Hycroft Mining Holding Corporation — Q3 2021 Form 10-Q Summary
Business context and reporting period
Hycroft operates the wholly owned Hycroft gold and silver mine in Nevada. The filing covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. The company remained in a pre-commercial-scale run-of-mine operation and was evaluating commercial sulfide processing alternatives.
On November 10, 2021, management announced that it would discontinue pre-commercial-scale ROM mining because of reagent and consumable cost pressures and the timeline for completing technical studies. The company planned to continue processing ore on existing leach pads while focusing on an Acid POX milling study for sulfide ore.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $31.7 million | $12.3 million | $86.7 million | $31.1 million |
| Cost of sales | $43.7 million | $25.8 million | $106.6 million | $81.5 million |
| Gross profit/(loss) | $(12.0) million | $(13.5) million | $(19.9) million | $(50.5) million |
| Gross margin | (37.8%) | (109.7%) | (22.9%) | (162.6%) |
| Operating loss | $(18.7) million | $(24.6) million | $(37.2) million | $(74.2) million |
| Net loss | $(23.2) million | $(32.3) million | $(41.3) million | $(117.6) million |
| Loss per share | $(0.39) | $(0.64) | $(0.69) | $(5.10) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(27.1) million | $(85.2) million |
Q3 gold sales were 16,354 ounces at an average realized price of $1,781 per ounce; silver sales were 105,478 ounces at $24.15 per ounce. For the first nine months, gold sales were 43,244 ounces at $1,794 per ounce and silver sales were 352,480 ounces at $25.94 per ounce.
Q3 production was 14,831 ounces of gold and 91,437 ounces of silver. Nine-month production was 45,532 ounces of gold and 320,812 ounces of silver. Management stated that Q3 production increased 240% for gold and 295% for silver versus Q3 2020.
Production costs were $30.6 million in Q3 and $77.9 million for the nine months. Mine site period costs were $11.5 million and $24.4 million, respectively, reflecting inefficient operations, downtime, repair costs, reagent consumption and an unfavorable cost structure. No production inventory write-down was recorded in 2021, compared with a $17.9 million write-down in the first nine months of 2020.
Balance sheet, debt and liquidity
- Cash was $19.8 million at September 30, 2021, compared with $56.4 million at December 31, 2020.
- Cash plus restricted cash was $54.0 million, including $34.3 million of restricted cash securing reclamation and other surety bonds.
- Working capital was approximately $41.1 million.
- Total debt was $158.9 million, consisting primarily of the Sprott Credit Agreement and Subordinated Notes; the balance sheet also reported $4.1 million of warrant liabilities.
- Scheduled debt payments included approximately $11.0 million of Sprott principal due within twelve months, in addition to $2.2 million of Additional Interest.
- Total liabilities were $216.9 million, and stockholders’ equity was negative $21.5 million.
- Contractual obligations totaled approximately $712.2 million, including debt principal, royalties, reclamation and remediation, interest, leases and other commitments.
The company used $27.1 million in operating cash flow and $11.9 million in investing cash flow during the first nine months. Financing activities used $3.0 million, primarily for debt repayments. Management stated that the company does not expect to generate net positive cash flow for the foreseeable future and will require additional funding.
Material changes versus the prior comparable period
- Revenue increased 157% in Q3 and 179% for the first nine months, primarily from higher gold and silver sales volumes and greater ore under leach.
- Net loss improved by $9.1 million in Q3 and $76.3 million for the first nine months, mainly due to higher revenue, lower interest expense and the absence of the 2020 inventory write-down.
- Interest expense declined to $15.2 million from $39.3 million for the first nine months because the 2020 recapitalization exchanged or converted much of the predecessor company’s debt.
- A non-cash warrant fair-value gain of $11.0 million was recorded for the first nine months of 2021, compared with a $4.3 million loss in the restated 2020 period.
- General and administrative expense declined to $12.3 million from $18.1 million for the first nine months, although projects and development expense increased to $3.9 million from zero.
- The company restated the 2020 comparative financial statements to classify certain SPAC-related warrants as liabilities. Management identified a material weakness in controls over accounting for complex financial instruments.
Guidance, outlook, risks and unusual items
Management indicated that Q3 production represented approximately 91% of the midpoint of full-year 2021 gold production guidance and 75% of the midpoint of full-year silver guidance; the filing text does not provide the underlying guidance values.
The company is focusing on an Acid POX pre-feasibility study, expected to be completed in the first quarter of 2022, with metallurgical test work expected to continue through the second quarter. It planned to file an updated technical report with mineral reserves and resources before or concurrently with its 2021 Form 10-K and expected to update its commercial sulfide operating path in the second quarter of 2022.
The filing states that substantial doubt exists regarding the company’s ability to continue as a going concern. Management projected a need for additional cash within six to nine months after the filing date and had no agreement or understanding in place to issue securities. The company may require additional lender waivers to avoid debt covenant defaults.
On November 9, 2021, Sprott waived provisions permitting the company to cease active mining and reduced the minimum unrestricted cash requirement from $10.0 million to $9.0 million through May 10, 2022. Other risks include gold and silver price volatility, uncertain recoveries and processing technology, escalating reagent costs, dependence on one mine, substantial indebtedness, environmental and reclamation obligations, COVID-19 impacts and delays in the Acid POX study or updated technical report.
Unusual items included a $0.9 million write-off of an equipment deposit, $1.6 million of deferred revenue for undelivered customer obligations, and a $0.7 million former executive cash obligation exchanged for up to 275,000 shares. Restricted cash declined by approximately $5.4 million after surety bonds were replaced with instruments requiring less collateral.
Most important facts for investors to verify
- Whether additional capital can be raised before unrestricted cash and operating liquidity are exhausted.
- Compliance with Sprott and other debt covenants after active mining ceased, including the $9.0 million minimum cash requirement and potential need for further waivers.
- Results, timing and economics of the Acid POX pre-feasibility study and related updated technical report.
- Whether leach-pad inventory can continue generating cash at economic recovery rates after ROM mining stops.
- Actual debt maturities, cash interest requirements, royalty obligations and reclamation collateral requirements.
- Remediation of the material weakness related to warrant accounting and the effect of future warrant fair-value changes on reported earnings.
- Changes in gold and silver prices, reagent costs, recoveries, production volumes and customer concentration.