On Monday, Hycroft Mining (HYMC), the number one stock on Barchart’s Top 100 Stocks to Buy list, announced positive exploration drilling rights from its Vortex silver system in Nevada. The stock jumped 49% on the news. It is up over 10% in Tuesday morning trading.
While Eric Sprott, Hycroft’s largest shareholder as of Dec. 18, with a 33% ownership stake, has got to be ecstatic with the news, AMC shareholders must be wondering what, if anything, yesterday’s news means for them.
Earlier this month, AMC sold a significant piece of their stake in Hycroft to Eric Sprott for $24.1 million. While it retained warrants and a small stake in the gold and silver exploration company, the profits from the hotly debated non-core 2022 investment may not be significant.
At a time when movie theaters very existence could be under siege due to the fight over Warner Bros Discovery (WBD), AMC Entertainment (AMC) can use all the money it can get its hands on.
While Eric Sprott and all Hycroft shareholders should be happy about the news, it’s a case of too little too late for AMC. Here’s why.
AMC first invested in Hycroft in March 2022, paying $27.9 million for a 22% stake; Eric Sprott made an identical investment. Together, they owned 44% of the company.
For the 22% stake, AMC received 23,408,240 Hycroft units, each consisting of one Hycroft common share and a warrant to purchase one additional Hycroft common share at $1.068. The warrants carried a five-year term, expiring in March 2027.
At the time of AMC’s non-core investment in 2022, professional investors scratched their heads. Even CEO Adam Aron admitted it was a curious move.
“To state the obvious, one would not normally think that a movie theatre company’s core competency includes gold or silver mining,” MarketWatch reported Aron’s comments from the company’s March 2022 announcement about the investment.
To put things in perspective, AMC had an Altman Z-Score of -0.40 in March 2022. This calculation uses data from the balance sheet, income statement, and market cap to generate a score indicating the likelihood of bankruptcy proceedings over the next 24 months; scores below 1.81 are considered distressed.
It’s not hyperbole to say the business was hanging on by a thread. It hasn’t improved since. As of Sept. 30, it was -0.90, according to S&P Global Market Intelligence. Only in seven quarters over the past five years has the Altman Z-Score been worse than it is now.
AMC looks like it will extract itself from this investment without harming the core business — which, let’s face it, is hardly booming.
In connection with the partial sale of its stake in Hycroft, AMC transferred ownership of 2.34 million Hycroft shares, warrants to purchase 1.34 million additional Hycroft shares, and 12,000 future-vesting shares issuable under previously granted equity awards, to Eric Sprott in exchange for $24.1 million.
AMC retains a small stake in Hycroft (64,037 shares) and warrants to purchase more than 1 million common shares at $10.68 per share.
The Dec. 5 press release said the transaction generated an accounting profit of $7.9 million in Q4 2025.
“Now is the right time for us to smartly monetize the majority of our original investment and re-deploy the capital towards the substantial opportunities within our core theatrical exhibition business. At the same time, with this transaction, we retain warrants to purchase more than 1 million shares of Hycroft plus a small direct equity stake so that AMC shareholders will continue to benefit from Hycroft’s future success,” Aron stated in its press release.
On Nov. 15, 2023, Hycroft did a reverse 1-for-10 stock split to get the share price in compliance with Nasdaq’s $1 minimum bid price requirement. Post-split, AMC would hold 2,340,824 shares of Hycroft common and the right to purchase 2,340,824 additional shares at $10.68.
Based on the reverse split, AMC’s original investment of $27.9 million would have been approximately $11.93 per unit. The shares closed Dec. 5 at $11.45. Based on this price, the value of the 64,037 Hycroft common held after the sale to Sprott was $733,224 [64,037 * $11.45]. The 1,000,824 warrants held would be worth $770,634 [$11.45 Dec. 5 closing price – $10.68 exercise price].
I’m having difficulty reconciling the $7.9 million accounting profit. After you subtract the $24.1 million received from Sprott, that leaves a deficit of $3.8 million. The value of the shares and warrants as I write this is $18.41 million [64,037 shares * $27.33 share price + 1,000,824 warrants * ($27.33 share price – $10.68 exercise price].
That turns the $3.8 million deficit into a $14.61 million profit. That’s an 11.9% CAGR (compound annual growth rate).
I’d be happy to generate a double-digit annualized investment return over 45 months. Most investors would. But AMC isn’t in the portfolio management business. They primarily sell movie tickets, food, beverages, and advertising.
AMC got lucky with this investment. Sure, it was smart enough to hook up with Eric Sprott, a legend in the mining industry, but investors shouldn’t mistake that happenstance as a stroke of genius.
Consider this: If Adam Aron and the rest of the AMC team were portfolio managers and not theater operators, they might still be sitting on an investment worth $129.38 million as of today’s Hycroft share price, not the $42.51 million for the partial sale and remaining investment.
Spin this however you may, the future of AMC remains very much in doubt, with or without the Hycroft Hail Mary.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
‘ The preceding article may include information circulated by third parties ’
‘ Some details of this article were extracted from the following source finance.yahoo.com ’
