June 8, 2020 | The Most Leverage to Rising Metals Prices Without Margin

I’ve alerted The Independent Speculator clients to two private-placement opportunities over the last few days. It seems that higher monetary metals prices are bringing more of the world’s speculative cash back to bear on junior gold and silver explorers. This is creating opportunities, even for investors who can’t participate in the placements.

What is a private placement, and how do savvy speculators make the most of them?

I’ve covered this in detail in a special report on private placements you can download for free.

The key point I want to make sure everyone is aware of is this: private-placement opportunities are surging—and will likely keep surging even if gold and silver trade sideways for the rest of the year.
Here’s why:

• $1,700 is a great gold price. The better miners and projects can make boatloads of money for shareholders at current levels, or at $1,600, or even down at $1,500. The very best can make money at even lower prices.
• All mines are self-depleting assets. Whether gold and silver rise or fall, producers need to replace the ounces they mine, either by successful exploration or by acquisition of successful explorers. It’s that or they mine themselves out of business.
• Producers have been exploring less. Since the first budget item most producers cut when times are tough—as they have been for years—is exploration, a huge wave of takeovers is clearly on the horizon. Juniors that have large discoveries with robust economics are prime takeover targets.
• Juniors need cash to advance their projects to make them prime takeover targets. Junior explorers always need money, since their whole business revolves around pouring cash into holes in the ground when they have no revenue. But when markets are down, they too tend to cut spending as much as they can and wait for better times. Better times are here, and cash-starved juniors are coming out of hibernation.
• Juniors with no resource in hand know that now is the time to give a new discovery their best shot.
• Juniors with advanced deposits know that now is the time to de-risk their projects and strut their stuff.
• The uptick in junior financings this year shows that, at long last, money is flowing back to the sector.

This is good news for all of us, not just fat cat investors.

Why?

Because (as covered in my free report on private placements) share prices usually drop when a company announces a private placement.

This happens because the placement is usually offered at a discount to market, or with a juicy warrant, or both.

A warrant is like an option that gives participants the right—but not the obligation—to buy shares in the future at a set price. That means warrant-holders can exercise their warrants when they know they’ll make money, with essentially no risk.

This is why private placements are the #1 means by which famous speculators like Doug Casey made their fortunes.

The result of this logic is that existing shareholders will often sell the stock they have in order to buy in at the lower price of the private placement—and get the free warrant to boot. Some might do this even if the offering is not at a lower price, just to get the warrant.

And that creates lower entry points for everyone else.

Plan B

Also, while private placements are restricted to SEC-accredited investors, if the warrants are transferrable, they’re not restricted. When this happens for a large pool of warrants in a company with good volume, the warrants will sometimes get their own listing and trade like stocks.

For example, as I type, I can buy shares in Gran Colombia Gold (GCM.TO) for C$6.70. Or I can buy Gran Colombia Gold warrants (GCM.WT.B) for $4.52.

What a bargain, right? Well… maybe. For them to be worth the effort, GCM shares have to rise to a level that justifies what I pay to buy the warrant, plus the amount I have to pay to exercise the warrant (the strike price)—C$2.21, in this case—and I have to get this right before the warrants expire in April of 2024.

The good news is that buying tradable warrants like this is a way to gain options-like leverage without actually having to get an options trading account.

The bad news is that it adds a time constraint to our speculation. The cash I pay up front for the warrant can be totally wiped out if the warrants expire out of the money. Still, for savvy investors willing to take the risk, buying a tradable warrant instead of a stock can add leverage to the upside.

Either way, private placements create opportunities.

But…

Not All Placements Are Created Equal

All of the above is great news for speculators, but it doesn’t mean that all private placements are great opportunities.

If a company is forced to issue new shares for pennies—with a long-lived, full warrant thrown in as well—it results in massive dilution for existing shareholders. That’s not necessarily bad if the company has good odds of delivering more than enough value to offset the dilution. But such financings are often done just to keep the lights on. That’s absolutely not the same as “delivering more than enough value to offset the dilution.”

Some might think that such a financing is just too bad for existing shareholders, but great for those getting in on the new offering with the juicy warrants. That’s shortsighted. If the placement just keeps the lights on—or even if it pays for exploration that’s no more likely to succeed than throwing darts blindfolded—the new shareholders are no better off than previous ones when that money runs out.

For more on how to evaluate opportunity versus dilution, please see my “Dilution Dilemma” article.

Bottom line: I see a great deal of opportunity via private placements in 2020 for savvy speculators.

I expect gold and silver to rise much further this year, but the above remains true whether or not I’m right about that.

It’s also true for ordinary investors, not just big financiers on Wall Street, Bay Street, or Howe Street.

The caveat is that due diligence is still required. Not all private placements will deliver big wins. But the ones that do offer us the most leverage we can get in this space without going out on margin.
That’s my take,

Lobo Tiggre June 8th, 2020

Posted In: Louis James

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