HYCROFT MINING HOLDING CORPORATION
In Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), "we", "us", "our", the "Company", and "Hycroft" refer to
Hycroft Mining Holding Corporation and its subsidiaries. The following
discussion, which has been prepared based on information available to us as of
August 7, 2020 , provides information that we believe is relevant to an
assessment and understanding of our condensed consolidated operating results and
financial condition. As a result of the completion of the Recapitalization
Transaction, the financial statements of Hycroft Mining Corporation ("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 and the financial statements have been
restated to reflect the financial statements of Seller. The following discussion
should be read in conjunction with our other reports filed with the U.S.
Securities and Exchange Commission (the "SEC") as well as our interim unaudited
condensed consolidated financial statements (the "Financial Statements") and the
notes thereto included in this Quarterly Report on Form 10-Q for the three and
six months ended June 30, 2020 .
Our discussion and analysis consists of the following subsections:
? Introduction to the Company provides a brief discussion of our current
operations, business strategies, and goals;
? Executive Summary lists significant highlights of 2020;
? Health and Safety provides a discussion of our year-to-date performance and
initiatives in this area;
? Recent Developments provides details on corporate and industry-specific items,
including the recently completed Recapitalization Transaction, COVID-19, and
our ability to continue as a going concern;
? 2020 Outlook summarizes our estimates for the second half of 2020 crushing and
production levels;
?
statistics, the leach pad expansion project, and a summary of the 2019 Hycroft
Technical Report Summary;
? Results of Operations provides a review of our operating results for the
current period and comparable prior year period;
? Liquidity and Capital Resources provides a discussion of our liquidity,
available sources of liquidity, cash flows, capital requirements, and debt
instruments and covenants; and
? Critical Accounting Estimates provides a discussion of accounting estimates
that we believe are critical in understanding and evaluating our reported
financial results because they affect reported amounts and require significant
management judgment and assumptions about highly uncertain matters. Introduction to the CompanyHycroft Mining Holding Corporation (formerly known asMudrick Capital Acquisition Corporation ("MUDS")) and its subsidiaries is aU.S. -based gold producer that is focused on operating and developing its 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 the state ofNevada and the corporate office is located inDenver, Colorado . Based upon the 2019 Hycroft Technical Report (as defined herein), with an effective date ofJuly 31, 2019 , theHycroft Mine had proven and probable mineral reserves of 12.0 million ounces of gold and 481.4 million ounces of silver. Operations restart During the second quarter of 2019, we restarted open pit mining operations at theHycroft Mine , and, during the third quarter of 2019, produced and sold gold and silver which we have continued to do on an approximate weekly basis since restarting. As part of the 2019 restart of mining operations, existing equipment was re-commissioned, including haul trucks, shovels and a loader, upgrades were made to the crushing system and new leach pad space was added to the existing leach pads. During 2020, we continued to increase our operations by mining more tons, procuring additional mobile equipment rentals, and increasing our total headcount. During the first six months of 2020 theHycroft Mine produced 12,342 ounces of gold and 73,717 ounces of silver and sold 10,797 ounces of gold and 70,703 ounces of silver. 29
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Table of Contents Strategy and goals Our strategy is to increase stockholder value through the successful execution of a two-stage, heap oxidation and subsequent leaching of transition and sulfide ores, as presented in the 2019 Hycroft Technical Report. To accomplish this strategy, we must first achieve our most critical near-term internal targets and performance metrics, including within key operating areas, such as mining, crushing, and processing, as well as the related costs and operating expenses associated with producing gold and silver at theHycroft Mine . We must also successfully construct, commission, and operate our ongoing leach pad expansion project, which provides the required pad areas for future ore placement expected to commence in the fourth quarter of 2020. Due to the technical nature of the two-stage, heap oxidation and leaching process, we must also be successful at attracting and retaining highly-skilled and experienced employees to manage the metallurgical and process departments. At such future time when we believe our near-term goals are achieved, we plan to ramp-up theHycroft Mine by increasing the amount of ore tons mined and crushed, the amount of ore tons processed, and ultimately the number of gold and silver ounces produced. As discussed throughout this MD&A, including within theHycroft Mine section, during the first six months of 2020 we have been unable to fully achieve our internal operating, processing, sales, and production cost targets, which has created substantial doubt about our ability to continue as a going concern. Refer to the Going concern subsection of the Recent Developments section of this MD&A for additional details. Executive Summary
? Health and Safety - During the second quarter of 2020, we reported two lost
time accidents.
? Recapitalization Transaction - On May 29, 2020 , we completed the
Recapitalization Transaction, which as of the closing date, among other
things, resulted in a cash balance of
HYMC common stock issued and outstanding. In addition, the Company
had 34,289,999 outstanding warrants to purchase an equal number of shares of
HYMC common stock at
3,210,213 shares of HYMC common stock at a price of $44.82 per share.
? Ounces and realized prices - During the first six months of 2020, the Hycroft
Mine produced 12,342 ounces of gold and 73,717 ounces of silver and sold
10,797 ounces of gold (average realized price
silver (average realized price of $16.24 ).
? Leach pad construction - During the second quarter and first six months of
2020, we spent
expansion project.
? Cash flows and liquidity - Our ending cash balance was $47.3 million ,
following year-to-date 2020 operating cash flows of
activities of
? Going concern - As of
ability to continue as a going concern due to our need for additional capital.
