Hycroft Mining Holding Corp Q2 FY2021 Earnings Call

Good day and welcome to the Hycroft Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tracey Thom, Vice President. Please go ahead, ma'am.

Thank you. And thank you, everyone for joining us this morning. Today, we'll be discussing our second quarter 2021 results for which we filed our form 10-Q with the Securities and Exchange Commission and issued a press release. The press release can be found on our website at www.hycroftmining.com. Please read the press release and listen to this call in conjunction with reviewing the Form 10-Q which contains additional disclosures. Also, please note that some information provided during this call may include forward-looking statements that involve risks, uncertainties and assumptions. Even if these risks or uncertainties have materialized or the assumptions prove incorrect, these results may differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical facts are statements that could be deemed forward-looking. A discussion of some of the risks and uncertainties and assumptions are set forth in more detail in our press releases and SEC filings, including the most recently filed 10-Q and 10-K. We assume no obligation and do not intend to update such forward-looking statements. I'll now turn the call over to Diane Garrett, President and CEO.

Thank you, Tracey. Good morning, everyone. And thank you for participating today on our call to discuss our second quarter 2021 achievements. Hi, I'm Diane Garrett, President and CEO of Hycroft Mining. And along with me today in Winnemucca, Nevada is Tracey, who just spoke with you. Others on the call are; Jack Henris, our Executive Vice President and Chief Operating Officer; Stan Rideout, our Executive Vice President and Chief Financial Officer; and Mike Eiselein, our Vice President and General Manager. After I make some initial remarks, I'm going to ask Stan Rideout to review the highlights of our first quarter financials, followed by Jack, who's going to provide a brief operational update, and then we'll be opening the call up for questions. As we mentioned in some of our prior calls, 2021 is a defining year for Hycroft as we complete a lot of the necessary work to unlock the value of the Hycroft Mine, which as a reminder, is the largest silver resource in North America with over 700 million ounces, and it's the second largest gold resource in the US with 21 million ounces of gold. We still have plenty of open areas for resource expansion, including the oxide and sulfide material. It truly is a world-class asset with hundreds of millions of dollars of infrastructure on the site; we have an operational mine, and we are fully permitted in one of the very best jurisdictions for mining, not just for heap leach operation. Should we decide that it makes sense, we're also permitted for a mill operation also. It would take many years and a lot of money to duplicate what we have here at the site and to bring any mine to our current state of operations. So we're very proud of the assets that we have. This world-class resource, and what this team is doing to unlock the value at Hycroft. Our stock price and our opinion in no way reflects the value of this asset. And by the way, many of us in management and on the board are very engaged shareholders also, and we are committed to realizing the value that is inherent in this asset. We can certainly appreciate the disappointment when we communicated that there was more work required to do at Hycroft before we reach commercial scale sulfide operations. But we hope that by having identified the gaps in the prior works, and also the necessary components that are critical to commercial success, that it in some way provides a level of comfort that this team is extremely capable and highly qualified in operational execution, and then our approach to minimizing risk, which will all translate into shareholder value. Before I recap the plans and visions for the remainder of this year and beyond, I want to address a couple of other important key areas. We've had a lot of positive things happening here at Hycroft. And while they don't particularly make for newsworthy announcements on an interim basis, please know that this team is working diligently on many fronts and we're delivering very good results. We still have a lot of work to do over the rest of this year. But we're on schedule and we're on budget for delivering that work. I'm extremely proud of the positive changes and accomplishments that we've made over the past year. A lot of the initiatives that we've put into place in 2020 that we spoke about in the past. We're starting to see the results of all of that great work. We've made remarkable improvements on our safety with an 83% decrease in the total reportable incident frequency rates for what we refer to as TRIFR, over the last 12 months. We have gone from a 3.8 triple rating to 0.62 and well below industry average. And I was just informed yesterday at the site, that at the end of July, our TRIFR decreased again to 0.53. So remarkable achievement by the team. We've also seen a dramatic improvement in the culture and morale on site. We recently conducted an employee engagement survey, which revealed from our employees' perspective that our company culture has transformed over this past year into one of teamwork and transparency, the collaboration on operational improvements, a commitment towards excellence in all areas, and a striving focus on keeping our employees safe every day. It was commented by many that they feel valued as an employee of Hycroft and that they want to be part of the success of Hycroft. They're recommending their friends that Hycroft is a great place to work. The improved engagement of this entire team is reflected in the operating performance numbers that we're seeing today. In addition to our dramatically improved safety record, we're also driving performance for operating more efficiently, more cost-effectively, and we're reducing costs in both mining and processing. I want to thank everybody at Hycroft for the role that you have played in getting us to this point; it's really been a miraculous turnaround. The operations continue to hit their production targets. This is the first time since the restart of operations that the Hycroft Mine has not only met its targets but has done so for 30 consecutive quarters. As I mentioned, we've driven costs down in both mining and processing areas, made a lot of improvements to equipment efficiency and utilization. That in and of itself is very remarkable given the age of our fleet. We've also improved the overall plant efficiency. Moreover, since this team has been put into place, we've had no write-downs of mineral inventory from the leach pads. I'm very pleased to say that the initiatives undertaken in 2020 are starting to come to fruition throughout the organization and the operation. So now let's talk about some of the activities that we've been conducting this year, which are going to be completed by year-end, followed by an internal review of that work with the team, and then we'll be presenting those results to the market during the first quarter of '22. The variability drilling and met program is well underway; it's on budget, it's on schedule, samples are being sent to the lab, analyses are ongoing, we're doing a suite of metallurgical tests of each domain that we've been drilling and submitting for the