Hycroft Mining Holding Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020. The filing was signed August 10, 2020. Hycroft operates its wholly owned Nevada gold and silver mine; the May 29, 2020 recapitalization with Mudrick Capital Acquisition Corporation was accounted for as a reverse recapitalization.
Business Context and Reporting Period
- The Hycroft Mine restarted open-pit operations in April 2019 and continued ramping mining, crushing and leaching activities during 2020.
- Gold and silver sales comprise 100% of operating revenue. Approximately 95.1% of first-half 2020 revenue came from one customer.
- At June 30, 2020, the Company had 50,160,042 common shares outstanding and 47,011,622 warrants outstanding.
Financial Performance and Key Metrics
| U.S. dollars in thousands, except per-share data | Q2 2020 | Q2 2019 | 6M 2020 | 6M 2019 |
|---|
| Revenue | $7,636 | $— | $18,760 | $— |
| Total cost of sales | $31,863 | $— | $55,731 | $— |
| Gross loss | $24,227 | Not meaningful | $36,971 | Not meaningful |
| Approximate gross margin | (317.2%) | Not meaningful | (197.1%) | Not meaningful |
| Loss from operations | $(34,753) | $(6,131) | $(49,596) | $(14,997) |
| Net loss | $(49,790) | $(21,947) | $(84,408) | $(45,387) |
| Basic and diluted loss per share | $(2.71) | $(73.21) | $(9.02) | $(151.80) |
- Q2 revenue consisted of $7.284 million of gold sales and $0.352 million of silver sales. Gold ounces sold were 4,237 at an average realized price of $1,719 per ounce; silver ounces sold were 21,331 at $16.49 per ounce.
- First-half production was 12,342 ounces of gold and 73,717 ounces of silver; sales were 10,797 ounces of gold and 70,703 ounces of silver.
- Q2 cost of sales included $11.996 million of mine-site period costs, $10.959 million of production-inventory write-downs, and $8.034 million of production and depreciation costs. Six-month write-downs totaled $17.924 million.
- General and administrative expense increased to $10.432 million in Q2 from $1.214 million in the prior-year quarter, primarily due to transaction-related bonus expense, directors-and-officers insurance, and higher legal and professional fees.
- Net interest expense was $15.072 million in Q2 and $34.959 million for the first six months. Much of the interest expense was non-cash.
Cash Flow, Liquidity, Debt and Capital Resources
| U.S. dollars in thousands | June 30, 2020 | December 31, 2019 |
|---|
| Cash | $47,293 | $6,220 |
| Total cash and restricted cash | $86,924 | $48,967 |
| Current assets | $89,970 | $38,750 |
| Total liabilities | $195,404 | $573,888 |
| Debt, net | $139,044 | $553,965 current debt |
| Stockholders’ deficit | $(2,723) | $(439,251) |
- Six-month operating cash flow was $(57.642) million, investing cash flow was $(11.704) million, and financing cash flow was $107.303 million.
- Financing included $75.963 million from a private placement, $68.600 million from the Sprott Credit Agreement, $30.000 million from the Sprott royalty transaction, $25.000 million from a forward purchase contract and $10.419 million from the SPAC transaction.
- Net debt consisted of $63.114 million under the Sprott Credit Agreement and $80.711 million of Subordinated Notes, net of debt issuance costs. The Sprott facility had an 8.5% interest rate at June 30, 2020 and matures no later than May 31, 2025. The Subordinated Notes bear 10% payment-in-kind interest and mature December 1, 2025.
- The Company was in compliance with debt covenants at June 30, 2020, including the requirement to maintain at least $10 million of working capital and unrestricted cash. Management stated that it did not believe the final $40 million Sprott tranche was currently available because production milestones and other conditions had not been met.
- Phase-one leach-pad expansion spending totaled $9.7 million through June 30, 2020. Total phase-one spending is expected to approximate $36 million, with completion targeted for the fourth quarter of 2020 and final payments potentially extending into the first quarter of 2021.
Material Changes Versus the Prior Comparable Period
- The Company generated revenue in 2020 following the 2019 mine restart, whereas no revenue was recorded in the comparable 2019 periods.
- Six-month net loss increased to $84.4 million from $45.4 million, and operating cash use increased to $57.6 million from $24.1 million.
- Production and operating scale increased, but execution problems caused high costs, recurring downtime and lower-than-planned recoveries.
- Metallurgical balancing resulted in the write-off of 6,512 gold ounces in Q2 and 10,492 ounces year to date. The filing attributes the write-offs primarily to mismanagement of the oxidation process and failure to adjust process variables for ore-type changes.
- The recapitalization substantially reduced reported debt through repayment, exchanges and conversions, while increasing equity and adding new Sprott debt and royalty obligations.
- Restricted cash declined to $39.631 million, primarily reflecting the release of $3.270 million associated with repayment of the former First Lien Agreement.
Guidance, Outlook, Commentary and Risks
- Management expects second-half 2020 crushing and production levels to be consistent with or above first-half levels, but does not forecast positive operating cash flow for the second half of 2020.
- Management expects material increases in mining, crushing and production in 2021 and beyond if infrastructure is successfully expanded and operated. Future ore placement on the new leach pad is expected to begin in the fourth quarter of 2020.
- The Company disclosed substantial doubt about its ability to continue as a going concern. Management projects insufficient cash to meet obligations and fund the planned mine ramp-up without additional capital.
- The Company is seeking additional debt and/or equity financing, but has no commitment from any party, no expected financing timetable and no assurance that financing will be available on acceptable terms. A non-binding support letter was received from the two largest stakeholders.
- Key operational risks include heap-leaching and oxidation performance, process mismanagement, equipment failures, contractor and staffing shortages, elevated maintenance and reagent costs, and dependence on a single mine.
- COVID-19 could cause a mine-wide shutdown if an outbreak occurs at the site. The Company had not experienced material supply-chain disruption as of the filing date.
- Additional obligations include approximately $10.1 million of remaining mobile-equipment lease payments, a $1.8 million consignment-inventory purchase obligation, estimated future net smelter royalty payments of $209.8 million under the current mine plan, and $62.2 million of estimated remediation and reclamation expenditures.
- Former CEO Randy Buffington departed effective July 1, 2020. Stephen Jones became interim CEO while the Board searches for a permanent CEO. Buffington is entitled to 24 months of salary continuation, a $1.3 million restricted-stock-unit award and $25,000 per month under a 24-month consulting agreement.
Most Important Facts for Investors to Verify
- Whether the Company secures additional financing before liquidity becomes insufficient and whether the financing complies with existing debt covenants.
- Actual cash burn, unrestricted cash, working capital and covenant compliance in subsequent filings.
- Whether leach-pad construction is completed on schedule and within the approximately $36 million phase-one budget.
- Whether metallurgical recovery improves and further inventory write-downs are avoided.
- Actual production, sales volumes, realized metal prices and cash cost trends compared with management’s second-half outlook.
- The effect of the 47.0 million outstanding warrants and other equity awards on future dilution.
- Progress in the CEO search and the financial impact of executive transition obligations.