Health and Safety No matter the level of our health and safety performance, whether high or low, our philosophy is one of "continuous improvement" combined with a belief that "the miner is the most important thing to come out of a mine." We have mandatory mine safety and health programs that include employee and contractor training, risk management, workplace inspection, emergency response, accident investigation and program auditing. We consider these programs to be essential at all levels to ensure that our employees, contractors, and visitors operate safely. During the second quarter of 2020, we reported two lost time accidents, which brought the year-to-date total to three. When included with other reportable incidents, theHycroft Mine's total reportable incident frequency rate ("TRIFR"), which is one of the metrics we use to assess safety performance, is above industry averages and historical levels experienced at theHycroft Mine . As a result, we have allocated additional personnel, resources, workforce time, and communications to mine safety which we believe should contribute to a reduction in future lost time accidents and our TRIFR 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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Table of Contents Recent Developments Recapitalization Transaction As discussed in Note 1 - Company Overview and Note 3 - Recapitalization Transaction to the Notes to the Financial Statements, onMay 29, 2020 , we, formerly known asMudrick Capital Acquisition Corporation ("MUDS"), consummated a business combination transaction (the "Recapitalization Transaction") as contemplated by a purchase agreement datedJanuary 13, 2020 , as amended onFebruary 26, 2020 (the "Purchase Agreement"), by and among us,MUDS Acquisition Sub, Inc. ("Acquisition Sub") andHycroft Mining Corporation ("Seller"). Pursuant to the Purchase Agreement, Acquisition Sub acquired all of the issued and outstanding equity interests of the direct subsidiaries of Seller and substantially all of the other assets of Seller and assumed substantially all of the liabilities of Seller. In conjunction with the Recapitalization Transaction, Seller's indebtedness existing prior to the Recapitalization Transaction was either repaid, exchanged for indebtedness of HYMC, exchanged for shares of HYMC common stock or converted into shares of Seller common stock, and our post-Recapitalization Transaction indebtedness included amounts drawn under the Sprott Credit Agreement and the assumption of the newly issued Subordinated Notes (as such are defined herein). Upon closing of the Recapitalization Transaction, our unrestricted cash available for use totaled$68.9 million and the number of shares of HYMC common stock issued and outstanding totaled 50,160,042. In addition, we had 34,289,999 outstanding warrants to purchase an equal number of shares of HYMC common stock at$11.50 per share and 12,721,623 warrants to purchase 3,210,213 shares of HYMC common stock at a price of$44.82 per share (see Note 12 - Stockholders' Equity to the Notes to the Financial Statements for additional information). Upon closing of the Recapitalization Transaction and after giving effect to the terms of the business combination, the former holders of Seller's indebtedness and common stock, including affiliated entities of such former holders, owned approximately 96.5% of the issued and outstanding HYMC common stock. Going concern As discussed in Note 2 - Summary of Significant Accounting Policies to the Notes to the Financial Statements, events and conditions exist that, when considered individually or in the aggregate, raise substantial doubt about our ability to continue as a going concern because it is probable that, without additional capital injections, we will be unable to meet our obligations as they become due within one year after the date that second quarter 2020 financial statements were issued. Although we recently completed the Recapitalization Transaction, using our internal forecasts and cash flow projection models, we currently project there will be insufficient cash to meet our future obligations as they become due or ramp up theHycroft Mine's operations from current levels or to levels that are contemplated by the 2019 Hycroft Technical Report Summary (See Item 1A. Risk Factors below).
Production inventory write-downs
Consistent with our financial reporting and accounting policies, and as part of the preparation of the second quarter 2020 financial statements, we performed routine quarter-end metallurgical balancing analysis, which is a process that estimates the remaining recoverable gold and silver ounces on the leach pads using surveyed volumes of material, ore grades determined through sampling and assaying of blastholes, crushed ore sampling, leach pad and solution sampling, estimated recovery percentages based on ore type, domain, and oxidation levels achieved, and quantities of gold and silver actually recovered. During the second quarter of 2020, based on metallurgical balancing results, we determined that 6,512 ounces of gold that had been placed on the leach pads were no longer recoverable and wrote-off such ounces. The write-down of these ounces significantly reduced our projected revenues for the second half of 2020. See Note 4 - Inventories to the Notes to the Financial Statements for additional information. Cost of sales We have been unsuccessful in achieving our operating and production costs targets at theHycroft Mine . During the second quarter of 2020, our production costs, mine site period costs, and the cash portion of the write-down of production inventories totaled$29.7 million , which exceeded second quarter 2020 revenues of$7.6 million by$22.1 million . Higher than planned operating and production costs were the result of: (1) increased contractor support for technical and manpower shortages in crusher operations, mobile maintenance, and leach pad operation; (2) overuse of processing reagents used in the leach pad operations due to poor planning, monitoring, and execution; (3) higher operating costs in the crusher, due to higher than planned belt failures; and (4) higher maintenance costs for the owned mining fleet, due to unexpected timing of component failures. As a result of actual second quarter 2020 operating and production costs incurred, we have revised our future forecasts of production and operating cost estimates for the second half of 2020 which has reduced our estimated future cash flows. 31
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Table of Contents Current status Our ability to continue as a going concern is contingent upon achieving our sales, production, cost, and other operating targets, as well as the success of a future financing transaction to provide additional capital financing for working capital and construction of the leach pad. We have begun the process of speaking with our financial advisors and stakeholders about options and timing related to securing additional debt and/or equity financing that may provide us with the financial resources required to complete the construction of the leach pad and continue to ramp up our operations. While we have received a non-binding letter of support from our two largest stakeholders, the Board of Directors of the Company intends to evaluate its options to ensure the necessary capital is raised on terms favorable to and in the best interests of all of its shareholders. We have no commitment from any party to provide additional financing or capital, and we can provide no assurance that any funding will be available, or if available, that its terms will be favorable or acceptable to us. At this time, we do not have an expected time frame for, or an expectation with respect to, securing additional financial capital, if at all. Disclaimer This Quarterly Report on Form 10-Q shall neither constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which the offer, solicitation, or sale would be unlawful prior to the registration or qualification under the securities laws of any such jurisdiction. 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 of America . Efforts implemented by local and national governments, as well as businesses, including temporary closures, are expected to have adverse impacts on local, national and the global economies. We have implemented health and safety policies for employees, contractors, and visitors that follow guidelines published by theCenter for Disease Control (CDC) and the Mine Safety andHealth Administration (MSHA). The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and continued spread of the outbreak, 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 COVID-19 outbreak at the mine site could result in an entire shutdown of theHycroft Mine itself which would negatively impact our financial position, operating results, and cash flows.
As a result of COVID-19, we have implemented numerous policies and initiatives, including, but not limited to:
? General travel and site access restricted to business-critical needs;
discretionary travel strongly discouraged;
? Health and temperature checks required prior to boarding mine site
transportation buses;
? Increased cleaning and disinfecting of common areas, including mobile mining
equipment cabs;
? Social distancing, including limiting meetings to essential people with
increased use of conference calls and webinars;
? Communications informing employees of their ability to take paid-leave for
COVID-19-related matters;
? Employees who can have been permitted to work remotely; and
? Regularly monitoring local, state, and national publications and guidance for
routine discussion amongst executives and management.
