Hycroft was forced to suspend operations and lay off half of its workforce
HYMC stock only holds speculative value as long as AMC is willing to keep paying the bills
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There’s been a lot of unbelievable business news over the past year. Even so, movie theater chain AMC Entertainment’s (NYSE:AMC) move to diversify into the gold mining industry has to take the cake. I
n March, AMC announced its investment into Hycroft Mining (NASDAQ:HYMC) stock, which is a Nevada-based gold and silver mining company. This unexpected development revived interest in HYMC stock.
Shares had previously fallen below 50 cents each as the company’s mining operations failed to achieve profitability. Now, however, shares are back over the dollar mark thanks to AMC’s involvement.
Don’t count on this investment having blockbuster success, though. Here’s why this Hycroft mining feature is set to be an investment flop.
Hycroft: Historically Not A Great Mine
The Hycroft mine has been around for a long time. Indeed, it was previously available to investors as a company named Allied Nevada Gold Corp. That company went bankrupt in 2015 in order to reorganize its $543 million of outstanding debt after long failing to achieve high enough mining grades from its property to turn a profit.
The Hycroft asset was restructured as Hycroft Mining. In 2020, a special purpose acquisition company (SPAC) took Hycroft public once again. Hycroft initially traded around the $10 mark, but plunged to below $5 in early 2021 on weak operating results from the mine.
Things went from bad to worse in November 2021, as the company was forced to suspend operations and lay off half of its workforce. The problem at its heart is that Hycroft is a low-grade mining operation. Yes, the company has absolutely massive gold and silver resources in the ground. If the price of gold and silver spiked dramatically, Hycroft might be able to mine a fortune. At current more muted gold and silver prices, however, it seems Hycroft just isn’t able to effectively compete with lower-cost gold and silver mines.
AMC Enters The Picture
Hycroft appeared to be on its last legs once again. Obviously the company was already facing hard times given that it had suspended mining operations. However, AMC injected a fresh $28 million into the company, which secured AMC a 22% ownership stake of Hycroft. That, along with other fundraising efforts on Hycroft’s part, has given it a reasonable cash balance for the time being.
Consider, however, that Hycroft generated an operating loss of $81 million in FY’ 21 on just $111 million of revenues. This mine wasn’t anywhere remotely close to profitability while it was still up and running. And it won’t be a small amount of capital to turn things around either; mines are massive investments. Even if Hycroft is able to find a higher-grade portion of the mine to produce resources out of, it’s still unclear if the company has sufficient liquidity to make that happen.
And, as things stand now, the company’s outstanding share count has run up from fewer than 10 million back in 2020 to 197 million now. Like Hycroft’s mine, Hycroft’s stock also faces massive problems from dilution.
HYMC Stock Verdict
Thanks to AMC’s involvement, Hycroft is now a meme stock. As such, the most important factor driving HYMC stock’s price is trading interest in AMC and other related meme stocks. Whereas Hycroft was previously more tied to things such as the prices of gold and silver, now it is less attached to its own fundamentals.
That being the case, perhaps HYMC stock can run again if AMC stock enjoys another uptrend. Over the longer-term, however, there’s not much evidence of underlying value at the Hycroft mine. Previous investors in Allied Nevada were wiped out in 2015, and HYMC was already deep into penny stock territory until AMC showed up with its surprise investment.
All that being the case, HYMC stock only holds speculative value as long as AMC is willing to keep paying the bills. And given AMC’s own operating losses and expensive financing situation, I’m skeptical that AMC will keep wanting to fund Hycroft indefinitely.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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