Earnings Call Transcript - HYMC Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Hycroft Year-End 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tracey Thom. Thank you. Please go ahead.

Tracey Thom, Investor Relations

Thanks, April. Good day, everyone. Thank you for joining us today. We'll be discussing our year-end 2020 results and providing guidance for 2021, for which we filed our Form 10-K and issued a press release this morning. This press release can be found on our website, www.hycroftmining.com. Please keep an eye out for a new presentation to be posted in the coming days on our website as well. Please read the press release and listen to this call in conjunction with reviewing the Form 10-K, which contains additional disclosures. Some information provided during the call may include forward-looking statements that involve risks, uncertainties, and assumptions. Even if the risks or uncertainties have materialized or the assumptions proven correct, 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, uncertainties, and assumptions are set forth in more detail in our press releases and SEC filings, including the most recently filed 10-K. We assume no obligation and do not intend to update any such forward-looking statements. I'll now turn the call over to Diane Garrett, President and CEO.

Diane Garrett, President and CEO

Thank you, Tracey. And I want to welcome everybody to Hycroft Mining's 2020 year-end and 2021 outlook conference call. I'm Diane Garrett, President and CEO of Hycroft Mining. With me today in Winnemucca, Nevada is Jack Henris, our COO; Stan Rideout, our CFO; Mike Eiselein, our General Manager; and Tracey Thom, Investor Relations. On the phone, we have Jeff Saber, Finance and Treasurer. I'm going to ask Stan Rideout, our CFO, to review the highlights of our 2020 financials, followed by Mike Eiselein who will report on the metallurgical update and Jack Henris, who will report on our operating plans. Given the new team that we've assembled and that we've only been with the company for less than six months, I think it's important that our audience and our shareholders hear from each of the senior members on this particular call. We will then open the call for questions. I want to address the delay in our earnings release from late February that seemed to take people by surprise. It was not a desirable move, but the basis for that was our plan to issue the earnings release in advance of our 10-K filing so that we could take advantage of some of the virtual investor conferences in early March. We are a new public company reporting under the new SEC disclosure guidelines, and this is our first 10-K. Due to the work that needed to be completed, we decided not to let the investor marketing schedule drive our process. We thought it made more sense to wait and release all documents simultaneously because of the amount of work that we had to complete. As reflected in our share price, when the market sees delays, they tend to react negatively. However, if there's ever any material news, the company has an obligation to disclose it immediately, whether that news is positive or negative. We are always available for your calls and to answer any questions you may have. I always start with the team, because it's the people that make a mine and the company successful. I joined this company a little over six months ago and assembled the technical leadership team that we have at Hycroft today. I cannot say enough good things about the intellectual horsepower we've assembled here. This team has the precise experience and knowledge that is relevant for this project. They have come together quickly with a commitment to unlocking the full potential value at Hycroft for the benefit of all our stakeholders. This mineral resource we have is amazing, and we are all very excited to be working on it. We have seen material improvements in safety performance, operating performance, reduced downtime on our equipment, and significantly reduced costs by eliminating wasteful spending and realigning our team to reduce reliance on contractors. We started seeing the benefits of this in the first quarter of 2021 in terms of reduced spending, and we'll continue to manage our cash resources wisely as we go forward. Our cash to date will see us through this year to complete our development projects, and we'll discuss those items shortly. The prior team's ramp-up plan was not achievable at Hycroft. It was designed to mine sulfide stockpiled for six years that had turned acidic, creating issues when it was placed under oxidation. Accessing fresh and commercial-scale sulfide representative of what we will mine over the life of the mine is not possible until late 2021 or early 2022, as there is much transition material that must be mined to gain access to those sulfides. As mentioned in our third-quarter call, 2021 is and will be a conventional run-of-mine heap leach operation. We have plenty of room on existing leach pads for the 2021 mine plan, and there is no urgency to complete the larger leach pad until we need it for additional oxide material or have addressed the design changes required for the sulfides. We have encountered and stockpiled about 300,000 tons of sulfide material, which will be available for a two-stage oxidation and leach process once we complete additional work to ensure all necessary factors are accounted for to make it successful. I want to be very clear; we are not starting from ground zero or delaying any schedules, as we cannot access the commercial scale sulfide material until late this year or early next year anyway. Thus, we have the time to complete testing that has been lacking and ensure we can set ourselves up for commercial success. Our work to date has identified many things that were not known in the past and will help improve our sulfide oxidation process. We are seeing increases in gold recovery as a function of that. The review we've done of past work has revealed some important findings that had not previously been addressed by management. One finding is that forced air injection is critical for the oxidation process and needs to be designed into the new leach pad. While higher consumptions of soda ash will be required along with other reagents, we know agglomeration must be factored in as well. The good news is we have the time to do this work, which will be completed this year. We have just kicked off a $10 million drill program to begin this work. In a heap leach setting, it requires much planning because it is more difficult to control than in a mill setting. We need to ensure we understand how every domain behaves under the sulfide oxidation process. Overall, we believe Hycroft was previously viewed as merely a low-grade ore body. Still, our work has identified a number of higher-grade areas and intercepts that warrant attention. Our job is to determine the best economic potential for each of our ore types. The new technical leadership team at Hycroft has accomplished a lot. We're in the midst of doing extensive work on the operational front, and we're optimistic about maximizing gold recovery while developing the sulfide oxidation process. With that, I'm going to turn it over to Stan Rideout to walk us through the financials.

