Hycroft Mining Holding Corporation

Good day and welcome to the Highcroft Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tracy Tom, Vice President. Please go ahead, ma'am.

Thank you, and thank you, everyone, for joining us this morning. Today, we'll be discussing our Second Quarter 2021 results, for which we filed our Form 10-Q with the Securities and Exchange Commission and issued a press release. The press release can be found on our website at www.highcroftmining.com. Please read the press release and listen to this call in conjunction with reviewing the form 10-Q, which contains additional disclosures. Also, please note that some information provided during this call may include forward-looking statements that involve risks, uncertainties, and assumptions. Even if these risks or uncertainties have been materialized or the assumptions proven correct, these results may differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking. Discussion of some risks, uncertainties, and assumptions are set forth in more detail in our press releases and SEC filings, including the most recently filed 10Q and 10K. We assume no obligation and do not intend to update such forward-looking statements. I'll now turn the call over to Diane Garrett, President and CEO.

Thank you, Tracy. Good morning, everyone, and thank you for participating today on our call to discuss our second quarter 2021 achievements. I am Diane Barrett, President and CEO of High Cross Mining. And along with me today in Winnemucca, Nevada, is Tracy, who just spoke with you. Others on the call are Jack Henris, our Executive Vice President and Chief Operating Officer. Stan Rideout, our Executive Vice President and Chief Financial Officer. And Mike Eislein, our Vice President and General Manager. After I make some initial remarks, I'm going to stand right out to review the highlights of our first quarter financials, followed by Jack, who's going to provide a brief operational update. And then we'll be opening the call up for questions. As we mentioned in some of our prior calls, 2021 is a defining year for Highcroft as we complete a lot of the necessary work. in order to unlock the value of the Highcroft mine, which, as a reminder, is the largest silver resource in North America with over 700 million ounces, and it's the second largest gold resource in the U.S. with 21 million ounces of gold. We still have plenty of open areas for resource expansion, including bed oxides and sulfide materials. It truly is a world-class asset with hundreds of millions of dollars of infrastructure on site. We have an operational mine and we are fully permitted in one of the very best jurisdictions for mining, not just for heat leaked operation. Should we decide that it makes sense, we're also permitted for a MEL operation also. It would take many, many years and an awful lot of money to duplicate what we have here at this site and to bring any mine to our current state of operations. So we're very proud of the assets that we have. this world-class resource, and what this team is doing to unlock the value at Highcroft. Our stock price, in our opinion, in no way reflects the value of this asset. And by the way, many of us in management and board are very engaged shareholders also, and we are committed to realizing the value that is inherent in this asset. We can certainly appreciate the disappointment when we communicated that there was more work required to do at Highcroft before we reached commercial-scale sulfide operations. But we hope that by having identified the gaps in the prior work and also the necessary components that are critical to commercial success, that it in some way provides a level of comfort that this team is extremely capable and highly qualified in operational execution and in our approach to minimizing risk, which will all translate into shareholder values. Before I recap the plans and visions for the remainder of this year and beyond, I want to address a couple of other important key areas. We've had a lot of positive things happening here at Highcroft, and while they don't particularly make for newsworthy announcements on an interim basis, please know that this team is working diligently on many, many fronts, and we're delivering very good results. We still have a lot of work to do over the rest of this year, but we're on schedule and we're on budget for delivering that work. I'm extremely proud of the positive changes and accomplishments that we've made over the past year. A lot of the initiatives that we put into place in 2020 that we spoke about in the past, we're starting to see the results of all of that great work. We've made remarkable improvements in our safety with an 83% decrease in the total reportable incidence frequency rate, or what we refer to as TRIFR. Over the last 12 months, we have gone from a 3.8 TRIPR rating to 0.62, and well below industry average. And I was just informed yesterday at site that at the end of July, our TRIPR decreased again to 0.53. So remarkable achievement by the team. We've also seen a dramatic improvement in the culture and morale on site. We recently conducted an employee engagement survey which revealed from our employees' perspective that our company culture has transformed over this past year into one of teamwork and transparency, a collaboration on operational improvements, on a commitment towards excellence in all areas. and a strident focus on keeping our employees safe every day. And it was commented by many that they feel valued as an employee of Highcroft, that they want to be part of the success of Highcroft, and they're recommending their friends as Highcroft being a great place to work. The improved engagement of this entire team is reflected in the operating performance numbers that we're seeing today. In addition to our dramatically improved safety record, we're also driving performance. We're operating more efficiently, more cost-effectively, and we're reducing cost in both mining and processing. And I want to thank everybody at Highcroft for the role that you have played in getting us to this point. It's really been a miraculous turnaround. The operations continue to hit their production targets, and this is the first time since the restart of the operations that the Highcroft mine has not only met its targets, but has done so for three consecutive quarters. As I mentioned, we've driven costs down in both mining and processing areas, made a lot of improvements to equipment efficiency and utilization, and that in and of itself is very remarkable given the age of our fleet. And we've also improved the overall plant efficiency. Moreover, since this team has been put into place, we've had no write-downs of mineral inventory from the leach pads. I'm very pleased to say that the initiatives undertaken in 2020 are starting to come to fruition throughout the organization and the operation. So now let's talk about some of the activities that we've been conducting this year, which are going to be completed by year end, followed by an internal review of that work with the team, and then we'll be presenting those results to the market during the first quarter of 22. The variability drilling and MET program is well underway. It's on budget. It's on schedule. Samples are being sent to the lab. Analyses are ongoing. We're doing a suite of metallurgical tests of each domain that we've been drilling and submitting to the lab. And this work is important not just for the two-stage