Earnings Call Transcript - HYMC Q1 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Hycroft First Quarter 2021 Earnings Conference 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 today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Tracey Thom, Vice President, Investor Relations. Please go ahead.

Tracey Thom, Vice President, Investor Relations

Thank you so much. Good morning. Thanks everyone for joining us today. Today we will be discussing our first quarter 2021 results for which we filed our Form 10-Q with the Securities and Exchange Commission and issued a press release this morning. 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 the call may include forward-looking statements that involve risks, uncertainties, and assumptions.

Diane Garrett, President and CEO

Thank you, Tracey. Good morning, everybody, and thank you for participating in our call today. I'm Diane Garrett, President and CEO of Hycroft Mining, along with Tracy. Others that are on the call today 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 my initial remarks, I will then ask Stan Rideout to review the highlights of the first quarter financials, followed by Jack Henris who will provide a brief operational update. After that, we will open the call up for questions from our audience. First, I'd like to congratulate the entire Hycroft team for their dedication to improving our health and safety culture at Hycroft. When I joined last September, our total reportable incident frequency rate, otherwise known as TRIFR, was well above the industry average. We've worked diligently with a top-down approach to institute and improve our safety culture in addition to our corporate work culture overall. With additions to the operating team at the site and at the corporate level, combined with a motivated workforce, we saw the benefits of that work very quickly. By the end of 2020, we saw more than a 50% reduction in that TRIFR rate and a significant decline in the frequency and seriousness of incidents. As we all know, safety performance leads to fewer incidents, which leads to operational efficiencies and productivity. We've continued seeing improvements in the first quarter of this year with another decrease in our TRIFR rate, which now places us below the industry average of 1.22. I am extremely pleased to report that the trend continues, and as of April, our TRIFR rate is 0.93. In addition, operating performance is at the best level since the restart of operations in 2019.

Stan Rideout, Executive Vice President and CFO

Thank you, Diane, and good morning. During Q1 2021, the Hycroft mine continued to operate at a pre-commercial scale with operations focused on the run-of-mine ore. Top-line revenue was in line with our plan, and we're on track to meet full-year ounce sales targets. Sales in Q1 2021 were 9,830 ounces of gold, at an average realized price of $1,784 per ounce, and 57,236 ounces of silver, at an average realized price of $26.12 per ounce. In Q1 2021, ounces sold increased from the first quarter of 2020 by 50% for gold, and for silver, as more ore tons are out on the pads under leach compared to a year ago. While we are making progress and achieved our Q1 2021 sales plans, Hycroft has not been able to generate positive net income or positive cash flows due to the low gold equivalent ounce production and sales volumes in a high operating cost profile. At the end of the first quarter of 2021, we had $36.5 million in cash, which represents a $20 million decrease from December 31, 2020. The cash balance at that time was $56.4 million. Cash used in operations was $15 million and cash used in investing activities accounted for another $5 million as we wrapped up the spending on the leach pad. While there were no financing activities during Q1, we will begin making cash payments in the second quarter. Additionally, a recent development of meaningful interest to the operations is that we expect to start improving our cost metrics as we experienced the arrival of the new Caterpillar 994K wheel loader. Parts began arriving in March and commissioning is expected to be completed soon. This unit will eliminate an expensive rental loading unit, and we expect that it will improve our loading capabilities and cost structure. As always, we continue to focus on controlling our spending and managing our cash.

Jack Henris, Executive Vice President and COO

Thank you, Stan. Good morning, everyone. We've been working diligently on our mine planning optimization work. As Diane indicated, we've identified 50 million tons of oxide and transitional ores. Our goal is to get to free cash flow positive as quickly as possible. We began this work in January and we expect to complete it in Q3. As Stan indicated, our 994 parts began arriving in March. Commissioning is ongoing and we expect to complete the commissioning of that new 994K in May. It has replaced a high-cost rental loading unit and it will help reduce our unit loading costs as we continue to focus on lowering mining costs. Our variability drilling program is underway. We have a reverse circulation drill on site. Thirty-four pre-collar holes have been completed of a planned 98 holes total. Two core rigs continue to operate on site as well, and we've completed 12 core tails. The work today has been completed in the Camel area. We're currently drilling in South Brimstone, and our next move will be to North Brimstone. We expect that program to continue throughout the year with variability testing completed early next year. Lastly, we're following up on high-grade mineralization. This is an area we've identified to the south and adjacent to the Vortex pit. We'll be following up in these areas in Q3 and Q4. Additionally, we've already followed up on some inferred blocks adjacent to current and planned mining areas in the Camel area. The idea is to convert them from inferred to indicative blocks with some additional drilling. Our assays are pending as some of that work has already been completed. On that note, I'll turn it back over to Diane.

