“Gold Placements”, “Q-Shares” or “Omega Shares” — What’s with this “Warrants” stuff from Casey Research?

What's being teased by Tucker's Strategic Trader?

Today I’m throwing in a little bonus article, since it’s an interesting topic, everyone seems to be obsessed with gold again this week (though gold prices took a little tumble yesterday), and a few folks have asked about E.B. Tucker from Casey Research and his “Gold Placements” pitch. If that doesn’t sound familiar, he has similarly called these “Omega Shares” or “Q Shares” in the past, it appears, though I didn’t write about those ads.

This ad is still dated November 2019, and they’re selling Tucker’s Strategic Trader, though it’s apparently circulating pretty heavily still because I continue to get questions (and they still seem quite prepared to still process your $2,000 subscription — no refunds, naturally).

This is the lead-in that got my attention:

“A few years ago, I worked my way into a tight-knit group of ultra-wealthy individuals and scored the secret to raking in millions of dollars in profits in the gold market…

“If this sounds like the beginning of a suspense novel…

“Brace yourself, because it only gets more interesting from here.

“And during this brief broadcast, I’ll hold nothing back.

“IN FACT, I’ll GIVE YOU MY TOP TRADE RECOMMENDATION TODAY FOR FREE.”

And he gins up the excitement quite a bit…

“… most regular investors have never heard of these Gold Placements… or their secret codes… and couldn’t access them if they wanted to…

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“At least not under normal circumstances.

“But with gold taking off – I’ve decided to come forward and share the secret I learned.

“Because the upside is simply too big to ignore.”

What he’s clearly talking about are warrants, which 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, 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, 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 do keep one eye on the list of SPACs and watch to see when interesting ideas emerge, 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) this year and Hostess Brands (TWNK) a few years ago, just to pull some names from the hat.

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, 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 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 (so maybe there will be airline warrants in a few years following however this rescue goes, we’ll see)… and you’ll still sometimes find them in other odd situations — I tend to see them pretty regularly among small biotech stocks, 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 them. You’ll see them usually with tickers that ad a W or a WT to the standard ticker, though every broker 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 DKNGw 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.

The best free warrant listing I’ve found for Canada is here 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 Tucker’s talking about this time — and that sparked my interest, because, as I wrote to the Irregulars a couple weeks ago, I went looking for gold warrants as a way to add some gold leverage to my portfolio… and didn’t find many of them. 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 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).

More from Tucker:

“Once you understand how they work – and how easy they are to own, you may never want to own gold or mining stocks again.

“Why would you want to when the upside here is so much higher… the risk is so much lower… and you have a huge “time advantage” built in, from the start.

“As you’ll see, 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 $1,000 into $8,513.”

Nice leverage, no? The bonus, too, is that mining stock warrants don’t often, in my experience, have the company-friendly redemption or forced exercise cap that SPAC warrants do, so there’s more of a chance that they can provide ludicrous leverage if things go really well (usually once a SPAC gets to $18 or so, the warrant stops offering much leverage — that’s because they can force an exercise… usually a cashless exercise, where your warrants will just become shares using some ratio based on the current price — it’s fair, but it means the leverage isn’t infinite and from that point on your return just matches the equity return).

So what’s this first one he hints at?

“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.

“That means we get the chance to buy mispriced assets cheaply and ride them for huge gains as this gold bull market gets underway.”

That’s Gran Colombia Gold (GCM.TO, TPRFF), and they do indeed have listed warrants trading. Gran Colombia raised money two years ago, and part of that fundraising included 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 a good long time left to expiration.

As was the case back in November, though, the leverage is a little bit limited 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 four 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 closed yesterday at C$5.86. This means we can instantly say the warrant is worth at least C$3.65, since we know that one warrant plus C$2.21 gets us a share of stock. The warrant closed at C$3.78 yesterday, so you’re only paying 13 cents (C$2.21 strike price plus C$3.78 to buy the warrant adds up to 13 cents less than the current share price) to get that “free” leverage for four years.

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 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 four 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, 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 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 — all I can tell you is that they are a junior gold producer with more than one property that pulled 240,000 ounces out of the ground last year, and they have a decent all-in sustaining cost of production of about $900-950 an ounce, which should provide a nice boost to cash flow if gold prices rise (their investor presentation is here)… but given the rarity of warrants these days I might look into them a little further — I can see myself being tempted at some point to put on a little flier on those warrants if they drop meaningfully on some future bad day for gold prices (we had a bad day for gold yesterday and the warrants fell 5%… so that’s a start).

What’s the next one? Here are the clues…

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

“It could turn $1,000 into $11,321.