sulfide oxidation and leach process, but any milling process or any process that we would be implementing on a commercial scale here at Highcroft. We have initiated column tests on site. We are using the sulfide material that we've been mining this year. And this is going to give us a clear picture of oxidation and chemistry management so that we can mimic the precise conditions of the commercial application prior to spending considerable time and money on test heat. We've conducted a range of internal scoping analyses on a variety of processing methods. And the result of the work that we've been doing in that regard indicates that one, with respect to the novel sulfide oxidation and leach process, we have identified and also previously reported to the market several items that are critical to any successful commercial application of this process, which will likely lead us to update our capital costs and operating costs once they're better defined. You'll recall that some of those items include the need for an agglomeration circuit, forced air injection circuit, And through some of the work that we've been doing this year, we now know that the best option for handling multi-solutions on a multi-lift heap will be on-off pads. So that's a critical component to the process. And we'll need to determine what we will require in terms of materials handling components and, of course, the size of the on-off pads. With respect to a milling process, We have completed scoping level economics and internal evaluations on multiple milling process options at various throughput rates with associated mine plans. There was a feasibility study on the AAO mill process in 2014 for the High Cross mine, and then subsequent to that, there was a feasibility study in 2016 based on smaller tonnage throughput and also reduced capital progress. At the time of the 2016 feasibility study, the company was private. So that report was not filed or disclosed publicly. And we have, with Asynco Engineering, reviewed the past technical work and the very successful 10 ton per day mill demonstration plant that followed the 2016 feasibility study. Based on that work that our team has done in connection with Asynco Engineering, We have determined that we should advance to a feasibility study for the mill AAO process, and we've engaged Asynco Engineering to complete this work. This doesn't negate any other process that we're working on. We've just identified a lot of areas within this process that it's important to complete a feasibility study on it. We're going to also be utilizing independent mining consultants. Many of you know them as IMC. They're going to be developing the mine planning as a subcontractor for Asynco. We expect to have the feasibility completed in the first quarter of 22. In addition to that, we plan to kick off a pre-feasibility study very soon on pressure oxidation process. This is a process that would yield significantly higher recoveries for both gold and silver of any of the processes that we've studied to date. Previous test work indicates that high crop ores perform very well when subjected to alkaline pressure oxidation conditions. This work is also going to be completed by year end with the results expected to be announced in the first quarter of 22. And we're in the process of receiving bids from engineering firms and expect to make that selection shortly. So a lot of work to do on the technical studies and the work for the two-stage process, for the AAO mill feasibility, and for the pressure oxidation pre-feasibility, all which will be completed by year-end, reviewed by our team, and available to disclose to the market in the first quarter of 2022. While we've been doing all of that work, we've also been working on developing a run of mine plan for 2022 and beyond with the idea of bridging the run of mine operations to commercial sulfide production while we optimize our cash. The run of mine plan has an important secondary objective of removing the run of mine oxide and transition material in a manner to expose the commercial scale sulfides. You'll recall that we have around 40 million tons of material that needs to be moved before we can get into commercial scale sulfide operations. This work is ongoing on the mine plan and we expect to have it completed by the end of the year and coincide with the results of our other technical reports. So now let's talk about cash because that is always on everybody's mind. And we know that there's a lot of speculation regarding the timing of any potential financing. First of all, we have a lot of work to do for the remainder of this year and in the first quarter of next year. And that work is going to give us a lot of valuable and necessary information that we're going to use to help us determine what our mine plans are going to be and any capital needs associated with those specific mine plans. With the improvements that we have made in the efficiency of our mining fleet, our plans are to continue utilizing the current fleet until all of our technical work is completed. We will continue to drive unit costs lower to reduce the negative burn until we have clarity on what our commercial operation plan will be and how we are going to implement it. Because until we know that, until the mine plan is finalized for the most suitable process or combination of processes, We don't know what size haul trucks we're going to need or how many we're going to need and what's going to be required specifically for the type of sulfide operation that we're going to be presenting. So we do have a plan to recommission the North Merrill Crow plant and do a phased installation commissioning of the new refinery there. We spoke to you about that upgrade in the past. We've also spent considerable effort to mechanically and operationally improve the existing Brimstone Merrill Crow plant facility. And the plant flows and recoveries that we're seeing from Brimstone are the highest the site has experienced in many, many years. We also filed a Form S3 in July. That not only allows us to incorporate S1 filings by reference, but it also provides for a universal shelf, which provides flexibility for the company. A shelf is prudent for any company, including High Cross, as we continue to monitor and evaluate opportunities to appropriately fund the company once we have clarity on the mine plan and processing methods. However, we currently do not have any agreements or understandings to issue any securities under the shelf. At current prices and with the current plans we have and utilizing our own equipment, we We expect to remain comfortably above our $10 million cash threshold, which is required under our debt covenants, into the second quarter of 2022. This is going to help us and enable us to complete the necessary technical work, generate mine plans, finalize the plant flow sheet, and then be able to assess any capital requirements. I'm extremely pleased with this team and what we've been able to achieve over the past nine to 12 months. We have a very full year with technical studies to be completed on three different processes. And we will continue to update the market on developments as they arise. And we look forward to providing an update on the results of this work and also to providing a coherent, executable mine plan for the successful development of the commercial sulfides on the operation. And with that, thank you. I'll turn it over to Stan Rideout after I clear my throat.

