HYCROFT MINING HOLDING CORPORATION The following discussion, which has been prepared based on information available to us as ofMarch 31, 2022 , provides information that we believe is relevant to an assessment and understanding of our consolidated operating results and financial condition. As a result of the completion of the Recapitalization Transaction, the financial statements of Seller are now the financial statements of the Company. Prior to the Recapitalization Transaction, the Company had no operating assets but, upon consummation of the Recapitalization Transaction, the business and operating assets of Seller sold to the Company became the sole business and operating assets of the Company. Accordingly, the financial statements of Seller and its subsidiaries as they existed prior to the Recapitalization Transaction and reflecting the sole business and operating assets of the Company going forward, are now the financial statements of the Company. The following discussion should be read in conjunction with our other reports filed with theSEC as well as our consolidated financial statements (the "Consolidated Financial Statements") and the notes thereto (the "Notes") included in this Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K"). Terms not defined herein have the same meaning defined elsewhere in this 2021 Form 10-K. The following MD&A generally discusses our consolidated financial condition and results of operations for 2021 and 2020 and year-to-year comparisons between 2021 and 2020.
Introduction to the Company
We are aU.S. -based gold and silver company that is focused on developing our wholly ownedHycroft Mine in a safe, environmentally responsible, and cost-effective manner. Gold and silver sales represent 100% of our operating revenues and the market prices of gold and silver significantly impact our financial position, operating results, and cash flows.The Hycroft Mine is located in theState of Nevada and the corporate office is located inWinnemucca, Nevada . We recently filed the 2022 Hycroft TRS which contemplates processing gold and silver ore using milling and pressure oxidation to process sulfide ore along with heap leaching to process oxide and transition ore. As discussed throughout this MD&A, including within theHycroft Mine section, during the year endedDecember 31, 2021 , while we have been able to achieve or improve on certain of our internal operating, processing, sales and production cost targets, because the Company was operating at a pre-commercial scale until it ceased mining operations inNovember 2021 , it has incurred a net operating loss with negative cash flows before financing activities. Refer to the Liquidity and Capital Resources section of this MD&A for additional details.
Health and Safety
We believe that safety is a core value and we support that belief through our philosophy of safe work performance. Our mandatory mine safety and health programs include employee engagement and ownership of safety performance, accountability, employee and contractor training, risk management, workplace inspection, emergency response, accident investigation, and program auditing. This integrated approach is essential to ensure that our employees, contractors, and visitors operate safely. During the year endedDecember 31, 2021 , we reported no lost time accidents.The Hycroft Mine's Total Reportable Injury Frequency Rate ("TRIFR") for the trailing twelve months, is one of the metrics we use to assess safety performance, and it is well below industry averages and significantly below historical levels experienced at theHycroft Mine . During the year endedDecember 31, 2021 , we continued our critical focus on safety, including allocating additional personnel, resources, workforce time, and communications to mine safety. These actions contributed to a reduction in our TRIFR to approximately 0.64 atDecember 31, 2021 , compared with approximately 2.30 atDecember 31, 2020 , an approximate 80% reduction. We will continue our safety efforts to reach the level of safety we expect and need to keep our workforce, contractors, and visitors safe.
For health and safety actions specific to COVID-19, refer to the Recent Developments section of this MD&A.
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Executive Summary
During the year endedDecember 31, 2021 , we operated a conventional ROM heap leach operation at pre-commercial scale using a mix of the Hycroft-owned mining fleet and a rental mining fleet until ceasing mining operations inNovember 2021 due to cost pressures for many of the reagents and consumables used at theHycroft Mine , and the timeline for completing our updated technical studies in early 2022. We will continue to produce gold and silver from ore on the leach pads as long as it is economic. When the operation was re-started in 2019, mining oxide and transition ore allowed the Company to pre-strip overburden with some revenue offset to gain access to commercial scale sulfide mineralization. With the change in focus from the two-stage heap oxidation and leach to a milling operation, there is ample time to align the remaining pre-stripping with the start-up of commercial scale sulfide operations. We believe that this action will conserve cash and focus the Company's time and resources on its technical studies for sulfide ore. The metallurgical and variability drill program concluded in Q1 2022 and metallurgical analysis and test work is expected to continue through Q3 2022. The Company has previously discussed its strategy for developing an economic sulfide process for Hycroft. Based on the Company's findings to-date, including the analysis completed by an independent third-party research laboratory and the independent reviews by two metallurgical consultants, the Company does not believe the novel two-stage sulfide heap oxidation and leach process ("Novel Process"), as currently designed in the 2019 Hycroft TRS, is economic at current metal prices or those metal prices used in the 2019 Hycroft TRS. Subject to the challenges discussed below, we will complete test work that is currently underway and may advance our understanding of the Novel Process in the future. Following a review of past and recent test work and based on the currently contemplated designs and operating parameters of the alternative sulfide processing methods being studied including the Novel Process, and milling with atmospheric alkaline oxidation or alkaline pressure oxidation ("POX"), the Company, working closely with its industry leading technical consultants, completed pit optimization runs and trade-off analyses comparing the alternative processes which reflected that an Acid POX process has significantly better economics than other processes studied. Therefore, the Company focused its study efforts and resources solely on the Acid POX Initial Assessment which was prepared by Ausenco, with an effective date ofFebruary 18, 2022 . The Acid POX process included in the 2022 Hycroft TRS is a conventional crushing, grinding, and flotation circuit that generates a concentrate to be fed to an autoclave facility commonly used for refractory gold ores in this region.
2021 Highlights
•Safety - Hycroft's safety performance was significantly improved with a 0.64 Total Recordable Injury Frequency Rate (TRIFR) at the end of 2021, which was an 80% reduction from 2.30 at the end of 2020. At month endJanuary 2022 , the TRIFR improved to a new low of 0.31. •Production - Gold production for the year endedDecember 31, 2021 , of 57,668 ounces exceeded the high end of the guidance range as the process team continued to improve equipment, process control and costs. Silver production of 355,967 ounces was approximately 20% below guidance due to slower than planned leach kinetics. Processing of ore on leach pads is currently planned to proceed through the second quarter of 2022.
•Cash Position - The Company ended 2021 with
2021 Development Highlights
•Drill Results - During the 2021 drill program Hycroft encountered positive
assay results further supporting the strategy to enhance the deposit through
exploration drilling:
•Higher-grade intercepts from the 2021 drill program returned approximately 102
intercepts (1.5-meter intervals) averaging 4.1 grams per metric ton ("g/t") or
0.13 ounces per ton ("opt") gold and 85.3 g/t (2.73 opt) silver.
•Recent near-surface, higher-grade material was encountered in the Porter area
of the deposit with intervals including 3 meters grading 9.13 g/t (0.29 opt)
gold and 32.55 g/t (1.04 opt) silver within a larger interval of 19.8 meters
grading 1.78 g/t (0.06 opt) gold and 12.85 g/t (0.41 opt) silver (H21C-5568) and
12.2 meters grading 0.68 g/t (0.02 opt) gold and 12.78 g/t (0.41 opt) silver
(H21C-5552).
•Exploration drilling in the Vortex Zone identified gold grades that are up to
five times higher than the average Mineral Resource grades at Hycroft of 0.34
g/t (0.011 opt). Significant intercepts previously reported from that drilling
included 51.8 meters (170 feet) grading 2.47 g/t (0.08 opt) gold and 25.5 g/t
(0.82 opt) silver (H21R-5592) and an additional intercept of 30.5 meters (100
feet) grading 0.71 g/t (0.02 opt) gold and 17.5 g/t (0.56 opt) silver in drill
hole H21R-5591.
