AMC just bought a stake in a tiny gold miner with a shaky financial history

AMC just bought a stake in a tiny gold miner with a shaky financial history

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Adam Aron, AMC Entertainment president and CEO.
David Orrell | CNBC

Movie theater chain AMC Entertainment has agreed to purchase a major stake in a tiny gold and silver miner that has been on shaky financial ground, the companies announced Tuesday,

It’s an unusual expansion for AMC, a one-time meme stock whose value has come back down to earth after surging last summer.

AMC will spend $27.9 million in cash for the deal, receiving roughly 23.4 million shares for the company, Hycroft Mining Holding Corp., and an equal amount of stock warrants. The deal would make AMC the owner of roughly 22% of Hycroft.

Hycroft shares rose more than 30% Tuesday morning after it more than doubled at one point in premarket trading. AMC shares, which are down 50% this year alone, rose 3.6%. The shares reached above $60 a pop during the height of its meme-stock frenzy last June and July.

AMC CEO Adam Aron was slated to appear on CNBC on Tuesday morning, but he canceled his interview, saying he wasn’t comfortable making public comments on the move due to volatility in Hycroft’s stock, CNBC’s David Faber reported. AMC declined to comment beyond what Aron said in the press release announcing the move.

In a quarterly securities filing released in November, Hycroft included a “going concern” clause, saying that that it would likely need to raise additional cash to meet its financial obligations over the next year.

In November, the company laid off more than half its workers at its mine in western Nevada, ceasing mining operations there. At the time, the company said it would focus more on processing gold and silver sulfide ore, according to a report from the local Elko Daily Free Press. Hycroft’s corporate offices are in Denver.

Formerly called Allied Nevada Gold Corporation, Hycroft Mining has a history of financial turmoil.

In 2013 and 2014, investor Luis Chang and Everbright Development Overseas Limited bought up shares of the company and disseminated false press releases about a potential tender offer for the mining company. Chang and the investment company then sold their shares in to the a market that was inflated by their scheme.

Additionally, in 2015 the company filed for bankruptcy protection. At the time, Hycroft was filing so it could restructure its debt, which stood at $543 million. When the company emerged from bankruptcy later that year, it changed its name to Hycroft Mining.

Meme stock fallout

Aron sees parallels between Hycroft and AMC.

“Our strategic investment being announced today is the result of our having identified a company in an unrelated industry that appears to be just like AMC of a year ago,” he said. “It, too, has rock-solid assets, but for a variety of reasons, it has been facing a severe and immediate liquidity issue. Its share price has been knocked low as a result. We are confident that our involvement can greatly help it to surmount its challenges — to its benefit, and to ours.”

AMC’s stock emerged as one of the main “meme stocks” last year, surging as an army of retail investors bought into shares of companies that were heavily shorted by hedge funds. Aron has embraced the new shareholders, including offering popcorn deals for owners of the company.

The company has also used its newfound popularity to raise billions in additional capital, with Aron saying some of that money would be used for strategic acquisitions. Aron has sold tens of millions of dollars of his own shares in AMC, which he has attributed to estate planning. AMC is also experimenting with a new pricing model that charges more for certain movies.

“I don’t think it’s an indictment on the future of theatrical exhibition; just a relatively small investment in an unrelated industry with the hope that it provides greater liquidity down the road,” said Alicia Reese, analyst at Wedbush.

In addition to AMC, the same number of shares and warrants in Hycroft is being purchased by metals investor Eric Sprott. Hycroft said in its release that investment vehicle Sprott Private Resource Lending II has agreed to extend the maturity of its debt to May 2027 from May 2025.

As part of the deal, Hycroft will no longer be required to make regular principal payments on that debt and will instead be expected to pay it all back in a single “bullet” payment in 2027, according to a securities filing.

The deal makes Sprott and AMC the second largest shareholders of Hycroft, according to a press release.

Hycroft history

According to a presentation Hycroft prepared for a mining conference in February and early March, hedge fund Mudrick Capital held a 40% stake in Hycroft. Mudrick briefly owned shares of AMC last year but, according to Bloomberg News, sold the shares within a day after earning a profit.

In 2020, Mudrick acquired Hycroft. A year later, a St. Louis-based law firm, Schlichter Bogard & Denton, began to investigate the merger.

The law firm sought to determine whether directors and officers of Hycroft or Mudrick breached their fiduciary duties to shareholders, and whether shareholders suffered damages as a result. According to Schlichter Bogard & Denton, Hycroft stock has plummeted since the transaction with Mudrick closed on May 29, 2020, and continued to fall significantly over the next year. When Hycroft announced its 2020 financial results in March 2021, shares fell by more than 60%.

Between May 29, 2020, and Monday, they day prior to AMC’s investment announcement, shares of Hycroft had fallen nearly 90%, from $12.65 a share to $1.39.

Representatives from Schlichter Bogard & Denton did not immediately respond to CNBC’s request for comment.

In a separate securities filing, Hycroft said it had entered an agreement with B. Riley Securities to sell up to $500 million of its stock in an at-the-market offering program.

Analysts’ reactions to AMC’s investment in the mining firm were mixed.

“Taking valuable cash and investing it into a high risk business outside of its core competency,” said Eric Handler, media and entertainment analyst at MKM Partners. “I don’t get it.”

Eric Wold, a senior analyst at B. Riley Securities, said he could see why the theater company made the investment – and that it could help AMC find additional opportunities for growth.

“While this is definitely a surprise move by AMC, my initial and early take is that I can understand the rationale of the AMC board somewhat in their decision,” Wold said. “After the AMC board was able to navigate through the pandemic lows and avoid bankruptcy, the impressive cash balance and strengthened balance sheet outlook gives the company an opportunity to diversify away from the theatrical industry.”

CNBC’s Dan Mangan contributed to this report.

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