“They operate in North America and Brazil with access to significant gold deposits.

“But that’s just the beginning of what’s great about this company.

“Their list of backers includes the United Arab Emirates Sovereign Wealth Fund.

“The company has respected mining veterans running the show and their president has several successful exits under his belt already.

“One of their largest shareholders is a legendary billionaire gold stock investor well-known for his prowess in the gold industry.

“Oh, and on execution, their gold placements also give you an ownership stake in a private copper mining company you couldn’t otherwise access.

“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.”

And actually, he later goes on to reveal this one as Equinox Gold (EQX), so that’s his favorite and his “freebie”… and, frankly, it’s probably the most appealing gold warrant I’ve run across this year (this is the one I bought a few weeks back, when I was looking around to see what warrants are available). Here’s what I wrote to the Irregulars two weeks ago, when I searched and searched but found that the fun old junior miner warrants had mostly given way to completely unappealing marijuana stock warrants:

“I do think that we have a better-than-even chance of seeing gold really spike up in value over the next 2-3 years, as has happened following past market calamities, and because of the huge pressure that government “rescues” should be putting on currencies. So I went through to see if there might be any appealing high-leverage warrants out there on little gold stocks that might be expected to surge if gold keeps rising.

“Interestingly enough, there aren’t nearly as many of those as there used to be. These are nutty investments and they often lose money, but little penny-priced warrants on junior miners are also the place to look for those occasional 1,000% or 10,000% gains in a wild gold bull market, so in the past I’ve occasionally thrown a tiny speculation that way — but I couldn’t find many of them this time. The past five years have seen junior miners largely starved for financing and unable to do those equity raises that have often created warrant opportunities, at least in the public markets (there are still plenty of private warrants out there, but I’m talking about warrants that are publicly traded, almost always on the Venture exchange in Canada).

“The one that did repeatedly pop up was an old holding that I took profits on a while back, Equinox Gold (EQX) — and that one makes some sense to me, since Ross Beaty’s Equinox, with its growing portfolio of midsize mines that have fairly high operating costs, should be a little more levered to rising gold prices than most of the big, established gold miners. The warrants are listed at EQX.WT in Canada, or OTC in the US at EQXWF, and they give some exposure to possible gains over the next 18 months or so — they have a strike price of C$15 after the share consolidation last year, so now five warrants plus C$15 gets you one share of Equinox, and they expire on October 6, 2021. EQX trades around C$10-11 these days, so with the warrants at about 40 cents (so five warrants would be C$2), that’s a levered bet on Equinox going over C$17 in the next year and a half. Probably not a sensible bet, but a relatively cheap one that should pay off well if gold goes up by 20-30% in a big surge.”

There’s also a little kicker built in there that Equinox warrantholders get a tenth of a share of Solaris Resources (formerly Solaris Copper) as part of that exercise — but that’s worth zero right now, and if I’m being honest with myself I’ll admit that it will probably be worth zero for the next year and a half. Solaris is the home of the copper properties that Equinox spun off a year or two ago (Equinox still holds 40%, they spun off the rest — Solaris controls the South American properties in Ecuador, Chile and Peru that David Lowell brought to the table when Equinox was first formed several years ago), and they also actually did a share consolidation this week for some reason, despite the fact that their shares don’t really trade (I have a small pile of Solaris shares in my account thanks to that spinoff, since I owned Equinox shares at the time and there’s no way to sell them, and they do say that they might apply for a listing and become tradable again, and that they have exposure to lots of potential if copper rises again… but my stake is tiny, I don’t think about it much, and I’d happily trade my shares for a beer).

Equinox would have to rise pretty dramatically to turn this into a 1,000% opportunity — that would mean EQX going from C$10 to over C$35 before the October 2021 expiration… not impossible if gold goes bonkers, and this is my favorite shorter-term speculation on a rapid rise in gold prices, but a 1,000% gain is certainly not my base assumption.

What’s next?

“Our last gold placements are offered by one of my favorite gold royalty companies.

“It could turn $1,000 into $11,417.

“They hold the rights to tons of gold… literally.

“As of last count they have about 2.6 million ounces coming their way…

“That’s somewhere close to 100 tons of gold.”

OK, that narrows it down quite a bit — and I do love royalties, so which one is he talking about? He first tells us why royalties are appealing, which we already know…

“They have no costs of building or maintaining a mine… no trucks and heavy equipment… no land leases they need to pay.

“They just sit back and collect money on gold other people pull out of the ground.

“As far as ways to play the rise in gold… this company is about as good as it gets.

“But we’re going to do even better because we have the chance to buy their gold placements instead.”

