HYCROFT MINING HOLDING CORP annual report, FY2020

Hycroft Mining Holding Corporation — Fiscal 2020 Form 10-K Summary

Business context and reporting period

Hycroft operates the wholly owned Hycroft open-pit gold and silver mine near Winnemucca, Nevada. Mining restarted in 2019, and 2020 was the first full year of post-restart operations. The filing covers the year ended December 31, 2020, with comparative results for 2019. The May 29, 2020 recapitalization with Mudrick Capital Acquisition Corporation was accounted for as a reverse recapitalization; historical financial statements represent the predecessor mining business.

2020 production: 27,392 ounces of gold and 178,836 ounces of silver.
2020 sales: 24,892 ounces of gold and 136,238 ounces of silver.
Proven and probable reserves at December 31, 2020: 11.9 million ounces of gold and 478.5 million ounces of silver.
The mine remains below the production levels contemplated by the technical report, which projected approximately 366,000 gold-equivalent ounces of average annual production over a 34-year mine life.

Financial performance and key metrics

Metric	2020	2019	Change
Revenue	$47.0 million	$13.7 million	+243%
Cost of sales	$109.6 million	$30.7 million	+257%
Gross loss	$62.6 million	$17.0 million	Higher loss
Operating loss	$89.4 million	$33.9 million	Higher loss
Net loss	$132.7 million	$98.9 million	Higher loss
Net loss per share	$3.81	$327.95	Not directly comparable due to recapitalization
Cash used in operating activities	$110.5 million	$59.8 million	Higher outflow
Cash used in investing activities	$31.1 million	$12.3 million	Higher outflow
Cash provided by financing activities	$188.7 million	$68.2 million	Higher inflow

Revenue increased primarily because 2020 included a full year of operations, compared with approximately eight months in 2019, and because realized prices improved. Average realized gold price increased to $1,779 per ounce from $1,512; silver increased to $20.30 per ounce from $17.41.

Gold revenue was $44.3 million and represented approximately 94% of total revenue; silver revenue was $2.8 million.
Production costs were $41.7 million, or $1,675 per ounce of gold sold, versus $11.0 million, or $1,285 per ounce, in 2019.
Mine site period costs were $47.1 million, reflecting downtime, inefficient operations, repairs, reagent usage and other costs that could not be capitalized into inventory.
The company wrote off 10,492 ounces of previously recoverable gold during 2020, recognizing a $17.9 million production-inventory write-down. No comparable metallurgical balancing write-down was recorded in the second half of 2020.
General and administrative expense increased to $21.1 million from $6.1 million, driven by transaction-related bonuses, executive separation costs, insurance and public-company legal and professional fees.
Approximate calculated margins were negative: gross margin of -133%, operating margin of -190% and net margin of -282%.

Balance sheet, debt and liquidity

Cash at December 31, 2020 was $56.4 million, compared with $6.2 million at December 31, 2019. Restricted cash was $39.7 million, primarily collateral for reclamation surety bonds.
Working capital was approximately $90.3 million; total assets were $232.6 million and total liabilities were $200.7 million.
Net debt consisted primarily of $61.9 million under the Sprott Credit Agreement and $84.8 million of Subordinated Notes, net of debt issuance costs; current debt was $5.1 million.
The Sprott Credit Agreement bears interest at a floating rate that was 8.5% at year-end, requires principal repayments beginning August 2021 and matures no later than May 31, 2025. The Subordinated Notes carry 10% payment-in-kind interest and mature December 1, 2025.
The company received approximately $83.1 million of net proceeds from an October 2020 public offering and had approximately $188.7 million of net financing cash inflows for the year.
Contractual obligations totaled approximately $657.6 million, including perpetual net smelter royalty estimates, reclamation and remediation obligations, debt principal and interest, leases and other commitments. These estimates depend on mine-plan and commodity-price assumptions.
The company was in compliance with debt covenants at December 31, 2020, including requirements to maintain at least $10 million of working capital and unrestricted cash.

Material changes versus the prior comparable period

Operations moved from a partial restart year in 2019 to a full operating year in 2020, substantially increasing mined tonnage, production, sales and revenue.
Despite higher revenue, costs increased faster than production and sales, resulting in a larger operating and net loss.
The recapitalization materially reduced legacy debt. Approximately $627.8 million of predecessor debt was repaid, exchanged or converted, leaving approximately $159.8 million of post-transaction debt at closing.
Equity increased to $31.9 million from a stockholders’ deficit of $439.3 million, primarily because of debt-for-equity exchanges and new equity financing.
Capital expenditures increased to $33.4 million, including approximately $29.3 million for a leach-pad expansion project. The project’s first-phase estimated cost increased to approximately $41.0 million from the prior estimate of $36.0 million.
Proven and probable reserves declined modestly from 12.0 million to 11.9 million gold ounces and from 481.1 million to 478.5 million silver ounces, primarily reflecting depletion from 2020 mining.

Guidance, outlook, management commentary and risks

Management’s 2021 plan emphasizes preserving cash and evaluating the proprietary two-stage heap oxidation and leach process rather than immediately ramping to the technical report’s contemplated production rates. The plan focuses on run-of-mine oxide and transitional ores, which require less crushing, rehandling and soda ash and have shorter recovery cycles.

2021 production outlook: approximately 45,000–55,000 ounces of gold and 400,000–450,000 ounces of silver.
Management expects 2021 production costs to exceed gold and silver revenue at current metal prices because of fixed costs and lower planned run-of-mine volumes.
Management does not expect positive operating cash flow for the full year 2021 and forecasts a likely need for additional financing within 12 months of the filing date.
A technical program of approximately $10.0 million is planned for drilling, metallurgical testing and mineralogical studies.
Leach-pad expansion construction and commissioning were deferred toward 2022, while management evaluates design changes and value-engineering opportunities.
Technical findings identified the potential need for forced-air injection, segregated solution flows, agglomeration, higher reagent consumption and additional variability testing. These factors may increase capital and operating costs or reduce recoveries.
Substantial doubt exists regarding the company’s ability to continue as a going concern without additional capital injections. The auditor included a going-concern emphasis, although the financial statements received an unqualified opinion.
Principal risks include volatile gold and silver prices, inability to raise capital, substantial debt service and royalty obligations, reliance on one mine, unproven commercial-scale sulfide processing, permitting and environmental requirements, COVID-19 disruptions, equipment and labor availability, slope stability and uncertain reserve recoveries.
Reclamation surety bonds totaled $59.9 million. Significant reclamation expenditures are currently not expected until 2047, with completion projected by 2065.

Most important facts for investors to verify

Whether the 2021 production targets and planned cash preservation measures are achieved without additional financing.
Actual recovery rates, reagent consumption, costs and scalability of the proprietary sulfide oxidation and heap-leach process.
Liquidity under the Sprott Credit Agreement, including the ability to meet approximately $9 million of estimated near-term cash payments and principal amortization beginning in 2021.
Progress, revised cost and completion timing for the leach-pad expansion, North Merrill-Crowe plant refurbishment and second refinery.
Whether production costs can decline sufficiently to eliminate recurring operating cash losses.
Changes in gold and silver prices relative to the reserve assumptions of $1,200 per ounce for gold and $16.50 per ounce for silver.
Potential dilution from approximately 56.6 million outstanding warrants and other equity awards as of year-end.
Updates to reserve estimates, metallurgical balancing and any further inventory write-downs.