To date, we have not experienced any material disruptions to our supply chain because of COVID-19.
CEO transition As more fully discussed in Note 22 - Subsequent Events to the Notes to the Financial Statements, onJuly 1, 2020 ,Randy Buffington , our former Chairman, President, and CEO departed the Company.Mr. Buffington is assisting us during this transition period and has entered into a consulting agreement for 24 months. The Board of Directors is currently conducting a search process for a permanent CEO and our former Executive Vice President and CFO,Stephen Jones , was named the interim CEO uponMr. Buffington's departure. Director Compensation The Compensation Committee and Board of Directors approved the following initial annual Director compensation arrangements, in the form of: (i) an annual cash retainer of$55,000 ; (ii) annual committee chair fees of$12,500 for the Audit Committee,$10,000 for theSafety, Sustainability and Technical Committee , and$7,500 for each of the Nominating and Governance and Compensation Committees; (iii) annual committee member fees of$5,000 for the Audit Committee,$4,000 for theSafety, Sustainability and Technical Committee , and$2,500 for each of the Nominating and Governance and Compensation Committees; and (iv)$75,000 in annual equity awards in the form of restricted stock units. In addition, an initial equity award in the amount of$50,000 in the form of restricted stock units will be granted to each director. Equity awards will be granted at the each annual stockholder meeting of the Company unless otherwise determined by the Compensation Committee. 32
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Table of Contents 2020 Outlook While we expect second half of 2020 crushing and production levels to be consistent with or above first half of 2020 levels, we believe that 2021 and beyond will see material increases in mining, crushing and production as we continue to ramp up infrastructure, including the large new leach pad currently under construction on the north of the property. We continue to believe that feasibility study production levels or greater are ultimately achievable once infrastructure is ramped up and we can execute successfully.Hycroft Mine Operations
The following table provides a summary of operating results for our
Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Ore mined - crusher feed (ktons) 1,550 837 2,507 850
Ore mined - run of mine (ktons) 196 --- 501 ---
Total ore mined (ktons) 1,746 837 3,008 850
Waste mined (ktons) 1,272 87 1,437 310
Crushed ore rehandled to leach
pads (ktons) 1,350 678 2,334 842
Total mined and rehandled (ktons) 4,368 1,601 6,779 2,002
Waste tons to ore tons strip
ratio (#) 0.73 0.10 0.48 0.36
Ore crushed (ktons) 1,378 752 2,393 850
Ore grade mined - gold (oz/ton) 0.011 0.022 0.014 0.022
Ore grade mined - silver (oz/ton) 0.245 0.311 0.205 0.311
Production - gold (oz) 5,370 --- 12,342 ---
Production - silver (oz) 31,806 --- 73,717 ---
Sales - gold (oz) 4,237 --- 10,797 ---
Sales - silver (oz) 21,331 --- 70,703 ---
Average realized sales price -
gold ($/oz) $ 1,719 --- $ 1,631 ---
Average realized sales price -
silver ($/oz) $ 16.49 --- $ 16.24 ---
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Table of Contents
During the second quarter of 2019, we restarted open pit mining operations at theHycroft Mine , and, during the third quarter of 2019, produced and sold gold and silver which we have continued to do on an approximate weekly basis since restarting. Each quarter since restarting, we have generally increased tons mined, crushed, and placed on the leach pads, most notably in the second quarter of 2020 following the arrival and commissioning of mobile mining equipment rentals (seven haul trucks and one loader). Ore tons mined and crushed require rehandling from the crusher fine ore stockpile to the leach pads for processing, that is, crushed tons require a second cycle of loading and hauling beyond the initial mining cycle which occurs in the open pit. Run of mine ore tons can be placed directly on the leach pads and are not required to be rehandled. During the first quarter of 2020, ore tons crushed averaged approximately 338,000 tons per month and increased to approximately 459,000 tons per month in the second quarter of 2020. During the second half of 2020, we expect to crush at levels consistent with or above first half levels, which will allow us to continue our focus on improving crusher operations, planned maintenance scheduling, operator training, and automation enhancements. As discussed in Note 2 - Summary of Significant Accounting Policies to the Notes to the Financial Statements and in the Going concern section of this MD&A, during the first half of 2020 we were unable to achieve many of our targets, including with respect to leach pad processing activities which resulted in the write-off of recoverable gold ounces through metallurgical balancing reconciliations. Since restarting, we have (1) been unable to consistently maintain leach pad conditions required to produce all of the estimated recoverable ounces placed on the leach pads, and (2) have experienced instances of solution mismanagement in which pregnant metal-bearing solutions have been circulated to areas of leach pads not currently in operation, thus making such ounces unrecoverable in our current plans. Our operating plans for the second half of 2020 contemplate our estimates of ore tonnage (and related solution flows) that we believe can be successfully processed to mitigate potential future write-offs of recoverable gold ounces due to metallurgical balancing reconciliations, poor leach pad conditions, or solution mismanagement. Early in the third quarter of 2020, additional technical process and metallurgical staff were hired which is expected to mitigate further instances of solution mismanagement and poor process practices.
The gold and silver grades of ore mined in the first half of 2020 were as planned and decreased from the comparable period of 2019 in which existing higher grade stockpile ore was mined prior to any drilling and blasting starting. During the second quarter of 2020, we commenced in-pit contractor drilling and blasting activities to provide fresh ore feed for the crusher, run of mine hauling, and waste removal in support of the full year plan.
Gold and silver ounces produced and related ounces sold was lower than feasibility study level due to our inability to properly execute our processing plans, resulting in recurring write-offs of recoverable gold ounces due to metallurgical balancing reconciliations. Average realized gold prices per ounce increased during the first half of 2020 and resulted in revenue of$7.6 million and$18.8 million during the three and six months endedJune 30, 2020 . Leach pad expansion project During the second quarter of 2020, we commenced a leach pad expansion project on the north side of theHycroft Mine property to provide us with leach pad space required for future operations. The initial stage of the leach pad project is being constructed in two phases by a contractor, with the first phase consisting of approximately 4.0 million square feet of pad space and infrastructure for ponds, pipes, and electrical controls, and the second phase consisting of approximately 4.6 million square feet, which we expect to construct in 2021. With respect to the first phase, we expect the earthworks and leach pad construction to be completed in the fourth quarter of 2020 with the infrastructure completed and initially commissioned shortly thereafter later in the fourth quarter of 2020. During the second quarter and first six months of 2020, we spent$8.6 million and$9.7 million , respectively, on the leach pad expansion project, and expect total phase one leach pad project spending to approximate$36.0 million , including any final payments made in the first quarter of 2021. The leach pad expansion project represented approximately 82.9% of our total capital spending during the first six months of 2020 and is expected to represent a similar percentage of capital spending for the remainder of 2020.