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•Variability Program - The drilling portion of the program concluded inJanuary 2022 . The Company completed 12,985 meters of drilling in 62 holes. This generated 92 samples and two bulk samples for variability testing and enhancing information in the metallurgical database. Backlogs in the independent labs due reduced staffing levels associated with the COVID-19 pandemic combined with delayed drilling have adversely impacted the assays and variability work schedule. To date, the Company has received test results for approximately 20% of the samples. Additional test results on the remaining samples are anticipated to be received over the course of the next two quarters, assuming no further delays. Recent Developments COVID-19 InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a pandemic, which continues to spread throughoutthe United States with new variants of the virus. Efforts implemented by local and national governments, as well as businesses, including temporary closures, have had adverse impacts on local, national and global economies. We have implemented health and safety policies and protocols for employees, contractors, and visitors that follow guidelines published by theCenter for Disease Control (CDC) and the Mine Safety andHealth Administration ("MSHA"). During 2021, and the fourth quarter of 2020, our operations were limited by COVID-19 related absences, however the impact while negative, did not materially and adversely affect our operations. The extent of the impact of COVID-19 on our operational and financial performance going forward will depend on certain developments, including but not limited to the duration and continued spread of the outbreak and strand mutations, the availability and use of vaccines, the development of therapeutic drugs and treatments, and the direct and indirect impacts on our employees, vendors, and customers, all of which are uncertain and cannot be fully anticipated or predicted. Since theHycroft Mine represents the entirety of our operations, any further COVID-19 outbreaks at the mine site or any governmental restrictions implemented to combat the pandemic could result in a partial or an entire shutdown of theHycroft Mine itself, which would adversely impact our financial position, operating results, and cash flows. During the year endedDecember 31, 2021 , the site continued to manage COVID-19 control restrictions in accordance with state, national, andCDC guidelines and will continue to monitor and follow those guidelines going forward. To date, COVID-19 related absences have limited our operations from time-to-time but did not materially disrupt our operations. Additionally, we have not experienced any material disruptions to our supply chain because of COVID-19. However, we can provide no assurance that our operations will not be materially adversely affected by the COVID-19 pandemic in the future that could result from any worsening of the pandemic, the effect of mutating strains, additional outbreaks of the pandemic, actions taken to contain the pandemic's spread or treat its impact, continued availability of vaccines, and their distribution, acceptance and efficacy, and governmental, business and individual actions taken in response to the pandemic including government-imposed regulations regarding, among other things, COVID-19 testing, vaccine mandates and related workplace restrictions. Mineral Resource Update Gold equivalent mineral resources totaled 15.5 million ounces of measured and indicated and 6.9 million ounces of inferred. For this study, IMC developed theHycroft Mine resource block model which includes data from 1981 to 2018 and includes 5,501 holes, representing 2,482,722 ft of drilling. The current inflationary environment and change in processing technique has resulted in increased cost assumptions and an associated higher cut-off grade partially mitigated by higher recoveries leading to a change in the mineral resource estimate, when compared with the prior model. The mineral resources were estimated based upon results of the 2022 Hycroft TRS, as conducted in accordance with the Modernization Rules. With the issuance of the 2022 Hycroft TRS reflecting a different mining process, the 2019 Hycroft TRS is superseded and the 2019 Hycroft TRS and information from such 2019 Hycroft TRS should no longer be relied upon.
Private Placement
OnMarch 14, 2022 , the Company entered into subscription agreements (the "Subscription Agreements" and each a "Subscription Agreement") with each ofAmerican Multi-Cinema, Inc. ("AMC") and 2176423Ontario Limited , an entity affiliated withEric Sprott ("Sprott" and together with AMC, the "Purchasers"), pursuant to which the Company agreed to sell to the Purchasers, in a private placement, an aggregate of 46,816,480 units ("Units") at a purchase price per Unit of$1.193 , with each Unit consisting of one share of the Company's Class A common stock, par value$0.0001 per share ("Common Stock") and one warrant to purchase a share of Common Stock and the shares issuable upon exercise of the Warrants (the 41
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"Warrant Shares"), providing for a total purchase price of approximately$55.9 million (the "Private Placement"). The Warrants issued in the Private Placement have an exercise price of$1.068 per Warrant Share, and will expire five years after issuance. The closing of the sales of securities pursuant to the Subscription Agreements occurred onMarch 15, 2022 for gross proceeds to the Company of approximately$55.9 million before deducting expenses incurred in connection with the Private Placement. The Company intends to use the proceeds for general corporate purposes, which may include the repayment, refinancing, redemption or repurchase of existing indebtedness, working capital or capital expenditures and other investments, which may include additional technical evaluations and studies, advancement of the Initial Assessment in the 2022 Hycroft TRS to a pre-feasibility and/or feasibility study and additional exploration at theHycroft Mine . The Subscription Agreement with AMC also provided AMC with the right to appoint a director to the Company's board of directors (the "Board") and the Company agreed to support such director's nomination so long as AMC retains at least 50% of the common stock purchased under the Subscription Agreement with AMC. As part of the Subscription Agreements, the Company is required to prepare and file a resale registration statement with theSEC as soon as practicable, but in no event later than ten (10) business days after the filing of this 2021 Form 10-K to register the Common Stock, Warrants and Warrant Shares for sale under the Securities Act.
Agreement with
OnNovember 10, 2021 , the Company entered into a waiver with Sprott Private Resource Lending II (Collector) (the "Lender") of certain provisions of the Amended and Restated Credit Agreement effectiveNovember 10, 2021 (the "November 2021 Waiver"). Pursuant to theNovember 2021 Waiver, the Lender has permitted the Company to cease active mining operations and to reduce the amount of Unrestricted Cash required to be maintained by the Company from not less than$10.0 million to not less than$9.0 million for the period endingMay 10, 2022 OnFebruary 28, 2022 the Company entered into a waiver and amendment agreement with theLender and Sprott Private Resource Lending II (Co) Inc. (the "February 2022 Waiver and Amendment") amending the previous waiver and require that the Company maintain at least$7.5 million of Unrestricted Cash on the last day ofFebruary 2022 and at least$9.0 million on the last day of each month thereafter during the waiver period, waived all obligations of the Company to prepay the facility with the net cash proceeds of any mill asset sales until the earlier of the date on which the Company completes a private placement or other offering or issuance of its equity securities andMarch 31, 2022 , and extended the payment due date for the February additional interest payment and the February principal payment until the earlier of any such offering date andMarch 31, 2022 . OnMarch 11, 2022 , the Company entered into an agreement (the "March 2022 Sprott Agreement") with the Lender with respect to the Amended and Restated Credit Agreement, dated as ofMay 29, 2020 (as amended, restated, supplemented or otherwise modified from time to time, the "Sprott Credit Agreement") among the Company, the Lender, the Guarantors (as defined in the Sprott Credit Agreement) and the other parties thereto. As described in theMarch 2022 Sprott Agreement, the Company was contemplating the sale or issuance of its equity securities pursuant to one or more transactions to be completed on or beforeMarch 31, 2022 (the "Equity Financing Transactions"). Pursuant to theMarch 2022 Sprott Agreement, if the Equity Financing Transactions result (or are likely to result pursuant to definitive subscription underwriting and/or similar legally binding agreements) in the Company's receipt of total gross cash proceeds (before deduction of fees and expenses) of at least$50 million on or beforeMarch 31, 2022 (the "Required Equity Amount"), the Lender and the Company will amend the principal repayment terms under the Sprott Credit Agreement such that no further scheduled payments of principal shall be required prior toMay 31, 2025 (the "Maturity Date") (i.e., there will be no required regular amortization payments of the Facility (as defined in the Sprott Credit Agreement) and the full principal balance of the Facility shall be due and payable in a single "bullet" payment on the Maturity Date). The consummation of the Private Placement as described under "Private Placement" above satisfied the Required Equity Amount condition in theMarch 2022 Sprott Agreement. TheMarch 2022 Sprott Agreement also provides that, in connection with the modification of the required facility amortization payments, the Company shall pay in-kind to the Lender an amount equal to$3.3 million , with such amount to be capitalized and added to the principal amount owing under the Sprott Credit Agreement and accrue interest at the same rate and upon the same terms as the existing loans under the Sprott Credit Agreement; provided, the payment or prepayment of such capitalized principal amount shall not be subject to the Prepayment Premium (as defined in the Sprott Credit Agreement) or any other penalty or premium.
