Metals Update 13/05/2021

Harte earns $5.83-million in Q1

Harte Gold Corp. has released its results for the three months ended March 31, 2021.

The company’s unaudited annual financial results for the three months ended March 31, 2021, together with its management’s discussion and analysis for the corresponding period, can be accessed under the company’s profile on SEDAR and on the company’s website.

First quarter 2021 operational highlights:

  • Gold production: total production of 11,776 ounces gold for Q1 2021, a 9-per-cent increase over the previous quarter; average monthly production totalled 3,925 oz Au for the quarter;
  • Mine capital development: averaged 14.0 metres per day, an increase of 23 per cent over fourth quarter 2020;
  • Ore tonnes processed: average throughput rate of 716 tonnes per day for the quarter, an increase of 42 per cent over Q4 2020;
  • Head grade: 6.1 grams per tonne gold, within 10 per cent of target for the quarter.

Q1 2021 financial highlights:

  • Revenues: $27.4-million in revenue from 12,349 ounces sold in Q1 2021 ($15.7-million and 7,637 ounces, respectively, in Q1 2020);
  • Net income: $5.8-million in Q1 2021 (loss of $16.1-million in Q1 2020);
  • Mine operating cash flow (1): $9.2-million in Q1 2021 ($3.9-million in Q1 2020);
  • Gold hedge impact: incurred a $4.3-million expense in Q1 2021 ($1.1-million in Q1 2020) for the settlement of 8,341.3 ounces hedged; average realized gold price (1) after hedge in Q1 2021 was $1,491 (U.S.) per oz ($1,447 (U.S.) in Q1 2020);
  • EBITDA (earnings before interest, taxes, depreciation and amortization) (1): $1.6-million in Q1 2021 ($300,000 in Q1 2020);
  • Cash cost (1): $1,183 (U.S.) per oz in Q1 2021 ($1,178 (U.S.) per oz in Q1 2020);
  • AISC (all-in sustaining cost) (1): $1,916 (U.S.) per oz in Q1 2021 ($2,231 (U.S.) per oz in Q1 2020);
  • Mine capital development: $6.3-million invested in Q1 2021 ($6.0-million in Q1 2020);
  • Enhanced shareholder base: on March 24, 2021, the company closed an investment by New Gold Inc. for net proceeds of $23.7-million;
  • Liquidity position: cash on hand at March 31, 2021, was $21.1-million ($8.2-million at Dec. 31, 2020); based on the company’s updated outlook and guidance for 2021, the company will require additional financing within the next few months.

(1) Mine operating cash flow, average realized gold price, EBITDA, cash cost and AISC are non-international financial reporting standard measures.

Operating and financial summary for Q1 2021 and 2020

The attached operating and financial summary table compares operating and financial performance for Q1 2021 relative to the preceding year-on-year quarter.

                                   OPERATING AND FINANCIAL SUMMARY

                                                                               Three months ended     
                                                     Units           March 31, 2021           March 31, 2020
Operating performance
Ore tonnes processed                                tonnes                   64,418                   51,705
Average daily throughput                               tpd                      716                      575
Head grade                                             g/t                      6.1                      5.5
Recovery                                                 %                     93.7                     94.0
Gold ounces produced                                    oz                   11,776                    8,597
Gold ounces sold                                        oz                   12,349                    7,637
Key financial data
Revenues, net                                         $000                  $27,368                  $15,667
Mine operating cash flow (1)                          $000                    9,152                    3,891
EBITDA (1)                                            $000                    1,606                      316
Net income/(loss)                                     $000                    5,833                  (16,131)
Net (decrease)/increase in cash                       $000                   12,806                   11,579
Cash on hand at end of period                         $000                   21,054                   13,675
Cost statistics
Average realized gold price (1)                   U.S.$/oz                    1,768                    1,555
Realized gold price
after hedge (1)                                   U.S.$/oz                    1,491                    1,447
Cash operating cost                      $/tonne processed                      287                      234
Cash cost (1)                                     U.S.$/oz                    1,183                    1,178
AISC (1)                                          U.S.$/oz                    1,916                    2,231

(1) Non-international financial reporting standard measure. 

Revised 2021 outlook and guidance

While positive production advances experienced over the prior two quarters continued in Q1 2021, based on an analysis of recent learnings and the continued operational challenges faced, as well as the additional mitigative measures being implemented, the company is now forecasting that quarterly growth will occur at a lower rate than what was previously planned for 2021. This increased timing expected to achieve stabilization at 800 tonnes per day has negatively impacted 2021 guidance.

