If you’ve traded penny stocks for at least a year, chances are you’re not surprised by much anymore. But for those uninitiated, today’s story is something that might make you take a step back and say, “Hmm.” I will preface this by giving a quick 30,000-foot view, especially when discussing “emerging growth” companies, typically associated with penny stocks. In many cases, these are companies looking for opportunities to drive shareholder value by any means necessary. The truth is that “unusual” mergers and acquisitions date much further back than you might think.
“Unusual” M&A
Keep in mind that in some way, companies participating in M&A have attempted to identify a common thread that might apply to their business model. For instance, Alcohol company Constellation Brands (NYSE: STZ) made its foray into the “MJ” industry after acquiring a stake in Canopy Growth (NASDAQ: CGC). Two vice industries making a play to capitalize on a larger market share appeared as a reason for the deal.
The social media company, Facebook, now known as Meta Platforms (NASDAQ: FB), decided that pokes and wall posts weren’t quite enough. It took a stab at virtual reality. The company ultimately foreshadowed its push into AR/VR with the purchase of Oculus back in 2014. Other, more recent M&A deals saw payment processing company Square (NYSE: SQ) grab a piece of the music-streaming company, Tidal.
You also had General Mills (NYSE: GIS) nab Play-Doh maker Rainbow Crafts back in the ’60s. The point is, when companies identify a potential opportunity through M&A, no matter the target, they’ll take it if it “makes sense” to them. But what about this latest deal that pairs a movie theatre company with…a mining penny stock?
AMC Entertainment Acquires Stake In Hycroft Mining
That’s right; you’re not seeing things. AMC Entertainment (NYSE: AMC) bought a stake in small-cap mining penny stock Hycroft Mining (NASDAQ: HYMC). The deal sees AMC and metals investor Eric Sprott investing a total of roughly $56 million into Hycroft. Sprott & AMC will purchase their shares at $1.193 per unit. They also have the opportunity to exercise warrants for $1.068 with a five-year term. AMC also obtains a board seat with the deal.
To put this into perspective, we discussed Hycroft earlier this month with a share price of less than $1. As of this article, HYMC stock is trading just shy of $3, and while that move is substantial considering the short period, the deal has come as a surprise to many.
Diane Garrett, President, CEO, and Acting Chairman of Hycroft commented, “We couldn’t be more pleased to announce this transformational investment in the future of Hycroft, anchored by Eric Sprott, one of the world’s leading precious metals investors, and AMC Entertainment Holdings, which has proven its expertise and ability to address liquidity challenges and to raise capital to optimize the value of significant underlying assets. Collectively, their investment dramatically improves Hycroft’s liquidity position and provides years of financial runway.”
AMC CEO Adam Aron also discussed the deal on his Twitter account, saying:
AMC is playing on offense again with a bold diversification move. We just purchased 22% of Hycroft Mining (NASDAQ: HYMC) 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.
How Has The Market Taken The AMC News?
AMC stock and HYMC have pulled back at the start of the Tuesday session following plenty of above-average activity in the stock market today. Despite the reaction, investors continue digesting the reasoning behind the deal.
AMC’s CEO explained, “The strength of SPIDER-MAN: NO WAY HOME and THE BATMAN, as well as 2022’s promising industry box office, heighten AMC Entertainment’s conviction that we are on a glide path to recovery. 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. 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…It is appealing that the investment requires the commitment of only a nominal amount of AMC cash. Independent third-party studies confirm that the 71,000 acre Hycroft Mine in northern Nevada has some 15 million ounces of gold resources and some 600 million ounces of silver resources.”
AMC CEO Sees Potential in HYMC Stock
Aron also discussed the prospects of Hycroft’s claim. “It is one of North America’s largest development sites…Additionally, at our urging, the maturity of $156 million of first-lien debt and second-lien debt has been extended all the way until 2027, giving Hycroft ample time to start moving its mineral resources up the value chain. What’s more, as a result of AMC’s success in having raised capital in 2020 and 2021, we will be a valuable advisor to Hycroft in its efforts to secure additional equity investments to further increase its cash reserves.”
In closing comments, Aron went on to say the company is “taking AMC’s demonstrated achievement in writing the play book as to how to navigate through liquidity challenge and applying our lessons learned to another entity in Hycroft Mining.”
Connecting The Dots
What business does a movie theatre company have with a mining company? Aron explained the deal’s initial reasoning, but are there more dots to connect here? Hycroft is a SPAC deal that was conducted with Mudrick Capital Acquisition Corp. (F/K/A MUDS). Yes, this is the same MUDS stock that was supposed to do a deal with Topps playing cards. That deal was canceled after the MLB said it wouldn’t renew its agreement with Topps after the current contract ends. Mudrick ultimately acquired Hycroft mining, taking it public through a SPAC merger transaction.
For those not in the know, this is the same SPAC that Mudrick Capital sponsored. Mudrick was also notable in selling out of AMC stock last year. Mudrick was also a key piece in AMC’s debt restructuring before the meme stock frenzy blazed its way through markets.
Now a former Mudrick SPAC is gaining investment from AMC Entertainment and a famous metals investor, Eric Sprott. You can come to your conclusions on this. But it may be worth noting that vague dots also connect the parties, which may not make this deal so ambiguous. The market has now paused to see what happens next. Where do you stand on this latest M&A deal between AMC and HYMC stock?