Stan Rideout, CFO

Thank you, Diane. Hycroft is operating at a pre-commercial scale in developing the oxidation leaching process for extracting gold and silver. While our site team is making progress, Hycroft has not yet generated positive net income or cash flows from operations due to low production volumes and high relative operating costs. With the new operating team, we are seeing a positive trend for gold sales. In 2020, gold sales were 24,892 ounces, contributing $47 million to total revenue, compared to $14 million in 2019. Our cash position at year-end was $56 million, an increase of approximately $50 million from the beginning of the year, which leaves us with $46 million in available cash considering our $10 million minimum cash balance required by our debt covenants. For 2021, gold production and sales volumes are projected at 45,000 to 55,000 ounces of gold from 400,000 to 450,000 ounces of silver, which includes monetizing some inventory in the first half of 2021. Our capital spend is forecast at $14 million to $18 million, including $10 million for the variability program. We are seeing improvements in controlling our spend and managing cash. However, costs are expected to exceed current metal prices. With that, I'll turn it over to Mike to highlight our value opportunities.

Mike Eiselein, General Manager

Thank you, Stan. Good morning, everyone. I'd like to provide some context to what we're working on in the background. Our new technical team has been working closely to get a better understanding of the AAO oxidation process. We want to ensure everyone is confident that the chemistry is understood and how oxidation drives recovery. We were disappointed in the lack of detail from previous testing and have been working to understand the variability of oxidation rates versus expected recovery. We've identified some operational issues that could impact recovery, which we are actively addressing. Looking deeper into the resource, we're starting to see a complexity that was undervalued. Our goal is to unlock the better value for the operation by understanding the distinct geometalurgical domains and how they'll behave. We see the potential for a multifaceted approach, which is common among complex refractory ore bodies. There are a lot of great opportunities that we are excited about as we advance our work. We have a thorough understanding of the chemistry involved and will take steps to fill those gaps. The AAO process is novel but proven, and we believe we can unlock the full potential here. I'm excited to see where it takes us. With that, I'll turn it over to Jack Henris.

Jack Henris, COO

Thanks, Mike. Good morning, everyone. I've started the mine optimization work by reviewing the block model. I'm pleased to report that the block model has validated nicely and the reconciliation looks good. However, we still see opportunities where the model is limited by data. There are many opportunities to convert inferred blocks to indicated blocks with minimal work. We've just shifted our focus into both short-term and long-term mine planning to create the most value for our shareholders while retaining flexibility as we mine through the ore body. I see a lot of opportunities and have been doing good work alongside a great team. We have a lot to do, but it’s all positive work ahead.

Diane Garrett, President and CEO

Okay. Operator, thank you, Jack. Thank you, Mike. Thank you, Stan. We can open the lines for questions.

Operator, Operator

Your first question is from Vincent Anderson with Stifel.

Vincent Anderson, Analyst

I was hoping to get into a bit more detail around the update to the pre-oxidation process. Was this new list of modifications in your press release in the context of getting to that 65% recovery rate from the original technical report? Or did you decide to address these parameters against a higher bar in terms of recovery?

Mike Eiselein, General Manager

That’s a good question. The detail we’ve found with previous work and the confirmational work is that there are different factors contributing to recovery. Some are physical and metallurgical aspects, while others relate to how the ores are processed. There were gaps in data from previous test work that we need to address. To ensure we fully understand the factors affecting the oxidation and recovery, we are looking to build back the fundamentals of the oxidation kinetics.

Diane Garrett, President and CEO

I would just add that throughout the mine's life, we're always working to improve recoveries. The feasibility study was based on seven samples, which is not enough for a robust database. Some gaps in previous tests have been identified, and we need to fill those to ensure we're ready to operate effectively.

Vincent Anderson, Analyst

Maybe less fair given what stage you're at, but what are you looking at aside from the physical configuration of the pads? What were some key differences between the ore that was tested previously and resulted in mid-80% recovery rates?