Who could it be? Most of the royalty companies have had outstanding publicly traded warrants at one point or another, even big daddy blue chip Franco-Nevada, though their last tranche expired in 2017. The only ones that are really left are on the mid-size players, Osisko Gold Royalties (OR) and Sandstorm Gold (SAND).

The Osisko royalties are wildly out-of-the-money and expire in February 2022, so they offer huge leverage but only if gold goes up a LOT, and the odds are really good that they’ll expire worthless…. while the Sandstorm warrants are expiring in six months, so they don’t really do anything for you that you can’t do with options. So while I prefer Sandstorm, and I’d guess that’s probably the warrant Tucker was touting in November, there’s not a lot of leverage there any more… the Osisko warrants are more of a wild bet on ludicrous gold prices, if that’s what you’re looking for (if you want to make a wild bet on Sandstorm, options provide more leverage opportunity going a little further out than the current warrants).

The Sandstorm warrants (SSL.WT in Canada, SDDXF OTC in the US) are in the money and expire this year — they have an exercise price of US$4 and expire on November 3, 2020, so they’re priced at about C$5.30 now (US$3.85). That’s essentially free leverage, it’s true, so that might be worthwhile if you just want to bet on gold rising over the next six months… but the only reason to buy this over SAND options is that the warrants are a bit more liquid than any single options contract. You could buy SAND options for December or January, and the same amount of leverage (a $4 call option instead of a $4 warrant) should be available for about the same price (roughly $4). The results wouldn’t be markedly different between the two, though the nice thing about options is that brokers will typically automatically exercise them for you if you forget — that’s not the case with warrants, which can and do expire worthless if you don’t exercise or sell them before the expiration date.

If you want more time to be right, buying in the money SAND options for January 2022 would give you that, without a dramatically higher price (the $4 call options are about $4.50 at the moment, or if you want to take more risk and get more leverage you could go further out with $10 options for less than $2 (of course, you also get a much higher probability of your options expiring worthless).

The Osisko Gold Royalties warrants, on the other hand, are WAY out of the money. Those warrants, listed at OR.WT in Toronto (there’s a “grey market” listing at OKSWF in the US, though it’s extremely illiquid), give you the right to buy one share of OR at C$36.50 anytime before February 18, 2022. That’s a nice almost two years before expiration, but the share price for Osisko is down below $13 right now, so that means the stock would have to triple in value in less than two years for the warrants to be worth anything at all.

What might make them appealing to “gold is going to go INSANE” speculators is that they’re trading for only about 20 cents… so you get a lot of bang for your buck. If you put C$1,000 into OR.WT, for example, then you’d get about 5,000 warrants — if OR stays below $35 for two years, as is most likely, you lose it all. If OR goes to C$50 for some reason, perhaps because gold has soared to $10,000 an ounce like so many goldbugs like to predict is imminent, then your $1,000 turns into $67,500 (5,000 warrants to buy the shares at $36.50, so they’d be worth $13.50 each, 5,000 times $13.50 is $67,500). That’s HIGHLY unlikely, of course, and what probably happens is that you spent $1,000 on a lottery ticket… but it’s fun to dream. And yes, that’s a big return even if they are Canadian dollars (kidding! I love Loonies).

I’m not sure which one Tucker might have been talking about here, but I’ll tell you my druthers… I do like Sandstorm, and have owned it for more than ten years and traded some of their various warrants at times (and written about it a million times, it feels like), but I wouldn’t bother with a six-month warrant — the leverage isn’t likely to be that dramatic, you’d get better leverage from an out-of-the-money call option.

And I just sold Osisko Gold Royalties recently to take a taxable loss and roll that capital over into Sandstorm and Royal Gold (RGLD), mostly because I’m not as comfortable with Osisko’s portfolio balance (their diamond project has continued to go downhill) and their push recently into more prospect development, but Osisko may well have more explosive upside if things go well just because of their huge production from Canadian Malartic mine and the possibility that mine could see its life extended further (Sandstorm’s “explosive” upside is largely contingent on Hod Maden being developed in Turkey, they own a third of that project and it’s a big fella, but they’re the junior partner and it has been delayed several times already… with investors probably too skeptical about it just because it’s in Turkey).

But if I were to place a small all-or-nothing gamble on “what if things really go crazy,” the wild leverage of those Osisko Gold Royalties warrants would appeal to me… I haven’t bought them because the odds seem so very low that OR will rise by 300-400% in less than two years to make that gamble work, but there is a little temptation. I haven’t placed a bet on Osisko (and yes, this is gambling, not investing), and I’ll just also note that they’re very illiquid, so certainly don’t go chasing them — only a few thousand dollars worth of those warrants trade in any given day.

