Quiet on the Set ‒ Mining, Movies, and Meme Stocks

When a miner does not mine... Movies and mining hook up... Sprott invests too... Beware the ides of March... AMC apes make a big play... Quiet on the set ‒ mining, movies, and meme stocks...

Suppose you and I (Dan Ferris) were out having a drink...

We start talking about the meme stocks of 2021, like GameStop (GME) and AMC Entertainment (AMC).

We talk about how crazy it all seems...

Two industries in secular decline... two heavily shorted dying businesses whose share prices rapidly increase more than 1,000% as a classic short squeeze is amplified by hyper-enthusiastic, know-nothing speculators using government stimulus checks to trade stocks during COVID-19 lockdowns...

We laugh about it, then we talk about how both companies got into crypto... Ha, ha, ha!

Then one of us says... "What'll they do next, buy a gold mine?"

We guffaw, clink our glasses, and say that we're glad we got together, been too long, must do it again soon.

Except that we can't make the gold-mine joke anymore... because one of them actually did it.

AMC Entertainment, the distressed, heavily indebted movie-theater chain, announced Tuesday that it has bought 22% of Hycroft Mining (HYMC).

I repeat...

AMC, the movie-theater company that hasn't made a profit since 2017, just bought a stake in a gold mine...

AMC and well-known mining investor Eric Sprott will each invest $27.9 million and will each receive 23.4 million units consisting of one Hycroft common share and one share-purchase warrant.

After the deal, Hycroft will have about 106 million shares outstanding, and AMC and Mr. Sprott will each own 21.8% of them. (Eric Sprott invests his own capital and has retired from the company that bears his name.)

As soon as I saw the headline on the AMC press release, the deal reminded me of gold-mining companies that added ".com" to their names during the dot-com boom... This took place near the end of a long, brutal decline in gold prices.

It also reminded me of the companies that added "blockchain" to their name a few years ago, in some cases causing share prices to instantly soar more than 100%.

AMC's gold-mining investment clearly has more substance than a mere name change... but it's just as ridiculous.

That didn't stop the stock from rising 6.7% on Tuesday – it's up another 9% since then. It seems somebody out there likes the stock – we'll talk about them later – even though it's nearly 80% off its 2021 meme-stock high.

The bond market was less sanguine about AMC's new gold-mining investment. The price of the company's 10% second lien bonds due 2026 fell by as much as $1.88 after the announcement... to finish Tuesday down $0.75, at $86.13.

CreditSights analysts wrote that, although the $28 million investment is small compared with AMC's $1.6 billion in cash... "We nevertheless view the Hycroft investment as a concerning development for creditors."

AMC has 10 bond issues outstanding, according to data compiled by Bloomberg. Four have 10% coupons. Six of them trade below 90. Four trade below 80... Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is $378.5 million and interest expense is $458.1 million.

The previous paragraph is a more technical way to say that AMC is a distressed company. It has $10.75 billion in debt and hasn't earned a profit since 2017.

Bond investors should be concerned about AMC buying a gold mine the way a parent should be concerned about their emotionally unstable teenager joining a cult.

Though its shares now trade nearly 80% below its meme-stock high of $72.62, its current market cap is still about $7.8 billion... Add its $9.2 billion in net debt and AMC's enterprise value is $17 billion, more than 45 times EBITDA (a very generous cash-flow metric).

That's a rich multiple for any company and absurd for one that lost $1.2 billion last year.

But AMC is a blue chip compared with Hycroft...

Hycroft went public via SPAC (a special purpose acquisition company) on May 29, 2020... The SPAC traded around $10 just before the deal. It shot up to an all-time high of $15.86 in August 2020. It fell from there to an all-time low close of $0.29 on February 23, 2022.

Here's a chart of Hycroft from the day it went public in May 2020 until just before the AMC-Sprott deal...

During the time period on the chart, the price of gold went from about $1,700 per ounce to around $1,998... When gold adds nearly $300 per ounce ‒ nearly 18% ‒ and your gold-mining company's stock goes from $10 to $0.29 ‒ down 97% ‒ gold mining might not be your thing.

Hycroft has lost $169 million since it went public less than two years ago. It has $159 million in debt and after the recent deal, $76 million in cash.

The Hycroft mine has been closed since November, when the company laid off 109 of its roughly 200 employees. A recent filing with the U.S. Securities and Exchange Commission ("SEC") states...

