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Hycroft Mining Has A Lot Of Gold But There Are Many Red Flags
Jul. 07, 2021 5:54 AM ETHycroft Mining Holding Corporation (HYMC)21 Comments4 Likes
Summary
The company’s flagship project has reserves of 11.9 million ounces of gold and 478.5 million ounces of silver.
The after-tax net present value is $2.1 billion at $1,300 per ounce of gold and more than $4 billion at today’s gold prices.
However, the grades are very low and most of the remaining material is sulfide, which could lead to a lot of technical issues.
Hycroft Mining also had a $116.8 million net debt as of March 2021 and the red flags seem too many.
I think that the company is heading to a funding shortfall, which likely means stock dilution. I’m bearish.
Gold Bars Sitting on Blue Bar Graph - Stock Market and Finance Concept
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Investment thesis
Hycroft Mining (NASDAQ:HYMC) owns a gold and silver project under the same name in the U.S. state of Nevada. At the moment, its reserves stand at 11.9 million ounces of gold and 478.5 million ounces of silver, making it one of the best gold-silver projects in a Tier 1 jurisdiction in the world. Yet, the market values Hycroft at less than 0.1x the project’s after-tax net present value (NPV) and there are several reasons for this. The grades are low and almost all of the material is sulfide, which means that designing a good flow sheet could be tricky and recovery rates could be an issue. It’s an old mine that has been shut down several times in the past and I think the risk is just too high. Best to avoid or sell this one.

Overview of the Hycroft deposit
The project is located near the Florida Canyon gold mine of Argonaut Gold (OTCPK:ARNGF) and started out in 1983 as a small heap leach operation known as the Lewis Mine (page 16 here).



(Source: Hycroft Mining)

The project has historical production of around 2.1 million ounces of gold and 7.5 million ounces of silver and was shut down several times over the years, usually due to low gold prices. The most active period was from 1983 to 1998, when the mine produced 1.2 million ounces of gold and 2.5 million ounces of silver.

According to a 2019 heap leaching feasibility study, there is still a lot of gold and silver left in the Hycroft deposit. Enough, in fact, to rank it among the best low-risk jurisdiction gold and silver deposits in the world in terms of reserves.





(Source: Hycroft Mining)

According to the feasibility study, the initial capital cost for a heap leach operation is estimated to be $230.8 million and the after-tax net present value of the project stands at $2.1 billion at a 5% discount rate. This is a compelling NPV number, especially considering that the study was based on gold prices of just $1,300 per ounce of gold.

The price of gold stands at over $1,800 per ounce as of the time of writing, which means that Hycroft’s NPV should be over $4 billion at the moment.



(Source: Hycroft Mining)

The mine life is expected to be over three decades and the strip ratio stands at just 1.17. Both of those are very good numbers for a gold mine.

(Source: Hycroft Mining)

However, you might’ve already started noticing some of the issues and red flags. The grades are very low and there is barely any oxide material.



(Source: Hycroft Mining)

Leaching gold and silver from oxides is relatively easy, but processing sulfidic ore is challenging. The latter is refractory, which means that the gold particles are ultra-fine and this requires more sophisticated treatment methods in order to achieve oxide-ore recovery rates. According to the feasibility study, Hycroft plans to add iron (as ferric chloride) to the oxidation solutions but even then, there are numerous challenges to achieve adequate gold recovery rates.



(Source: Hycroft Mining)

The company has ideas on how to deal with some of the technical challenges of this operation but I’m skeptical as these are technologies and methods that haven’t been proven on a commercial scale. There are a lot of things that can go wrong here.



(Source: Hycroft Mining)

Another red flag for me is that Hycroft Mining plans to use a significant part of the old mining infrastructure. Sure, such a move can significantly decrease CAPEX, but there are operational risks involved. The nearby Florida Canyon mine used the same approach when it was owned by a company named Rye Patch Gold (the company no longer exists, the SA profile is here). SA contributors including me were optimistic about the prospects of the latter, but some of the refurbished equipment kept breaking down or underdelivering and the project still hasn’t lived up to its potential. The point is that using old equipment is risky and can result in higher costs down the line. At the moment, Hycroft Mining has a mining fleet, a crushing circuit, and a North Merrill-Crowe plant. As you can see, not all of them seem to be in a good condition.







(Source: Hycroft Mining)

Looking at the financials, the picture doesn’t look good as the net debt stood at $116.8 million as of March 2021.



(Source: Hycroft Mining)

The company has decided to direct leach its run-of-mine ore, but this is proving to be unprofitable at the moment. In Q1 2021, Hycroft Mining booked a $14.8 million loss from operations.



(Source: Hycroft Mining)

Still, Hycroft Mining aims to develop a 3-5 year ROM plan to generate positive cash flows. It remains to be seen if this is possible.

Investor takeaway
The Hycroft gold and silver project looks great at first glance thanks to its high reserves and NPV. However, grades are low and most of there is almost no oxide material left to mine. Overall, I doubt that the Hycroft project will be able to reach commercial production without encountering significant technical or operational issues. This is set to lead to a funding shortfall for Hycroft Mining, which likely means stock dilution.

Hycroft Mining is pretty cheap compared to peers at the moment, but I think its valuation could fall lower due to the high debt load as well as the stock dilution risk. It’s possible this one is close to worthless.



(Source: Hycroft Mining)

According to Fintel, the short borrow fee rate stands at 16.37% as of the time of writing. This is relatively high.

In case you prefer to protect the downside, I think long-dated put options are a good idea.



(Source: Seeking Alpha)


Or you could just avoid this one.