Second Amendment to Sprott Credit Agreement
On
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the loans and other principal obligations under the Sprott Credit Facility by two years, toMay 31, 2027 ; (b) provides for the Company to prepay principal under the facility in the amount of$10.0 million promptly upon the Company's receipt of cash proceeds from the Private Placement offering withAmerican Multi-Cinema, Inc. and 2176423Ontario Limited (the "Initial Equity Proceeds Prepayment"); (c) provides for the Company to prepay principal under the Sprott Credit Agreement in the amount of$13.9 million (representing 10% of the subsequent issuance of its equity interests consummated on or prior toMarch 31, 2022 ) (the "Subsequent Equity Proceeds Prepayments"); and (d) eliminates the prepayment premiums otherwise payable with respect to the Initial Equity Proceeds Prepayment, the Subsequent Equity Proceeds Prepayments and all future prepayments of principal under the Sprott Credit Facility. In addition, the Company's obligations to prepay principal with proceeds of asset sales will be credited/offset by the aggregate amount of Initial Equity Proceeds Prepayment and the Subsequent Equity Proceeds Prepayments ($23.9 million ), and to maintain a minimum amount of Unrestricted Cash (as defined in the Second A&R Agreement) is increased to$15.0 million . The Company (i) paid the previously deferred additional interest payment of$0.5 million , (ii) made the Initial Equity Proceeds Prepayment of$10.0 million and paid in kind a$3.3 million fee in connection with the modification and capitalized it to principal onMarch 16, 2022 and (iii) made the Subsequent Equity Proceeds Prepayment of$13.9 million onMarch 30, 2022 ; and after giving effect to such prepayments the outstanding principal balance under the Second A&R Agreement is estimated to be$57.9 million (before issuance discounts) including unpaid additional interest of approximately$7.1 million .
At-the-market Offering of Common Shares
OnMarch 15, 2022 , the Company implemented an "at-the-market offering" program ("ATM Program") by entering into an At Market Issuance Sales Agreement (the "Sales Agreement") withB. Riley Securities, Inc. (the "Agent"). Under the terms of the Sales Agreement, the Company may from time to time to or through the Agent, acting as sales agent or principal, offer and sell shares of the Company's common stock having a gross sales price of up to$500,000,000 . The compensation payable to the Agent for sales of shares pursuant to the Sales Agreement was equal to 3.0% of the gross sales price for any shares of common stock sold through the ATM Program by Agent as sales agent under the Sales Agreement. Shares sold under the Sales Agreement, were issued pursuant to the Company's shelf registration statement on Form S-3 (No. 333-257567) (the "Registration Statement") that theSEC declared effective onJuly 13, 2021 , including the prospectus, datedJuly 13, 2021 , and the prospectus supplement, datedMarch 15, 2022 . OnMarch 25, 2022 , the Company announced that it had terminated the ATM Program having sold 89,553,602 shares of common stock and generated aggregate gross proceeds before commissions and offering expenses of approximately$138.6 million . Following consummation of all sales under the ATM Program, the Company will have 196,803,459 Shares issued and outstanding.
Amendment to the 10% Senior Secured Notes and Note Exchange Agreement
OnMarch 14, 2022 , the Company entered into an amendment to the 10% Senior Secured Notes and Note Exchange Agreement (the "Note Amendment"), with (i) certain direct and indirect subsidiaries of the Company as Guarantors; (ii) holders of the 10% Senior Secured Notes (the "Notes"), including certain funds affiliated with, or managed by,Mudrick Capital Management , L.P,Whitebox Advisors, LLC ,Highbridge Capital Management, LLC ,Aristeia Highbridge Capital Management, LLC andWolverine Asset Management, LLC (collectively, the "Amending Holders"), and (iii)Wilmington Trust, National Association , in its capacity as collateral agent. The Note Amendment amends the Note Exchange Agreement dated as ofJanuary 13, 2020 (the "Note Exchange Agreement") and the Notes (as defined in the Note Exchange Agreement) issued thereunder in order to extend the maturity date of the Notes fromDecember 1, 2025 toDecember 1, 2027 . The Note Amendment also removes the requirements that a holder receive the consent of the Company and the other holders in order to transfer any Note. The Amending Holders constitute all of the holders of the Notes. The Note Amendment became effective upon the closing of the Private Placement Offering upon receipt of$55.9 million gross cash proceeds (before deduction of fees and expenses).
Amendment to the Company's Second Amended and Restated Certificate of Incorporation
OnMarch 11, 2022 , the Board approved an amendment to the Company's Second Amended and Restated Certificate of Incorporation increasing the number of authorized shares of the Company's Class A common stock by 1,000,000,000 to a total of 1,400,000,000 (the "Certificate of Incorporation Amendment") and directed that the Certificate of Incorporation Amendment be submitted for consideration by the stockholders of the Corporation. OnMarch 15, 2022 , AMC, Sprott, and entities affiliated withMudrick Capital Management LP ,who together constituted the holders of a majority of the Common Stock, approved the Certificate of Incorporation Amendment by written consent. The Certificate of Incorporation Amendment will not become effective until 20 days after the Company distributes an Information Statement on Schedule 14C to the stockholders of the 43
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Company. The Company expects to commence mailing of the Information Statement on
Schedule 14C to the stockholders of the Company on or about
2022 Outlook
Our current operating plan is to: (i) operate safely as we continue to process heap leach inventory until it is no longer economic; (ii) complete the metallurgical test work associated with the variability drilling program; (iii) conduct exploration activities and targeted exploration drilling; and (iv) continue to advance the Acid POX technical study to a pre-feasibility or feasibility level.
