Description

We are recommending a short in A-Mark Precious Metals, a <$100mm mkt cap for most of it’s life that 10’x’d on the back of a super-cycle in gold and silver coins. Sounds pretty good right?!?!

A-Mark owns wholesale and retail businesses relating to the sale of silver and gold bullion (most of the business is silver coins). This business is massively over-earning due to demand shocks from 2020-2023 and limited supply from the U.S. government mint. It is massively over-earning in both the wholesale and retail operations where “spreads” - the difference between coin price and the underlying silver price - grew to all time, transient, highs. We believe spreads and volumes are declining in real-time now. We estimate EBITDA in fiscal year 2025 that is 90% below Street estimates and think the stock is worth $4 per share, or -87%.

This opportunity exists because the historical, low level, of spreads is not easily identifiable in the retail business. A-Mark made a large acquisition of JM Bullion in early 2021 (which drives 90% of the retail business) and did not provide historical financials for this business. Instead of digging in, investors that own this name just assume recent results are more or less representative of perpetuity. This is immeasurably wrong and we will be proven right imminently. 

Business breakdown

A-Mark has two businesses of focus, wholesale and direct-to-consumer retail operations:

• Wholesale 

  • Buys coins products by government mints (mostly u.s.) and sells them to a network of online and offline retailer customers. Simple spread business. When there is high demand at retail and low supply from the mints, spreads increase, and vice versa. 

  • 40% of gross profit in the most recent quarter. 

• Retail

  • Mostly JM Bullion, which is the onlin site JMBullion.com. JM has around 25% market share. They also own a smaller entity called Goldline. JM Bullion is around 80-90% of the segment gross profit.

  • 60% of gross profit in the most recent quarter. 

Thesis overview:

1. Retail business is over-earning on vols and spreads. Spreads have been extremely weak since July. They have fallen considerably since then and have more to go.

2. Wholesale business is over-earning considerably on vols and spreads. Spreads took a massive step down in the most recent quarter. They will continue to fall and vols will drop. It is an extension of retail over-earning. 

1) Retail over-earning 

While investors only see financials starting in mid 2021 for JM Bullion, we have spoken with formers, used credit card data, and proprietary scrape data of JM Bullion’s site to directionally confirm that JM Bullion’s normalized gross profit is around $30mm. The business did $135mm in 2022 on elevated transitions and elevated spreads (triple normal):

As can be seen below - we are extremely confident spreads normalize as this has already occurred rapidly in the past few months. Scraped spreads were $2.8 per silver eagle in August of 2023, down 65% from the 1H of 2023 and around 69% from 2022 levels:

This directionally supports gross profit for JM Bullion down to around $40mm (we think it goes lower as vols decline as well). The Street and the Market are asleep at the wheel here, sell side is generally estimating JM Bullion to continue to contribute upwards of $110mm for FY24 (ending June 2024) and there-after. It’s just wrong and it’s normalizing in real time. We believe calendar 3Q23 will see retail gross profit decline roughly 40% q/q with continued declines thereafter. 

Oh and the Company is telling you spreads are down on their most recent conference call, they just did not quantify and they do not provide guidance. 

“Thank you, Thor and Kathleen. Looking ahead to fiscal '24, we've seen a bit of premium compression since we commenced our new fiscal year, with the headwinds continuing from June into July. “

The Street is erroneously assuming slightly improved volumes offset this premium erosion - it’s wrong - our tracking suggests volumes are actually down q/q in 3q23!!

2) Wholesale over-earning

Wholesale over-earning is a bit easier to prove out as the historical financials exist here. Wholesale gross profit margin was 30bps in FY18, 60bps in FY19 but jumped to 200bps in FY21/22 on the back of demand shock + mint production issues in 2022. 

Here, again, the Street and Market are asleep at the wheel. The Company told you on the most recent conference call that the U.S. mint is now producing significantly more coins:

“It's public on the U.S. Mint's website is the United States Mint in July has been able to produce a few -- a significantly larger amount of Silver Eagles that it had in April and May. So you have had a little combination of a drop in demand, but you've had a little bit of extra supply on Silver Eagles.”

You already saw margins start to drop - calendar 2Q 2023 wholesale gross margins declined 60bps q/q to 1.2%. This should continue to drop going forward, given weaker retail spreads should bring about lower demand at the same time the mint is producing more. Street is more or less modeling gross margin to stay at 1.7% into perpetuity here. 

Valuation

Wholesale will do 50bps in normalized gross margin. Using FY22 as the rev base which is conservative as vols probably decrease from there, this is $30mm of wholesale gross profit at mid-cycle. Down from $120mm they just did in Fy23 and way below the $110mm or so Street projects. Wholesale did $24mm of gross profit in fiscal 2018 and $26mm in fiscal 2019 for context, so this is a good sanity check. 

Retail operations will do around $40mm of normalized gross profit. JM Bullion is around $30mm as previously described and the smaller Goldline business should do around $10mm or so. 

Adding these together we get just $80mm of mid-cycle gross profit. SG&A was $77mm in FY2022 and $87mm in FY23 ($65mm in 2021 PF for JM Bullion). We think they need to cut SG&A here, so use $65mm for SG&A. That produces $15mm of EBITDA (and can add in $1mm or so of profit from their very small secured lending business if you want. Street is modeling $161mm EBITDA in FY24 and $174mm in FY25, so they will miss by 90% or so. 

At 10x EBITDA, this would be $150mm EV. They have $200mm of net debt, but we give them credit for $150mm working capital release of inventory, so $50mm of net debt PF for this. Produces a $100mm mkt cap or $4 per share in value. 

It’s no secret this business is temporarily over-earning if you pay attention to the right things. For example, JM Bullion got sold for LSD p/e multiple by the founders in early 2021, even before more supernormal profits. Insiders have been dumping. 

Catalyst

earnings miss next quarter and following quarters