Thank you, Diane, and good morning. In terms of ounce of sold revenue and cash conservation, the second quarter of 2021 was our best quarter since we restarted pre-commercial scale operations in the second quarter of 2019. Since the new management and operating team came on board in the second half of 2020, The operational improvements that have been implemented, including the excellent management of our run of mine reach pads that have resulted in no ounces written off since the second quarter of 2020 are making a positive impact on our financial performance. Second quarter 21 sales of 17,060 gold ounces and 189,766 silver ounces for 36 million of revenue was nearly double the first quarter of 2021. and nearly five times second quarter of a year ago. And that was due mostly to the higher sales volume from increased ore tonnages on the leach pad. Second quarter 2021 average realized gold price of $1,811 gross per ounce was 5% higher than the same quarter last year. And year to date 2021 average realized gold price per ounce was about 10% higher than the comparable six months of 2020. The high product benefit from silver was significant during the second quarter of 2021 as we were able to sell some previously produced MAP bars containing 55,000 silver ounces. In addition to higher silver sales volumes, second quarter 2021, average realized silver price of $26.88 per ounce was 62% higher than second quarter of a year ago. And year-to-date 2021, average realized silver price of $26.70 per ounce was 64% higher than the same period a year ago. In the second quarter of 2021, we narrowed our loss from operations to $3.8 million, and our net loss was $8.4 million after other net expenses, which was mainly interest expense. While our cash burn was reduced in the second quarter of 2021 because of our continuing pre-commercial scale volumes and associated higher relative operating cost profile, we've not been able to generate positive net income or positive cash flows from operating activities. At the end of the second quarter of 2021, we had $30 million in unrestricted cash, which represents a $26 million decrease from the beginning of the year. Year-to-date 2021 cash used in operations was $21 million, and cash used in investing activities accounted for another $9 million. But you'll note the significant decrease in the second quarter. We also began making cash payments on the credit agreement in the second quarter of 2021, and that was approximately $600,000. Included in our $30 million of unrestricted cash is approximately $5 million that we were able to free up from restricted cash as we replaced existing surety bonds with new surety bonds that required less cash collateral. While we complete the necessary work required for commercial scale sulfide operations, we will continue to focus on managing our cash through operational improvements and appropriate mining plans that keep us on site with our debt covenants. With that, I'll turn the conversation over to Jack.

