April Fools' Day seems to have come 17 days early on Tuesday, as AMC Entertainment Holdings (AMC -15.33%) announced that it was taking a 22% stake in tiny gold miner Hycroft Mining (HYMC 0.58%). It was an outlandish development, but the market had an equally incredulous reaction. AMC and Hycroft moved 7% and 9% higher, respectively.
Let's consider three reasons this move is bizarre and one way it makes sense.
Image source: Getty Images.
Why it doesn't make sense
It wasn't on anybody's Bingo card for AMC to take a position in an obscure Northern Nevada mining company. The first reason it doesn't make sense is that there's no synergy in the acquisition. It was hard to take the deal seriously the moment AMC CEO Adam Aron posted about the news on the socials.
AMC is playing on offense again with a bold diversification move. We just purchased 22% of Hycroft Mining of northern Nevada. It has 15 million ounces of gold resources! And 600 million ounces of silver resources! Our expertise to help them bolster their liquidity. pic.twitter.com/LihqZguwnd
-- Adam Aron (@CEOAdam) March 15, 2022
Aron ran a few popular companies before turning his attention to the multiplex market. He's been at the helm of a leading cruise line and ski resort operator. He owns a piece of an NBA team. But gold mining doesn't make sense. A crypto mining operation wouldn't make sense, either, but at least it would align with AMC's pro-cryptocurrency mindset. What's AMC going to do now? Is it going to accept gold bars as legal tender for popcorn tubs?
The second reason this doesn't make sense is that it doesn't move the needle. AMC is making a $27.9 million investment in a penny stock backed by a debt-saddled company with a small mine. This is just 0.4% of AMC's market cap and less than 0.2% of AMC's market cap. The investment would have to pop sixfold in value for it be worth as much as 1% of AMC's market cap. It's a meaningless passive investment at best, and a distraction it can't afford at worst.
The third reason the move is a head-scratcher is that it sends the wrong message to investors. There's a long list of things that AMC, a company that analysts see posting losses for the next few years, could do with a little money. There's debt it can pay down. It can repurchase shares that have increased fivefold through the pandemic. It could make a small bet on a consumer-facing entertainment business that would slide into some of its multiplex screens in the lull between superhero flicks. It could push into content. Instead, it went mining for fool's gold.
Why it does make sense
Aron backed out of a CNBC interview on Tuesday after the deal was announced. His legal team advised him against it, given the illiquid nature of Hycroft Mining. News of the transaction sent shares of the tiny miner 95% higher at the open on Tuesday, and even though it gave most of that back, it was a show of force that can help AMC strike more important relationships in the future.
AMC was able to flex its strength. It turned heads because of its 4 million retail investors and the cult following the stock has amassed over the past year. Even with AMC stock losing 80% of its value since peaking nine months ago, it's still every inch a tastemaker and an influencer. And even though gold mining is a silly venture that's well out of its wheelhouse, you can be sure that other potential AMC nibbles that make far more synergistic sense are now watching, if not reaching out to Aron.
This week's mining deal was a harmless shot into thinly traded air. Now let's see what the leading movie theater stock does when it actually takes the time to aim.