Diane Garrett, President and CEO

Thank you, Stan. Thank you, Jack. I appreciate that very much. I just want to say on behalf of the whole Hycroft team, we really appreciate the continued support of all of our shareholders as we continue to develop and unlock the value of this amazing asset. We know we're on the right path to achieving that goal, and we wouldn't be able to do that without your support. So, we really do appreciate it. It's a very busy year for us. Everything is on track, and we look forward to reporting back to the market once we have the final information on the heap leach run-of-mine plan, as well as the work that comes in from our variability test work for the two-state sulfide oxidation and any updates we may have on the mill. If necessary, we'll be updating our technical report as well. So, a lot is on the go, and we're very excited about what we see with Hycroft and where we're going for our shareholders this year.

Operator, Operator

Your first question comes from Vincent Anderson with Stifel. Your line is open. You may ask a question.

Vincent Anderson, Analyst

Yeah. Good morning. It sounds like the process group did a particularly nice job this quarter. Well done there. Can you help us bridge the financial impact of the 1Q mining disruptions versus those improvements you made to the solution management system, the Merrill-Crowe plant? Just kind of thinking as it relates to the cadence of operating cash flows to the balance of the year.

Mike Eiselein, Vice President and General Manager

Operationally, early in the year, we had issues with COVID and COVID management that were impacting the mine operations crews primarily. We also did some safety stand-downs to correct some issues there. However, those impacts were often not felt immediately, because of the way you stack a pad. We kind of knew that we wanted to set ourselves up for a strong first half performance this year and in the latter part of 2020. So, we did a lot of work on coordinating our ore placement and stacking on the pad. We also undertook the conversion of a contractor pad operations crew and self-performed. The result was much better coordination and operation of solution flows and application to the pad, which improved the ounce profile. In heap leach, obviously, solution flow is directly attributable to your ounce profile. The way we coordinated our stacking and got more material under leach quicker improved the ounce production, which translates to revenue relatively quickly on this path. That is what we're doing from an operational perspective.

Stan Rideout, Executive Vice President and CFO

Vincent, this is Stan.

Vincent Anderson, Analyst

Yeah, go ahead.

Stan Rideout, Executive Vice President and CFO

I would just add briefly. The challenge was that because of the COVID impacts, we weren't able to put, as Mike said, as much material on the leach pads. We're going to have to run the rental fleet or the larger size rental fleet a little longer to catch up due to missing personnel. So that cost came through, but we'll see some of those costs roll through in the second quarter as we start stacking ore again.

Vincent Anderson, Analyst

Okay. Thank you. That's a perfect clarification there. It seems like gold and silver production in the quarter ran pretty well ahead of ounces sold. Not too much of an impact on working capital or unit costs in aggregate. How should we think about that against the balance of some of those higher costs from the 1Q disruptions, just kind of flowing through the next couple of quarters?

Stan Rideout, Executive Vice President and CFO

Our expectation is that we'll be able to operate more efficiently and keep our costs in line, but they will be higher as we stack on the pad. Those ounces will come out probably more in the third quarter than being available to us in the second quarter. That's kind of the impact. I don't know if Mike or Jack want to add anything.

Mike Eiselein, Vice President and General Manager

No, that's spot on, Stan. That's exactly it. It’s kind of a delayed effect. One thing we're focusing on is picking up steam this quarter—consistency in getting material to the pad and working through our active mine plan to be as efficient as possible. We're optimizing our own fleet and reducing rental hours—anything that moves the needle on costs and efficiency is a huge effort underway right now in the mine to really make a deep dive and get that extra margin of savings.

Vincent Anderson, Analyst

Okay. You are in the final stages of planning out that pre-commercial phase of operations, as you mentioned in the report, but how should we think about capital expenditures this year; the balance between cash burn and investment in some of these more critical assets, like the refining facilities that you mentioned?

