- AMC (AMC) stock doesn’t gain much from odd miner acquisition based on warrants.
- The commodities narrative is questionable.
- Remains fundamentally unappealing and volatile
The investment case for AMC Entertainment (NYSE:AMC) stock has not changed following its 22% purchase of Hycroft Mining Holding Corporation (NASDAQ:HYMC). It wasn’t a worthwhile investment before, and it isn’t a worthwhile investment now.
The acquisition was indeed a very strange decision. Most of my InvestorPlace colleagues have come to the same conclusion in that the move isn’t accretive to AMC moving forward. The purchase isn’t going to provide AMC with a lot of financial leeway. Moreover, the fundamental turnaround narrative remains clouded for AMC although its business has been diversified.
| AMC | AMC Entertainment | $27.24 |
Interesting Development
AMC’s decision to purchase a 22% stake in gold and silver miner Hycroft Mining Holding Corporation was certainly a surprise. Companies regularly diversify their holdings after all. Therefore, it wouldn’t have been surprising to see AMC, a movie theater chain, diversify by purchasing a related business.
That’s what’s puzzling here: Why would a movie theater be interested in a gold and silver mining firm? CEO Adam Aron explained that he believes his firm has the ability to help steer Hycroft Mining through liquidity challenges, capital raises, and effectively communicate with retail investors.
So if AMC can help guide Hycroft Mining higher, what does it mean in terms of capital and when might that happen? That’s the real question AMC investors should be asking themselves if this move is making them consider share purchases.
Warrants
One way AMC can benefit from this transaction is through the warrants it received in the deal. It received 23.4 million warrants priced at $1.07 per share.
HYMC stock currently trades at $1.28 as of this writing. Let’s say hypothetically that AMC simply exercised those warrants immediately. It could buy 23.4 million HYMC shares at $1.07, sell them all for $1.28, and net the difference of less than $5 million. AMC almost certainly isn’t going to do that.
Let’s assume that HYMC rockets up to the $10 levels it traded at pre-pandemic. That would be a much more interesting scenario. AMC would then have an asset in the warrants worth roughly $200 million.
Let’s assume the value of those warrants is somewhere in the middle, around $100 million. AMC suffered a $1.269 billion net loss in 2021. $100 million doesn’t change much. It also lost $149 million in 2019. In the case that AMC reverts to its pre-pandemic form $100 million wouldn’t even bring it into the black.
What About Silver & Gold?
The 71,000 acre Hycroft Mine in Nevada holds 15 million ounces of gold and 600 million ounces of silver. AMC now owns 22% of that.
Just running some quick numbers it seems AMC has a significant asset on its hands. It holds rights over 3.3 million ounces of gold and 132 million ounces of silver. The current value based on gold’s spot price of $1,950 per ounce is roughly $6.5 billion and $3.5 for the silver, priced at $26 per ounce.
Those metals require time and money to extract. By the time all is said and done that current spot price value becomes significantly less. And again, it requires years to extract gold. All in all, it just seems like a bizarre change of course for AMC to have taken.
That leads investors back to AMC’s fundamental investment case.
Fundamentally Unappealing
AMC lost $4.589 billion in 2020 and $1.269 billion in 2021. Yes, those were exceptional years and the pandemic deserves part of the blame. But let’s not forget that it lost $487.2 million in 2017, posted a net gain of $110.1 million in 2018, and then lost $149 million in 2019. It is volatile but trending in the wrong direction overall.
So even once AMC makes a comeback, investors have to ask themselves if they want any part of it. AMC is a leader in a business that isn’t what it once was. It seems to be adept at finding ways to entice retail investors to provide it with liquidity. I hope those retail investors see AMC stock for the troubled business that it represents moving forward.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
