Did the Warrant Strategy from Largo Resources Ltd (OTCMKTS:LGORF) Just Backfire?

Did the Warrant Strategy from Largo Resources Ltd (OTCMKTS:LGORF) Just Backfire?

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It could be a lesson in the making for stocks like Largo Resources Ltd (OTCMKTS:LGORF). The company recently announced that effective December 3, 2018 the company will permit, without any further action on the part of holders, all outstanding unlisted warrants of the company to be exercisable on a cashless exercise basis at the option of the Warrantholder.

According to the release, no other terms of the Warrants are being amended. However, the stock has been hit in direct response to this announcement. One wonders about the logic here. Clearly, shareholders assumed a dilutive impact. However, the company has advertised this idea as a preventative for overall dilution because the volume-weighted 5-day average price was much higher at the time of the announcement than the minimum strike price for the warrants, suggesting that, in a perfect world, it would take fewer shares to pay off the warrants. However, it isn’t a perfect world, and shareholders have been selling the stock down, and with every tick lower, the dilutive potential of this strategy grows.

Largo Resources Ltd (OTCMKTS: LGORF) bills itself as a natural resource development and exploration company, engages in the acquisition, exploration, and development of mining and exploration properties located in Brazil and Canada. The company primarily explores for vanadium, iron, tungsten, molybdenum, chromite, palladium, and platinum group metals. Its flagship project is the Maracás Menchen Mine that consists of 18 concessions covering an area of 17,690.45 hectares located in Bahia State, Brazil.

The company was formerly known as Consolidated Kaitone Holdings Ltd. and changed its name to Largo Resources Ltd. in June 2004. Largo Resources Ltd. was incorporated in 1988 and is headquartered in Toronto, Canada.

Moreover, Largo Resources Ltd. is a mid-tier mining development company primarily focused on the production of vanadium at its Maracas Menchen Mine in Brazil.

According to company materials, “Largo is a Toronto-based strategic mineral company focused on the production of vanadium flake, high purity vanadium flake and high purity vanadium powder at the Maracás Menchen Mine located in Bahia State, Brazil. The Company’s common shares are principally listed on the Toronto Stock Exchange.“

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As noted above, LGORF just announced that effective December 3, 2018 the company will permit, without any further action on the part of holders, all outstanding unlisted warrants of the company to be exercisable on a cashless exercise basis at the option of the Warrantholder.

We’ve witnessed a pullback of about -20% for the stock in the past month, mostly in response to this announcement in the spiraling feedback loop discussed above. In addition, the company has witnessed a pop in interest, as transaction volume levels have recently pushed 95% above its longer-run average levels.

Mr. Mark Smith, Chief Executive Officer of Largo, stated “If our Warrantholders take advantage of this cashless exercise tool, it will minimize dilution to our shareholders upon exercise. As an example, assuming all of the existing Warrants are exercised on this basis at a price of $4.38 (being the approximate 5-day VWAP as of close today), approximately 16.3 million fewer common shares will be issued upon exercise.”

The logic of this statement is exactly what is now in question by the company’s shareholders.

Now commanding a market cap of $1.43B, LGORF has a significant war chest ($128.1M) of cash on the books, which compares with about $28.2M in total current liabilities. LGORF is pulling in trailing 12-month revenues of $392.9M. In addition, the company is seeing major top-line growth, with y/y quarterly revenues growing at 179.3%. We will update the story again as soon as further details emerge. Sign-up for continuing coverage on shares of $LGORF stock, as well as other hot stock picks, get our free newsletter today and get our next breakout pick!

Disclosure: we hold no position in $LGORF, either long or short, and we have not been compensated for this article.

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