Australia | Oct 10 2006
By Greg Peel
If readers are unsure how warrant investment works, see “Enhancing Yield Through Warrant Products”, Sell&Buy-ology, 11/08/06.
ABN Amro Warrants has alerted its clients to the fact zinc producer Zinifex (ZFX) has declared a massive 70c dividend payable on October 16. Soaring zinc prices have led to the company being well cashed up.
ABN believes Zinifex is “moving into a new phase”. Since listing the company has been riding the zinc wave and ensuring operating costs are kept under control. With plenty of cash in the bank, the company can now look to acquisition and/or exploration.
The zinc price is currently well supported by a tight market, but any reader contemplating the strategy below must appreciate the fact that the Zinifex price will move in lockstep with the zinc price and that can be very volatile.
By leveraging into Zinifex via the April 07 $10.00 instalment warrant (ZFXIZ7), known as a “HOT Instalment”, the buyer can collect the dividend and, if held for 45 days, the franking credit. This would yield 17.63% if the Zinifex share price stands still.
Similarly the April 07 $11.00 instalment warrant (ZFXIZ8) will yield 19.47%.
On a comparable basis, simply holding the stock would yield 8.06%.
It is important to understand that these figures are based on a fixed Zinifex price, and that on a 45 day hold there is every chance the stock price could fall, thus undermining the yield. Of course it could also rise.