Achieving a steady-state ore mine production rate of 800 tpd, representing approximately 5,200 ounces per month, continues to be the company’s main priority to stabilize the operation and provide the launching platform to the subsequent expansion to 1,200 tpd in 2023. The company’s updated view, assuming the acceleration of some life-of-mine capital, is that the targeted ore mine production rate of 800 tpd will only be achieved in late fourth quarter 2021.

The company has revised its guidance for 2021 as outlined in the attached 2021 guidance table.

                                              2021 GUIDANCE 

                                    Revised 2021       Prior               Basis       
                                    guidance           guidance

Production (oz Au)                  50,000 to 55,000   60,000 to 65,000    Reflects deferral of ramp-up to 
                                                                           800 tpd from Q1 2021 to Q4 2021
Cash cost (U.S.$/oz)                $1,100 (U.S.) to   $800 (U.S.) to      Reflects accelerated infill 
                                    $1,250 (U.S.)      $850 (U.S.)         drilling, additional labour 
                                                                           initiatives and lower production 
All-in sustaining cost (U.S.$/oz)   $1,800 (U.S.) to   $1,400 (U.S.) to    Reflects accelerated mine 
                                    $2,200 (U.S.)      $1,550 (U.S.)       development and other capital   

The guidance on AISC reflects the company’s current best estimate but remains subject to continuing analysis, especially with respect to the costs associated with the mitigation measures discussed herein. The company is continuing to review its prior guidance for mine development ($26-million), other capital ($13-million) and regional exploration ($5-million), and will provide updated guidance to the market when available.

Recent insights

In late 2020, a system for tracking key operational metrics was established to provide the company with the ability to better monitor and analyze operational performance. During Q1 2021, these data were continually evaluated although the trends were not evident until more recently. The key findings include:

  • Significantly higher-than-planned labour work force shortfalls (approximately 20 per cent) and a much-longer-than-anticipated timeline to filling vacancies;
  • Continuing definition drilling completed to date, critical to increasing the understanding of the orebody, has, in some areas, resulted in changes to portions of the 2021 mine plan grade and tonnage assumptions and, in other areas, the identification of new economic mineralization outside of the planned reserves;
  • The negative impact the condition of the company’s mobile equipment is having on production;
  • Much-longer-than-planned lead time to obtain critical components.

Over the course of the past two weeks, the company has been working on translating what these challenges mean for 2021. Ultimately, it has determined that achieving 800 tpd of ore at near mineral reserve grade will only occur later in the year.

The impact of a shortfall of approximately 10,000 recovered gold ounces in 2021 (resulting from the change in production guidance to 50,000 to 55,000 ounces from 60,000 to 65,000 ounces) creates a revenue shortfall of approximately $22-million. The impact on the company’s liquidity due to the loss of this revenue is compounded by a mostly fixed operating cost base, continuing sustaining capital deployment, the commencement of some expansion capital and a debt repayment of $3.3-million (U.S.) to BNP scheduled for June 30, 2021.

Despite the company’s current capital constraints, the 1,200-tonne-per-day expansion, which would generate an average annual gold production of close to 100,000 ounces, continues to be the ultimate objective for 2023.

Mitigation measures

To mitigate factors currently impacting the previous 2021 guidance and the subsequent 1,200-tonne-per-day expansion, the company is taking the following steps to derisk planning, significantly increase mine flexibility and unlock potential additional ore tonnes:

  • Bolster mine work force: Significant competition to attract and retain employees, primarily in underground mining and, partially, in mobile maintenance, has prevented the company from achieving its budgeted work force complement, which is currently approximately 20 per cent below plan. While the company continues to focus on hiring and retention strategies to expand its labour complement and expects these strategies to have a positive impact on the medium to long term, the company anticipates this labour shortage to continue to be a challenge throughout 2021. The company is also seeking temporary additional support from specialist contracted mining operators to assist in designated areas of the mine for specific activities such as ore sill development and Alimak mining.
  • Accelerate definition drilling: The company plans to accelerate its definition drilling from 30,000 metres initially planned for the year to approximately 40,000 metres for the year. Adding more diamond drill coverage across the orebody on a tighter space pattern from the original 50-metre mineral resource spacing will allow for more efficient future budgeting, forecasting and mining by increasing the understanding of the orebody, especially the grade and tonnage profile of current reserves and the potential to better clarify economic material recently identified but not within the reserves.
  • Accelerate mine capital development: To increase mine production flexibility and access, the company plans to accelerate capital development from an average of 14.0 metres per day (Q1 2021) to 18.0 metres per day by Q4 2021, with increased focus on decline ramp development as compared with horizontal capital. Expanded horizontal and ramp development remains the most critical indicator for operational success as it provides access to more ore haulage horizons and additional stope faces.
  • Reinforce underground equipment: Equipment availability targets above 80 per cent have not been met for some of the highest utilization gear due to the condition of some of the underground fleet, supply chain delays on certain critical spares, outstanding key maintenance hires and the new larger capacity workshop not yet completed. The company plans to pursue options to either acquire, lease or rent some selected additional mobile gear and to conduct time motion study analyses. This equipment is expected to further improve availability constraints and can also be leveraged as the company prepares for the 1,200-tonne-per-day expansion. In addition, critical data tracking of key metrics, such as mean time between failure, and progressing planned maintenance practices, will help clarify critical spares for lead orders while only moderately increasing inventory holdings.

