TORONTO, Oct. 19, 2012 /CNW/ - Gran Colombia Gold Corp. (TSX: GCM) announced today that pursuant to an Alternative Monthly Report filed by Sprott Asset Management LP and Flatiron Capital Management Partners, as of August 31, 2012, Sprott and Flatiron have purchased, on behalf of accounts fully managed by them, an aggregate of 70,062,746 of the Company’s listed warrants (TSX: GCM.WT) in the open market. As of today’s date, Sprott and Flatiron hold approximately 44.5% of the total Warrants issued and outstanding. Assuming the exercise of these Warrants, Sprott and Flatiron would exercise control or direction over approximately 15.5 % of the issued and outstanding Common Shares of the Company (on a partially-diluted basis).
These warrants are publicly traded, and closed at $0.14 on Friday. For the past 12 months or so of trading they have been somewhat astonishingly (read on) range-bound between 10 and 20 cents as shown below:
Although these Gran Colombia warrants do not expire until August 2015 they happen to have an exercise price of C$2.60. That means the breakeven 0% return point for owning the warrants is $2.74, but if we get to this level then simply owning the common shares outright would have generated a whopping 670% return based on Friday’s $0.355 closing price!
Keep doing the math and it turns out you’ll only do better owning the warrants once the share price surpasses $4.30, and of course let’s not forget that the warrants are far less liquid than the shares. So what in the heck are Sprott and Flatiron thinking having accumulated 70 million warrants in the open market for their clients?!
The only possible explanation that comes to mind is the idea that Sprott/Flatiron are speculating on (or are about to start advocating for) a very, very significant repricing event. We can’t recall any examples of a repricing occurring on a publicly traded warrant, and we’re not even sure such a thing would be allowed, but how else could this be explained? Nevertheless even if we’re correct and assuming Sprott’s average buy-in price was $0.15 there’s really only room for a double given the current price of the common. Remember, a no frills warrant can never be worth more than the common share, even if it had an infinite time until expiration, since there is a cost to exercise the warrant. Furthermore there’s still the question of when we could expect such a repricing announcement. Perhaps if you can pick up the Warrants at the low end of their trading range it might be worth a punt, but otherwise this looks very strange all-around.