lab. This work is important not just for the two-stage sulfide oxidation and leach process but any milling process or any process that we would be implementing on a commercial scale here at Hycroft. We have initiated column tests on site, and we are using the sulfide material that we've been mining this year. This is going to give us a clear picture of oxidation and chemistry management so that we can mimic the precise conditions of the commercial application prior to spending considerable time and money on testing. We've conducted a range of internal scoping analyses on a variety of processing methods. The result of the work that we've been doing in that regard indicates that, one, with respect to the novel sulfide oxidation and leach process. We have identified and also previously reported to the market several items that are critical to any successful commercial application of this process, which will likely lead us to update our capital costs and operating costs as they're better defined. You'll recall that some of those items include the need for an agglomeration circuit, forced air injection circuit, and through some of the work that we've been doing this year, we now know that the best option for handling multi-solutions on a multi-lift heap will be on/off pads. This is a critical component to the process, and we'll need to determine what we will require in terms of material handling components and, of course, the size of the on/off pads. With respect to a milling process, we have completed scoping level economics and internal evaluations on multiple milling process options at various throughput rates with associated mine plans. There was a feasibility study on the AAO mill process in 2014 for the Hycroft Mine and then subsequent to that, there was a feasibility study in 2016 based on smaller tonnage throughput, and also reduced capital costs. At the time of the 2016 feasibility study, the company was private, so that report was not filed or disclosed publicly. We have reviewed the past technical work with Ausenco Engineering and the very successful 10 ton per day mill demonstration plant that followed during the 2016 feasibility study. Based on that work that our team has done in connection with Ausenco Engineering, we have determined that we should advance to a feasibility study for the mill AAO process, and we've engaged Ausenco Engineering to complete this work. This doesn't negate any other process that we're working on; we've just identified a lot of areas within this process that it's important to complete a feasibility study on it. We will also be utilizing independent mining consultants, many of you know them as IMC; they're going to be developing the mine planning as a subcontractor for Ausenco. We expect to have the feasibility completed in the first quarter of '22. In addition to that, we plan to kick off a prefeasibility study very soon on the pressure oxidation process. This is a process that would yield significantly higher recoveries for both gold and silver than any of the processes that we've studied to date. Previous test work indicates that Hycroft ores performed very well when subjected to alkaline pressure oxidation conditions. This work is also going to be completed by year-end with results expected to be announced in the first quarter of '22. We're in the process of receiving bids from engineering firms and expect to make that selection shortly. So a lot of work to do on the technical studies and the work for the two-stage process for the AAO mill feasibility and for the pressure oxidation prefeasibility, all of which will be completed by year-end, reviewed by our team, and available to disclose to the market in the first quarter of '22. While we've been doing all of that work, we've also been working on developing a run-of-mine plan for 2022 and beyond with the idea of bridging the run-of-mine operations to commercial sulfide production while we optimize our cash. The run-of-mine plan has an important secondary objective of removing the run-of-mine oxide and transition material in a manner to expose the commercial scale sulfide. You'll recall that we have around 40 million tons of material that needs to be moved before we can get into commercial scale sulfide operations. This work is ongoing on the mine plan and we expect to have it completed by the end of the year and coincide with the results of our other technical reports. Now, let's talk about cash because that is always on everybody's mind. We know that there's a lot of speculation regarding the timing of any potential financing. First of all, we have a lot of work to do for the remainder of this year and in the first quarter of next year. That work is going to give us a lot of valuable and necessary information that we're going to use to help us determine what our mine plans are going to be and any capital aids associated with those specific mine plans. With the improvements that we've made in the efficiency of our mining fleet, our plans are to continue utilizing the current fleet until all of our technical work is completed. We will continue to drive the unit cost lower to reduce the negative cash burn until we have clarity on what our commercial operation plan will be and how we are going to implement it. Until we know that, until the mine plan is finalized for the most suitable process or combination of processes, we don't know what size haul trucks we're going to need or how many we're going to need and what's going to be required specifically for the type of sulfide operation that we're going to be presenting. We do have a plan to recommission the North Merrill-Crowe plant and do a phased installation commissioning of the new refinery there. We spoke to you about that upgrade in the past. We've also spent considerable effort to mechanically and operationally improve the existing Brimstone Merrill-Crowe plant facility, and the plant flows and recoveries that we're seeing from Brimstone are the highest site we've experienced in many years. We also filed the Form S-3 in July that not only allows us to incorporate S-1 filings that I referenced, but it also provides for Universal Shelf, which provides flexibility for the company. A shelf is proof for any company including Hycroft as we continue to monitor and evaluate opportunities to fund the company once we have clarity on the mine plan and processing methods. However, we currently do not have any agreements or understandings to issue any securities under the shelf. At current prices and with the current plans we have in utilizing our own equipment, we expect to remain comfortably above our $10 million cash threshold, which is required under our debt covenants into the second quarter of 2022. This is going to help us and enable us to complete the necessary technical work, generate mine plans, finalize the plant flow sheet, and then be able to assess any capital requirements. I'm extremely pleased with this team and what we've been able to achieve over the past 9 to 12 months. We have a very full year with technical studies to be completed on three different processes. We will continue to update the market on developments as they arise, and we look forward to providing an update on the results of this work, and also to providing a coherent executable mine plan with the successful developments of the commercial sulfides on the operation. With that, I'll turn it over to Stan Rideout after I clear my throat.

