David Forest’s “most lucrative way to play the rise of gold I’ve ever seen”

What are the "Gold Placements" being teased by Casey's Strategic Trader?

For much of the past couple years the folks at Casey Research have teased a “secret” kind of gold investment, often calling them “Gold Placements” or “Q Shares,” and I covered one of those pitches that we saw in late 2019, back when E.B. Tucker was still editing this Strategic Trader newsletter… but now we’ve got an updated version, under the byline of David Forest, and the tease is a little different, so I’m taking another look.

Here’s the intro that got investors excited this time around:

“After seeing gold gains as high as 2,450%… 3,922%… 5,509%… 6,200%… one of the world’s top resource investors is finally revealing…

“GOLD PLACEMENTS”

“YOU can use this secret investment for the chance to turn every $3,000 into $31,251 starting February 23, 2021

‘These little-known securities have always been one of my favorite ways to
play gold… But they aren’t stocks, bonds, ETFs, options or bullion itself.’
– Doug Casey”

What’s not to like, right? We all enjoy daydreaming about 10X returns. So what are they hinting at to get you to part with $2,000 (nonrefundable) for Strategic Trader?

“Gold Placements are a much BETTER way to profit off the rise in gold..

  • They are up to 99% cheaper than buying stocks…
  • They’re safer because you risk less capital…
  • And they have the potential for 100 times more upside…

“I’m willing to bet…

“Once you see how these placements work, you’ll never want to invest in the ‘normal’ stock market again.”

So yes, the short answer is still “warrants,” as it was last time around… but the actual ideas hinted at are probably different (warrants expire and new ones are born all the time)… let’s dig in and see what they’re pitching. But first, a little explanation about warrants, in case that word is new to you — they’ve become dramatically more popular in the past year with the explosion in SPACs, but plenty of folks have still never heard of them. Here’s how Forest describes the “double leverage” they can provide:

“A good mining or royalty stock is a leveraged way to play gold.

“A gold placement is a leveraged way to play the mining or royalty stock.

“As long as the underlying stock is a solid bet, the gold placement is the absolute best way to turn a small sum into big bucks fast.”

Warrants are similar to call options, and are generally given to investors as an inducement for them to buy into an equity offering. Most commonly these days they are a part of “blank check” financings, just about every special purpose acquisition corporation (SPAC) is initially created with some sort of warrant bundled in as a reward for investors who tie up their money in the “capital pool” without knowing when or how it will be invested… but warrants have also been very common in the natural resource space for decades, as a way to reward investors who are willing to risk their money on mining stocks, often very small ones who might otherwise have trouble raising money at reasonable prices.

I confess to having a certain fondness for warrants — I sometimes dabble in SPAC warrants, since those are usually the only “mainstream” stocks that have warrants attached, and while most of those don’t go anywhere we do get a shining star every now and again, including Virgin Galactic (SPCE) and DraftKings (DKNG) in 2020 and Hostess Brands (TWNK) a few years ago, just to pull some names from the hat.

And I agree with one of Forest’s main assertions, that the models used by analysts, particularly the Black-Scholes pricing model, tend to understate the value of long-term warrants… though every warrant is a little bit different, and it’s also true that a lot of warrants, particularly SPAC warrants on hot technology ideas, have gotten wildly overpriced, too.

If you don’t know what warrants are, just think of it this way — they trade like stocks, but they are mostly like individual options contracts (just without the standardized terms of options). A warrant, like a call option, gives you the right to buy a stock at a set price (the “strike” price), at any point before the expiration date. If you want to do that, you would “exercise” the warrant — though often people don’t bother to exercise their warrants, which takes some communication with the broker and sometimes a fee, they just sell them before the expiration date (hopefully at a profit).

Do note that warrants can expire even if the stock is trading above the exercise price — brokers won’t automatically exercise them for you like most brokers will with options contracts, so don’t forget to take action (sell or exercise if it’s “in the money”) before the expiration date. Having an in-the-money warrant expire and become worthless just because you forgot would definitely be a bummer.