Technical Activities
During 2021, we continued to work alongside our industry leading consultants to provide additional and expanded information on the ore body and investigate opportunities for improvements in operating parameters for commercial scale operations at theHycroft Mine . This information is critical in understanding the mineralogical properties of the deposit and ultimately the most economic processing technology for the various ore domains. Accordingly, we developed an approximate$10 million program for drilling and additional metallurgical and mineralogical studies in 2021 and early 2022. The drilling program was completed inJanuary 2022 , and the metallurgical test work portion of the program is expected to be completed in the early third quarter of 2022. Lab testing continues to be challenged by labor shortages and equipment availability. As ofDecember 31, 2021 , we have spent$7.3 million under the program. Ongoing and future technical work for theHycroft Mine will be primarily focused on the Acid POX milling for processing sulfide ore and completing the variability and metallurgical test work. We also plan to evaluate exploration opportunities targeting higher ore grades and expect to continue to advance the Novel Process as time and resources permit. •Exploration - We have identified exploration drilling opportunities to follow up on higher grade areas that would benefit from expanded drilling in order to convert inferred blocks to measured or indicated blocks, and areas that are prospective for higher grade material. We currently have plans to opportunistically and cost effectively drill these areas as we have drilling capacity with the drill rigs that were contracted to complete the variability drilling program. •Mill sulfide processing options - While our technical team continued to progress and develop an understanding of the requirements for implementing the Novel Process on a commercial scale, we received a completed peer reviewed report in the fourth quarter 2021 from one of our independent technical consultants stating that, for reasons outlined below as well as increased commodity costs, it did not appear that the proprietary two-stage oxidation and leaching process as detailed in the 2019 Hycroft TRS, will be economic as designed at current metal prices or those metal prices used in the 2019 Hycroft TRS. Based on scoping level economic analyses on multiple processing options completed by our technical team, together with independent engineering firms and consultants and on the currently contemplated designs and operating parameters of the alternative sulfide milling processes being studied, we completed pit optimization runs comparing the alternative processes. The comparative analysis indicated that using an Acid POX process should be significantly more economic than the alternatives. Therefore, we used the test results and documented recoveries from the Acid POX process in the financial determination of the mineral resource. These are documented in the 2022 Hycroft TRS. •Two-stage sulfide heap oxidation and leach process - As a result of challenges to consistently achieve targeted oxidation and recoveries from the Novel Process, our new technical and operating team, together with our industry leading metallurgical consultants, initiated detailed reviews of the technical information and prior work. We also had fresh samples of material from our Brimstone deposit metallurgically tested and launched a$10.0 million expanded variability drilling and metallurgical test program in late Q1 2021. While the variability metallurgical test work is ongoing, the information to date supports our view that milling is likely the preferred method of processing sulfide ores at theHycroft Mine . Additionally, while the chemistry of the two-stage sulfide oxidation and leach process has been confirmed, the commercial scale application of the process as currently understood will be economically challenged due to: •Higher operating costs - In the field work on the pre-commercial test pads, higher levels of soda ash were being applied to oxidize the transitional ore, and inconsistencies in achieving the targeted oxidation levels across the ore body. The test work has confirmed soda ash consumption is significantly higher than what was estimated in the 2019 Hycroft TRS. Moreover, the cost of soda ash and other reagents has increased substantially since 2019, which will negatively impact operating costs; 44
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•Higher capital costs - We identified a number of critical areas that had not been previously addressed in the 2019 Hycroft TRS. These included 1) the logistical placement of large volumes of new ROM material at the same time there is removal of material for preparation of the second stage, 2) the implementation of on/off pads to avoid comingling solutions on the leach pads, 3) addition of a material handling system, 4) an additional amalgamation circuit, and 5) an additional forced air injection pumping system. As a result, the necessary capital costs were expected to be materially higher than previously reported. Additionally, working capital was projected to be higher due to slower oxidation rates for some ores; •Lower recoveries on some ores - After reviewing all the column tests and considering additional factors in measuring oxidation and recovery rates, we were not able to consistently replicate a strong correlation between oxidation rates and gold recoveries. We believe that more test work is required before implementing this process in a commercial setting; and •Finer crush size will be required - After reviewing all the column tests and considering additional factors in measuring oxidation and recovery rates, we were not able to consistently replicate a strong correlation between oxidation rates and gold recoveries. We believe that more test work is required before implementing this process in a commercial setting. We currently believe that more test and development work is required to demonstrate that the Novel Process can be applied successfully on a commercial scale and the analysis to date indicates the process may not be amenable to all ore domains at theHycroft Mine . For the near term, we currently plan to complete the following test work which is important and will benefit all processing methods for theHycroft Mine :
•Column test work - Column tests are being performed on sulfide ores mined
during the year ended
•Variability test work - The variability test work that is underway is necessary for all commercial scale sulfide processing options. The test work includes a suite of laboratory tests designed to:
•understand the metallurgical characteristics of each geologic domain and their amenability to various processing technologies;
•understand the metallurgical characteristics of sulfide material below the water table;
•understand the role other minerals may play in the overall oxidation process;
•determine amenability to oxidation in each geologic domain; and
•establish a relationship between oxidation levels and gold recoveries across each geologic domain.
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Table of ContentsHycroft Mine Operations The following table provides a summary of operating results for theHycroft Mine : Year Ended December 31, 2021 2020 Ore mined - sulfide stockpile (ktons) 1,505 - Ore mined - crusher feed (ktons) - 4,941 Ore mined - ROM (ktons) 6,853 1,873 Total ore mined (ktons) 8,358 6,814 Waste mined (ktons) 4,934 4,815 Total mined (ktons) 13,292 11,629 Waste tons to ore tons strip ratio (#) 0.59 0.71 Ore grade mined - gold (oz/ton) 0.014 0.014 Ore grade mined - silver (oz/ton) 0.425 0.261 Production - gold (oz) 57,668 27,392 Production - silver (oz) 355,967 178,836 Ounces sold - gold (oz) 56,045 24,892 Ounces sold - silver (oz) 397,546 136,238
Average realized sales price - gold ($/oz)
$ 1,779 Average realized sales price - silver ($/oz)$ 25.66
As reflected above, tons mined, ounces produced, ounces sold and average realized prices increased during the year endedDecember 31, 2021 , compared with the same period of the prior year due to higher tons mined in 2021. The average price increased during the year endedDecember 31, 2021 consistent with the increase in the spot price of gold compared with the same period of the prior year. As planned for 2021, all mined ore was routed to the leach pad as ROM and sulfide ore encountered was stockpiled. Due to the ROM plan for 2021, the crusher did not operate during the year. Production and sales for the year ended 2021 increased over the comparable 2020 period due to increased quantities of ROM ounces placed during 2021. The gold and silver ounces produced in the year endedDecember 31, 2021 resulted from continued leach production of inventory ounces added to the leach pad in 2020, additional ounces placed under leach from mining in 2021, higher leach solution flows to the pad, and improved flows and recovery performance from the Brimstone plant. 46
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Table of Contents Results of Operations Revenues Gold revenue
The table below summarizes gold sales, ounces sold and average realized prices for the following periods (dollars in thousands, except per ounce amounts):
Year Ended December 31,
2021 2020
Gold revenue $ 100,532 $ 44,279
Gold ounces sold 56,045 24,892
Average realized price (per ounce) $ 1,794 $ 1,779
During the year ended December 31, 2021 , gold revenue was $100.5 million
compared to $44.3 million for the comparable period of 2020. The significant
increase in revenue during 2021 was attributable to the mine having more ore
under leach as mining and processing operations increased beginning in the
second quarter of 2020, resulting in higher production-related inventory
balances and gold revenue during the year ended December 31, 2021 . Gold revenue
was also adversely affected during the year ended December 31, 2020 due to lower
gold ounces available for sale as a result of write-downs of recoverable gold
ounces on the leach pads (see Note 4 - Inventories and Ore on Leach Pads to the
Notes to the Consolidated Financial Statements).
Silver revenue
The table below summarizes silver sales, ounces sold and average realized prices for the following periods (dollars in thousands, except per ounce amounts):
Year Ended December 31,
2021 2020
Silver revenue $ 10,202 $ 2,765
Silver ounces sold 397,546 136,238
Average realized price (per ounce) $ 25.66 $ 20.30
During the year ended December 31, 2021 , silver revenue was $10.2 million
compared to $2.8 million for the comparable period of 2020. Similar to gold
revenue, the increase in silver revenue during 2021 was attributable to the mine
having more ore under leach as compared to the same 2020 period. During the year
ended December 31, 2021 , we also benefited from favorable silver prices, which
were more than $5 per ounce higher compared to the same period of 2020. Silver
revenue was also adversely affected during the year ended December 31, 2020 due
to lower silver ounces available for sale as a result of write-downs of
recoverable ounces on the leach pads.
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Total cost of sales
Total cost of sales consists of Production costs, Depreciation and amortization, Mine site period costs, and Write-down of inventories. The table below summarizes total cost of sales for the following periods (dollars in thousands):
Year Ended December 31,
2021 2020
Production costs $ 102,750 $ 41,688
Depreciation and amortization 8,544 2,894
Mine site period costs 38,166 47,115
Write-down of inventories 13,878 17,924
Total cost of sales $ 163,338 $ 109,621
Production costs
For the year ended December 31, 2021 , we recognized $102.8 million in Production
costs, or $1,833 per ounce of gold sold, compared to $41.7 million or $1,675 per
ounce of gold sold during the same period of 2020. The increase in Production
costs was primarily due to a respective increase in the sales volumes of gold
and silver of 31,153 and 261,308 ounces sold, respectively, at a higher average
inventory cost per ounce during the year ended December 31, 2021 compared to the
same period of 2020. As discussed in the below Mine site period costs section,
throughout 2021 and 2020, a high operating cost structure at current levels of
production has resulted in Mine site period costs to adjust ending inventory
values of gold that approximate the net realizable value per ounce of gold
(after considering future costs to complete and sell) as determined in
accordance with our accounting policies. Accordingly, production costs per ounce
of gold sold has been partially limited by the impact of recognizing Mine site
period costs, which lowers the carrying value of production-related inventories.