We are not currently conducting commercial mining operations at the Hycroft Mine. There is no certainty that the mineral resources estimated at the Hycroft Mine will be mined or, if mined, processed profitably. We have no specific plans and cannot currently predict when we will be able to bring the Hycroft Mine back into production.

Wow. Never heard that one before. I know they said, "We have no specific plans," but I distinctly heard...

"We are on the couch, watching Netflix and waiting for a pizza to arrive. We just want to raise enough cash to get paid a few more years. Pulling gold out of a big hole in the desert is the last thing on our mind, and we're not real great at it, anyway. Also, The Thing About Pam starring Renée Zellweger is pretty good."

When people tell you who they are, you should listen...

Hycroft will never produce gold profitably... if it ever produces gold again. And its management team doesn't care. They were desperate to keep their paychecks coming and are under no illusions about getting their crappy mine up and running.

Before the deal, Hycroft had less than $20 million left and it burned through more than five times that much the prior year.

Hycroft is not hiding the reason it took AMC's money...

In Hycroft's press release announcing the investment, its President, CEO, and acting Chair Diane Garrett commented on AMC's "expertise and ability to address liquidity challenges and to raise capital to optimize the value of significant underlying assets."

Nearly identical language appears in AMC's press release...

It's code for, as I describe it... "AMC was about to go bankrupt when a bunch of idiots sent its stock to the moon, enabling the company to sell them a bunch of new shares at a valuation it will never see again, and which will never be justified. We'd like to become a meme stock, too, and see our shares unhinged from reality. Since meme-stock status only happens to the worst businesses on the planet, we should definitely be next in line."

Hycroft prayed for meme-stock status and the universe gave the company what it wanted ‒ good and hard...

On March 8, with no good news to report, Hycroft's share price soared from its March 7 closing price of $0.32 per share to close at $1.88 four days later, Friday, March 11 ‒ a nearly six-fold increase in four trading sessions.

March 11 is four days before the AMC-Sprott deal was announced publicly. Looks like that meme-stock prayer was answered a little too early...

Look at Hycroft's share price and trading volume in the days before March 15...

Hycroft had about 60 million shares outstanding before the AMC-Sprott investment.

Roughly 341 million shares traded on March 11, four days before the deal was announced. In the five trading sessions before the announcement, nearly 870 million shares changed hands.

Hycroft's call-option volume exploded in the days before the deal announcement too... From a few tens of thousands of option contracts, option volume soared as high as 43.9 million on March 11, the Friday before Tuesday's announcement.

The tallest line on the chart below is from the day of the announcement, but you can see how the first two days of the month generated very low volumes, then things started getting busy on March 8.

Less than 100 HYMC option contracts trade on any given day... but volume mysteriously spiked up to almost 87,000 contracts on March 11 ‒ four days before the deal became public information...

You'd be forgiven for wondering if somebody knew the deal was coming and bought options and shares ahead of time... The market went into a frenzy seeing all the activity, helping to push the share price and trading volume moonward.

But wait, there's more...

Hycroft reported an even bigger share offering on the exact same day, though you won't find it mentioned in any press release...

On March 15, the same day the AMC-Sprott deal was announced, Hycroft quietly filed a registration with the SEC to sell as much as $500 million in new shares.

The registration document was for an at-the-market offering, which means as soon as it's filed, the company can sell as much as it wants, whenever it wants. And oh yeah, $500 million would be five times the current share count at recent prices!

At 6:25 a.m. on Tuesday, Bloomberg ran a story that said Hycroft was planning the new offering "as early as Tuesday"... Hycroft only filed it Tuesday morning.

So in other words, Hycroft planned to start selling new shares as soon as it filed the registration, knowing the share price had already spiked on the 11th and would likely jump again on Tuesday, the official announcement day.

Putting it all together...

Hycroft got AMC and Sprott – a famous headline-grabbing meme stock and a famous mining investor – to invest $56 million to save it from corporate death... The same day that investment was announced, it filed to offer almost 10 times that amount in new shares, effective immediately.

All those factors together helped drive the stock price up.

On March 15, Hycroft's share price opened 95% above the previous day's close...

But it finished the day up just 9%. Trading volume that day exceeded 331 million shares. So maybe somebody sort of sold a whole bunch of Hycroft shares that day...

Maybe somebody should have warned the two new Hycroft shareholders to "beware the Ides of March," as the soothsayer warned Julius Caesar in the Shakespeare play of the same name...