Companies sometimes have more than one tranche of warrants, in which case they might give them letters (Warrant A, Warrant B), but they’re usually associated with a financing that the company did and usually set with a strike price that is somewhat above where the stock was when the financing was done — to give the financier a bonus for risking their capital, but not one that’s too easy to reach. There are sometimes terms like accelerated redemptions, or cashless redemption triggers, but unless it’s written into the prospectus they need to get warrantholders to agree to any change in terms — and companies will sometimes offer inducements to warrantholders to get them to exercise the warrant early, both to remove that overhang from the shares (warrants represent future dilution, and sometimes shareholders find that offputting) and, sometimes, just to raise some cash from the exercise.

Most US-listed warrants are associated with SPAC financing deals these days, but there are some others — there were the fantastic TARP warrants following the financial crisis rescue, which were warrants that banks and insurance companies who were rescued had to give the government, and which the government later auctioned off in public listings… and you’ll still sometimes find them in other odd situations — I see them sometimes from small biotech stocks, for example, which tend to have the same thirst for perpetual financing as junior miners.

And while they’re not necessarily easy to find from one common listing, there is no ‘secret code’ for locating warrants. You’ll see them usually with tickers that ad a W or a WT or WS to the standard ticker, though every broker and exchange uses a different convention (so the DKNG warrants are at ticker DKNGW in most systems, though you may also see a DKNG-WT or a DKNGws or something a little different). Most Canada-listed warrants just add a .WT to the Toronto or Venture ticker, though they also often have an OTC listing for US brokers to trade. Often, because they’re not standardized, the only place to confirm the specific terms of the warrant is the original prospectus from the offering, though companies often share the basics on their website (SPACs usually have accelerated redemption terms, for example, and can force early expiration if the share price gets to $18 or so for a few weeks, and they’re generally standardized… but they’re not all exactly the same). Warrants are never “buy and forget” holdings.

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The best free warrant listing I’ve found for Canada, which is where you’ll find most junior miners and most publicly-traded warrants on mining stocks, is here at CanadianWarrants.com if you’d like to browse around and see what else is out there — the same folks have a less polished list of US-listed warrants here, separated by exchange (NYSE, Nasdaq, etc.) — I don’t know if it’s comprehensive, but it’s free (there are lots of entrepreneurs trying to sell warrant listings and warrant services out there, so if you search you’ll quickly run into them).

But it’s specifically those gold warrants (“gold placements”) that Forest is talking about this time — and that sparked my interest, because there aren’t so many of them trading these days. There were dozens of junior mining warrants available five or ten years ago, I especially remember them being a fun ride during the run gold had in the first half of 2016, but financing has been so hard to come by for junior miners in recent years that there haven’t been many equity raises… and still fewer new warrants created (at least listed warrants… there are probably plenty of private ones out there, but I’m only interested in the ones that get listed and are tradable).

So… with that out of the way, which “Placements” are being teased by Forest this time? Any new gold warrants we should be looking at? We do get a few details in the tease…

“A Way to Make small bets and reap huge rewards as gold heats up.

“As I mentioned, we’re in an excellent position with our Gold Placements we’re following today.

“We have two gold placements from miners and one from a gold royalty company.”

OK, are these different from the three warrants they were pitching back in 2019 and 2020? I would guess they’d have to be, since some of those are getting close to expiration and one of their criteria is that they want “plenty of time” left on the warrant (they say “usually a minimum of several years”)… let’s see what hints they drop about the warrants that are included in their special report, Gold Placements: Explosive Profits From the World’s Best Asset:

“… our first gold placement trade recommendation is a perfect example of how you can potentially multiply gold gains a hundred times or more.

“It could turn every $1,500 into $16,982.

“It’s a small gold producer operating in Colombia.

“And its gold production is growing at a double-digit pace. This is great news….

“After having a strong run in 2020 the company pulled back.