Thank you, Stan. Good morning, everyone. In all of my years in the mining industry, I've not seen such a marked improvement in safety, culture, operational performance, and process plant efficiency in less than a year. This team is to be congratulated. We will continue to drive our costs down and enhance our operating performance. The technical team has been working on developing an oxide and transition ROM plan for 2022 and beyond. The ultimate ROM plan will be designed to coincide with the start of commercial scale operations, which of course will be determined following the ongoing technical studies with the goal of improving our cash position and to keep the outstanding operating team in place. Metallurgical drilling continued through the second quarter of 2021, with 31 holes drilled, today totaling approximately 31,000 feet. This drill program, as Diane already noted, is to complete the necessary variability and metallurgical work on geologic domains that were not tested in the past, but that represent a significant portion of the life of mine production. One thing I'm particularly excited about is that throughout our mine planning work and MED drilling, we've identified a number of robust targets, including Chance, Hades, East Fault, Campbell South, and South Vortex. These areas have both oxide and sulfide targets, and South Vortex in particular is a very high-grade silver deposit, which remains open to the south. We have verified the prior drilling in that area and will soon be including that in our corporate presentation on our website. While we currently remain focused on commercial scale sulfide operations, we look forward to be able to explore the untapped potential at Highcroft. As a reminder, there's been no exploration drilling in Highcroft for more than a decade. We have a lot of work to do for the remainder of this year. And I can say that we have a team passionate about driving the future success of Highcroft. Back to you, Diane.

Thanks, Jack. Appreciate it. Thank you, Stan, also. I just, before we open it up for questions, I just want to say that we truly appreciate the support and patience of all of our shareholders as we are hard at work conducting all of the necessary work to develop the most economic long-term plan for Highcroft. This team is very passionate and very excited about what we're doing here. and the opportunity to work on this world-class asset. So it's in good hands with the team. We look forward to delivering a plan to you soon, early in the new year, that helps provide the best value for all of our shareholders. So with that, I will turn it back to Tracy so we can open up for questions.

Danita, please open the call for Q&A. Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. Again, press star one to ask a question. We'll take our first question from Vincent Anderson with Stephen. Please go ahead.

Thanks. Good morning. Nice job again this quarter. So, you know, I think the focus here to start things off would certainly be around AAO and you know, doing a little bit of background reading. The name is unique, but does this really differ significantly from other ore flotation processes?