This article was written by

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Gold Panda
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I have been investing in stocks for 13 years now, most of the time in my native Bulgaria. I have a bachelor's degree in Finance and a Master's degree in International Business and I like reading Pratchett and Michael Lewis. Regarding the opportunities that I cover, please take into account that I'm an admirer of legendary fund manager Peter Lynch so I tend to follow a lot of his investment philosophy. - Disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (21)
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nick1045us profile picture
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ivnoh
15 Nov. 2021, 1:38 PM

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did they ever complete any of the engineering tasks that they listed out as items that they needed to complete in this article?

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onat profile picture
onat
14 Nov. 2021, 4:00 PM

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What do you think about price ~ 1 USD now?

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Gold Panda profile picture
Gold Panda
15 Nov. 2021, 4:19 AM

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@onat don't like it

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SilverisREALMoney profile picture
SilverisREALMoney
31 Oct. 2021, 3:27 PM

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At the time of this article's publication, I agreed that HYMC was a bad investment idea. Now that it's down another ~45% and trades for just $1.65, I think just the quantity of silver (700M ounces) and the tier one jurisdiction justify taking a small position in this company for the LT investor.

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Omer Altay profile picture
Omer Altay
31 Oct. 2021, 5:39 PM

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@SilverisREALMoney If all you're looking at is reserves/resources, you should save your money and stay away from investing in gold / silver mines. This is likely a zero.

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CashCollateral
20 Jul. 2021, 5:04 PM

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How much does Mudrick own?

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CashCollateral
17 Nov. 2021, 3:08 PM

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@CashCollateral Mudrick is done here. Disaster. Worst stock I've ever bought.

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Omer Altay profile picture
Omer Altay
12 Jul. 2021, 5:36 AM

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Good article covering the basics here! I wrote about ANV many years ago when I was younger and naive about the industry. The NPV and HUGE resources fooled me when I was a novice. There's a lot more to a mining company than NPV as your article spelled out. The grades on the ore are tiny and the process to mine them hasn't been proven. HYMC is uninvestable unless you're intimately familiar with the technical challenges involved. Looks like no one is willing to fund these guys and the company will likely go bankrupt again.
Everyone in the industry knows about the Hycroft mine and its massive resources. None of the majors are interested in buying or financing it because they understand it may never be viable. Kind of reminds me of the Pebble Mine in Alaska owned by NAK. Huge resources but low grades and in the middle of nowhere with no infrastructure makes it totally uneconomical.

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Charlie's Munger profile picture
Charlie's Munger
12 Jul. 2021, 7:22 AM

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@Omer Altay and if asset is worthless so are stock and both warrants

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DanielTD
08 Jul. 2021, 10:07 AM

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Allied Nevada stuck a lot of money into this company prior to BK. Mudrick is a billionaire who most likely spent a lot of time analyzing this stock before owning 40% of the company. They now have a solid management team. After BK the company was owned by creditors that had little to no experience in mining they also had liquidity problems. Mudrick gave this company access to capital to grow. Do you think they got so involved with this company to lose?

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B
Bojou
08 Jul. 2021, 1:52 PM

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@DanielTD this is what I thought when I bought at... 10, I ignored the warning about the untested process. Hopefully I finally took my losses at 4 to reinvest in FTCO.

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DanielTD
08 Jul. 2021, 2:13 PM

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@Bojou I brought in 3s and 2s. I think this has a lot of long term potential the stock has been beat like a dog the last year.

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Bojou
08 Jul. 2021, 3:12 PM

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@DanielTD Of course if one enters at a much lower level... why not, it's a gamble.

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tonyconnolly
07 Jul. 2021, 7:49 AM

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Think this used to be Allied Nevada…but then went bust? Run by a bunch of financiers and Mudrick Capital…absence of Miners and geologists on the board. High debt, low grade…but high resource. I don’t believe capex will be under 300m to get them into full scale production. Best hope for shareholders is a rising Gold price lifting them enough to make them a buyout candidate. Not one for me,t

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TheCompetentMan profile picture
TheCompetentMan
16 Sep. 2021, 6:30 PM

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@tonyconnolly Yes, this was ANV, Allied Nevada Gold. It seemed that company even back then was 'cursed'. No matter what they did, they lost money. In the months leading up to their Chap 11 filing they tried to 'hang in', even sold more stock, but they were losing too much too fast so went Chap 11. Even in Chap 11 things did not go well. They had lots of ore in leach pads but as time went on discovered that was not going to recover the amounts they predicted and even in Chap 11 took another write down on work in process on the pads. The common shares did not get wiped out totally, they got warrants but the exercise price on them is something like in the 40s, I think. The reorg company was semi-private for a while as Hycroft Mining, and then did a SPAC to get new financing a while ago at $10/share plus new warrants with a strike price of $18, plus the older warrants are still around, I think or got converted.
One unusual item is that after the reorg I was able to get about a thousand shares for like nothing and sell once the SPAC went through at an ok profit. The problem buying back then was there were no published financials so it was impossible to tell exactly what one was buying into plus the stock really did not trade at all.
While I did not think the company would be great, I didn't think things would go so bad so fast.

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Charlie's Munger profile picture
Charlie's Munger
07 Jul. 2021, 6:57 AM

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Yup probably worth zero or close to it and that includes warrants

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About This Article
Ticker Covered
HYMC
Author's rating at publication
Bearish
Price at publication
$2.80
Change
-75.40%
S&P 500 change
7.30%
Author's Rating History
Chart

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About HYMC
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HYMC
Post
0.69
0.70
5.95%
1.64%
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Market Cap
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PE
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https://seekingalpha.com/article/4438121-hycroft-mining-has-a-lot-of-gold-but-there-are-many-red-flags
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