Thank you, Diane, and good morning. In terms of ounces sold, revenue, and cash preservation, our second quarter 2021 was our best quarter since we restarted pre-commercial scale operations in the second quarter of 2019. Since the new management and operating team came on board in the second half of 2020, the operational improvements that have been implemented, including the excellent management of our run-of-mine leach pads, have resulted in no ounces written off since the second quarter of 2020, making a positive impact on our financial performance. Second quarter '21 sales of 17,060 gold ounces and 189,766 silver ounces generated $36 million of revenue, nearly double the first quarter of 2021, and nearly five times the second quarter of a year ago. This was due mostly to the higher sales volume from increased ore tonnages on the leach pad. The second quarter 2021 average realized gold price of $1,811 gross per ounce was 5% higher than the same quarter last year, and year-to-date 2021 average realized gold price per ounce was about 10% higher than the comparable six months of 2020. The byproduct benefit from silver was significant during the second quarter of 2021, as we were able to sell some previously produced met bars containing 55,000 silver ounces. In addition to higher silver sales volumes, the second quarter 2021 average realized silver price of $26.88 per ounce was 62% higher than the second quarter of a year ago, and year-to-date 2021 average realized silver price was $26.70 per ounce, which was 64% higher than the same period a year ago. In the second quarter of 2021, we narrowed our loss from operations to $3.8 million, and our net loss was $8.4 million after other net expenses, which was mainly interest expense. While our cash burn was reduced in the second quarter of 2021 due to our continuing pre-commercial scale volumes and an associated higher relative operating cost profile, we've not been able to generate positive net income or positive cash flows from our operating activities. At the end of the second quarter of 2021, we had $30 million in unrestricted cash, which represents a $26 million decrease from the beginning of the year. Year-to-date, 2021 cash used in operations was $21 million, and cash used in investing activities accounted for another $9 million, noting the significant decrease in the second quarter. We also began making cash payments on the Sprott Credit Agreement in the second quarter of 2021 of approximately $600,000. Included in our $30 million of unrestricted cash, there's approximately $5 million that we were able to free up from restricted cash as we replaced existing surety bonds with new surety bonds that required less cash collateral. While we complete the necessary work required for commercial scale sulfide operations, we will continue to focus on managing our cash through operational improvements and appropriate mining plans that keep us compliant with our debt covenants.

