Nothing says you're serious about turning around your movie theater business than investing in a defunct gold and silver miner, or so AMC Entertainment (AMC -0.88%) would have you believe.
The theater owner shocked everyone by announcing it had invested $27.9 million in Hycroft Mining (HYMC 10.60%) in exchange for a 22% stake in the company. At the same time, metals investor Eric Sprott invested a similar amount into Hycroft.
CEO Adam Aron said AMC's own near-death experience has made it willing and able to help other businesses also knocking at death's door.
In recent years, however, AMC Entertainment has had enormous success and demonstrated expertise in guiding a company with otherwise valuable assets through a time of severe liquidity challenge, the raising of capital, and strengthening of balance sheets, as well as communicating with individual retail investors. It is all that experience and skill that we bring to the table to assist the talented mining professionals at Hycroft.
However, investors should be even more wary of investing in AMC than they were before.
Image source: Getty Images.
In the pits
AMC is not healthy. Despite having established significant liquidity by using its meme stock popularity to raise cash, the movie industry has not recovered. There are fewer movies planned for release in 2022, and that will result in even lower theater attendance than was the case even before the pandemic. So taking resources away from bolstering the business is more than just surprising.
More so because Hycroft Mining is not an active miner. It ceased operations at its only mine in Nevada last November, saying it wanted to switch to building a mill to process gold and silver sulfide ore.
The problem is, Hycroft hasn't even done a feasibility study on whether the method Hycroft wants to use to process the ore will even work or is economically feasible. It says its previous plan for using a novel two-stage sulfide heap oxidation and leach process is not economical at current metal prices, so it will instead consider using an alternative process, though it's not yet proven it can be workable at a commercial scale.
AMC, however, says third-party analyses confirm Hycroft has "rock-solid assets," with 15 million ounces of gold deposits and around 600 million ounces of silver deposits at its Nevada mine.
Hoping something sticks
Investing $28 million in a defunct gold miner when you have $1.8 billion sitting in the bank is in itself not much of an issue. Even if the whole enterprise goes belly up, it's not going to severely affect the company, and if it's successful, it may make some money on the deal. So why not, right?
The problem arises from the mindset behind such an investment. The scattershot approach to trying something -- anything! -- to get some kind of a return that's completely unrelated to your core competency indicates your actual business is not worth investing in.
Buying a business in which you have no knowledge or understanding of the industry, only that it looks kind of similar to the situation you found yourself in, is hardly the way to be using shareholder resources.
Aron has indicated he wants to think outside the box when it comes to reviving AMC, and not all of the options involve movies per se.
For example, Aron recently revealed six strategies he saw AMC undertaking that included developing non-fungible tokens, or NFTs, and selling popcorn in retail stores. He did say he wanted to make more acquisitions, but I suspect most people thought he meant in line with the theater chain acquisitions he previously made. Buying a gold and silver miner was probably not on anyone's bingo card.
Suspicious trading activity
The investment is likely to get SEC scrutiny too. CNBC reports there was highly unusual trading occurring in the days just preceding the announcement of the investment.
It says analysis of FactSet data shows the 90-day average trading volume of Hycroft stock was around 355,000 shares prior to the news, but the day before, it spiked to 58.6 million shares, bringing the 90-day average up to 10.5 million shares.
Indeed, last Friday, trading surged to 340 million shares, or five times greater than Hycroft's outstanding share count, and its stock rocketed from $0.30 a share to $1.40 the day before AMC announced its investment, a better than four-fold increase in price.
Fool's gold
Investing legend Peter Lynch had a word for when companies go far afield like this: "de-worsi-fication."
In a bid to engage in a bit of empire building, CEOs graft wildly unrelated businesses onto their operations, ones that do nothing to strengthen the primary company -- and they tend to end badly.
There was a lot to make investors cautious about taking a stake in AMC Entertainment before this. Now that the movie theater stock is getting into gold and silver mining, they should stay far away.
