. Five were private startups and five were shells, reverse takeovers, or spin-outs that came without a warrant. Two of the placements that had no warrant were secondary financings for an RTO and a spinco, and both were priced at significant discount to the market.
Folks, here’s the sad truth about these 23 warrant speculations:
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:
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,