On the ancient Roman calendar, the Ides usually fell on the 13th of the month except in March, May, July, and October when it fell on the 15th. The Ides of March was a day of sacrifice... and most famously the day in 44 B.C. when 60 Roman senators stabbed Julius Caesar to death.

It looks as if Hycroft needed to sacrifice a couple of big investors to raise the hundreds of millions it needs to pretend like it cares about getting its gold mine running again.

Imagine you were Hycroft's top brass, and you had shut down the mine last November and were running out of cash... and that you'd really like to keep your job even though you've told the entire world that you don't have a plan for how to make your gold mine work.

You might say... "Gosh, I wish we were more like those meme stocks. They're crap businesses, too, just like us. But they raised money at stupid valuations because the people buying the stocks are insane... if only we could..."

"Wait!" you might shout. "We can! We need to become a meme stock like AMC. We need AMC to buy a bunch of our shares!"

And before you know it, you've got AMC CEO Adam Aron on the line...

Instantly, you sense a kindred spirit... and then he's telling you he'll gladly write you a check for $27.9 million.

You hang up and say to yourself, "Wow, that was surprisingly easy. I should have asked for twice as much."

But maybe you can get twice as much. Besides, it would look much better to the investment community if the only investor was not a distressed movie-theater chain selling $25 popcorn and still losing money.

So you call Eric Sprott, the famous and respected mining investor... Eric owns a gazillion different mining stocks and he's fabulously wealthy.

You're certain he'll come up with a piddling sum like $28 million for one of the biggest gold deposits in North America.

And he does...

Now you have $56 million. But that's roughly half of the $110 million you burned through in 2021. It'll take a lot more to keep this gravy train rolling.

And there is only one investor out there with the appetite to buy your shares and raise the kind of money that'll keep you going for a few years... the public.

Full disclosure: I've met Eric Sprott, socialized with him, and admired him for many years. He is respected and gets you some credibility as a savvy, experienced risk-taker in the mining world...

But Adam Aron gets you apes...

The one thing you must have to become a meme stock...

Apes, as they call themselves, are the vast legion of tiny shareholders who believe AMC's share price can go to the moon... even though it's down 80% and has a mountain of debt and a CEO who thinks buying a shuttered gold mine is smart.

One AMC ape recently posted on Twitter...

$1000 per [AMC] share is rather low ball, we're actually aiming for #AMC100k

Meaning he's hoping AMC hits $100,000 per share... That would value the company – whose revenue is roughly half its pre-COVID-19 levels – at $51.3 trillion, a little more than all U.S. stocks combined today, which are worth about $48 trillion recently, according to Bloomberg.

So these people are exactly the sort of naïve, uninformed, totally unhinged mob Hycroft needs to send its stock soaring to the Sea of Tranquility, that cushy, seaside neighborhood on the moon... If anybody would ever believe a shuttered gold mine that lost $169 million while gold rose $300 per ounce is a good investment, it'd be the AMC apes.

So, the day you announce the AMC-Sprott investment, you file to raise as much as $500 million in "at the market" offerings...

And before you know it, you're shopping for a second home in Maui...

Minute details about the timing of various filings and press releases referred to above are well covered in a series of Twitter posts by an investor calling himself @Keubiko (a great follow if you're on Twitter). Suffice to say that the evidence he has dug up supports what I'm telling you...

One reply to his posts included a meme that said...

Apes are being repeatedly used for exit liquidity.

That's what this is all about. The meme-stock phenomenon has become an exploitable strategy for lousy companies run by people with no specific plans for the business they've been hired to run.

I expect sooner or later some regulatory cop will notice all the hooting and hollering by people like me.

Many folks on Twitter, Bloomberg, and elsewhere have pointed out suspicious details of the timing of Hycroft's soaring price and volume, the AMC-Sprott deal, and the at-the-market registration...

I'm consciously adding my voice to the fray. Mostly, I'm hoping AMC and Hycroft will provide some more information about all this. We'll see...

And if you're wondering how the man I admire so much, Eric Sprott, doesn't come away looking as bad as Aron Adam, that's easy.

Eric is an experienced, successful mining investor comfortable with high risk. He's been doing it for decades... And most important of all, he's investing his own capital. He's got real skin in the game.

But Aron is a career-hospitality executive allocating shareholders' capital. He knows nothing about mining and has no skin in the game.

If you're thinking that AMC investing alongside Eric Sprott is smart, I disagree.

Eric is comfortably operating on his home turf and Adam Aron has somehow stumbled onto the wrong planet. Aron should be looking for hospitality assets, not gold mines.