Frazer Bourchier, president and chief executive officer, commented: “Although we have continued to make good progress over the past three quarters, we also continue to face challenges that are preventing us from achieving our previous targets and stated guidance. Data tracking mechanisms that I implemented in late 2020 and continued to enhance in Q1 2021 began to reveal more recently our critical constraints. I believe these challenges can be overcome, and I know we have a team committed to doing so. What I see as the exceptional long-term value potential of the Sugar Zone mine and vast exploration potential of the surrounding property remains intact. Ultimately, however, I believe this value may only be unlocked in the context of a stronger balance sheet, which is why we are evaluating all alternatives.”

Liquidity and capital resources

In Q1 2021, the company completed a private placement offering of 154,940,153 common shares to New Gold at a price of 16 cents per common share for gross proceeds of $24,790,424.

In exchange for waiving its: (i) right to receive up to 35 per cent of the net proceeds of the strategic investment for debt repayment under the Aug. 28, 2020, facility agreement; and (ii) participation right under the Nov. 23, 2016, subscription agreement, Appian was granted a deferred participation warrant that allows Appian to acquire up to 55,802,812 common shares of Harte Gold at 18 cents per share for a period of 15 months following the closing of the strategic investment. The Appian deferred participation warrant is not exercisable by Appian, subject to certain exceptions, until March 24, 2022. New Gold was also granted a warrant, which provides New Gold with the right, subject to Appian exercising the Appian deferred participation warrant, to acquire up to 8,314,619 additional common shares of Harte Gold at 18 cents per common share to maintain its pro rata interest in the company.

In Q1 2021, the company also received a non-binding indicative proposal from BNP Paribas to reschedule principal debt payments under the company’s senior debt facility with BNP composed of a $46.9-million (U.S.) term loan and a $20-million (U.S.) revolving credit facility. The BNP refinancing proposal provided for the deferral of certain principal debt payments and an extension of the maturity dates of the revolving credit facility and term loan.

The BNP refinancing proposal was subject to certain conditions, including: (i) obtaining final internal BNP approvals; (ii) the extension of the maturity of the Appian debt facility from June, 2023, to June, 2025; (iii) negotiation of definitive documentation with BNP and Appian; and (iv) shareholder approval being obtained for the extension of the maturity of Appian debt facility.

In light of the updated guidance announced today, seeking shareholder approval of the extension to the maturity date of the Appian debt facility is being deferred until such time as the company can confirm what changes to the terms of the BNP refinancing proposal are required. The company is now targeting to obtain shareholder approval of the extension to the maturity date of the Appian debt facility in third quarter 2021.

Due to the deferral of the proposed BNP refinancing, the company does not expect to be in compliance with the current financial covenants of the BNP debt facilities on June 30, 2021, which would constitute an event of default under the BNP debt facilities and the Appian debt facility. In addition, there is a $3.3-million (U.S.) principal repayment on the BNP term loan due June 30, 2021. The company intends to seek a waiver of the anticipated financial covenant breaches and a deferral of the $3.3-million (U.S.) principal payment due June 30, 2021, but there can be no assurance that such waivers or deferral will be granted by BNP.

The company does not expect that it will generate sufficient cash from operations to fully finance planned investment activities and debt service obligations (including the $3.3-million (U.S.) principal repayment to BNP due on June 30, 2021) due to the estimated cash flow based on the reduction in expected gold production for 2021.

Strategic review process

The company plans to initiate a strategic process to explore, review and evaluate a broad range of alternatives focused on ensuring financial liquidity and to finance accelerated life-of-mine capital. This includes the restructuring of its long-term debt and reviewing other potential strategic alternatives.