2019 Hycroft Technical Report Summary
M3 Engineering and Technology Corporation ("M3 Engineering"), in conjunction withSRK Consulting (U.S.), Inc. ("SRK") and us, completed the Hycroft Technical Report Summary, Heap Leaching Feasibility Study, prepared in accordance with the requirements of the Modernization of Property Disclosures for Mining Registrants, with an effective date ofJuly 31, 2019 (the "Hycroft Technical Report"), for a two-stage, heap oxidation and subsequent leaching of transition and sulfide ores. The 2019 Hycroft Technical Report projects the economic viability and potential future cash flows for theHycroft Mine when mining operations expand to levels presented in the 2019 Hycroft Technical Report. 34
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The Hycroft Technical Report provides the results of the Hycroft heap leach feasibility study that evaluated the possibility of oxidizing and leaching transitional and sulfidic material in a heap leach application. The feasibility analyzes a full-scale operation including construction of new leach pads and expanded mining activities. Key components of the process that currently exist onsite include heap leach pads, a crushing facility consisting of primary, secondary, and tertiary crushing, two Merrill-Crowe plants having a total capacity of 26,000 gpm, and associated support facilities. The Hycroft Technical Report presents reflects a mineral reserve estimate as ofJune 30, 2019 , of 12.0 million ounces of gold and 481.4 million ounces of silver and contained in oxide, transition and sulfide ores, which is projected to be mined over 34 years using typical truck and shovel open pit mining methods. The mine plan developed for the Hycroft Technical Report requires a range of approximately 85 to 100 million tons per year to be mined (both ore and waste) through the mine life. Overall, 1.1 billion tons of ore is mined with a strip ratio of 1.17. The Hycroft Technical Report outlines the test work done to demonstrate the viability of the two-stage, heap oxidation and subsequent leaching of transition and sulfide ores. As outlined in the Hycroft Technical Report, 94% of the ore is crushed to a P80 of ½" and then mixed with soda ash to induce an alkaline pre-oxidation process. After the ore has been oxidized to the desired extent, we will rinse the ore with fresh water and saturated lime solution and then cyanide leach the ore to extract the gold and silver. This process is the subject of a pending patent application. The crushing system is initially designed to run at nominal capacity of 2.0 million tons per month ramping up to 3.0 million tons per month with the addition of two additional tertiary crushers. Soda ash is added prior to the trucks unloading into the primary crusher dump pocket to begin the pre-oxidation process. The ore proceeds through three stages of crushing and exists into the fine ore stockpile, which is then hauled to leach pads. The pH and alkalinity of the ore is managed on the leach pad using a soda ash solution that is applied to bring the ore to field capacity (8-10% moisture). The ore is regularly sampled for reagent addition control and the soda ash solution in the heap is replenished on a regular basis to offset evaporation and carbonate consumption. The duration of the pre-oxidation is expected to take between 30 and 120 days which is determined by the characteristics of the ore and the measured extent of oxidation baes upon sulfate production. When the pre-oxidation cycle has been completed, we rinse the ore first with fresh water and then with a saturated lime solution prior to the commencement of cyanidation leach. This is necessary to remove sulfate and bicarbonate from the heap and reduce cyanide loss during leaching. The alkalinity of the solution in the heap is monitored to ensure rinse completion prior to the start of cyanidation. The pH is controlled during cyanidation using lime. As the ore has already been oxidized and rinsed, it undergoes a nominal 60-day primary leach cycle. Due to the high silver content of the pregnant solution, gold and silver are recovered by zinc cementation. We have two existing Merrill-Crowe plants, which are used to process pregnant solution from the heap leach operation. The older plant has a capacity of 4,500 gallons per minute. The newer plant is considerably larger, with a present capacity of 21,500 gallons per minute.
Overall, the Hycroft Technical Report shows 7.8 million ounces of payable gold and 344.1 million ounces of payable silver produced and sold.
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 ounce amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Gold revenue $ 7,284 $ - $ 17,612 $ -
Gold ounces sold 4,237 -
10,797 -
Average realized price (per ounce)
During the three and six months endedJune 30, 2020 , our gold revenue was$7.3 million and$17.6 million , respectively, compared to no revenues in the prior year periods as mining operations were restarted duringApril 2019 and there was no production during the first six months of 2019. As discussed in theHycroft Mine - Operations section of the MD&A, gold revenues were less than expected for both the three and six months endedJune 30, 2020 due to lower production resulting from our inability to achieve processing targets. Because of the lower production for the reasons discussed in theHycroft Mine - Operations section of the MD&A, gold revenues during the three months endedJune 30, 2020 decreased from three months endedMarch 31, 2020 . However, we benefited from favorable gold spot prices as the average realized price increased from$1,574 per ounce sold in the first quarter 2020 compared to$1,719 per ounce sold for the second quarter 2020. 35
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Table of Contents Silver revenue
The table below summarizes silver sales, ounces sold and average realized prices for the following periods (dollars in thousands, except ounce amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Silver revenue $ 352 $ - $ 1,148 $ -
Silver ounces sold 21,331 -
70,703 -
Average realized price (per ounce)
During the three and six months endedJune 30, 2020 , our silver revenue was$0.4 million and$1.1 million , respectively, compared to no revenues in the prior year periods as mining operations were restarted duringApril 2019 and there was no production during the first six months of 2019. Silver revenue was similarly impacted negatively from our inability to achieve processing targets. Total cost of sales Total cost of sales consists of Production costs, Mine site period costs, Depreciation and amortization mine site period costs, Depreciation and amortization, and Write-down of production inventories. The table below summarizes total cost of sales for the following periods (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Production costs$ 7,486 $ -$ 16,421 $ - Mine site period costs 11,996 - 18,630 - Depreciation and amortization mine site period costs 874 - 1,432 - Depreciation and amortization 548 - 1,324 - Write-down of production inventories 10,959 - 17,924 - Total cost of sales$ 31,863 $ -$ 55,731 $ - Production costs For the three and six months endedJune 30, 2020 , we recognized$7.5 million and$16.4 million , respectively, in production costs, or$1,767 per ounce and$1,521 per ounce of gold sold, respectively, compared to no production costs in the prior year periods as mining operations were restarted duringApril 2019 . Mine site period costs During the three and six months endedJune 30, 2020 , inclusive of depreciation and amortization, we recorded$12.9 million and$20.1 million , respectively, of mine site period costs which did not qualify for allocation to our production-related inventories and, therefore, were expensed as incurred. Such period costs are generally the result of recurring or significant downtime or delays, unusually high levels of repairs, inefficient operations, overuse of processing reagents, or other unusual costs and activities. There were no comparable costs in the prior year periods as mining operations were restarted duringApril 2019 and there was no production during the first six months of 2019.
