The Junior Mining Market Is Getting Hot - So Why Use Warrants In Financings?

Warrants can be an investors’ sweet dream, and an issuing company’s worst nightmare.

Warrants are basically like stock options given to investors on a financing–and in the high risk junior mining, game they are used a lot. I would argue that sometimes they are used too much.

Yesterday, I spoke at a conference hosted by my colleague and friend Gwen Preston, who writes exclusively on junior mining as The Resource Maven. Like me, she is not a trained geologist but she is a trained trader and market watcher with great insight, and a gift to that community.

She asked me to speak on the topic of warrants, because she knew my thoughts–they are overused by promoters, management teams and brokers. I would not be popular.

I spent the first 18 years of my career in the market in junior mining, and got to work with some amazing management teams–and some not so amazing. I was there when there were no institutions and liquidity was tight and 8 million shares was a rollback and if a stock hit a good hole it could go to $10–because the share counts were so few due to lack of liquidity/funding. (Sonny, get me my cane over there in the corner.)

My overall message was that warrants DO have a place in this high risk business, and certainly other industries (think biotechs with convertible preferreds etc) use worse instruments that impeded an efficient market and transparency. But by judiciously using warrants, and having clean share structures, mining might be able to attract more investors just as this market starts to ramp up.

The original intent of warrants was to incentivize investors to take a shot at either a high-risk play, or one that could take a long time to develop.

Why do I think warrants can be bad? Warrants are a drag on a stock. Warrants create inefficiencies in markets. And they steal value from future investors.

If there are 20 million warrants at $1/share strike price and they don’t expire for another two years, as soon as the stock starts trading….I don’t know, let’s say…50% higher…those warrants start to get exercised and sold into the market.

They become a really annoying supply that management does not control. It makes it more difficult for me to buy any stock as an investor knowing that a large supply of new stock could swamp the stock at any time. I want to buy stock right after warrants expire. 

We have now, as an industry, got into the habit of longer dated warrants—three and five years now, and that can create a barrier to funding at higher levels. We all know that although value gets created in the ground, having control of the supply demand on your stock is an important tool in creating the best price to finance your stock.

And management’s goal is to get their deposit developed to a buyout or into production with fewest shares out as possible. Aside from ESG concerns, that is their #1 goal. The fewest shares means the highest price. Warrants rarely help those goals.

Unless management can force the exercise of the warrants under a certain scenario, they have no control over when these get exercised. And while getting the money in from warrants is a positive, it may be at a bad time when they want to raise a larger amount of money and find they have to do it at a lower price than they want.

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This article was written by Keith Schaefer, Editor/Publisher. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this ...

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