There can be no assurance that the strategic review will result in any transaction or that the company will be able to continue as a going concern.

Conference call and webcast

Date:  May 14, 2021, at 9 a.m. EST

Webcast access:  on Harte Gold’s website (details on home page)

Telephone access

Toronto local and international:  647-427-7450

Toll-free (North America):  1-888-231-8191

Conference ID:  9278235

A replay of the conference call and webcast will be available until 11:59 p.m. EST on May 21, 2021. A link to a replay of the webcast will be provided on the company’s website, and a replay of the call can be accessed using the following dial-in number.

Toll-free (North America):  1-855-859-2056

Encore ID:  9278235

Mercer Park extends GH Group merger closing to July 30

Mercer Park Brand Acquisition Corp., which has entered into a definitive agreement to merge with GH Group Inc., California’s leading fully integrated cannabis business, is updating the status of its proposed merger with GH Group.

To facilitate the closing of the Glass House Group transaction, the holders of the company’s Class A restricted voting shares have approved an extension of the company’s permitted timeline to complete a qualifying transaction to July 30, 2021. The company’s board of directors has also approved the extension, which is effective as of May 13, 2021. After processing notices of redemption received with respect to the extension, Mercer Park expects that immediately prior to the closing of the Glass House Group transaction, it will have an aggregate of approximately $266-million (U.S.) (assuming no additional redemptions and including the previously announced private placement expected to close concurrently with the Glass House transaction) to finance its growth strategy and pay transaction expenses.

A total of 22,406,149 Class A restricted voting shares were redeemed in connection with the extension.

As previously announced, the company and GH Group announced a business combination to create the largest cannabis brand-building platform in California, the world’s largest cannabis market.

GH Group will support its existing and future portfolio of brands with unmatched capacity and distribution in the state. The combined company has planned expansions to reach six million square feet of cultivation in state-of-the-art greenhouses, representing by far the largest capacity of any cannabis operator in California and an anticipated retail footprint of 21 operational dispensaries by first quarter 2022, more than double the next largest retail operator in the state.

“We view successful cannabis brand building as a combination of four factors: the ability to control quality biomass at a large scale, produce at the most competitive costs, offer the highest-quality products and deliver the best-value proposition to consumers. Glass House has a record of excellence across all four of these drivers. Combined with the proposed combination with the Southern California greenhouse asset and 17 proposed Element 7 retail licences, Glass House Group is poised to become the largest, vertically integrated brand-building platform in California, the world’s largest cannabis market,” said Mercer Park chairman Jonathan Sandelman.

Commenting on the transaction, Glass House’s co-founder and chief executive officer, Kyle Kazan, stated: “We have established a strong retail and wholesale network and best-in-class cultivation processes, all anchored by a scaled and highly efficient cost structure. I am incredibly proud of the robust operation we have built over the past five years, and we look forward to augmenting these strengths to further capitalize on the growing statewide and national CPG opportunity.”

Draganfly firms up Coldchain deal

Draganfly Inc. and Coldchain Technology Services LLC have signed a definitive agreement to develop, deploy and operate solutions for the delivery of medical supplies, medicine and vaccines.

Coldchain Delivery Systems provides solutions for health care supply chain management for multiple governments and commercial clients, including the Defense Logistics Agency, the Centers for Disease Control and Prevention, Reserve Component forces, Johnson & Johnson brands, Chicago Department of Public Health, Texas Department of State Health Services, and others.

The definitive agreement provides for phase 1 of a planned five-phase rollout for the comprehensive development, deployment and operation of a medical drone delivery service, as well as the development of a solution for the timely delivery of medical supplies, medicine and vaccines. Phase 1 will also include working with various regulatory bodies, including the Federal Aviation Administration, to obtain licences and approvals for initial non-commercial beta test delivery routes. Phase 2 has a value of $125,000, to be executed over a maximum of 10 months, and the parties have agreed to negotiate an extension to the definitive agreement for phase 2 prior to the expiry of phase 1. Under phase two, Coldchain Delivery Systems will commit to purchasing no less than $625,000 (U.S.) in equipment and services from Draganfly.

“The partnership between Coldchain Delivery Systems and Draganfly will enable us to ensure delivery of medicine, supplies and vaccines,” said Wayne Williams, founder and executive director of Coldchain Delivery Systems. “Draganfly’s commitment to enabling access to essential medical supplies by building an advanced payload system to accommodate our requirements is extremely exciting.”

