Bocana Resources: Pending Warrant Exercises Create Volatility, But Not For Long

I have another update on Bocana Resources Corp. (BOCA.V). The stock has been steadily increasing while investors and traders position themselves for coming news, but last week was very volatile. The trading on December 23 was particularly crazy. The stock traded as high as $0.345 in the morning, but got smashed down to $0.20 in the last hour before close. Thankfully BOCA recovered nicely the next day back up to $0.25.

What’s with the sudden sell off? These warrants may provide some insight:

25 million warrants are set to expire on January 3. There are four trading days left before these warrants expire. The $0.10 strike warrants are well in the money and are likely to get exercised. But they amount to only 1.4 million units. The majority of the warrants have a strike price of $0.25.

The sell off we saw on Tuesday is likely related to the exercising of these warrants. Investors will sell shares on the open market to garner funds to purchase shares at $0.25. When the stock price is above $0.25, it makes sense to do so as anything above this is essentially arbitrage profits. The very short time to expiry means that warrant holders must move quick. They have incentive to sell large batches of shares quickly rather than taking a more measured approach of slowly selling into strength. The sell off from the $0.30’s likely triggered stop losses or swing traders exiting the trade, as it would not make sense for warrant holders to sell shares below $0.25.

There are over 23 million warrants at the $0.25 strike price and only a little over 3 million shares traded on the Venture on December 23. Judging by these numbers, we can expect some volatile swings for the next week. There are 101.2 million shares outstanding and that has been steady for several months. So no warrant exercises have officially been reflected in the share count. By monitoring any increase in shares outstanding, we can infer the amount of warrants that get exercised over the next few days.

If the stock price was $1.00 right now, I would say that this would be a temporarily bearish catalyst as warrant holders would very clearly want to sell any stock they could get a hold of in order garner funds to exercise deep in-the-money warrants. But because the exercise price is right at the current stock price, things get interesting and point to a bullish move no matter the fate of the warrants.

First, no warrant holders are going to sell stock below or even at $0.25 in order to exercise warrants. There is no profit motive in that. Shareholders are safe from another big tank below this level, at least one driven by warrant holders.

Second, the company may want to get those warrants exercised. Those $0.25 strike warrants would bring in $6 million in cash. This would completely change BOCA’s balance sheet which sat at around $0.6 million working capital deficit as of June 30. Yes, we all expect $60 million in funding for the Arizore Joint Venture which would fund the ambitious mining property acquisition targets and gold tokenization business model. But any money coming from warrant exercises would sit specifically in BOCA’s corporate treasury. What’s the easiest way to guarantee that these warrants get exercised? Put out an amazing press release this week so that the stock rises to the point that warrants are well in the money and a good chunk if not all of them get exercised.

Third, they expire a week from now. Instead of wanting the warrants to be exercised, the company may deem that it doesn’t need the cash and would rather save the dilution and not have the warrants exercised. That would mean that the stock price is unlikely to trade much above $0.25 this week. But the silver lining would be that the stock would remain between 100-105 million shares outstanding as opposed to around 125 million. Investors could view this bullishly as it would signal to the market that management has no interest in diluting at these prices and that the funds within Arizore cover off all necessary expenses. Plus by January 5, any overhang or negative sentiment potentially created by warrants would be gone.

So in my view, we are unlikely to see any sell off, at least one driven by the exercise of warrants. We could see a boost this week if news is released in order to try to get as many warrants as possible exercised. But whether that’s the case or not, these warrants are gone by trading on January 5. The stock price is likely to move up as no one will be fretting about warrants anymore and whatever dilution occurred would have been in the past.

It looks like a bullish outcome no matter the situation. It’s only a matter of timing.

Disclosure: I am long Bocana stock.