Structured Warrants: Sakari Resources

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Structured Warrants: Sakari Resources

StockFanatic

Publish date: Wed, 14 Dec 2011, 11:52 AM

In the first seven trading sessions of December, structured warrants on Sakari Resources traded a daily average notional value of $164,716, almost triple the daily average turnover in November.

Structured warrants offer investors an avenue to leverage on the upside (call) or downside (put) price performance of the underlying stock or index. Investors with a bullish view on Sakari Resources can consider call warrants.

Structured warrants on Sakari Resources traded a daily average notional value of $164,716 in the first seven trading sessions this month (1-9 December), almost triple the daily average turnover of $58,767 in November.

The share price of Sakari Resources declined 22% in the month of November compared to a 5.4% decline in the Straits Times Index (STI). As of 9 December, it recovered part of this loss with a 8.6% rise relative to a -0.3% loss in the STI.

Sakari Resources, formerly known as Straits Asia Resources, is principally engaged in the exploration, mining and marketing of coal. Sakari Resources owns two coal mines in Kalimantan, Indonesia: the Sebuku Mine on the Sebuku Island in South-East Kalimantan and Jembayan Mine in East Kalimantan. As announced by the company in its third quarter results on 31 October 2011, total coal production in 2011 year-to-date reached 8.2 million tonnes which is a record achievement. Net profit after tax in the nine months ending 30 September 2011 was $117 million, an increase of 103% from the same period in 2010.

Further to the collapse of the bridge over the Mahakam river in Indonesia on 27 November 2011, Sakari said that production at its Jembayan mine continued as usual. The river is a major conduit of coal barge traffic and supplies to and from upstream mines around the region. For more information on Sakari Resources, please visit their Investor Relations page here

China and India Coal Markets

According to Bloomberg on 1 December citing a UOB-Kay Hian report, coal prices in China may rise 5% in 2012 and 2013 and imports may increase 15% a year because of supply tightness, strong industrial demand and reliance on thermal power. China, the world's biggest producer and consumer of coal, had bought record amounts of the fuel overseas in September to replenish inventories and meet winter demand. Earlier on 30 November, China's National Development and Reform Commission raised power tariffs and put a cap on coal prices to help address potential winter power shortages.

Separately, Reuters reported on 9 December that India's state utilities were suffering from an acute shortage of fuel as domestic coal supply has fallen short of targets and logistical constraints have hindered the transport of imported coal. Coal traders anticipated that this would translate into higher imports including Indonesian coal in 2012.

Structured warrants offer investors an avenue to leverage on the upside (call) or downside (put) price performance of the underlying stock or index. Unlike other leveraged instruments, investors are not subject to cash top-ups when the underlying moves adversely against his/her position. Thus, investors do not risk more than their initial amount paid for the warrants, a fraction of the underlying asset, while enjoying unlimited potential gains.

The degree of leverage of a warrant is reflected in its effective gearing which typically range from 2x to more than 10x, that is, a 1% change in the price of the underlying can lead to 2% to more than 10% move in the warrant's value. A warrant's effective gearing is not constant and is higher for those which are out-of-the-money and/or close to expiry.

Investors with a bullish view on Sakari Resources can consider call warrants as shown in the table below. To compute the sensitivity of the warrant, take the example of SakariMB eCW120702@ (PG4W) with a delta of about 0.5 and effective gearing of about 3x. Therefore, every $0.01 movement, the warrant will move about $0.01 x 0.5 delta / 5 WPS = $0.001. In percentage terms, this translates into a 1.6% change in the warrant price which is about 3x that of percentage price movement of the underlying of 0.5%.

Read related articles : Sakari Resources, Buy (Mine visit reaffirms our positive view)

Source : SGX

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