A Fool and His Gold
“I signed on as the clown, and, by golly, I'll keep up my end of the bargain.” – Chris Farley
For the unsophisticated speculator, investing in junior gold mining companies is fraught with risk. While few have made vast fortunes betting on companies that go on to hit the literal mother lode, most stand little chance of realizing notable gains. The sector is both challenging to grasp from a technical perspective and filled with all manner of hucksters willing to say and do whatever it takes to separate amateurs from their money. A scratch-off lottery ticket flips from being a bad investment to a good one if you can trick somebody else into paying for yours.
When judging the potential economic value of a gold deposit, there are three critical questions: how much gold is in the ground, at what average concentration, and in what form? While all three are important, the last one is often the strongest determinant of gold mine economics. How the gold presents itself in a deposit dictates the means needed to isolate it in pure form, and those means can vary from easy to nearly impossible – at least financially.
On the easy end of the spectrum sit placer gold deposits that result from the weathering and disintegration of rock formations containing seams of gold, thus liberating the precious metals. Creeks and rivers then transport and concentrate the relatively pure gold over millennia, often depositing it at ancient river bends and in bedrock depressions. Placer gold can be isolated with water and gravity, using contraptions as simple as a pan or as sophisticated as a sluice box. Placer mining once dominated US gold production (it is still the form of mining profiled on the popular show Gold Rush) but the best and most accessible placer deposits have already been exhausted.
On the more difficult end of the spectrum sit lode deposits, where the gold is still trapped inside rocks and veins, surrounded by minerals and other impurities. Here, extracting and concentrating the gold is more challenging and usually involves crushing the rock in a mill, leaching the ore with a cyanide solution, isolating the high-value metals, and forming them into doré bars which are sent to refiners for final processing. No two ores are alike and the exact details of the process flow required vary from mine to mine.
The above process works well enough for oxide ores where the gold is trapped in silica minerals like quartz. It’s a different story for the class of deposits known as sulfide ores, where the gold is surrounded by sulfides of iron. Sulfide ores are so difficult to mine they are often categorized as refractory deposits, and the gold industry has spent decades trying to develop cost-effective methods to free this gold from its stubborn prison. Here’s how a recent study from McKinsey frames the issue (emphasis added throughout):
“Gold miners are facing a reserves crisis, and what is left in the ground is becoming more and more challenging to process. Refractory gold reserves, which require more sophisticated treatment methods in order to achieve oxide-ore recovery rates, correspond to 24 percent of current gold reserves and 22 percent of gold resources worldwide (Exhibit 1). Despite offering a higher grade, these ores can only be processed using specific pretreatment methods such as ultrafine grinding, bio oxidation, roasting, or pressure oxidation (POX).”
Knowing this, imagine our shock when we woke up on Tuesday, March 15, to the news that AMC Entertainment Holdings (AMC) had invested in a gold mine! We’ve had our fair share of fun with AMC’s chair and CEO Adam Aron, detailing how he shamelessly fleeces retail investors here and here, but even we were taken aback by this nonsensical press release:
“AMC Theatres (NYSE: AMC), the largest theatrical exhibitor in the United States, in Europe & the Middle East, and in the world, today announced it is buying 22% of Hycroft Mining Holding Corporation (NASDAQ: HYMC), which holds the 71,000 acre Hycroft Mine in northern Nevada. Independent third-party studies confirm that the Hycroft Mine has some 15 million ounces of gold resources and some 600 million ounces of silver resources. In addition, AMC will receive an additional 23.4 million warrants in Hycroft at $1.07 per share.
Making an investment equal to AMC is Eric Sprott, one of the world’s leading gold and silver investors. Combined, AMC and Mr. Sprott are investing $56 million, which will help Hycroft considerably lengthen its financial runway. With its investment, AMC has been granted the right to appoint a representative to the Hycroft Board of Directors.”
Further down in the same release is this gem of a quote, which will undoubtedly find a prominent place in the history of corporate silliness:
“Commenting on the investment in Hycroft, Adam Aron chairman and CEO of AMC Entertainment said, ‘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. We are confident that our involvement can greatly help it to surmount its challenges — to its benefit, and to ours.’”
Concurrent to the issuance of the press release, Aron took to Twitter and whipped up a retail frenzy:
The rationale for the move may seem hazy, but the timeline makes one thing clear: there was very little, if any, due diligence done. If reports are to be believed, this deal came together in a handful of days leaving precious little time for serious review.
Let’s dig into what’s really going on with this transaction.
Hycroft’s only mine has been in and out of operation for several decades, but most of the easy oxide ore was mined throughout the 1980s and 90s. While meaningful amounts of gold remain in the ground, it is predominately difficult sulfide ore, and the concentration of gold is quite low. In other words, the Hycroft Mine is a low-grade refractory deposit from which it is nearly impossible to extract gold in a way that makes money. Not that others haven’t tried.
In 2014, the mine was owned by Allied Nevada Gold Corporation, which launched an ambitious $1.4 billion plan to revitalize the mine and crack the sulfide ore challenge. By March of 2015, the company filed for bankruptcy protection:
“U.S.-based gold miner Allied Nevada Gold Corp filed for bankruptcy protection on Tuesday, buckling under a heavy debt load amid weaker metal prices. Allied Nevada, which owns the Hycroft open pit gold and silver mine in Nevada, said in a statement it was filing to restructure its debt, which stood at $543 million at the end of September.”
