Gold warrants a mystery despite rising popularity

Gold-purchase warrants are gaining favor among gold producers as a

way to attract investors. Three companies have issued gold purchase

warrants in the past two months, but the market seems to be slow to c

to them partly because of the difficulty in comparing the warrants.

There are currently seven of the warrants trading on the Toronto St

Exchange (three of them issued by one company) with the three most re

ones in the process of being listed.

Two years ago Echo Bay Mines was the only company to have issued

gold-purchase warrants. Now major producers — and some small ones, t

are finding them a good way to gain investors’ attention.

Northgate Exploration was one of the early companies to issue gold-

purchase warrants. President John Kearney indicated some of the marke

uncertainty toward the relatively new investment vehicle at his compa

1985 annual meeting in May.

“The gold warrants themselves are behaving a little unusual,” said

Kearney. “They trade at a discount to the Dome Mines warrants, which

the same expiration date, although the Dome exercise price is $25(US)

higher.

“Some of this difference is accounted for by credit perception and

liquidity, but not all.”

If the president of a credible mining company such as Northgate is

by the market’s perception of gold purchase warrants, imagine what th

investor feels when trying to untangle the various bells and whistles

attached to the gold warrants now available.

No standards

There seems to be no standard against which to judge them. Like sto

warrants, exercise prices vary. Most, but not all, are based on U.S.

because that’s the recognized standard for pricing gold. Some, like E

Bay’s and La Societe Miniere Louvem’s, have buyback clauses meant to

investors’ risk.

Echo Bay, one of North America’s largest gold producers, was the pi

issuing gold purchase warrants. It now has three of the warrants trad

which date back to an Echo Bay prospectus in 1981.

Following Echo Bay’s example came Dome Mines, one of the continent’

longest-established and most conservative gold producers, with Northg

coming soon after. Belmoral Mines and SherrGold, a subsidiary of Sher

Gordon Mines, also issued gold purchase warrants that now trade on th

Toronto Stock Exchange.

In various stages of completion are financings by La Societe Minier

Louvem, American Barrick Resources and Hope Brook Gold, a subsidiary

Canada set up to develop the Chetwynd gold deposit in Newfoundland.

The sudden interest in the warrants by issuers is probably a combin

factors. Probably the most important, however, is because gold prices

within a fairly narrow range over a relatively long period when most

warrants came out. Gold producers trying to raise new equity needed t

sweeteners to catch investors’ attention.

One way to sell forward

Now, with gold over $400(US), it’s one way for companies to sell go

forward. What’s more, if the gold price is less than the exercise pri

the expiry date, it is unlikely the warrants will be exercised. In th

the gold will not have to be delivered.

In effect, the companies lose nothing because they were selling gol

delivery at a more distant future date and at a higher price than the

have got on the futures market, getting more money in their equity fi

and adding some speculative interest to their offerings all at the sa

At Northgate, for example, the gold warrants issued in September, 1

looked on as a successful effort, although there are some concerns ab

market and its perception of the warrants.

Northgate issued its gold- purchase warrant as part of a financing

involving common shares. As part of the financing, Northgate’s warran

committed the company to provide up to 34,000 oz of gold — about fiv

production and as much as it would have in inventory at any normal ti

$400 per oz up to September, 1989, about five months production.

Even though gold is now above the exercise price of $400, it’s unli

anyone will exercise their warrants because of the greater leverage o

security compared to the commodity. So, Northgate has the benefit of

money raised in that public issue — $21.3 million — for four years

including the interest.

What’s more, if the price of gold at the time of expiry is less tha

an oz, Northgate likely will not have to deliver any gold at all.

Distant expiry dates

For the investor the warrant has the attraction of a distant expiry

something not available from options or futures. The warrants have mu

greater leverage, therefore, than physical gold and can be bought wit

modest investment.

Altogether, gold purchase warrants appear to be another investment

that offers benefits to gold producers and gold investors.