Thank you, Stan. Good morning, everyone. In all of my years in the mining industry, I've not seen such a marked improvement in safety, culture, operational performance, and process plant efficiency in less than a year. This team deserves to be congratulated. We will continue to drive our costs down and enhance our operating performance. The technical team has been working on developing an oxide and transition ROM plan for 2022 and beyond. The ultimate ROM plan will be designed to coincide with the start of commercial scale operations, which of course, will be determined following the ongoing technical studies with the goal of improving our cash position and keeping the outstanding operating team in place. Metallurgical drilling continued through the second quarter of 2021, with 31 holes drilled to date, totaling approximately 31,000 feet. This drill program, as Diane already noted, is to complete the necessary variability and metallurgical work on geological domains that were not tested in the past, but they represent a significant portion of the life of mine production. One thing I'm particularly excited about is that, throughout our mine planning work and metallurgical drilling, we've identified a number of robust targets, including Hades, East Fault, Camel South, and South of Vortex. These areas have both oxide and sulfide targets, and South Vortex, in particular, is a very high-grade silver deposit, which remains open to the south. We have verified the prior drilling in that area and will soon be including that in our corporate presentation on our website. While we currently remain focused on commercial scale sulfide operations, we look forward to exploring the untapped potential at Hycroft. As a reminder, there's been no exploration drilling at Hycroft for more than a decade. We have a lot of work to do for the remainder of this year, and I can confidently say that we have a team passionate about driving the future success of Hycroft. Back to you, Diane.

Thank you, Jack. Appreciate it. Thank you, Stan, also. Before we open it up for questions, I just want to say that we truly appreciate the support and patience of all of our shareholders as we are hard at work conducting all necessary work to develop the most economic long-term plan for Hycroft. This team is very passionate and very excited about what we're doing here and the opportunity to work on these world-class assets. So it's in good hands with the team. We look forward to delivering a plan to you soon early in the New Year that helps provide the best value for all of our shareholders. So with that, I will turn it back to Tracey so we can open up for questions.

Please open the call for Q&A.

Thank you. We'll take our first question from Vincent Anderson with Stifel. Please go ahead.

Thanks. Good morning. Nice job again this quarter. So, you know, I think the focus here to start things off would certainly be around AAO. You know, doing a little bit of background reading the name is unique. But does this really differ significantly from other flotation processes?

Yeah, this is Mike Eiselein. On the front end, no, it's a pretty straightforward grind flotation circuit. The oxidation piece, you know, the chemistry works; it's just a matter of, you know, designing a reactor system that gets the same retention and oxidation performance under atmospheric alkaline conditions versus a little bit higher pressure temperature in an autoclave.

Okay, that checks out. And then in that case, the one thing I'm still trying to figure out is, you know, would this be utilizing your existing grind capacity? Or does this need to build integrated grinding?

Not so the DD pad that we own the mills, we own the capital equipment on the front end, which is a huge piece. They're long lead, high capital items that are still sitting in the warehouse. The rest of the circuit and the plant obviously have a few parts and pieces, but the hard part is already sitting on the ground.

Right. And so I guess the question then becomes, you know, this isn't - maybe this isn't fair, but your assessment of maybe why this wasn't pursued more aggressively by the previous management prior to all your involvement in the company; why was this maybe not revisited in more detail in the original mine plan?

So I think it comes down to the price of gold and capital. In those previous environments, you're looking at a $1,400 gold; a significant capital was needed for circuit design, which I think was a little bloated and lacked the efficiency. It was marginal with the grade profile that currently exists. There are a lot of ways to further optimize that process. Knowing that we have the milling equipment on the ground, there's a lot we can do to be more efficient with the back end.

I would just add on to what Mike said, and he's absolutely correct. We weren't there at the time, so we don't know. However, as we all know, in the 2015 to '16 timeframes, the market was closer to $1,200 gold and looking fairly weak at the time. There was a sense that they could take that chemistry and apply it to heap leach setting to get into operations quickly at a lower capital cost. Our view is that the ore body will dictate the best way to process this material. We think there's some optimization to be looked at in the prior work that was done. In fact, we're doing it now with Mike and his team at Ausenco Engineering. We definitely think it's time to look at this again.

