Aris is picking up some good momentum. Who would have thought after touching $2200 in the April Gold futures contract, that the vast majority of gold mining stocks would have been underwater on the year?
April is going to be interesting for Aris Mining's capital structure. On April 30th, 9 million Aris Warrant B series will expire (strike C$2.21). This may really help the share price, let me explain. When an instituion owns a warrant deep in the money, they can short/play with a stock with impunity. The reason is a short sale no longer brings with it "infinite" downside potential as the warrant is a fixed cover price. Once the warrants expire and are exercised, there no longer is a safe bet cover point. I have seen this before in the past where a miner's stock bounces side ways like a yo-yo. Once a substanial warrant exercise was finished, the stock begins to strengthen and push higer.
Earlier in the month of April on April 5th, Convertible Debentures (C$18 million) expire with a strike of C$4.75. There are 3.79 million Debentures outstanding. I do not know how much a Convertible Debenture influences a stock around expiry. My guess is that Aris will want the stock to trade above that strike price. My guess is if the stock doesn't hit that price, then the Convertible has to be settled with cash. I'd assume Aris management would rather keep most of the C$20 million from the exercise of the B warrants instead of give it back for the Convertible.
I own a large position in Aris A series warrants. There are 58 million outstanding converting to 29 million shares upon exercise. The terms of the warrants are C$5.50 plus 2 warrants = 1 share. Hence, strike is C$5.50 with an expiry of July 29, 2025. The warrants trade on the TSX and for US investors CLGDF. Right now the A series warrants are trading at a significant discount.
I use the standard Black-Scholes Model. With inputs of Aris Stock 4.50, Months to maturity = 16.7, Risk Free rate of 5.3% and Volatility of 42%. The warrant value as calculated right now is C$0.33. The last trade as I type is C$0.27. Hence, they are undervalued by 22%.
For those who don't know much about the Black-Scholes model, it is what is used to calculate the value of a warrant or option. It is highly driven by the Volatility number. For example, the true volatility of Aris is above 50%. Using 50% in the model, the fair value of the A series warrants is C$0.42. I use 42% as that is generally what the market over the last year has generally valued the A series warrants. Hence, my fair value of C$0.33 is quite conservative.
If anyone wants a copy of the excel spreadsheet I use to calculate options or warrants, just send me an email at thansen509@gmail.com. I have nothing to sell, just want to share information in the spirit of these message boards.