Investors often have questions about the warrants issued by EXRO. This guide will clarify key aspects to help you understand them better. Please note all dollar values are in CAD.
What is a Warrant?
A warrant is an option that allows the holder to buy a share directly from the issuing company by paying the exercise price. Unlike market options, warrants are fulfilled by issuing new shares rather than trading existing ones.
Why Choose Warrants Over Shares?
1. Warrant Price vs. Share Price
- The warrant price is the upfront cost.
- The total cost includes the warrant price plus the exercise price to convert it into a share.
2. Leverage
Warrants can provide significant leverage compared to direct stock purchases.
Let’s use an example with the $0.42 warrants (EXRO.WT.A):
- Share price: $0.14
- Warrant bid/ask price: $0.03/$0.05
- Exercise price: $0.42
If you buy 10,000 shares directly at $0.14, your investment is $1,400.
However, with the same $1,400, you could purchase approximately 35,000 warrants at $0.04 each.
- Cost to exercise: $14,700 (35,000 x $0.42), payable only if/when you are profitable.
- Total investment: $16,100.
Now, suppose the share price increases to $2.00:
- Shares:
- Value of 10,000 shares becomes $20,000 ($2.00 x 10,000), resulting in a profit of $18,600 ($20,000 – $1,400).
- Percentage profit: ~1,329%.
- Warrants:
- Intrinsic value of each warrant becomes $1.58 ($2.00 – $0.42).
- Value of 35,000 warrants is $55,300 (35,000 x $1.58), resulting in a profit of $39,200 ($55,300 – $16,100).
- Percentage profit: ~243%.
While the percentage gain is higher for shares in this scenario, the leverage provided by warrants allows investors to control a larger potential position with the same initial investment, significantly increasing the dollar value profit.
3. Risk
- Warrants can become worthless if the share price remains below the exercise price at expiry.
Types of EXRO Warrants
$2 Warrants [EXRO.WT] – Expired
- Outstanding: 6,191,225 (as of September 30, 2024).
- Exercise Price: $2.00
- Expiry: February 4, 2025
- Details:
- Issued in February 2022 as part of a $20.35 million bought deal financing.
- Holders can buy one share by paying $2.00.
- Broker warrants: 90,911 outstanding, not exchange-traded.
- No acceleration clause.
- If fully exercised, EXRO gains ~$12.38 million.
$1.36 Warrants
- Outstanding: 3,833,147
- Exercise Price: $1.36
- Expiry: September 2026
- Details:
- Issued in September 2022 as part of a public and private offering.
- EXRO may accelerate expiry if shares trade above $2.72 for 20 consecutive days.
- If fully exercised, EXRO gains ~$5.21 million.
$2.40 Warrants
- Outstanding: 6,240,000
- Exercise Price: $2.40
- Expiry: December 2027
- Details:
- Issued in December 2022 as part of a $15 million debenture offering.
- Acceleration clause triggers if shares trade above $4.80 for 20 consecutive days after the initial 4-month hold period.
- If fully exercised, EXRO gains ~$14.97 million.
$0.81 Warrants (Vestcor Warrants)
- Outstanding: 13,192,842
- Exercise Price: $0.81
- Expiry: April 2029
- Details:
- Issued in exchange for warrants Vestcor held in SEA Electric prior to the merger.
- No acceleration clause.
- If fully exercised, EXRO gains ~$10.69 million.
$0.42 Warrants [EXRO.WT.A]
- Outstanding: 37,500,225
- Exercise Price: $0.42
- Expiry: September 2027
- Details:
- Issued in September 2024 as part of a financing round.
- Broker warrants: 2,857,160 outstanding, not exchange-traded.
- No acceleration clause.
- If fully exercised, EXRO gains ~$15.75 million.
Nuances of Owning and Trading Warrants
- Only $2.00 and $0.42 warrants are exchange-traded.
- The $2.00 warrants (Feb 2025 expiry) have limited market activity due to low likelihood of being in-the-money.
- The $0.42 warrants are active, but large bid-ask spreads can occur. Use limit orders to avoid slippage.
Warrant Valuation
1. Intrinsic Value
- Based on the difference between the share price and exercise price.
- Example: If the share price is $0.62 and the exercise price is $0.42, the intrinsic value is $0.20.
2. Extrinsic Value
- Determined by time remaining, market interest rates, and share price volatility.
- Calculated similarly to options pricing.
3. Fair Value
- Sum of intrinsic and extrinsic values.
- Use the Black-Scholes model for detailed calculations. Online calculators like MyStockOptions can assist.
Tools for Analysis
- To update volatility values:
- Download historical data from Yahoo Finance.
- Use a historical volatility calculator for updated metrics.
EXRO’s warrants offer unique opportunities and risks. This detailed guide provides a foundation for understanding and evaluating these investment instruments.