And I’ll leave you with that… have any favorite “placements” you’d wager on, in gold or elsewhere? Like the look of the three or four possibles noted above? Let us know with a comment below. Thanks for reading!

Disclosure: of the investments noted above, I own Sandstorm Gold shares and Equinox Warrants. I will not trade in any covered investment for at leas three days after publication, per Stock Gumshoe’s trading rules.


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leofreeman
leofreeman
Irregular
May 1, 2020 10:21 am

It’s SAND Travis. Also, EB is retiring from newsletter writing to focus on his role as Metalla director.

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Sam Wiebaux
Sam Wiebaux
Member
May 1, 2020 10:55 am

Dropping in on Travis wailing on about STOCKS, warrants, options is as enjoyable as listening to Kenny Roger’s doing his greatest song from the 60’s, I JUST DROPPED IN TO SEE WHAT CONDITION MY CONDITION WAS IN! It is FAR OUT, MAN! Wildly informative and enjoyable, as well as VERY EDUCATIONAL!

Now I gotta go to YouTube!

Soon I will be an IRREGULAR!

Aimless
Aimless
Member
May 1, 2020 12:04 pm

What’s this … no love for Wheaton Precious Metals (WPM)? I bought deep in the money 2022 LEAP calls in WPM last year and they are performing well. I was also considering buying LEAP calls of the Global X Silver Miners ETF (SIL) to obtain some silver miner exposure. Based on the idea that silver is historically cheap compared to gold. The printing press is churning out dollars and probably won’t slow until after the election in November. Any better ideas on how to gain from a potential surge in silver prices?

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JBW
JBW
Irregular
May 1, 2020 1:56 pm

Travis, thanks again for all you do, really enjoy and appreciate your work. I actually invested in a few of EB recommended warrants. Bought PRPLW (on line mattress company, go figure) back early 2019 at $0.29 it took a while, but I sold in March this year for $2.09 I think of these low priced warrants kind of like penny stocks. Kind of take a flyer and just wait it out. I have a couple of others EQX up 115%, and a couple that are down 50%.

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Buck
Buck
Guest
May 1, 2020 2:16 pm

Interesting review. Thanks Travis! Mining is one of the industries that present so much risk and reward at the same time. Warrants can be an inducement for you to do what you might otherwise not do. And that is accept risk. But the idea of more exposure to opportunity is one of the things they provide.

We use a little different approach to investing in miners. It’s really just Benjamin Graham applied to the mining companies. Through that process, we selected two minrers about just over a year ago and have done quite well in these trades. Our trades are +99% and +100% (unlikely, but that’s where we sit). These may under-perform some, and outperform others.

We’re trying to stay anchored in financial and operational performance indicators. But it’s tricky. Today, there are several realities. Some metals are looking strong while others, are either not or are actually in trouble. So, understanding what your company does and is looking to do more of is essential. A company today, not growing output, but riding the underlying metal trend can either be a train wreck or look pretty good. So, finding the balance in an operational plan and linking that to the underlying metal production is pretty important.

Lastly, we don’t recommend that investors give miners too much exposure to an well balanced portfolio. I tend to think, stay with Mid-cap+ miners who are profitable, trade enough (stay away from liquidity traps), and wouldn’t recommend more than 5-10% of your portfolio in 2-3 trades. Just my opinion.

As always, thanks for your detailed and insightful work. You bring refreshing insights into our world.

j macswan
Member
May 2, 2020 9:53 am

I bought Equinox warrants last year and made good money in a short period. However, I never really understood the investment and couldn’t get any info on how to convert them to shares. So, I contacted the investor relations department at Equinox and was taken to school. Many of the warrants available on an exchange are, as were my Equinox warrants, “free traded”. This means they are bought and sold just like stock. The only caveat is the expiration date. The warrants need to be sold before they expire. Even if they are in the money as of the retirement date, they will be worthless if not formerly exercised. To trade them, par attention to the price f the underlying stock. The share price of the warrant will generally follow it, though there may be considerable distance between the two. Free traded warrants are often priced like penny stocks.

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laketangler
Irregular
May 2, 2020 5:46 pm

The bulk of my precious metal exposure is in GDXJ, SLVP, EQX, AND SAND. I’m not smart enough, or adventurous enough to pick and choose a handful of individual stocks for diversification in the precious metals arena. The only other positions I hold in this area are PVG (2000 shares), and SPPP (1500 shares) just to have some exposure to platinum and palladium. All except SLVP have been very good to me over the last couple of years, and I can maintain my comfortable 15% allocation to precious metals and still sleep at night without worrying about all the things that can go wrong with an individual mining operation.

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