Key points:
- Hycroft Mining might well be a strange investment for AMC
- However, the equity investment does seem to have solved Hycroft’s problem
- Meme stocks can work that is – but it depends
- What’s Behind AMC’s $27.9M Stake In Hycroft Mining?
Hycroft Mining (NASDAQ: HYMC) stock was up 80% yesterday and another 40% today premarket. That’s a stunning turnaround for what was a pretty bombed-out mining stock. Especially as the trigger for this Hycroft stock price rise was an equity investment from another meme stock, AMC.
It’s worth working out why this worked for not all meme stocks do. Sure, if lots of people go and buy something – which is a good definition of “meme stock” – then of course the price will rise. But sustained, or even sustainable, price rises depend upon more than just that. So, what is it that was true at Hycroft that makes it more than just a ramp in the price? The answer is in the specific problem that Hycroft Mining faced.
If we take a step back, why did GameStop work as a speculation? After all, that was pretty much a bombed-out retailer in a market sector resolutely moving online. The answer is in the technical details of short positions. So much of the company had been short sold – by some calculations more than 100% of the free float – that a short squeeze was possible. Any upward movement in the Gamestop share price would be greeted by those covering their shorts, which pushes the price higher. Yes, there’s more there as well, but that’s the basics. Once that happens then stonk’s the limit and so on. This then allows a capital raise, with which Gamestop can reorder the business and stop being a bombed-out retailer.
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Hycroft Mining had a different problem. It’s a perfectly acceptable little mine. Except for one specific problem. It could process its own ore. That had to be shipped off and the transport costs of doing that meant it couldn’t make any money. The solution is to build a processing plant, but that requires capital. At the previous market capitalisation Hycroft couldn’t raise the capital to do that. Nor, given the finances, would anyone lend it the money to do so.
At which point AMC arrives, bloated with capital from its own time as a recent meme stock. They buy 22% of the stock of Hycroft, this sparks interest in that it might become the next meme stock. The price rises and Hycroft Mining is able to raise another $138 million in at the market price issuance of new stock. That then neatly solves the problem. A processing plant can now be sorted out, those transport costs can vanish and a perfectly sensible little gold and silver mine is back in business.
The lesson here for us about meme stocks should be obvious. It’s not enough that it is a meme stock, there has to be some real problem that can be overcome for the price spike to work. At GameStop the technical detail of the short positions worked in favour of the price boost, sustaining it. At Hycroft the problem was a lack of access to capital. That’s now been solved – Hycroft is worth more.
Now, whether Hycroft Mining is now really worth $250 million is another matter. That’s something we’re only going to find out when we see the results of the application of that new capital. But Hycroft “worked” as a meme stock because there was a real if technical, problem that could be solved. This will also likely be true of any future meme stocks that capture the passing fantasy. There needs to be more than just the initial flood of buy orders – there needs to be some real problem that can be solved.