Depreciation and amortization
Depreciation and amortization expense was$0.5 million , or$129 per ounce of gold sold for the three months endedJune 30, 2020 and$1.3 million , or$123 per ounce of gold sold for the six months endedJune 30, 2020 .
Write-down of production inventories
As discussed in Note 2 - Significant Accounting Policies and Note 4 - Inventories to the Notes to the Financial Statements, based on metallurgical balancing results, for the three and six months endedJune 30, 2020 we determined that 6,512 and 10,492 ounces of gold, respectively, were no longer recoverable and wrote-off such ounces. As a result of the write-offs, we recognized$10.2 million and$16.7 million in write-downs of cash production costs during the three and six months endedJune 30, 2020 , respectively and$0.7 million and$1.3 million , respectively, in depreciation and amortization. See theHycroft Mine - Operations section of the MD&A for additional information. 36
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Table of Contents General and administrative General and administrative costs totaled$10.4 million and$1.2 million during the second quarters of 2020 and 2019, respectively, and$12.4 million and$3.2 million during the first six months of 2020 and 2019, respectively. Increases of$9.2 million and$9.3 million during the second quarter and first six months of 2020, respectively, compared to the same periods of 2019 were primarily due to$4.8 million of additional bonus expense which became payable upon completion of the Recapitalization Transaction,$2.1 million of insurance costs related to a directors and officers run-off policy for Seller as a result of the Recapitalization Transaction, and$1.1 million of additional legal and professional service fees associated with general corporate matters and obligations as a public company. Accretion We recorded$0.1 million of accretion expense for both the three months endedJune 30, 2020 and 2019 and$0.2 million of accretion expense both the six months endedJune 30, 2020 and 2019. Project and development For the three and six months endedJune 30, 2019 , project and development costs were$4.6 million and$6.8 million , respectively, while no such costs were incurred during the same periods of 2020. In late 2018, the Company began the process of restarting mining operations and restarted active mining at theHycroft Mine inApril 2019 . During the 2019 periods, project and development costs were incurred related to the restart of theHycroft Mine , such as maintenance and repair of mobile mining equipment and processing equipment (crusher, Merrill-Crowe facility), to prepare for use after sitting idle for several years. During 2019, project and development costs also related to the preparation of feasibility study and metallurgical test work, including for the 2019 Hycroft Technical Report Summary.
Pre-production depreciation and amortization
Pre-production depreciation and amortization represents expense recognized prior to the restart of mining operations at theHycroft Mine and for the three and six months endedJune 30, 2019 was$0.2 million and$1.1 million , respectively. Upon theApril 2019 restart of theHycroft Mine , we began capitalizing depreciation and amortization to ore on the leach pads. Care and maintenance Care and maintenance totaled$3.8 million for the first six months 2019 and were incurred from January to March of 2019 prior to theHycroft Mine's April 2019 restart, after which we no longer recorded such costs. Interest expense, net As discussed and detailed in Note 9 - Debt, Net to the Notes to the Financial Statements, interest expense totaled$15.1 million and$15.6 million during the second quarters of 2020 and 2019, respectively, and$35.0 million and$30.0 million during the first six months of 2020 and 2019, respectively. Interest expense decreased by$0.5 million during the second quarter of 2020 from the same period of 2019 as the Recapitalization Transaction was completed onMay 29, 2020 , and lowered recorded interest expense on Seller's pre-transaction indebtedness by approximately one month, which was partially offset by interest expense recorded for our new post-Recapitalization Transaction indebtedness. Interest expense increased during the first six months of 2020 from the comparable period of 2019 as Seller's weighted average debt balance prior to the closing of the Recapitalization Transaction increased by$131.1 million to$591.4 million , and we recorded$1.5 million interest expense for our new post-Recapitalization Transaction indebtedness. Interest income Interest income totaled$35,000 and$110,000 during the second quarters of 2020 and 2019, respectively, and$147,000 and$226,000 during the first six months of 2020 and 2019, respectively. Interest income was lower in the second quarter and first six months of 2020 due to decreases in interest rate yields from the comparable periods of 2019. 37
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Table of Contents Reorganization items OnMarch 10, 2015 , the a predecessor to Seller filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code with theUnited States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court ") and incurred legal and professional fees of$0.3 million and$0.6 million for the three and six months endedJune 30, 2019 , respectively, related to such matters. Income taxes There was no income tax expense or benefit, net, recognized during any of the three or six month periods endedJune 30, 2020 or 2019. Seller's gain from the Recapitalization Transaction was fully offset by the use of Seller's deferred tax assets. For additional details, refer to Note 15 - Income Taxes to the Notes to the Financial Statements. Net loss For the reasons discussed above, we recorded net losses of$49.8 million and$84.4 million for the three and six months endedJune 30, 2020 , respectively, compared to net losses of$21.9 million and$45.4 million for the three and six months endedJune 30, 2019 , respectively.