So perfect, Diane. I really appreciate the candor on that. If I think about, you know, again, not to get ahead of whatever the results of the feasibility report are, but in your mind, is this something that bridges you and gives you a little bit more time to work on the traditional pad leach and then becomes the supplementary process thereafter, or do you think that you could get this to scale efficiently? I'm just trying to think about how this could look in the overall mine plan if the feasibility comes back positive?

Yeah, I think you hit the nail on the head. Most of the operations in Northern Nevada here are complex ore bodies, either refractory and double refractory ore bodies. It requires a variety of different process applications to extract that value. This is really no different. So, yeah, this provides time to fine-tune the performance of the different metallurgical domains and tailor the appropriate processing and mining approach to that mineralogy. You got to get that right; you got to take the time to get that right or it's just not going to function as needed. It’s likely that it will be a hybrid operation.

When we consider these silver price environments, we want to capture as much recovery of that gold and silver as we can. We see that in the milling scenario; the ore generates much more value in that scenario than it does in a heap leach setting. To Mike's point, this is very likely going to look like a hybrid operation. The work we're doing now and testing each of these metallurgical geologic domains will help us understand which one generates the best economic value and best recoveries under which process.

Then I guess, you know, one conversation we haven't had to have, which is great, has been permitting, but could you walk us through what permits would be in place and what would be needed under AAO ore pox?

The another huge benefit is the bulk of the permitting for the process is completed, including tails down. The locations for the process are also permitted. In this feasibility study, we're looking at those and then putting a plan in place to, you know, tighten those up and get them ready to go in parallel with advancing the study work on a different plane. The previous work we've done at Hycroft on the permitting piece is a huge time-saver that will benefit the work we're doing now. Autoclaving was never looked at or permitted previously, but I don't see that being a heavy lift. It's a hydrometallurgical process and is known for the regulators in several other operations in Northern Nevada, so I don't see it being a huge obstacle.

Great. I'll give you a break. I'm just going to ask a couple of quick questions on cash flow. I really appreciate it. I think I missed the line you discussed, your covenants, minimum cash balance, and how you felt about that? Could I just get that again?

Sure. We have two financial debt covenants that we focus on, both on a $10 million threshold. One is absolute cash, and the other is net current assets, which requires that we take a haircut of 50% on our leach pad inventory in the calculation. We feel very good about it; the team is aware of our covenants, and all of our plans are targeted toward keeping us comfortably above those threshold levels.

Okay, excellent. That kind of informs the follow-up question, which is just, you know, everybody is focused on the mine plan, but if we think about the next 12 months in broad terms, it sounds like you're comfortable with those covenants based on the run-of-mine plan. As we get into 2022, are you comfortable continuing to operate at run-of-mine and feel comfortable producing positive operating cash flows before we consider any kind of funding for the go-forward mine plan?

Yeah, that is exactly our plan; to maximize cash generation from the run-of-mine. As Jack and all of us have commented, a component of that is to continue driving down costs. I truly believe the team is up to the task. You've seen the progress, and they're getting more creative by the day. We're optimistic; that's the plan. However, we'll reassess later in the year as we gather more information. For now, the plan is to get as deep into 2022, by late in the second quarter with the existing cash and plans.

Perfect. Just one last one from me. You maintain guidance, which is certainly prudent, but you have been doing quite well year-to-date. Is there anything exceptional about the first half of the year that you want to make us aware of in terms of the timing of what kind of grades are on the pads right now or labor constraints, being cautious about the back half of the year? What keeps you from hitting the high end of that range?

Pad management is always a good process; a person doesn't really reveal all his tricks. Much of it is timing; what we're seeing is the result of that process group maximizing and squeezing every ounce out of that pad and hitting - advancing the leach front just as soon as they get it released from the mine and get it ripped. Our flows to the pad are the highest that I've seen since I've been here, and the plant recovery has been performing extremely well. Those are all positives affecting our bottom line. The rest of it is just how we manage inventory on and off the pad throughout the rest of the year. We have a few tricks up our sleeves; we're pulling some leverage now on side slopes and re-leaching some old areas, even re-leaching roads and access. These are all tricks of the trade helping our ounce profile.

All right, perfect. Well, thanks, everyone on the call for all the color, and best of luck on the rest of the year.

Thanks, Vincent. Thank you, everybody. We look forward to reporting back to you in the very near future.

This concludes today's call. Thank you for your participation. You may now disconnect.