Stan Rideout, Executive Vice President and CFO

For the existing plan, in the guidance, there’s minimal capital. The 994K wheel loader was able to be leased, with very little money down, and then spread the payment over 48 months. It’s a really efficient capital investment. We're using the rental fleet, so the $10 million investment into the variability program is the biggest item, as well as the $5 million we spent in the first quarter, with the predominant amount on the new leach pad, which we're now deferring for future capital. For the base plan, we're in good shape. As we transition and work on the run-of-mine plan where we're focusing on capital at this point, we expect to finance a significant portion of that. Our game plan is to do it through capital leases with the operating equipment while also investing in the process facilities.

Vincent Anderson, Analyst

Okay. Do you have a preliminary budget for the processing facilities?

Diane Garrett, President and CEO

Go ahead, Stan. We're both jumping in.

Stan Rideout, Executive Vice President and CFO

I’m not trying to squeeze too much out of you, but just key bottleneck here.

Diane Garrett, President and CEO

We've talked in the past about the upgrades to the North Merrill-Crowe plant needing to happen in order for us to reach higher mining rates and stacking rates. We need to ensure that the plant can handle the solutions and the Brimstone plant. While we've made a lot of upgrades and addressed some issues there, it’s not going to be satisfactory for the larger scale operation. For the plant upgrades, I think we've addressed in the past, it’s about $3 million. We will also need to deploy the refinery and various components on site that need to be put in place, and that’s about an equal amount of money as well. For the larger scale operation as we go to higher tons, there will be a component for additional haul trucks, and Stan is working with several equipment manufacturers right now on capital leases. The work that Jack and his team are doing on the mining side with Forte, we’re finalizing the mine plans over the next couple of weeks. That will enable us to size the trucks and the number needed. The capital items and things we envision are to be delivered to the market. We’re just finalizing our operational stuff to ensure we have the right-sized equipment, but from the plant and funding, it’s not significant dollars. Anything you want to add, Stan or Jack or Mike, to any of that?

Stan Rideout, Executive Vice President and CFO

No, that was spot on.

Jack Henris, Executive Vice President and COO

No, I think it's spot on.

Vincent Anderson, Analyst

Thank you for that. Have you been able to begin additional lab testing on the sulfide ore pre-oxidation? Should we expect to get interim updates on those results or should we just stay tuned for the full technical report?

Mike Eiselein, Vice President and General Manager

Yes, we're just getting rolling with the drilling. Samples will start trickling in here relatively soon over the next couple of weeks. It's going to take a long time. This is a very large campaign, and we should start seeing some results probably at the end of the third quarter, early fourth, but the whole suite of testing really won't be completed until the end of Q1 next year. We should have some indication, though, as we progress, but it’s going to take several months.

Vincent Anderson, Analyst

So, it sounds like you wanted to do this holistically. There's no one specific area of the mine that you plan to prioritize for those test results?

Mike Eiselein, Vice President and General Manager

No, well, we’ve got a pretty detailed distribution of drill holes set up to well define all the geological domains and, more importantly, the geo-metallurgical domains. We just don’t have enough information one way or the other to determine what's more promising than the next. It’s going to take time to get these core samples in and run them through preliminary tests. Our team has done a great job in really diving down and putting a plan together for this variability testing that should answer all the questions we need to answer with—across this mine as we do this drilling.

Vincent Anderson, Analyst

Alright. Thank you very much, and best of luck for the rest of the year.

Diane Garrett, President and CEO

Great, thank you, Vincent.

Operator, Operator

No further questions at this time. I'll hand the call back to Diane Garrett.

Diane Garrett, President and CEO

Okay, thank you, operator. We have quite a few people on this call. I guess we've answered everybody's questions. But as always, you have our numbers, and you have our emails, please reach out to us. We’d be happy to answer any of your questions at any time. We're very excited about the progress we've made, appreciate the support from all of our shareholders. The team has done an outstanding job and we look forward to continuing this upward momentum as we develop this amazing asset. So with that, everyone have a great day. Thank you again for joining us, and we'll be in touch soon.

Operator, Operator

That concludes today's conference. Thank you all for joining. You may now disconnect.