Liquidity and Capital Resources
General Prior to the closing of the Recapitalization Transaction, our primary source of liquidity was proceeds received from the issuance of related-party debt instruments, which were used to finance the 2019 restart of mining operations at theHycroft Mine and all working capital and capital expenditures thereafter. During the second half of 2019, we began to produce and sell gold and silver at theHycroft Mine which provided a source of revenue and related cash flow. OnMay 29, 2020 , we completed the Recapitalization Transaction which provided cash available for use of$68.9 million . As part of the Recapitalization Transaction, Seller's indebtedness existing prior to the Recapitalization Transaction was either repaid, exchanged for indebtedness of HYMC, exchanged for shares of HYMC common stock or converted into shares of Seller common stock, and our post-Recapitalization Transaction indebtedness included amounts drawn under the Sprott Credit Agreement and the assumption of the newly issued Subordinated Notes. Of the$68.9 million of cash available for use upon closing the Recapitalization Transaction, we expect to spend approximately$40.0 million on capital expenditures at theHycroft Mine , including for the leach pad expansion project and the$2.7 million final crusher payment to the vendor, with the remainder to be used for operations and working capital purposes at theHycroft Mine and corporate charges and expenses. We have yet to generate cash flow from operations and are not forecasting that we will do so in the second half of 2020. As discussed in the Going concern subsection of the Recent Developments section of this MD&A, we have insufficient liquidity and available capital resources that raises substantial doubt about our ability to continue as a going concern because it is probable that, without additional capital injections, we will be unable to meet our obligations as they become due within one year after the date that second quarter 2020 financial statements were issued. At this time, we do not have an expected time frame for, or an expectation with respect to, securing additional financial capital, if at all (See Item 1A. Risk Factors below). We have undertaken efforts aimed at managing our liquidity and preserving our capital resources by, among other things: (1) monitoring metal prices and the impacts (near-term and future) they have on our business; (2) developing a second half of 2020 forecast which we expect may be achieved in terms of processing projected recoverable ounces placed on the leach pads; (3) controlling our working capital and managing discretionary spending; (4) planning the timing and amounts of capital expenditures at theHycroft Mine and deferring such items that are not expected to impact our operating plans; and (5) evaluating new financing options that might be attainable and are permissible under our existing debt and royalty agreements. Our future liquidity and capital resources management strategy entails a disciplined approach to monitor the timing and amount of any operational tonnage ramp-up of theHycroft Mine 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 forecast future cash flows, and changes in other factors beyond our control. 38
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Table of Contents Cash and liquidity We have placed substantially all 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 inventory balances represent substantially all of our liquid assets on hand. As ofJune 30, 2020 , we had Cash of$47.3 million , Accounts receivable of$0.4 million , and metal inventories of$4.3 million . 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 our financial statements:
June 30, December 31,
2020 2019
Cash $ 47,293 $ 6,220
Accounts receivable 372 97
Metal inventories(1) 4,260 1,894
Ore on leach pads(2) 28,180 22,062
Total projected sources of future liquidity
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(1) Metal inventories contained approximately 2,508 recoverable ounces of gold
which are expected to be sold within the next 12 months. Assuming a gold
selling price of
any proceeds from silver sales, the sale of all gold ounces estimated to be
recovered from our metal inventories would provide us with
revenue. See Note 4 - Inventories to the Notes to the Financial Statements for
additional information.
(2) Ore on leach pads contained approximately 17,825 ounces of gold which are
expected to be processed into finished goods and then sold within the next 12
months. Assuming a gold selling price of
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
Financial Statements for additional information.
Six Months Ended
The following table summarizes our sources and uses of cash for the following
periods:
Six Months Ended June 30,
2020 2019
(dollars in thousands)
Net loss $ (84,408 ) $ (45,387 )
Net non-cash adjustments 52,057 27,298Net change in operating assets and liabilities (25,291 ) (6,046 ) Net cash used in operating activities
(57,642 ) (24,135 )
Net cash used in investing activities (11,704 ) (9,725 )
Net cash provided by financing activities 107,303 35,046
Net increase in cash 37,957 1,186
Cash, beginning of period 48,967 52,861
Cash, end of period $ 86,924 $ 54,047 Cash used in operating activities
For the six months endedJune 30, 2020 , we used$57.6 million in cash for operating activities primarily attributable to a net loss of$84.4 million and increases in production related inventories of$24.8 million , which were partially offset by certain non-cash items, in particular, write-downs of production inventories of$17.9 million , which is discussed in Note 4 - Inventories to the Notes to the Financial Statements, the non-cash portion of interest expense of$30.4 million and an increase in accounts payable of$7.8 million . For the six months endedJune 30, 2019 , we used$24.1 million of cash in operating activities primarily attributable to a net loss of$45.4 million and increases in production-related inventories of$7.6 million , which were partially offset by certain non-cash items, in particular, the non-cash portion of interest expense of$25.0 million and an increase in accounts payable of$1.7 million . 39
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Cash used in investing activities
For the six months endedJune 30, 2020 and 2019, we used$11.7 million and$9.7 million , respectively, in investing activities. For 2020, expenditures primarily related to construction of a new leach pad of$9.7 million , and construction or purchases of processing equipment of$1.5 million . For the 2019 period, expenditures were mostly driven by construction of leach pad space for the restart of$5.3 million , and the purchase and installation of four new cone crushers for$3.4 million .
Cash used in financing activities
For the six months endedJune 30, 2020 , Seller issued$44.8 million in aggregate principal amount of 1.25 Lien Notes (net of issuance costs) which were used to fund the operations and capital needs throughMay 29, 2020 . The remainder of the financing activities related to the Recapitalization Transaction, which provided$210.0 million in net cash flows and was used to repay Seller's$125.5 million First Lien Agreement,$6.9 million Promissory Note, and transaction costs and other issuance costs. See Note 3 - Recapitalization Transaction to the Notes to the Financial Statements for further discussion. The amount of cash provided by financing activities was$35.0 million for the six months endedJune 30, 2019 , which was due to$36.9 million in aggregate principal amount of 1.25 Lien Notes (net of issuance costs) issued to fund the restart of mining operations. Seller spent$1.2 million for legal and consulting fees related to the Recapitalization Transaction and$0.7 million to extend the maturity of the First Lien Credit Agreement.