Yeah, this is Mike Geislein. On the front end, no, it's a pretty straightforward grind flotation circuit. The oxidation piece, you know, the chemistry works. It's just a matter of, you know, designing a reactor system that gets the same retention and oxidation performance under atmospheric alkaline conditions versus a little bit higher pressure temperature in an autoclave.

Okay, that checks out. And then in that case, the one thing I'm still kind of trying to figure out is, you know, would this be utilizing your existing grind capacity, or does this need to build integrated grinding?

No, so the beauty about it, we own the mills. We own the capital equipment on the front end, which is a huge piece. You know, those are long lead, high capital items. That's already sunk tossed and sitting in a warehouse. So, you know, the rest of the circuit and the plant, obviously, you know, we have a few parts and pieces, but the hard part is already sitting on the ground.

Great. And so I guess the question then becomes, you know, this isn't, maybe this isn't fair, but your assessment of maybe why this wasn't pursued more aggressively by the original, basically prior to all your involvement in the company? Why was this maybe not revisited in more detail in the original mine plan?

I think it comes down to the price of gold and capital. I think in those previous environments, you're looking at $1,400 gold and a significant capital that they were looking for on circuit design, which I think was a little bit bloated and lacked efficiency. It was marginal with the grade profile that currently exists. There's a lot of ways to skin that cat. I've worked back on it from the design perspective, knowing that we have the milling equipment already on the ground. There's a lot we can do to conserve capital with plant design on the back end all the way through. And, you know, we have an $1,800 gold environment to further bolster that. So it could look very attractive in a lot of different aspects.

Yeah, and I would just – Vince and I would add on to what Mike said, and he's absolutely correct. I mean, you know, we weren't there at the time, so we don't know. But, you know, as we all know, in the 2015 kind of 2016 timeframe, gold was sliding actually back closer to $1,200 gold and was looking fairly weak at the time. But also, there was a sense of, you know, seeing if they could take that chemistry and apply it in a heat-leach setting and get into operations very quickly at even a lower capital. And, you know, our view is, you know, the ore body is going to tell you the best way to process this material. And we think there's some optimization and efficiencies that can be looked at in the prior work that was done. In fact, we're doing it now with Mike and his team in Asinco Engineering. So... We definitely think it's the time to be looking at that again.

No, perfect. I really appreciate the candor on that. And so if I think about, you know, again, not to get ahead of, you know, whatever the results of the feasibility report are, but, you know, in your mind, is this something that bridges you? and gets you a little bit more time to work on the traditional pad leach and then becomes a supplementary process thereafter? Or do you think that you could get this to scale efficiently? I'm just trying to think about how this could look in the overall mine plan, you know, if the feasibility comes back positively.

Yeah, I think you hit the nail on the head. Most of the operations in northern Nevada here are complex ore bodies, right? They're either refractory or double refractory ore bodies that require a myriad of different process applications to extract that value. This is really no different. So yeah, this kind of gives the time to really fine-tune the performance of the different metallurgical domains and then tailor you know, the appropriate approach, processing and mining approach to that mineralogy. And you've got to get that right. You've got to take the time to get that right or, you know, it's just not going to function the way you need it. So, yeah, it could be – it's very more likely going to be, you know, a continuing oxide conventional heat bleach. We'll continue to work on the sulfide oxidation piece for the heat bleach as well that may, you know, have a very – definitive impact as well as a milling circuit, milling flotation and oxidation circuit as well for some of the higher grade.

And when we look at these gold and silver price environments, Vincent, I mean, you just want to capture as much of that recovery of that gold and silver as you can. And we see that in the milling scenario, you know, the ore definitely generates far more value in that scenario than it does in a heat leach setting. But, you know, to Mike's point, you know, this is very likely going to look like a hybrid operation. So the work we're doing right now on testing each of these metallurgical geologic domains, is to help us understand which one generates the best economic value and best recoveries under which process. And route your accordingly.