“That’s giving us the perfect opportunity to stake a position in this company’s gold placements.

“These gold placements have five years left to play out and they have solid volume.”

There are two reasonably strong matches for this tease, companies with gold mining operations in Colombia that have listed warrants available for trade: Gran Colombia Gold, and Aris Gold (formerly known as Caldas Gold) — and it so happens that Gran Colombia is the largest shareholder in Aris Gold, and effectively created Aris by spinning out one of its Colombian projects, its Marmato mine, to Aris in February.

Which is the better match? I guess both did technically have a good run in 2020 and pull back, though that movement is more pronounced for Gran Columbia. And Caldas/Aris also has not recently been growing production at a “double digit pace” — they did have a solid catch up quarter in the fourth quarter, and they do have mine extension and expansion plans that might provide more growth in the future, but 2020 production was down about 20% from the prior year, and they’ve been at a pretty steady 20-25,000 ounces/year for a decade…. but then again, Gran Colombia’s production didn’t grow last year, either. Almost nobody’s did, thanks to COVID slowdowns at mine projects.

Aris Gold’s warrants have a strike price of C$2.75 and an expiration date of July 29, 2025, so that’s not quite five years but it’s more than four years… there are almost 40 million of them outstanding, and there’s an accelerated exercise provision for two years before expiration if the shares are above the exercise price. They’re now listed at ARIS.WT in Toronto, previously CGC.WT.

Gran Colombia was one of the warrants teased by Forest’s predecessor, E.B. Tucker, in 2019 and 2020, and they have had several tranches of warrants over the years… the closest match now is nowhere near five years from expiration, but you do at least get three years, GCM.WT.B in Canada is the ticker, and it’s got an expiration date of April 30, 2024 and an exercise price of C$2.21.

So what’s the answer? Well, to answer that let me blame the editorial intern at Casey for failing to update the text… this is how E.B. Tucker teased Gran Colombia back in late 2019…

“It’s a small gold producer operating in Colombia.

“And its gold production is growing at a double-digit pace. This is great news.

“I love to see production growth like that.

“After having a strong run this year the company pulled back.

“That’s giving us the perfect opportunity to stake a position in this company’s gold placements.

“These gold placements have five years left to play out and they have solid volume.”

So yes, almost word for word the same… so I’m pretty sure they’re just repeating the tease for Gran Colombia warrants. And though I surely haven’t looked through either company’s books in great detail, I’d agree with that selection of Gran Colombia over Aris, largely because Gran Colombia has lots of exposure to Aris but also has more ways to “win” with their other projects and investments.

The details? Gran Colombia raised money back in 2019, and part of that fundraising included five-year warrants that are now listed on the Toronto exchange at GCM.WT.B, (there’s also a very illiquid OTC listing in the US at TPRXF). They have an exercise price of C$2.21 per share, and the warrant expires on April 30, 2024, so there’s still a good long time left to expiration.

The leverage is a little bit limited, however, because Gran Colombia is already trading well above the strike price, so the warrants are “in the money” (that just means the current price is above the strike price)… still, having three years of leverage is worth something, especially for a stock as volatile as a junior miner can be, so these kinds of derivatives are rare enough to be appealing if the price (and company) is right.

Is it right for you? That’s a fairly tough call here because the stock has done well — Gran Colombia traded yesterday at about C$5.50. This means we can instantly say the warrant is worth at least C$3.30, since we know that one warrant plus C$2.21 gets us a share of stock. The warrant closed at C$3.42 yesterday, so you’re only paying 13 cents (C$2.21 strike price plus C$3.42 to buy the warrant adds up to 13 cents more than the current share price) to get that “free” leverage for three years. This is also roughly where the stock and warrant were trading when I last looked at them about a year ago, so there hasn’t been much change.

Leverage cuts both ways, of course — if Gran Colombia ends up having to raise a lot more money when gold prices are falling at some point in the next couple years, it might be that the shares fall to C$2… that might mean you lose 60% as a shareholder, but you’re a lot closer to losing 100% as a warrant holder.