Reductions in the spot price of gold at the reporting periods as compared to
prior reporting periods can result in additional Mine site period costs.
Depreciation and amortization
Depreciation and amortization was$8.5 million , or$152 per ounce of gold sold, for the year endedDecember 31, 2021 compared to$2.9 million , or$116 per ounce of gold sold, during the same periods of 2020. The increase in total depreciation and amortization costs per ounce of gold sold was largely due to an increase of 31,153 gold ounces sold during the year endedDecember 31, 2021 compared to the same period of 2020.
Mine site period costs
During the year endedDecember 31, 2021 , inclusive of depreciation and amortization, we recorded$38.2 million of Mine site period costs for costs that were in excess of the net realizable value per ounce of gold inventories, compared to$47.1 million during the same period of 2020. Such period costs are generally the result of costs related to activities at theHycroft Mine that do not qualify for capitalization to production-related inventories or adjustments to production inventories that are the result of recurring or significant downtime or delays, unusually high levels of repairs, inefficient operations, overuse of processing reagents, inefficient cost-volume structures, or other unusual costs and activities, and cannot be recorded to production-related inventories based on the threshold established by the calculation of the estimated net realizable value per ounce of gold. 48
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Write-down of inventories
We recorded a Write-down of inventories of
•A write-down of the non-current portion of Ore on leach pads of$5.5 million for Production costs and$0.4 million of capitalized depreciation and amortization costs related to 3,612 ounces of gold contained in the over liner material on the new larger leach pad which the Company began constructing in 2020. As the 2022 Hycroft TRS does not include proven and probable reserves, it was determined that the recoverability of these ounces is dependent upon additional work and technical studies and, as a result, it was determined that the ounces and related capitalized amounts should be written-off. •A write-down of Inventories of$5.9 million for obsolete and slow moving materials and supplies inventories. As a result of ceasing mining operations, it was determined that certain materials and supplies were not expected to be used in the next 12 months and, accordingly, a reserve was placed against these items. •A loss of$2.1 million related to a firm purchase commitment for crusher liners that the Company agreed to purchase under consignment over a period of three years beginning inAugust 2020 . This loss relates to the unfulfilled commitment obligation and has been reduced to reflect the Company's negotiated settlement with the supplier. As discussed in Note 4 - Inventories and Ore on Leach Pads to the Notes to the Consolidated Financial Statements, based on metallurgical balancing results, during the year endedDecember 31, 2020 , we determined that 10,492 ounces of gold that had been placed on the leach pads were no longer recoverable and recognized$17.9 million of Write-down of inventories on the Consolidated Statements of Operations, which included production costs of$16.7 million , and capitalized depreciation and amortization costs of$1.2 million , respectively.
General and administrative
General and administrative totaled$14.6 million during the year endedDecember 31, 2021 compared to$21.1 million during the year endedDecember 31, 2020 . The decrease of$6.4 million during the year endedDecember 31, 2021 was primarily due to decreases in: (i) salary and compensation costs of$6.2 million ; (ii) insurance costs of$1.2 million ; partially offset by increases in: (i) legal, professional, and consulting fees associated with general corporate matters and obligations as a public company of$0.4 million ; and (ii) director compensation for the members of our committees created upon becoming a public company of$0.5 million .
Projects, exploration and development
During the year endedDecember 31, 2021 , Projects, exploration and development costs totaled$13.6 million and were related to the following activities: (i) analyzing established feasibility studies; (ii) conducting geological studies; (iii) oversight and project management; and (iv) exploration drilling, engineering, and metallurgical activities. Upon determining that the 2019 Hycroft TRS was not likely to be economic, we determined that previously capitalized mine development costs related to the 2019 Hycroft TRS no longer qualified for capitalization. As a result we recorded an impairment charge of$6.7 million for the previously capitalized amounts that was included in Projects, exploration and development during the year endedDecember 31, 2021 . We did not incur any such costs during the year endedDecember 31, 2020 .
Write-off of deposit
During the year endedDecember 31, 2021 , the Company determined that additional equipment was no longer expected to be purchased under the current mine plan. Accordingly, a full reserve was applied against the$0.9 million deposit previously paid by the Company to an equipment supplier. Refer to Note 5 - Prepaids and Other, Net to the Notes to the Consolidated Financial Statements for further detail. Accretion We recorded$0.4 million of Accretion during both of the years endedDecember 31, 2021 and 2020, which related to our Asset retirement obligation and future reclamation costs. Refer to Note 13 - Asset Retirement Obligation to the Notes to the Consolidated Financial Statements for further detail. 49
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Interest expense, net of capitalized interest
As discussed and detailed in Note 10 - Debt, Net to the Notes to the Consolidated Financial Statements, Interest expense, net of capitalized interest totaled$20.6 million during the year endedDecember 31, 2021 compared to$43.5 million during the same period in 2020. The decrease of$23.0 million during the year endedDecember 31, 2021 was a result of completing the Recapitalization Transaction onMay 29, 2020 , which caused the exchange or conversion of the majority of Seller's$627.8 million outstanding indebtedness to equity, thus resulting in post-Recapitalization Transaction indebtedness totaling$159.8 million for the Sprott Credit Agreement and Subordinated Notes.
Fair value adjustments to warrants
During the year endedDecember 31, 2021 , the Fair value adjustments to warrants resulted in a non-cash gain$14.4 million as the market trading values of our publicly listed warrants decreased, which was primarily due to a decrease in the underlying trading price of our common shares. We did not incur any such warrant adjustment during the year endedDecember 31, 2020 . Refer to Note 12 - Warrant Liabilities to the Notes to the Consolidated Financial Statements for further detail. Interest income Interest income totaled approximately $Nil during the year endedDecember 31, 2021 compared with$0.2 million during the year endedDecember 31, 2020 . During the second quarter of 2021, the Company replaced certain surety bonds with new surety bonds with lower cash collateral requirements, in which none of the accounts holding the cash collateral earns interest income, resulting in no Interest income for the year endedDecember 31, 2021 .
Income taxes
During the year endedDecember 31, 2021 , we recognized an income tax benefit of$1.5 million which was the result of the Company carrying back its net operating losses to periods that the Company paid income tax prior to the Recapitalization Transaction. There was no income tax benefit or expense, net, recognized during the year endedDecember 31, 2020 . We have not recorded any future income tax benefits for net losses generated after the completion of the Recapitalization Transaction, due to a full valuation allowance recorded against our net operating loss carryforward earned after the Recapitalization Transaction. For additional details, refer to Note 17 - Income Taxes to the Notes to the Consolidated Financial Statements.
Net loss
For the reasons discussed above, we recorded a net loss of$88.6 million for the year endedDecember 31, 2021 , respectively, which included a gain from Fair value adjustments to warrants of$14.4 million , compared to a net loss of$136.4 million for the year endedDecember 31, 2020 .