Diane Garrett, President and CEO

Those initial test pads were not representative of the material we'll be mining. Some came from stockpiles, and there were different crush sizes put on those pads as well. It’s essential that we understand how each geologic domain behaves so we don't start experimenting on the field before knowing what we will get out of it.

Mike Eiselein, General Manager

We want clarity on how everything will behave and understand the results of different tests. There is still much work to be done.

Vincent Anderson, Analyst

It does sound like there are quite a few tests to do. Will you be able to test the pre-oxidation process specifically on pads, or will it go back to a lab setting?

Mike Eiselein, General Manager

Initially, it will go back to the lab to ensure we understand the driving principles. Our goal is to execute a commercial test pad as soon as possible but we must have enough data to do so effectively.

Vincent Anderson, Analyst

Have you already had discussions with the prior lab? Are you going with a new one, and are there any significant changes you’re planning to make to the lab test procedure?

Mike Eiselein, General Manager

We’ve got a mix of internal and external work, and we are engaging different labs to help us. Our plans are to ensure effective execution of the necessary testing.

Diane Garrett, President and CEO

The work done in the past was internal, so we're using third-party labs like Hazen. We will begin with the lab for controlled testing before moving to the field as it’s essential to ensure success before full-scale implementation.

Operator, Operator

Next question is from Mick Daly with EBMR.

Mick Daly, Analyst

Diane and team, going forward, you should not report earnings at 7:30 in the morning and then have your conference call for 4.5, 5 hours later. Your West Coast company could report at 4:00 PM Eastern Time and then have the conference call afterward. Customers will sit around for 3 or 4 hours and just look at headline news about your company, which is one reason your stock is down today. I know this is your first quarter, but going forward, I think having a 4-hour window between the report and the conference call is a bad approach.

Diane Garrett, President and CEO

And your question.

Mick Daly, Analyst

The question is, are there rare earth minerals at your mine?

Mike Eiselein, General Manager

Just trace amounts, if any.

Diane Garrett, President and CEO

We're a gold company, focused on gold and silver.

Operator, Operator

We do have a question from Mike Niehuser with Scarsdale Equities.

Mike Niehuser, Analyst

Can you describe the forced oxidation injection process?

Mike Eiselein, General Manager

The forced air injection involves a network of piping and blowers that force air into the heap leach material. Oxygen drives the oxidation process necessary for recovery. While it adds some operating expense, it’s relatively low capital compared to the benefits gained.

Mike Niehuser, Analyst

Regarding variability in the geologic body, you indicated that many ore bodies have distinct differences affecting recovery. Is it correct that the complexity of this large project means it will take time to understand each area? Should we expect to see the true potential of the project towards late this year or early next year?

Mike Eiselein, General Manager

Yes, you’re correct. There are complexities and gaps in previous work that we are addressing. We are working diligently to fill those gaps and understand the potential.

Operator, Operator

We have a follow-up from Vincent Anderson with Stifel.

Vincent Anderson, Analyst

Can you give any updates on your capital spending plan for 2021 and projections into 2022?

Diane Garrett, President and CEO

We are focusing on drilling for geometallurgical work and variability tests this year. Our capital plans include refurbishment of the North Merrill Crowe plant, which is central to our operating capacity. Options include optimizing our fleet and possibly integrating a small mill into the operation depending on what we find. We have plenty of opportunities and will determine the best approach to maximize the value we can deliver.

Vincent Anderson, Analyst

What should we expect in gold production over the next few quarters?

Diane Garrett, President and CEO

This year, our production targets remain 45,000 to 65,000 ounces of gold and 400,000 to 450,000 ounces of silver. We’re working on optimizing mine plans to maximize cash flow while enhancing operational efficiency.

Operator, Operator

We have time for one last question.

Mike Niehuser, Analyst

Can you detail some of the cost savings that you've managed to implement since you joined the company?

Stan Rideout, CFO

We’ve made significant savings by eliminating high-cost contractors and implementing new operational efficiencies. We're also working on better management of reagent consumption and renegotiating contracts to improve pricing, all while reducing downtime. We're optimistic about the financial trajectory moving forward.

Mike Niehuser, Analyst

Are you aiming for breakeven cash flow without raising additional equity?

Stan Rideout, CFO

Our plan is to maintain our cash balance above the minimum required by our debt covenants while making necessary improvements to achieve breakeven cash flow. We believe that current cost controls and the operational improvements we are implementing will help us navigate this successfully.

Diane Garrett, President and CEO

We have successfully reduced spending and are positive about achieving cash flow breakeven. Our financial condition is robust, and we are committed to unlocking value at Hycroft. We appreciate the continued support from our stakeholders. Thank you for joining us today and please reach out if you have further questions.

Operator, Operator

This concludes the Hycroft year-end 2020 earnings call. Thank you for your participation. You may now disconnect.