There are lots of calculations for figuring the fair value of a warrant, Black-Scholes is the most common, but that’s super-mathy and boring and really only helps if you’re going through hundreds of warrants or options and trying to compare them to each other with great specificity. I like to focus more on the company and it’s actual prospects, and keep it simple and logical — just do the basic math and make my own assessments based on a range of probabilities.

What happens to warrant holders if, in three years right before expiration, the stock is at C$5? In that case, the warrant would be worth $2.79, and you lose a little more than 25% of your money on the position (if you had bought the stock instead, you would have lost about 15%).

How about on the upside? Say Gran Colombia enjoys a huge boost because gold soars for a few years, and it’s trading at $20 before expiration. At that point, the warrant you paid $3.78 for is worth $17.79, a return of 370%. If you had bought the stock instead, your return would have been 240%. The gap between the gains improves with the rise in price, though gradually (so if the stock “only” doubles with a 100% return, the value of the warrant goes up about 150%).

So that’s the distinction… a greater chance of a 100% loss for the warrants if things go badly, and some leverage on the downside even if the stock only falls by 15-20%, and in exchange you get substantial leverage on the upside, roughly 50% leverage in most likely scenarios, if things go really well. I haven’t checked the terms of that warrant to see whether they can force an exercise or otherwise impact your returns.

And of course, if you’re comparing total returns for stock versus warrants that assumes you invest as much into the warrants as you would into the stock, which isn’t always the case — so if you’re being more cautious and only buying a half position in the warrants, since you consider them riskier (and rightly so), then the returns are less than you would have by buying a full position in the common stock if it’s a company that you’re really confident in. But, of course, if you only invest half your position in the warrants you’ve also got that extra cash that you can put into something you think is less speculative.

I have no particular confidence in this little gold miner in Colombia, mostly because I don’t really know anything about Gran Colombia — if you’d like to dig in to their story, this is their basic spiel from their website:

“Gran Colombia is a Canadian-based mid-tier gold producer with its primary focus in Colombia where it is currently the largest underground gold and silver producer with several mines in operation at its high-grade Segovia Operations. Gran Colombia owns approximately 44% of Aris Gold Corporation, a Canadian mining company currently advancing a major expansion and modernization of its underground mining operations at its Marmato Project in Colombia. Gran Colombia’s project pipeline also includes an approximately 18% equity interest in Gold X Mining Corp. (TSX-V: GLDX) (Guyana Toroparu), an approximately 36% equity interest in Denarius Silver Corp. (TSX-V: DSLV) (Colombia – Guia Antigua and Zancudo) and an approximately 26% equity interest in Western Atlas Resources Inc. (“Western Atlas”) (TSX-V: WA) (Nunavut – Meadowbank).”

That’s really the appeal here, that Gran Colombia has spun out some of its Colombian operations to Aris to help raise capital for that expansion, but also has invested in a couple other junior companies (Gold X and Denarius Silver), and therefore has some more avenues to growth if one of those does exceptionally well — they’re also in the middle of a takeover bid for Gold X, so if that works out the production and asset profile will also change a bit (and it could also be a bad thing, of course, they might overpay).

Earnings and production were down a little year over year, probably mostly because Aris was spun out, and the all-in sustaining cost for their core Segovia operations came down to $1,120 per ounce of gold, so they’re doing OK and generating some cash flow, which has been used for both buybacks and dividends (the dividend is fairly high for a small miner, about 3.5%).

Given the relative rarity of gold-related warrants these days, and the restructuring that Gran Colombia has somewhat quietly done during a period when gold stocks were mostly ignored over the winter, I can see myself being tempted by this one. They’re still drilling and extending the reserves at Segovia, which now stand at about 633,000 ounces of proven and probable reserves (with a couple million ounces in “resources”), so the likelihood of a continuing long mine life is pretty strong — with the investment in Gold X and continuing production, and a reasonable production cost, Gran Columbia is likely to be levered to gold prices over the next few years (assuming, of course, that the mine doesn’t flood or get shut down by protestors or war or COVID or whatever else). You can see their latest quarterly presentation here if you want to dig in a bit deeper.