Liquidity and Capital Resources
General
The Company's unrestricted cash position atDecember 31, 2021 was$12.3 million as compared with$56.4 million atDecember 31, 2020 . While the Company plans to continue processing gold and silver ore on the leach pads after ceasing mining operations for the pre-commercial scale ROM operation and partially offset the cash that is projected to be used in operations and investing activities, we do not expect to generate net positive cash for the foreseeable future. Accordingly, we will be dependent on our unrestricted cash and other sources of cash to fund our business. As discussed in Note 25 - Subsequent Events in the Notes to the Consolidated Financial Statements, the Company raised gross proceeds of approximately$194.4 million inMarch 2022 , before deduction of commissions and expenses, through the following equity financings: •OnMarch 14, 2022 , the Company entered into the Subscription Agreements with two private investors pursuant to which the Company sold onMarch 15, 2022 an aggregate of 46,816,480 units, each unit consisting of one share of common stock and one warrant to purchase one share of common stock, at a purchase price of$1.193 per unit for total gross proceeds of$55.9 million . •OnMarch 15, 2022 , the Company implemented an at-the-market offering program pursuant to which the Company has registered the offer and sale from time to time of its common stock have an aggregate offering price of up to$500.0 million of gross proceeds. The Company terminated the ATM Program onMarch 25, 2022 and announced that it had 50
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sold 89,553,602 shares of common stock under the ATM Program and generated
aggregate gross proceeds before commissions and offering expenses of
approximately
In addition, the Company will continue to evaluate alternatives to raise additional capital necessary to fund the future development of theHycroft Mine and will continue to explore other strategic initiatives to enhance stockholder value. Historically, the Company has been dependent on various forms of debt and equity financing to fund its business. While the Company has been successful in the past raising funds through equity and debt financings, no assurance can be given that additional financing will be available to it in amounts sufficient to meet the Company's needs or on terms acceptable to the Company. In the event that funds are not available, the Company may be required to materially change its business plans. To avoid potential non-compliance with the Sprott Credit Agreement, the Company obtained a series of waivers and entered into amendments to the Sprott Credit Agreement. Please see Debt Covenants below and Note 25 - Subsequent Events in the Notes to the Consolidated Financial Statements for information regarding additional waivers received and modifications to the Sprott Credit Agreement. Our future liquidity and capital resources management strategy entails a disciplined approach to monitor the timing and depth of any drilling, metallurgical and mineralogical studies and the continuation of processing the remaining leach pad inventory while attempting to remain in a position that allows us to respond to changes in our business environment, such as a decrease in metal prices or lower than forecasted future cash flows, and changes in other factors beyond our control. We have undertaken efforts aimed at managing our liquidity and preserving our capital resources by, among other things: (i) monitoring metal prices and the impacts (near-term and future) they have on our business and cash flows; (ii) ceasing open pit mining operations to reduce net cash outflows while continuing to process leach pad inventory until such time as it is no longer economic; (iii) reducing the size of our workforce to reflect the cessation of mining operations; (iv) controlling our working capital and managing discretionary spending; (v) reviewing contractor usage and rental agreements for more economic options, including termination of certain agreements in accordance with their terms; (vi) decreasing restricted cash balances that collateralize bonds, as available; and (vii) planning the timing and amounts of capital expenditures and drilling, metallurgical and mineralogical study costs at theHycroft Mine and deferring such items that are not expected to benefit our near term operating plans. We have undertaken and continue to undertake additional efforts to: (i) monetize non-core assets and excess materials and supplies inventories; (ii) return excess rental and leased equipment; (iii) sell certain uninstalled grinding mills that are not expected to be needed for a future milling operation; (iv) selling other uninstalled grinding mills if the proceeds contribute to enhancing a future milling operation; and (v) work with existing debt holders to adjust debt service requirements. In addition, as ofOctober 6, 2021 , we entered into an agreement withRandy Buffington , our former Chairman, President and Chief Executive Officer to terminate$0.7 million in aggregate future cash payments in exchange for the termination of the remainder of his restrictive covenant of non-competition and issuance of up to 275,000 shares of our common stock. 51
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Cash and liquidity
We have placed substantially all of our cash in operating accounts with a
well-capitalized financial institution, thereby ensuring balances remain readily
available. Due to the nature of our operations and the composition of our
current assets, our Cash, Accounts receivable, and metal in Inventories
represent substantially all of our liquid assets on hand. Additionally, we are
provided with additional liquidity as ounces are recovered from the Ore on leach
pads, processed into finished goods, and sold at prevailing spot prices to our
customers.
The following table summarizes our projected sources of future liquidity, as
recorded within the Consolidated Financial Statements (dollars in thousands):
December 31, 2021 December 31, 2020
Cash $ 12,342 $ 56,363
Accounts receivable - 426
Metal in Inventories(1) 6,693 6,418
Ore on leach pads(2) 10,106 38,041
Total projected sources of future liquidity $ 29,141 $ 101,248
(1)Metal in Inventories,contained approximately 3,849 recoverable ounces of gold that are expected to be sold within the next nine months. Assuming a gold selling price of$1,806 per ounce (theDecember 31, 2021 P.M. fix) and excluding any proceeds from silver sales, the sale of all gold ounces estimated to be recovered from our metal inventories would provide us with$7.0 million of revenue. See Note 4 - Inventories and Ore on Leach Pads to the Notes to the Consolidated Financial Statements for additional information. (2)The current portion of Ore on leach pads contained approximately 7,130 ounces of gold that are expected to be processed into finished goods and then sold within the next 12 months. Assuming a gold selling price of$1,806 per ounce (theDecember 31, 2021 P.M. fix) and excluding any proceeds from silver sales, the sale of all gold ounces estimated to be recovered from our ore on leach pads would provide us with$12.9 million of revenue. See Note 4 - Inventories and Ore on Leach Pads to the Notes to the Consolidated Financial Statements for additional information. 52
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The year ended
The following table summarizes our sources and uses of cash for the following periods (dollars in thousands):
Year Ended December 31,
2021 2020
Net loss $ (88,564) $ (136,392)
Net non-cash adjustments 30,829 76,809
Net change in operating assets and liabilities 20,697 (50,925)
Net cash used in operating activities (37,038)
(110,508)
Net cash used in investing activities (6,873)
(31,124)
Net cash (used in) provided by financing activities (5,494)
188,705
Net (decrease) increase in cash (49,405)
47,073
Cash and restricted cash, beginning of period 96,040
48,967
Cash and restricted cash, end of period$ 46,635
Cash used in operating activities
During the year endedDecember 31, 2021 , we used$37.0 million of cash in operating activities primarily attributable to a net loss of$88.6 million , the cash impact of net loss was equal to$57.7 million , and$20.7 million provided by working capital, which included$29.0 million used to increase production-related inventories. The largest non-cash items included in net income during the year endedDecember 31, 2021 included Impairment charges of$17.3 million related to the Write-down of inventories and Impairment on equipment not in use, a$14.4 million gain from Fair value adjustments to warrants and Non-cash portion of interest expense of$16.8 million . For the year endedDecember 31, 2020 , we used$110.5 million of cash for operating activities primarily attributable to a net loss of$136.4 million , the cash impact of net loss was equal to$59.6 million , and$50.9 million used for working capital, including the operational ramp up following the 2019 restart of theHycroft Mine using a net$43.8 million to increase production-related inventory balances. Cash outflows during the year endedDecember 31, 2020 were partially offset by certain non-cash expenses included in Net loss, including$38.8 million of non-cash interest expense and a$17.9 million Write-down of inventories
Cash used in investing activities
For the year endedDecember 31, 2021 and 2020, we used$6.9 million and$31.1 million , respectively, in investing activities. For the year endedDecember 31, 2021 , expenditures included (i)$2.7 million for purchased equipment and refurbishments; (ii)$2.5 million spent for the leach pad expansion project (which excludes$0.7 million of capitalized interest) to complete construction to the appropriate point in which we believe there would be minimal risk of adverse impacts to the leach pad. For the year endedDecember 31, 2020 , the majority of the capital expenditures related to construction of new leach pad space.