Future capital and cash requirements
The following table provides our gross contractual cash obligations as ofJune 30, 2020 , which are grouped in the same manner as they were classified in the cash flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information. We believe the following provides the most meaningful presentation of near-term obligations expected to be satisfied using current and available sources of liquidity Payments Due by Period Less than 1 - 3 3 - 5 More than Total 1 Year Years Years 5 Years (dollars in thousands) Operating activities Operating lease requirements(1)$ 10,112 $ 10,042 $ 70 $ - $ - Consignment inventory purchase obligation(2) 1,770 885 885 - - Interest payments(3) 25,296 1,090 15,687 8,519 - Crofoot royalty obligation(4) 4,990 240 4,554 196 - Net smelter royalty(5) 209,815 2,213 9,295 10,905 187,402 Remediation and reclamation expenditures(6) 62,213 - - - 62,213 Financing activities Repayments of debt principal(7) 214,135 - 30,511 45,766 137,858$ 528,331 $ 14,470 $ 61,002 $ 65,386 $ 387,473
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(1) As noted below in the Off-balance sheet arrangements section of this MD&A, we
have operating leases for mine equipment. (2) As noted below in the Off-balance sheet arrangements section of this MD&A, and
as discussed in Note 5 - Prepaids and Other to the Notes to the Financial
Statements, we have future purchase obligation for consignment inventory. (3) Under the Sprott Credit Agreement, we must pay interest beginning in the 13th
month after the initial advance to the Lender and also pay additional interest
payments commencing
9 - Debt, Net to the Notes to the Financial Statements for additional
information.
(4) We are required to pay a 4% net profits royalty, including advance royalty
payments of
Note 20 - Commitments and Contingencies. (5) Under the Sprott Royalty Agreement, we are required to pay a perpetual royalty
equal to 1.5% of the net smelter returns from our
monthly. Amounts presented above incorporate estimates of our current
life-of-mine plan. See Note 10 - Royalty Obligation to the Notes to the
Financial Statements for additional information. (6) 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. (7) Repayments of principal on debt consists of amounts due under the Sprott Credit
Agreement and the Subordinated Notes. 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. See Note 9 - Debt,
Net to the Notes to the Financial Statements for additional information.
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Table of Contents 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 our ability to enter into encumbrances (other than Permitted Encumbrances), incur indebtedness (other than Permitted Indebtedness), dispose of our 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 us to ensure that, at all times, both Working Capital and Unrestricted Cash is at least$10.0 million , and that at least every six months fromMay 29, 2020 (or earlier as required per the terms of the Sprott Credit Agreement) 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 and silver 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 of
As discussed in Note 2 - Summary of Significant Accounting Policies to the Notes to the Financial Statements, our ability to continue as a going concern is contingent upon achieving our sales, production, cost, and other operating targets, as well as the success of a future financing transaction to provide additional capital financing for working capital and construction of its leach pad. Additionally, if we are unable to achieve our targets and obtain financing in the future then we may no longer be able to stay in compliance with all covenants discussed above (See also, Item 1A. Risk Factors).
Off-balance sheet arrangements
As ofJune 30, 2020 , our off-balance sheet arrangements consisted of operating lease agreements (see Note 20 - Commitment and Contingencies to our Notes to the Financial Statements), a net profit royalty arrangement (see Note 20 - Commitment and Contingencies to the Notes to the Financial Statements), and a future purchase obligation for consignment inventory (see Note 5 - Prepaids and Other to the Notes to the 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 Financial Statements.
Critical Accounting Estimates
MD&A is based on our 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. The more significant areas requiring the use of management estimates and assumptions relate to; ore on leach pads; proven and probable mineral reserves; impairment of long-lived assets; and our reclamation liability. We base our assumptions and estimates on historical experience and various assumptions that we believe to be relevant 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. We consider an accounting estimate to be critical if it requires significant management judgments and assumptions about matters that are highly uncertain at the time the estimate is made and if changes in the estimate that are reasonably possible could materially impact our financial statements. 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 Financial Statements. Ore on Leach Pads Estimate Required: The recovery of gold and silver at theHycroft Mine is accomplished through a two-stage, heap oxidation and subsequent leaching 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, 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. 41
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Table of Contents 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 three and six months endedJune 30, 2020 , based on our metallurgical balancing results, we determined that 6,512 and 10,492 ounces of gold, respectively, that had been placed on the leach pads were no longer recoverable and wrote-off these ounces. For the three and six months endedJune 30, 2020 , we recognized write-downs of production inventories, which included production costs of$10.2 million and$16.7 million , respectively, and capitalized depreciation and amortization costs of$0.7 million and$1.3 million , respectively. The write-off of these ounces was primarily due to mismanagement of the oxidation process and not properly adjusting variables in the oxidation process for changes in the ore type based on domain. As a result, we determined that we would recover fewer ounces than planned of the mismanaged sections of the leach pads. AtJune 30, 2020 , 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 446 ounces or 891 ounces, respectively, which would require a write-down of$0.7 million or$1.4 million , respectively, of our ore on leach pad 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 reduce our weighted average cost per ounce by approximately$39 per ounce or$75 per ounce, respectively, which would be accounted for on a prospective basis.
Proven and Probable Mineral Reserves
Estimate Required: Proven and probable mineral reserves are the part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination. Our mineral reserve estimates are calculated in accordance with subpart 1300 of Regulation S-K under the Modernization of Property Disclosures for Mining Registrants of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Estimated recoverable gold ounces in our proven and probable reserves at theHycroft Mine are used in units-of-production amortization calculations and are the basis for future cash flow estimates utilized in impairment calculations. When determining proven and probable reserves, we must make assumptions and estimates of future commodity prices and demand, the mining methods we use and intend to use in the future, and the related costs incurred to develop, mine, and process our reserves. Our estimates of recoverable gold ounces in proven and probable reserves are prepared by and are the responsibility of our employees. Any change in estimate or assumption used to determine our proven and probable ore reserves could change our estimated recoverable gold ounces in such reserves, which may have a material impact on our financial statements. Impact of Change in Estimate: Our proven and probable mineral reserves are periodically updated, usually on an annual basis. Estimated recoverable gold ounces used in our units-of-production amortization and impairment calculations are based on proven and probable ore reserves that were determined as ofJune 30, 2019 using gold and silver selling prices of$1,200 per ounce and$16.50 per ounce, respectively. Resulting changes in estimates of recoverable gold ounces are used in our units-of-production calculations and impairment calculations on a prospective basis.