It's bizarre and totally inappropriate for AMC to be anywhere near this deal. AMC shareholders should be outraged.

Finally, this week, maybe there's one last, legitimate hope for Hycroft yet.

There's a genuine connection between AMC and Hycroft...

The movies.

The Hycroft mine is located near a Nevada ghost town called Rhyolite, a filming location for the 2005 dystopian sci-fi film, The Island, starring Ewan McGregor and Scarlett Johansson.

The couple learns that they are clones intended to be used for spare body parts. They escape the facility where they're being held and wind up spending the night in an abandoned building... the ruins of Rhyolite's old bank.

The area around Rhyolite was used for several films in the 1980s and 1990s, including The Hitcher, Cherry 2000, and Midnight Run.

Since Hycroft will never make money mining gold and silver, maybe the company can generate an income renting the mine out as a film set...

Otherwise, it seems like AMC and Eric Sprott just paid Hycroft to raise five times its market cap ‒ cloning itself five times over to keep itself alive.

New 52-week highs (as of 3/17/22): AbbVie (ABBV), Bristol-Myers Squibb (BMY), Berkshire Hathaway (BRK-B), Centene (CNC), Sprott (SII), Travelers (TRV), and W.R. Berkley (WRB).

In today's mailbag, feedback on yesterday's Digest about inflation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I feel that I'm not as angry about inflation as I should be because I was not ignoring the facts from the moment stimulus checks were being handed out.

"The toughest part of the whole thing is that inflation happens so slowly that it takes a while to catch up and then we see a bit of a butterfly effect take place.

"Fear begets more fear, which then leads to hoarding, which than leads to unpredictable circumstances that people must live under.

"I am not angry. However, I am fearful of the day I become angry because then will my limits have been pushed along with many others.

"Thank you, Stansberry team, for always providing great quality and insightful literature and guidance." – Paid-up subscriber Andres N.

"It has always puzzled me that the Fed fights inflation by inflating rates? By definition, isn't that more inflation? They claim, as do most economists, that it is a tool to slow inflation. I would be willing to bet that if, for the first time ever, the Fed just did nothing, the markets would perform in a manner that would slow inflation to respectable levels.

"By signaling higher rates, the Fed is just encouraging the markets to react in an inflationary way to protect their positions. It adds fuel to the fire. Chair Powell almost has it right by keeping rates near current levels.

"I know this goes against all conventional wisdom, but I am convinced the Fed should do nothing! History shows they always get it wrong anyway." – Paid-up subscriber Alan F.

"Thank you for your view on the market... I am 80, been in the small investor game awhile. I like figures, research. It's part of my mental makeup. I have wasted a ton of money with promotors taking out a dart and throwing at a chart.

"Options I did well in for a while but that fell apart. Cryptos the same. Back to the old school...

"Commodities were great but broker lost his mental facilities and started doing what he told me his dad did, which was pushing gold only. Next commodity broker didn't try. He admitted it later. Too hard to keep up with.

"Read the world... [it's] getting rough, many technical advances, cute stuff, but when the ground is too dry or too flooded, fuel [is] kept from processing, minerals to feed mechanical and tech not allowed to be unearthed... fertilizers are not able to be produced and shipped... woke wonders driving decisions that turn into non-productive laws... super rich people in private and in government picking lower level pockets and not taking care of each other leads [people] to stick with the basics.

"Water, food, fertilizers, fuels, minerals... Trying with [a basket of stocks in those sectors]. Overall up 4.5% Thursday, today... I have solids in Silver and Gold.

"Good night from International Falls, Mn." – Paid-up subscriber Alan B.

"Yes, yes, the FED is to blame... and yes, yes, profligate federal spending is to blame. But when, as now, corporate profits surge, and corporate margins simultaneously surge, then it is not rising costs pushing prices, it is the rapacious greed of 'monopoly' capitalism that is pushing up inflation. Check the data. Be appalled." – Paid-up subscriber Kendrick M.

"Yes, good article, Corey. But you never got back to the point at which you started: So, what did you tell your wife?" – Paid-up subscriber Dale K.

Corey McLaughlin comment: I gave you what I hope is a more useful or enlightened answer yesterday. I replied to my wife with something glib like, "About a year and a half too late," meaning The Today Show, or any mainstream program, talking about the Fed and inflation. Then we turned our attention to our routine, yet expensive, breakfast.

Good investing,

Dan Ferris
Eagle Point, Oregon
March 18, 2022