Cash (used in) provided by financing activities
During the year endedDecember 31, 2021 we repaid$5.4 million of the Additional Interest and principal which is classified as debt under the terms of our Sprott Credit Agreement. Cash provided by financing activities was$188.7 million for the year endedDecember 31, 2020 , which included proceeds from financing instruments consummated in connection with the Recapitalization Transaction of$254.8 million , offset by principal payments on debt of$132.4 million and payments for legal and consulting fees related to the Recapitalization Transaction of$16.1 million . 53
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Future capital and cash requirements
The following table provides our gross contractual cash obligations as ofDecember 31, 2021 , which are grouped in the same manner as they were classified in the cash flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information. We believe the following provides the most meaningful presentation of near-term obligations expected to be satisfied using current and available sources of liquidity (dollars in thousands): Payments Due by Period Less than 1 - 3 3 - 5 More than Total 1 Year Years Years 5 Years Operating activities: Net smelter royalty(1)$ 241,229 $ 229 $ - $ -$ 241,000 Remediation and reclamation expenditures(2) 70,100 - - - 70,100 Interest payments(3) 10,115 5,730 4,383 2 - Crofoot royalty(4) 4,630 - - - 4,630 Financing activities: Repayments of debt principal(5) 209,676 15,157 56,594 137,925 - Additional interest payments(6) 7,699 2,200 5,499 - - Total$ 543,449 $ 23,316 $ 66,476 $ 137,927 $ 315,730 (1)Under the Sprott Royalty Agreement, we are required to pay a perpetual royalty equal to 1.5% of the Net Smelter Returns from ourHycroft Mine , payable monthly that also includes an additional amount for withholding taxes payable by Sprott. Amounts presented above incorporate estimates of our current life-of-mine plan, and are based on consensus pricing for gold and silver. See Note 11 - Deferred Gain on Sale of Royalty to the Notes to the Consolidated Financial Statements for additional information. (2)Mining operations are subject to extensive environmental regulations in the jurisdictions in which they are conducted and we are required, upon cessation of operations, to reclaim and remediate the lands that our operations have disturbed. The estimated undiscounted cash outflows of these remediation and reclamation obligations are reflected here. In the above presentation, no offset has been applied for the$59.3 million of our reclamation bonds or for the$34.3 million of cash collateral for those bonds included in Restricted Cash. See Note 7 - Restricted Cash to the Notes to the Consolidated Financial Statements for additional information. (3)Under the Sprott Credit Agreement, we were required to pay interest beginning in the 13th month after the initial advance onMay 29, 2020 toSprott Private Resource Lending II (Collector), LP . (4)We are required to pay a 4% net profits royalty, including advance minimum royalty payments of$120,000 in any year where mining occurs on the Crofoot claims and an additional minimum royalty of$120,000 if tons mined from the Crofoot claim blocks exceed 5.0 million tons. See Note 23 - Commitments and Contingencies to the Notes to the Consolidated Financial Statements. Amounts shown represent our current estimates of cash payment timing using consensus pricing for gold and silver. (5)Repayments of principal on debt consists of amounts due under the Sprott Credit Agreement, the Subordinated Notes and notes payable for equipment purchases. Included in the repayment of the Subordinated Notes principal is interest that has been capitalized as payable in-kind on a quarterly basis, and on a monthly basis for the Sprott Credit Agreement for the first 12 months after the initial advance. (6)Additional interest payments consist of repayments of additional interest under the Sprott Credit Agreement, commencingFebruary 28, 2021 (with the first cash payment due three months after such date) and ending on the maturity date. 54
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Debt covenants
Our debt agreements contain representations and warranties, events of default, restrictions and limitations, reporting requirements, and covenants that are customary for agreements of these types. The Sprott Credit Agreement contains covenants that, among other things, restrict or limit the ability of the Company to enter into encumbrances (other than Permitted Encumbrances), incur indebtedness (other than Permitted Indebtedness), dispose of its assets (other than Permitted Disposals), pay dividends, and purchase or redeem shares, as such terms are defined in the Sprott Credit Agreement. The Sprott Credit Agreement requires the Company to ensure that, at all times, both its Working Capital and Unrestricted Cash are at least$10.0 million (subsequently reduced by the Waiver and Waiver Amendment discussed below), as such terms are defined in the Sprott Credit Agreement, and that at least every six months we demonstrate our ability to repay and meet all present and future obligations as they become due with a financial Model that uses consensus gold prices discounted by 5.0%, as such terms are defined in the Sprott Credit Agreement. The Subordinated Notes (as defined herein) include customary events of default, including those relating to a failure to pay principal or interest, a breach of a covenant, representation or warranty, a cross-default to other indebtedness, and non-compliance with security documents. As ofDecember 31, 2021 , the Company was in compliance with all covenants under its debt agreements. OnNovember 9, 2021 , we entered into theNovember 2021 Waiver withSprott Private Resource Lending II (Collector), LP (the "Lender") of certain provisions of the Sprott Credit Agreement. Pursuant to the Waiver, the Lender has: (i) permitted the Company to cease active mining operations; and (ii) to reduce the amount of Unrestricted Cash required to be maintained by the Company from not less than$10.0 million to not less than$9.0 million for the period endingMay 10, 2022 . Additionally, onFebruary 28, 2022 , we entered into theFebruary 2022 Waiver and Amendment with the Lender of certain provisions of the Sprott Credit Agreement and theNovember 2021 Waiver. Pursuant to theFebruary 2022 Waiver and Amendment, the Lender has (i) waived the Company's obligation under the Sprott Credit Agreement to maintain at least$9.0 million of Unrestricted Cash on the last day of each calendar month during the period endingMay 10, 2022 (the "Waiver Period"), provided that, the Company maintains at least$7.5 million of Unrestricted Cash on the last day ofFebruary 2022 and at least$9.0 million on the last day of each month thereafter during the Waiver Period; (ii) waived all obligations of the Company to prepay the facility with the net cash proceeds of any Mill Asset Sales (as defined in the Waiver and Amendment) until the earlier of (A) the date on which the Company completes a private placement or other offering or issuance of its equity securities (the "Offering Date") and (B)March 31, 2022 ; and (iii) extended the payment due date for the additional February interest payment and the February principal payment pursuant to the Credit Agreement until the earlier of (A) the Offering Date and (B)March 31, 2022 . Further, pursuant to theFebruary 2022 Waiver and Amendment, any failure by the Company to comply with the terms of the preceding sentence shall constitute an immediate Event of Default under the Credit Agreement. OnMarch 11, 2022 , the Company entered into theMarch 2022 Sprott Agreement with the Lender with respect to the Sprott Credit Agreement. As described in theMarch 2022 Sprott Agreement, the Company was contemplating the sale or issuance of its equity securities pursuant to one or more transactions to be completed on or beforeMarch 31, 2022 (the "Equity Financing Transactions"). Pursuant to theMarch 2022 Sprott Agreement, if the Equity Financing Transactions result (or are likely to result pursuant to definitive subscription underwriting and/or similar legally binding agreements) in the Company's receipt of total gross cash proceeds (before deduction of fees and expenses) of at least$50 million on or beforeMarch 31, 2022 (the "Required Equity Amount"), the Lender and the Company will amend the principal repayment terms under the Credit Agreement such that no further scheduled payments of principal shall be required prior toMay 31, 2025 (the "Maturity Date") (i.e., there will be no required regular amortization payments of the Facility (as defined in the Credit Agreement) and the full principal balance of the Facility shall be due and payable in a single "bullet" payment on the Maturity Date). The consummation of the Private Placement Offering of Company securities as described under "Private Placement" above satisfied the condition in theMarch 2022 Sprott Agreement. TheMarch 2022 Sprott Agreement also provides that, in connection with the modification of the required facility amortization payments, the Company shall pay to the Lender an amount equal to$3.3 million , with such payment to be capitalized and added to the principal amount owing under the Sprott Credit Agreement and accrue interest at the same rate and upon the same terms as the existing loans under the Sprott Credit Agreement; provided, the payment or prepayment of such capitalized principal amount shall not be subject to the Prepayment Premium (as defined in the Sprott Credit Agreement) or any other penalty or premium. OnMarch 14, 2022 , the Company reached an agreement in principle with the Lender with respect to the Sprott Credit Agreement to modify the terms of the Sprott Credit Agreement and other applicable loan documents. OnMarch 30, 2022 , the Company and Lender under the Sprott Credit Agreement entered into the Second A&R Agreement, which (a) extends the maturity date for all of the loans and other principal obligations under the Sprott Credit Facility by two years, toMay 31, 2027 ; (b) provides for the Company to prepay principal under the facility in the amount of$10.0 million promptly upon the 55
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Company's receipt of cash proceeds from the Private Placement offering withAmerican Multi-Cinema, Inc. and 2176423Ontario Limited (the "Initial Equity Proceeds Prepayment"); (c) provides for the Company to prepay principal under the Sprott Credit Agreement in the amount of$13.9 million (representing 10% of the subsequent issuance of its equity interests consummated on or prior toMarch 31, 2022 ) (the "Subsequent Equity Proceeds Prepayments"); and (d) eliminates the prepayment premiums otherwise payable with respect to the Initial Equity Proceeds Prepayment, the Subsequent Equity Proceeds Prepayments and all future prepayments of principal under the Sprott Credit Facility. In addition, the Company's obligations to prepay principal with proceeds of asset sales will be credited/offset by the aggregate amount of Initial Equity Proceeds Prepayment and the Subsequent Equity Proceeds Prepayments ($23.9 million ), and to maintain a minimum amount of Unrestricted Cash (as defined in the Second A&R Agreement) is increased to$15.0 million . The Company (i) paid the previously deferred additional interest payment of$0.5 million , (ii) made the Initial Equity Proceeds Prepayment of$10.0 million and paid in kind a$3.3 million fee in connection with the modification and capitalized it to principal onMarch 16, 2022 and (iii) made the Subsequent Equity Proceeds Prepayment of$13.9 million onMarch 30, 2022 ; and after giving effect to such prepayments the outstanding principal balance under the Sprott Credit Agreement is estimated to be$57.9 million (before issuance discounts) including unpaid additional interest of approximately$7.1 million .