Impairment of Long-Lived Assets
Estimate Required:
Our long-lived assets consist of plant, equipment, and mine development. 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 use a discounted cash flow model based on quantities
of estimated recoverable minerals and incorporate projections and probabilities
involving metal prices (considering current and historical prices, price trends,
and related factors), production levels, operating and production costs, and the
timing and capital costs of expansion and sustaining projects, all of which are
based on life-of-mine plans. The term "recoverable minerals" refers to the
estimated amount of gold and silver that will be sold after taking into account
losses during ore processing and treatment. In estimating future cash flows,
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 are based on numerous assumptions, which are
consistent or reasonable in relation to internal budgets and projections, and
actual future cash flows may be significantly different than the estimates, as
actual future quantities of recoverable gold and silver, metal prices, operating
and production costs, and the timing and capital costs of expansion and
sustaining projects are each subject to significant risks and uncertainties.
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Impact of Change in Estimate
The estimates and assumptions used in our impairment test as ofJune 30, 2020 were based on the Hycroft Technical Report, which was effective as ofJuly 31, 2019 . The Hycroft Technical Report was prepared using prices of$1,200 per ounce for gold and$16.50 per ounce for silver, which when using sales prices of$1,300 per ounce for gold and$17.33 per ounce for silver, resulted in an after tax net present value of$2.1 billion . We compared the estimated after tax net present value of$2.1 billion to the carrying value of our plant, equipment, and mine development of$42.3 million , and given the large surplus between the estimated after tax net present value of theHycroft Mine and the carrying value of our plant, equipment, and mine development a change in the estimates used in the Hycroft Technical Report would be unlikely to result in an impairment as ofJune 30, 2020 . Reclamation Liability Estimate Required: We will be required to perform reclamation activity at theHycroft Mine in the future. As a result of this requirement, a reclamation liability has been recorded on our condensed 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. Reclamation liabilities are accrued when they become known, are probable and can be reasonably estimated. Whenever a previously unrecognized reclamation 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 mine plan, 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$1.3 million and approximately$0.4 million , respectively.
Cautionary Statement Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995 (the "PSLRA") or in releases made by theSEC , all as may be amended from time to time. All statements, other than statements of historical fact, included herein or incorporated by reference, that address activities, events or developments that we expect or anticipate will or may occur in the future, are forward-looking statements, including but not limited to such things as: The words "estimate", "plan", "anticipate", "expect", "intend", "believe", "project", "target", "budget", "may", "can", "will", "would", "could", "should", "seeks", or "scheduled to", or other similar words, or negatives of these terms or other variations of these terms or comparable language or any discussion of strategy or intentions identify forward-looking statements. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefit of the "safe harbor" provisions of such laws. These statements involve known and unknown risks, uncertainties, assumptions, and other factors which may cause our actual results, performance or achievements to be materially different from any results, performance, or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on current expectations. Important factors that could cause actual results, performance, or achievements to differ materially from those in the forward-looking statements include, but are not limited to: Although we have attempted to identify important factors that could cause actual results to differ materially from those described in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results, performance or achievements may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results, performance, or achievements are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results, performance or achievements may not be indicative of results, performance or achievements in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. 43
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Please see "Risk Factors" in our other reports filed with theU.S. Securities and Exchange Commission (the "SEC"), including our Periodic Report on Form 8-K12B filed onJune 4, 2020 and Item 1A. Risk Factors to this Quarterly Report on Form 10-Q for more information about these and other risks. These risks may include the following and the occurrence of one or more of the events or circumstances alone or in combination with other events or circumstances, may have a material adverse effect on our business, cash flows, financial condition and results of operations. Important factors and risks that could cause actual results to differ materially from those in the forward-looking statements include, among others:
Industry-related risks including:
? Fluctuations in the price of gold and silver;
? Uncertainties concerning estimates of reserves and mineralized material;
? Uncertainties relating to the COVID-19 pandemic; ? The intense competition within the mining industry and state ofNevada ; ? The inherently hazardous nature of mining activities, including environmental risks; ? Our insurance may not be adequate to cover all risks associated with our business, or cover the replacement costs of our assets; ? Potential effects on our operations ofU.S. federal and state governmental regulations, including environmental regulation and permitting requirements; ? Cost of compliance with current and future government regulations;
? Uncertainties relating to obtaining or retaining approvals and permits
from governmental regulatory authorities;
? Potential challenges to title in our mineral properties;
? Risks associated with proposed legislation in Nevada that could
significantly increase the costs or taxation of our operations; and
? Changes to the climate and regulations and pending legislation regarding
climate change.
Business-related risks including:
? Risks related to our liquidity and going concern considerations; ? Risks related to the heap leaching process at theHycroft Mine and estimates of production; ? Our ability to achieve our estimated production and sales rates and stay within our estimated operating and production costs and capital expenditure projections;
? Risks related to our limited experience with a largely untested process
of oxidizing and heap leaching sulfide ores;
? The decline of our gold and silver production;
? Risks related to our reliance on one mine with a new process;
? The decline of our gold and silver production;
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? Risks related to our reliance on one mine with a new process;
? Uncertainties and risks related to our reliance on contractors and
consultants;
? Uncertainties related to our ability to replace and expand our ore reserves;
? The costs related to our land reclamation requirements; ? Availability and cost of equipment, supplies, energy, or commodities;
? The commercial success of, and risks relating to, our development activities;
? Risks related to slope stability; ? Our ability to raise capital on favorable terms or at all; ? Risks related to our substantial indebtedness, including cross
acceleration and our ability to generate sufficient cash to service
our
indebtedness;
? Uncertainties resulting from the possible incurrence of operating and net
losses in the future;
? Risks related to disruption of our business due to the historical chapter
11 proceedings;
? The loss of key personnel or our failure to attract and retain personnel;
? Risks related to technology systems and security breaches; ? Risks related to current and future legal proceedings;
? Our current intention or future decisions whether or not to use streaming
or forward-sale arrangements;
? Risks associated with possible future joint ventures; and
? Risks that our principal stockholders will be able to exert significant
influence over matters submitted to stockholders for approval.
Risks related to our Common Stock and warrants, including:
? Volatility in the price of our common stock;
? Risks related to a lack of liquidity in the trading of our common stock;
? Potential declines in the value of our common stock due to substantial
future sales of our common stock and/or warrants;
? Dilution of your investment;
? We do not intend to pay cash dividends; and
? Anti-takeover provisions could make a third party acquisition of us difficult.
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