“We are excited to develop a payload system that will leverage our extensive patent portfolio as well as secured auto-pilot and flight management system,” said Cameron Chell, chief executive officer of Draganfly. “Coldchain Delivery Systems is a leader in health care supply chain management and we are looking forward to helping deliver via UAV medical supplies to remote areas.”

FSD Pharma files criminal complaint against former CFO

FSD Pharma Inc. has filed a criminal complaint with Toronto Police Services, Financial Crimes Unit, against Donal Carroll, the company’s former chief financial officer. The complaint asserts that Mr. Carroll has intentionally interfered with the company’s banking in order to disrupt FSD’s business in the midst of a continuing proxy contest, in alleged contravention of criminal law, and Mr. Carroll’s fiduciary and other duties to the company.

The company has grounds to believe that Mr. Carroll through his conduct has committed the criminal offence of fraud (criminal code, Section 380) as well as the criminal offence of breach of trust (criminal code, Section 336).

The company knows on good authority that Anthony Durkacz, dissident director/shareholder, made unauthorized contact(s) with an intent to interfere with the company’s banking relationships.

The company suspects that Mr. Carroll and Mr. Durkacz’s aim was to disrupt the company’s clinical trials, research and development efforts, its annual and special meeting of shareholders scheduled for May 14, 2021, and other continuing company business.

The company is assessing all avenues available to it to address such alleged wrongdoing.

Vitalhub expands Shrewd contract with STP client

Vitalhub Corp. has expanded its existing contract with the Cambridgeshire and Peterborough sustainability and transformation partnership (STP) within the east-of-England region of the National Health Service.

The challenges faced during the pandemic has forced the NHS to adopt digital solutions at pace, with digital transformation and integrated care being a significant priority. Resulting from the success of a continuing four-year contract with Vitalhub subsidiary Transforming Systems, the client has expanded the use of the Shrewd platform to include the Shrewd Action module.

When asked to comment on the sale, Dan Matlow, chief executive officer of Vitalhub, said: “This expansion sale is a further illustration of how our strong existing install base and successful implementations lead to expansion and growth. We have built a highly synergistic product portfolio that offers health systems value across a number of critical areas of need. We look forward to continuing to contribute to the implementation of digital health solutions, as we progress our growth and expansion strategy.”

The client is responsible for serving a population of 900,000 individuals, and comprises three hospitals, two local authorities, one ambulance trust, one community trust and one mental health trust. Over the life span of the existing contract, Shrewd Resilience has provided the client visibility into essential operational metrics on a regional basis, available in a single, unified view, delivering the prescriptive intelligence required to better co-ordinate and streamline patient flow.

Shrewd Action is an addition module to Shrewd Resilience, developed to enable teams to prepare for, unite and take action when pressure starts to escalate, enhancing a collaborative system response. As health systems progress in their utilization of digital tools to streamline processes and optimize workflow, adoption of the Action module will contribute toward supporting a consistency of service in the delivery of care for patients.

The Action module compliments Shrewd Resilience by generating automated action alerts linked to digitized surge and escalation plans. As pressure builds, preagreed actions are sent via push notifications to client personnel in real-time. These live-trigger alerts notify the right people at the right time, which supports improvements in quality of service, operational performance and patient outcomes.

Globe says BMO keeps Hudbay Minerals at “outperform”

The Globe and Mail reports in its Thursday edition that BMO analyst Jackie Przybylowski is keeping her recommendation for Hudbay Minerals ($10.43) at “outperform.” The Globe’s David Leeder writes in the Eye On Equities column that Ms. Przybylowski trimmed her share target by 50 cents to $13.50. Analysts on average target the shares at $13. Ms. Przybylowski says in a note: “Although quarterly earnings missed consensus and our expectations, the miss was largely attributable to timing of shipments and back-half weighted production. We expect these shortfalls will be made up and that Hudbay will continue to execute on the plans it outlined at its April 7 Business and Technical Review.” The Globe reported on Nov. 13, 2020, and Jan. 12, 2021, that Scotia Capital analyst Orest Wowkodaw maintained Hudbay at “sector outperform.” The shares were then worth $6.75 and $8.73. The Globe reported on March 4, 2021, that Credit Suisse analyst Fahad Tariq continued to rate Hudbay “outperform.” The shares could then be had for $8.84. The Globe reported on April 1, 2021, that RBC analyst Sam Crittenden had boosted his recommendation for Hudbay to “outperform” from “sector perform.” The shares were then worth $8.60.