Off-balance sheet arrangements
As ofDecember 31, 2021 , our off-balance sheet arrangements consisted of a net profit royalty arrangement and a net smelter royalty arrangement (see Note 23 - Commitments and Contingencies to the Notes to the Consolidated Financial Statements).
Accounting Developments
For a discussion of any recently issued and/or recently adopted accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to the Notes to the Consolidated Financial Statements.
Critical Accounting Estimates
MD&A is based on our Consolidated Financial Statements, that have been prepared in accordance with GAAP. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts. We base our assumptions and estimates on historical experience and various other sources that we believe to be reasonable at the time our estimates are made. Actual results may differ from amounts estimated in these statements, and such difference could be material. As such, future events and their effects cannot be determined with certainty. Although other estimates are used in preparing our financial statements, we believe that the following accounting estimates are the most critical to understanding and evaluating our reported financial results. For information on all of our significant accounting policies, see Note 2 - Summary of Significant Accounting Policies to the Notes to the Consolidated Financial Statements.
Ore on leach pads
Estimate Required:
The recovery of gold and silver at theHycroft Mine is currently accomplished through a heap leach process, the nature of which limits our ability to precisely determine the recoverable gold ounces in Ore on leach pads. We estimate the quantity of recoverable gold ounces in ore on leach pads using surveyed volumes of material, ore grades determined through sampling and assaying of blastholes, and estimated recovery rates based on ore type and domain and level of oxidation actually achieved or expected to be achieved prior to leaching. The quantity of recoverable gold ounces and recovery rates varies based on ore mineralogy, steps in the leach process, ore grade, ore particle sizes and the percentage of cyanide soluble gold. The estimated recoverable gold ounces placed on the leach pads are periodically reconciled by comparing the related ore to the actual gold ounces recovered (metallurgical balancing). The ultimate recoverable gold ounces or life-of-mine recovery rate is unknown until mining operations cease. A change in the recovery rate or the quantity of recoverable gold ounces in our stockpiles or ore on leach pads could materially impact our financial statements. 56
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Impact of Change in Estimate:
Changes in recovery rate estimates or estimated recoverable gold ounces that do not result in write-downs are accounted for on a prospective basis. If a write-down is required, ore on leach pads would be adjusted to market values before prospectively accounting for the remaining costs and revised estimated recoverable gold ounces. During the year endedDecember 31, 2021 , we did not recognize any write-downs related to estimated ounces on our in-service leach pads. AtDecember 31, 2021 , if our estimate of recoverable gold ounces on the leach pad decreased by 2.5% or 5.0%, recoverable gold ounces in Ore on leach pads would decrease by approximately 178 ounces or 357 ounces, respectively, which would require a write-down of$0.3 million or$0.5 million , respectively, of our Ore on leach pads costs before prospectively accounting for the remaining costs. A 2.5% or 5.0% increase to our estimate of recoverable gold ounces in Ore on leach pads would increase the estimated recoverable ounces by the aforementioned amounts and would not result in a change to our weighted average cost per ounce.
Impairment of long-lived assets
Estimate Required:
Our long-lived assets consist of Plant, equipment, and mine development, net. We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Events that may trigger a test for recoverability include, but are not limited to, significant adverse changes to projected revenues, costs, or future expansion plans or changes to federal and state regulations (with which we must comply) that may adversely impact our current or future operations. An impairment is determined to exist if the total projected future cash flows on an undiscounted basis are less than the carrying amount of a long-lived asset group. An impairment loss is measured and recorded based on the excess carrying value of the impaired long-lived asset group over fair value. To determine fair value, we used a market-based approach for determining fair value based on sales transactions of comparable assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. Our estimates of future cash flows from the potential sale of our assets are based on numerous assumptions that are consistent or reasonable in relation to transactions occurring in the market and actual future cash flows may be significantly different than the estimates as each are each subject to significant risks and uncertainties.
Impact of Change in Estimate:
The estimates and assumptions used to determine the fair value of our long-lived assets as ofDecember 31, 2021 were based sales transactions of comparable assets. We compared the estimated$162.0 million estimated fair value, after allocating the fair value to other assets and liabilities, to the carrying value of our Plant, equipment, and mine development, net of$58.5 million , and given the large surplus between the estimated fair value of the Company and the carrying value of our Plant, equipment, and mine development, net a change in the estimates used in the mark-based approach would be unlikely to result in an impairment as ofDecember 31, 2021 .
Asset retirement obligation ("ARO")
Estimate Required:
We will be required to perform reclamation activity at theHycroft Mine in the future. As a result of this requirement, an ARO has been recorded on our consolidated balance sheets that is based on our expectation of the costs that will be incurred years in the future. Any underestimate or unanticipated reclamation costs or any changes in governmental reclamation requirements could require us to record or incur additional reclamation costs. ARO liabilities are accrued when they become known, are probable and can be reasonably estimated. Whenever a previously unrecognized ARO liability becomes known, or a previously estimated reclamation cost is increased, the amount of that liability and additional cost will be recorded at that time and could materially reduce our consolidated net income attributable to stockholders.
Impact of Change in Estimate:
Based on our current proposed 34-year mine plan set forth in the 2019 Hycroft TRS, which we believe remains the best estimate for the life of mine, no significant reclamation activity will be made until 2047. However, if the significant reclamation activity were to begin in 2042 or 2045 our reclamation liability would increase by approximately$1.9 million and approximately$0.7 million , respectively. 57
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Table of Contents Warrant liability Estimate Required: We account for the 5-Year Private Warrants to purchase shares of our common stock that are not indexed to our own stock as liabilities at fair value on the balance sheet. The warrants are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of Other income (expense), net on the statement of operations. We will continue to adjust the liability for changes in fair value of the 5-Year Private Warrants until the earlier of the (i) exercise or expiration of the 5-Year Private Warrants or (ii) the transfer of any 5-Year Private Warrants to any personwho is not a permitted transferee, at which time the applicable warrant liability will be extinguished. The terms of the 5-Year Private Warrants are substantially identical to the 5-Year Public Warrants except the 5-Year Private Warrants, while held by theSPAC sponsor and/orSPAC underwriter and their permitted transferees, are precluded from mandatory redemption and are entitled to exercise on a cashless bases at the holder's election. Accordingly, we use a Black-Scholes model with an appropriate estimate of volatility considering volatility of the 5-Year Public Warrants and using a Monte Carlo simulation model to incorporate the redemption and cashless exercise features in the 5-Year Private Warrants. Increases (decreases) in the assumptions result in a directionally similar impact to the fair value of the warrant liability.
Impact of Change in Estimate:
A
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