Yeah. And then I guess, you know, one conversation that we haven't had to have, which is great, has been permitting. But maybe just walk us through what permits would be in place and what would be needed under AAO or POC's.

So, yeah, another huge benefit is the bulk of the permitting for the process is complete, including Tails Dam. You know, the process is permitted. There's a couple of Tails Dam locations that are actually permitted. In this feasibility study, we're looking at those and then actually putting a plan in place to you know, with dewatering and everything else, just tighten those up and get them ready to go in conjunction, in parallel with, as we advance the study work on a different plane as well. So, yeah, it's all there. The previous work that's done at Icroft on the permitting piece is a huge, huge time saver that's going to really benefit the work we're doing now and advancing any process that we put in out there. Auto-cladding was never looked at, permitted previously, but I don't know if that'll be really much of a heavy lift in Nevada, honestly. It's a hydrometallurgical process. It exists in a couple other operations in northern Nevada. It's known to the regulators, so I don't see that being a huge obstacle.

All right, great. I'll give you a break. I'm just going to ask a couple quick questions on cash flow. I really appreciate it. So I think I missed this line. You discussed your covenants, minimum cash balance, and how you felt about that. Could I just get that again?

Sure. We have two financial debt covenants that we focus on, and they're both a $10 million threshold. One is absolute cash, and the other is you know, net current assets, which requires that we take a haircut of 50% on our leach pad inventory in the calculation. So we feel very good about it, the team. Everybody is aware of our covenants, and all of our plans are targeted toward keeping us comfortably above those threshold levels.

Okay, excellent. So that kind of informs the follow-up question, which is just, you know, I've everybody is focused on the mine plan, but if we just think about the next 12 months in very broad terms, you know, it sounds like you're comfortable with those covenants just based on the run of mine plan. But, you know, as we get into 2022, you know, are you comfortable with continuing to operate at run of mine and, you know, feel comfortable producing positive operating cash flows at least out of that before, you know, basically taking any kind of funding considerations for the go forward mine plan out of the equation.

Yeah, that is exactly our plan is to continue to, you know, maximize cash generation out of the ROM plan. As Jack and all of us have commented on, you know, a component of that is continuing to drive down costs. I truly believe the team's up to the task. You've seen the progress. And, you know, they're getting more creative by the day. So, you know, we're optimistic. That's the plan. But, you know, information will come in later in the year, and, you know, we'll reassess at that point. But, you know, as we said, you know, right now the plan is to get us deep into 2022, being late in the second quarter with the existing cash and plans.

Perfect. And just last one from me. You know, you maintain guidance. Certainly prudent, but you have been doing quite well year to date. Is there anything exceptional about the first half of the year that you just want to make us aware of in terms of maybe just timing of what kind of grades are on the pads right now or labor constraints and just being cautious into the back half of the year? But what kind of keeps you from hitting sort of the high end of that range, let's say, based on the current trajectory? Okay.

So pad management, it's always a good process person doesn't reveal all his tricks. But frankly, a lot of it's timing. And what we're seeing is really the result of that process group and maximizing and squeezing every ounce out of that pad and advancing the leach front. just as soon as they get it released from the mine and get it ripped. Our flows to the pad are the highest that I've seen since I've been here, and recovery plant is performing well, extremely well. Those are all positives that are affecting our bottom line, and the rest of it is just how we manage the inventory on and off the pad throughout the rest of the year, so stacking, placements, You know, we've got a few tricks up our sleeves. We're actually pulling some levers out there now on side slopes and re-leaching some old areas and, you know, even re-leaching roads and access areas. So those are all tricks of the trade that are really helping, you know, our ounce profile.

All right, perfect. Well, thanks, everyone, on the call for all the color and best of luck on the rest of the year.

Okay, thanks, Vincent. Thank you, everybody. We look forward to reporting back to you in the very near future.

This concludes today's call. Thank you for your participation. You may now disconnect.