And what’s the other one? Here are our hints…

“Our second gold placement trade recommendation is the other gold producer and I’m particularly excited about this one.

“It could turn $1,500 into $13,018.

“They have more than half a dozen active mines in North and South America with access to significant gold deposits.

“They have massive gold exposure.

“They also have massive exposure to silver and copper. Rising silver prices will be a huge benefit to this company’s bottom line.

“Their team of directors and managers has nearly 300 years of combined experience in the mining industry.

“The company has respected mining veterans running the show and their founder and executive chairman is a living legend having founded the largest gold company in the world before stepping away to create this company….

“We love this company and think the stock itself would be an excellent buy right now.

“I’d wager it will be a solid double.

“But you’ll get much more upside potential buying their gold placements.

“These gold placements have over two years left and have plenty of volume.”

Whenever we get that “living legend who founded the largest gold company in the world” hint, it’s almost always a reference to Rob McEwen, who was the founder of Goldcorp (now part of Newmont Goldcorp and, according to most measures, the largest gold miner in the world).

McEwen does have leverage to gold, silver and copper, it has done fundraisings with warrants before, and there is one current tranche of warrants that’s publicly traded. The stock has been a bummer over the past three years, it appears that’s at least partly because of disappointment from their Gold Bar mine in Nevada, so things have not be particularly great for shareholders, despite some relative strength in gold and the luminous nature of its CEO. They’ve been trying to turn things around by increasing production, drilling to extend the life of their core mines, and, perhaps, with some financial engineering — they’re thinking about spinning out their silver projects as a new company (McEwen Silver), and possibly either monetizing or somehow getting more attention for their copper assets. You can see their latest investor presentation here.

They don’t mention the warrants in the investor presentation, and like most companies would probably just as soon ignore them, a search for “warrants” on mcewenmining.com yields no results, but they do exist. The current publicly traded warrants were created by a financing that McEwen did in November of 2019 — the warrants trade OTC in the US, (not at all in Canada as far as I can tell), at ticker MQMNW, they have a strike price of $1.72, and they expire on November 22, 2024.

McEwen shares are right near where they were at the time of the financing, at $1.36 last I checked, so the warrants are about 25% out of the money — and they’re trading at 55 cents right now, so you can see that you need the shares to reach at least $2.27 within the next 3-1/2 years to make the warrants break even (that’s the $1.72 strike price plus the 55 cents you’d have to pay for the warrants). You’d need the stock to roughly double before expiration to make the warrants a better bet than the common stock, but beyond that the warrants would continue to have some leverage to rising share price, so if all goes well (and, to be clear, it has NOT gone well for McEwen over the past few years), this will probably be a “double leverage” play on gold, copper and silver to at least some extent.

I don’t know if the warrant holders have any protection from McEwen spinning out their silver or copper assets to shareholders, but in most of those kinds of cases (like with Gran Columbia) the parent would probably continue to hold at least some of McEwen Silver and get some benefit if it rises in value. The warrants are pretty thinly traded, only a few thousand dollars worth change hands on any given day, so do be careful if you think about placing an order (Gran Colombia warrants are a little more liquid, for whatever that’s worth).

And as to that “royalty company” warrant? Forest drops no clues… last time around I figured he might be teasing the Osisko Gold Royalties warrants (OR.WT.TO, OKSWF), but those are wildly out of the money and expire in less than a year (the warrants are for a C$36.50 strike price, February 2022 expiration — Osisko is currently around C$17, and the warrants trade for 12 cents, so they are more like a typical call option — they are low-priced, short-term, and represent a lot of leverage if gold really goes bonkers and Osisko doubles in price).

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