Hycroft Mining: Disappointing Drill Results, Momentum Lost (NASDAQ: HYMC)

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Introduction

In August 2022, I wrote a bearish article in SA on US gold miner Hycroft Mining Holding Corporation (NASDAQ:HYMC) in which I said that the company seemed to be stalling the development of its flagship project focusing on exploration. There is a 2019 feasibility study that showed an initial capex of $224.8 million, but Hycroft does not advance to the construction phase despite earning $194 million in gross receipts in the first quarter of 2022 through raises. capital.

The company completed more than 40,000 feet of drilling in the third quarter of 2022, but published assays seemed disappointing. In addition, existing pre-commercial scale direct leaching direct leaching [ROM] the operation is not yet profitable and the operating loss was $12.6 million for the quarter. Overall, the future looks bleak for this old stock of memes. Let’s review.

Summary of recent developments

In case you haven’t read my previous articles on Hycroft Mining, here is a brief overview of the business. The company owns a gold-silver project in northern Nevada called the Hycroft Mine, which is among the largest precious metals deposits in the world with measured and indicated resources of 15.3Moz of gold equivalent. There is a small direct leach ROM operation on site that will continue until the end of 2022. The reason gold production will cease after that is because almost all of the material is sulfide, which means Hycroft Mining needs to build new processing facilities. .

Hycroft Mine Resources

Hycroft Mining

In the third quarter of 2022, Hycroft Mining sold only 8,456 oz of gold and 15,131 oz of silver and generated revenue of $8.76 million. This time this did not even cover production costs, and I do not expect the situation to be any different in Q4 2022 as gold production stops. As you can see in the table below, exploration and development expenses skyrocketed to $7 million when Hycroft began an exploration program comprising 125,000 feet of reverse circulation. [RC] drilling and 20,000 feet of core drilling in July. In addition, the company had $4.46 million in interest expense despite having $153.4 million in unrestricted cash and cash equivalents at the end of September.

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Hycroft Mining Third Quarter 2022 Income Statement

Hycroft Mining

The reason for this is that Hycroft Mining is $144.8 million in debt, meaning net cash was only $8.6 million at the end of the third quarter. However, the company is unlikely to be cash-strapped anytime soon as most of the debt is due to be paid off in 2027.

Hycroft Mining debts

Hycroft Mining

Turning our attention to drill results, this is the largest exploration program at the Hycroft mine in nearly a decade and is expected to cost between $15 million and $20 million. Hycroft Mining is targeting potential feeder systems as well as high-grade zones and completed 41,000 feet of RC drilling and 2,300 feet of core drilling in the third quarter of 2022. initial drilling results They were released on 13th September but I think they look disappointing as there were few drilling intercepts above 1g/t gold. Here are the highlights.

Hycroft Mine Drill Results

Hycroft Mining

Additionally, all assays above 1 g/t gold were from the Brimstone area, so it is unclear if they are within the computer generated optimized pit.

Hycroft Mine Optimized Shaft

Hycroft Mining

Hycroft Mining will focus on directional drilling in the fourth quarter of 2022 within a 60,000 acre area that has not previously been explored, and I believe that finding oxide or low sulphidation material is crucial. You see, refractory gold sulfide ores must be processed using sophisticated treatment methods, and Hycroft Mining’s plan for the Vortex zone included an unproven technology that used iron (as ferric chloride) in the oxidation solutions. However, there are a number of challenges that need to be overcome for this method to work, and the fact that the company is betting on drilling rather than building the processing plant now that financing is secured leads me to believe that the odds of this technology working don’t look good.

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Hycroft Mining Heap Leach Plan

Hycroft Mining

In general, very few mining companies have made gold sulfide deposits work well in the past and this renders most of Hycroft Mining’s vast measured and indicated resources almost worthless in my opinion. Often the problem is that recoveries are low and the company was already projecting recoveries of only 80% using an assumed feed sulfide grade of 1.78%, which is lower than measured resources.

Hycroft mine recoveries

Hycroft Mining

I have never seen a well-funded mining company with a project in the feasibility study stage launch a major drilling program instead of moving on to construction. In light of this, Hycroft Mining’s exploration program looks like a Hail Mary move, and drilling results look unimpressive so far. In view of this, I am not surprised that the stock price is 30% lower compared to my previous article and I think it could continue to fall as there is little momentum left. And this is crucial for mining companies in the exploration stage.

Data of fintel shows that the short term loan fee rate is 5.71% at the time of writing, so opening a small short position seems feasible. However, commodity prices are notoriously volatile and hedging looks challenging as long-term call options are expensive at the moment. In light of this, I think risk-averse investors would be better off staying away from this stock.

Hycroft Mining Purchase Options

looking for alpha

As for the risks to the downside, the main one is that fortune is smiling on Hycroft Mining and the company finds a large zone of oxide mineralization. This is likely to cause the stock price to skyrocket.

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investor takeout

I think this was another disappointing quarter for Hycroft Mining investors as the pre-commercial scale direct leach ROM operation continued to lose money while early drilling results were nothing special. The company still has plenty of cash in its coffers, but momentum seems low and the share price is likely to continue falling for the foreseeable future.

However, short selling looks dangerous as hedging is challenging, and Hycroft Mining could be lucky in its exploration efforts. It might be best for risk-averse investors to avoid this stock.

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