Allied Nevada emerged from bankruptcy as a privately-held company in October of the same year and was renamed Hycroft Mining Corporation. The company continued to wrestle with the difficulty of mining its sulfide ore, with minimal success. In January of 2020, during the early stages of the Special Purpose Acquisition Company (SPAC) boom, Hycroft agreed to be acquired by Mudrick Capital Acquisition Corporation and became a publicly-traded company once again on June 1, 2020. To address the predicament of economically mining a low-grade refractory deposit – a requirement of survival – the slide deck promoting the deal claims a proprietary, patent-pending breakthrough technology for processing sulfide ores:
We also learn from the SPAC presentation that Sprott, Inc. issued fresh debt to the new company, offering Hycroft both a term loan and a 1.5% net smelter royalty agreement. In the ensuing quarters, as you’ll see, the likelihood that this debt holder would be made whole was in serious doubt.
In reviewing all of the Hycroft earnings call transcripts and company filings since it became a public company again, we’d describe the past two years as nothing short of a train wreck. One month after the SPAC deal closed, then-CEO Randy Buffington unexpectedly resigned, and the company hired the executive recruiting firm Korn Ferry to find a replacement. Two months later, the company hired Dianne Garrett to be its new CEO (we should note that Garrett has an impressive resume and seems to have earnestly attempted to make the best of a terrible situation). Less than a month after taking the reins, and only four months after completing the SPAC transaction, Garrett tapped the equity markets for more than $80 million of fresh capital.
In every quarter since the SPAC transaction, Hycroft reported operating losses, negative free cash flow, and continually managed down expectations about the viability of their “Novel Process” to economically extract gold from sulfide ores. Then, in mid-November, the company reported its Q3 2021 results with a press release that was a classic “turn out the lights” moment. The chair of the board resigned. The chief operating officer – who had just been hired in January of 2021 – resigned. Most importantly, the company came clean on the failure of the sulfide ore technology, fired half its workforce, and ceased its run-of-mine operations:
“The Company has previously discussed its strategy for developing an economic sulfide process for Hycroft. Based on the Company's findings to date, including the analysis completed by an independent third-party research laboratory and the independent reviews by two metallurgical consultants, the Company does not believe the novel two-stage sulfide heap oxidation and leach process ("Novel Process"), as currently designed in the 2019 Technical Report dated July 31, 2019 ("2019 Technical Report"), is economic at current metal prices or those metal prices used in the 2019 Technical Report. Subject to the challenges discussed below, the Company will complete test work that is currently underway and may advance its understanding of the Novel Process in the future.”
A technology miracle was needed to make the Hycroft Mine viable, and none was forthcoming. Virtually every major gold miner in the world has been working on finding economically viable ways to extract gold from refractory deposits, and to think that a decades-old mining operation that spends virtually nothing on research and development and relies on outside consultants and third-party research laboratories for their technology needs would produce a Holy Grail outcome is the height of lunacy. The stock traded below $0.30 a share, and bankruptcy seemed inevitable.
Enter Adam Aron.
As documented by this great thread (linked below) from the anonymous Twitter account @Keubiko – simply one of the smartest and sharply funny accounts in the FinTwit community – a mere 70 minutes after Aron was done pumping his deal with Hycroft via the aforementioned press release and Twitter postings, Hycroft initiated the dumping by quietly announcing a staggering $500 million at-the-market (ATM) equity offering led by the bucket shop, err, highly prestigious investment banking firm B. Riley Financial.
Mention of the offering was noticeably absent from Aron’s pronouncements and from the press release covering the AMC/Sprott investment, an omission that should raise an eyebrow or two at the Securities and Exchange Commission.
Putting a laser-sharp point on the issue: with the shuttering of its Hail Mary technology program at the end of 2021, there is no there there. To use a phrase often lobbed at gold enthusiasts, the mine is largely a pet rock. It won’t be extracted profitably. The buyers of Hycroft’s stealth ATM have enriched someone, but it isn’t the equity holders, and this newly minted cadre of gold bugs will soon make its acquaintance with humbuggery.
While watching this saga unfold in real-time, we wondered whether anybody was giving Aron sensible legal advice. It didn’t take long for us to find out, as Aron hastily canceled a scheduled appearance on CNBC where he intended to pump his new deal with Hycroft, and took to Twitter to say the quiet part out loud:
It has been an interesting two years for Aron and many believe he’s on a hero’s journey of sorts – called to new adventure, bringing AMC through its meme-fueled rebirth and looking for others to save. Happily for Hycroft, and especially happy for the sanctity of Sprott’s debt, this particular hero is attracted to shiny things. Even better, he is followed by an army of primate hodlers willing to follow him off a cliff.
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Folks, I've been following Eric Sprott for decades. An investment in this mine or any other should not be seen as a vote of confidence in the project and AMC using his name to garner credibility is totally disingenuous. He is a winner precisely because he invests in EVERYTHING. He'll invest in 100 companies knowing that 1 will go to the moon, 9 will turn out okay or get gobbled up by a larger mining group at a small profit, and the other 90 will go bust. It's the way this industry works. Not holding some of your investment in precious metals and mining stocks is silly, but you have to spread it broadly or you might as well be buying scratchers.
I LOVE independent financial media and Doomberg is now amongst my favorite reads. You guys are KILLING it!!!! Thanks for being there, the world needs more journalism like this. Bravo!