Mining Warrants

Financial Dictionary -> Investing -> Mining Warrants

The text below explains mining warrants as investment vehicles by answering the following questions: What is a mining warrant? Where does it derive from? Why do mining warrants catch the interest of investors? Where and how do mining warrants trade?

What is a mining warrant?

A mining warrant represents a financial instrument that enables the investor to purchase at his or her own discretion underlying common stock of mining companies at a specified price, and it has a predetermined expiration date. The average validity of mining warrants is two or five years.

Where do mining warrants come from?

Warrants are issued by a sale of extra stock in the business, in relation to some private equity financing arrangement, or when the company goes public. Essentially, mining warrants are the carrot that the management of the company dangles for the investors to pour cash in their business. To put it more formally, mining warrants are often referred to as "equity booster".

Why are mining warrants investments attractive?

To answer this question we should first explain the term "leverage". Leverage refers to getting the maximum return on investment by exposing your capital to the smallest amount of risk. In fact, leverage is the relation of the asset value of the warrant to that of the underlying common stock. Thus, a two-to-one leverage means that if the value of the underlying stock increases by a hundred percent, the warrant's value will go up by as much as two hundred percent. In their essence warrants are investment vehicles that guarantee a certain increase in the price of the common stock in the long run, and thus they provide investors the potential for significant upside leverage vs. its underlying common stock. Because a warrant has a specific exercise price and expiration date, it is bound to outperform the underlying common stock greatly, if its price starts rising.

In general, good mining warrants' opportunities are characterized by the following elements: attractive terms in view of excise price and duration; leverage potential, i.e. low warrant price relative to the value of the common shares; bright long term perspectives for the products of the company.

Where and how do mining warrants trade?

Most of the warrants issued by the mining companies are never traded in public and they are usually held by insiders such as members of the company's managing board, for example, or institutional investors. However, the warrants of many US and Canada-based mining companies are traded in public and could be purchased by investors. The good news is that warrants trade precisely in the way the underlying common stock does, meaning that the investors will not be bothered with extra documentation to fill in. Mining warrants are assigned trading symbols like stock. Thus, mining warrants trade at most of the stock exchanges around the world, as well as in the open financial markets in Canada and the United States. Investors can buy mining warrants on the New York Stock Exchange, NASDAQ, AMEX, among others.