Overview
A-Mark Precious Metals (AMRK) represents a high-upside play on precious metals volatility and also a solid defensive position in a market downturn. As A-Mark is situated as a broker in the precious metal world, their rise and fall is not predicated simply on rising prices. A-Mark takes a small margin on their bullion sales (Wholesale Trading & Ancillary Services and Direct Sales segments), and earns interest income through their Secured Lending business. Historic concerns have revolved around business controls for executive compensation, but those have been addressed in more recent compensation packages. A recent pullback on these lightly traded shares present a fantastic buying opportunity. The stock is now trading near an all-time low despite Management laying the groundwork for significant future earnings potential.
Business
A-Mark is a wholesaler of bullion that was spun off from Spectrum (OTCPK:SPGZ) in 2014 but has been around since the 1960s. They are the largest distributor for both the US and Royal Canadian Mints. Developments since the spin-off include acquisitions of a controlling interest in Silvertowne Mint in 2016 and an asset deal for GoldLine in 2017. The GoldLine acquisition got off to a rocky start, as their segment lost almost $9m in their first year of consolidation with A-Mark (factoring in a full write-down of the $2.7m goodwill related to the acquisition.) Management indicated the loss was primarily related to the business being too heavily staffed for a stagnant market. SilverTowne is currently producing at about half of capacity (170,000 ounces per week), with the ability to scale to 300,000 ounces per week if demand increases. Recent conference call transcripts on SA and the company website can provide further information regarding their business, including storage and logistics capabilities. Management indicated on the Q3-19 call that Goldline is finally approaching break-even on a standalone basis, despite continued market stagnation.
At first glance, some of the financials for A-Mark do not seem indicative of a $60 million EV company, especially when the business has practically no liabilities and did $4.8B of revenue in the most recent fiscal year. As a wholesaler, A-Mark has razor thin margins (0.047% in the fiscal year ended June 2019). Though, margins have expanded significantly in periods of volatility historically (0.27% in Q1-16, more below, and even higher in FY09 when still part of Spectrum). More rapid changes in price and higher demand for their products allows A-Mark to take larger spreads on their transactions.
Because the full inventory of the business is hedged (hedging described on page 5, 42, 60, and 75 of their latest annual report) with futures and forward sales contracts (impacting revenue), Management maintains that ounce volume and gross profit dollars are better indicator of Company performance than revenue. FY19 gross profit increased 9% to $32.0 million from $29.4 million in FY18. For FY19 they sold 1.8 million ounces of gold, down 6% from the 1.9 million ounces in FY18. FY19 silver sales increased 46% to 67.6 million ounces from 46.5 million ounces FY18.
Management has also expanded their secured lending segment and updated their website, which has led to 27% growth in the number of outstanding loans in Q1-20 and 109% growth from Q1-19. A-Mark’s lending practices are such that they haven’t experienced a loss of principle on a single loan to date. The have fully filled their book created through $100 million of bonds sold last year through an asset securitization agreement.
Management Team
Valid past concerns have been raised regarding excessive Management compensation. FY15 compensation for A-Mark’s top three executives was predicated on gross profits, which resulted in almost $5m in payments that year for circumstances largely outside of Management’s control. However, the recently filed employment agreement for the CEO is an example of the continued efforts of the company to better align management compensation with shareholders, compared to uncapped historic practices:
- Effective July 2020 through June 2023
- $560k base, to be adjusted upward 25% if he ceases serving at Spectrum
- Maximum of 150% of base salary as a target bonus
- 212,730 options with a 10.25 strike price
- 7,000 restricted stock units
- $100k signing bonus
Also, because of the annual loss in FY18, Management did not receive a bonus, further strengthening the case that past concerns regarding compensation controls are no longer significant.
In additional to the improvements above, key members of management and directors of A-Mark own about 40% of the company and therefore are strongly aligned with shareholders to see the stock price increase. Doubling the share price from current levels would represent a paper gain of about $20 million for Management. Most outstanding Management options are in the teens, so gains would become even more acute from there. Per the last Proxy statement:
Opportunity
The last quarter there was significant volatility in the precious metals market, and only since the spin from Spectrum, (Q1-16), A-Mark earned $0.76 a share and the stock reached $22 a share at that time. Since then the precious metals market has been remarkably calm. Note that those per share earnings were before SilverTowne, before GoldLine, and before they launched secured lending. All this stock is waiting for is some choppy markets and the earnings are primed to take off. Plenty of catalysts for uncertainty exist in the current market (Iran, 2020 US election, Brexit, trade wars, etc), and one does not need to be particularly bullish on precious metal prices to invest in A-Mark. Volatility is the name of the game.
Management is also open to a takeover. On their most recent conference call, the CEO addressed the possibility:
I think that – and as it relates to bigger banks, you would need a situation, where a bigger bank wanted to enter the precious metals business. And they were looking for a turnkey solution that they would find it with A-Mark. Selfishly, as a big shareholder of the company, I would want to hope that happens when we have two or three years of great results and we’re in a bull market for precious metals and the stock market is back to 2009 levels and we have crisis everywhere and you have interest rate problems and you have default problems, that is what’s going to make A-Mark worth the most money and that’s probably the most likely time where either a commodity bank or a non-commodity bank is going to want to get into our segment, and they’re just going to say, here’s our stock come be a part of this.
Risks
Given that market volatility is the main earnings driver for A-Mark, extended stagnation in the precious metals market would be the biggest risk to this idea. Loss of a contract with the US or Canadian Mint could also materially harm results. And given the earnings hiccup driven by the GoldLine acquisition, future execution by management with further acquisitions could also hurt the company valuation.
Valuation
With 7 million shares outstanding, this is a $60 million market cap when shares are around $8.50. Some screens may show a significant debt load, but a quick dig into the Sep-19 balance sheet reveals the only debt on the balance sheet is the ABS loan, which (by definition) is fully backed by hedged precious metals, and a short term line of credit for working capital purchases due to the nature of the business. Again, the assets corresponding to these liabilities are fully hedged. Tangible net worth of the company was $58.6 million at the end of the most recent quarter.
After stabilizing from the GoldLine acquisition and right-sizing, earnings appear to be heading back to the ~$1/share/year range they resided in from FY14-17, valuing the go-forward business at 8x EV/historic earnings levels. Volatility in precious metals could allow for quarterly earnings in excess of the $0.76/share seen in Q1-16 (prior to acquisitions), pushing earnings to ~$3 or 4/share if choppiness in the precious metals market persists. Optionality on those earnings also exists though the expanded secured lending, Goldline, Silvertowne, and logistics operations since that blowout quarter.
Considering the current cheap valuation of A-Mark in a hot market and markets at all-time highs, this play seems to represent a great hedge in the event of a market crash, with upside in any market if volatility increases. Management is aligned with shareholder interests and has indicated their desire to market the business if earnings take off. At the current valuation, I see significant upside and limited downside in these shares within the next couple years.
Disclosure: I am/we are long AMRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
