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Thursday, March 15, 2007


European Minerals A Warrants

European Minerals (EPM in Canada, EPMCF in the U.S.) is a gold mining company in Kazakhstan scheduled to go into production in October. Here’s a detailed article from December 7 discussing the potential for European Minerals, which could have cash flow of over 50 cents per share in their first year of production: Today, the stock has broken out of its trading range on strong volume of well over 2 million shares, helped by the huge Kazakhmys stating that they are “"actively looking'' for acquisitions in Kazakhstan and possibly in neighboring countries.

EPM started 2007 at $.89, so it’s up 37% on the year to $1.22. The “A” warrants (EPM.wt.a in Canada, EPMWF in the U.S.), discussed in the above article, started the year at $.47, so despite the sharp move up in the price of the stock, the warrants are still unchanged on the year. At the time of the article, the A warrants, which have an exercise price of $1.20 and an expiration date of April 11, 2010, were priced with an implied volatility of about 80 (using Black-Scholes and a risk-free interest rate of 5%). Plugging the same 80 volatility today into the same Black-Scholes calculation ( gives a current value of the A warrants of $.68. When there are takeover rumors on a stock, normally options implied volatility shoots up, so arguably these warrants’ value should be even much higher than that.

Before this month, the A warrants were trading mostly in a tight range between $.45 and $.50 since December, apparently right after that article came out. This month, the warrants have dropped in price to about $.40 before today on the recent global market selloff. We believe if you can get these warrants in this range, at about the same price as when the stock was in the $.80’s in December and again in January, it’s a tremendous value, especially since the shares are breaking out and the gold mine should be in production around October. With the added possibility of a takeover at a significant premium, the upside potential for these warrants that are now “in the money” is very high.

Keep in mind that warrants are leveraged derivatives on stocks, so they are very volatile and can be very risky, and European Minerals has some political risk because they are located in Kazakhstan. Therefore, even though it looks like a tremendous value, it’s best to only buy EPM warrants with money you can afford to lose.

What about the B warrants? I'm holding there ;-)

Normally they should have more leverage (higher strike). What happens if the buyout price is lower than the warrants' strike? Will the buyer pay the 'fair' value using some options model like Black Scholes?

Bruno D.
The B warrants are also an excellent value, though they're not as liquid as th A warrants and are further out of the money.

If a buyout price is lower than the warrants' exercise price(unlikely with the A warrants, which have a $1.20 exercise price), there would be some sort of offer to buy those warrants out or convert them to warrants on the new company.
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