Comstock Mining Inc. — FY2016 Form 10-K Summary
Business context and reporting period
Comstock Mining Inc. is a Nevada-based gold and silver exploration, development and production company focused on approximately 8,631 acres in the Comstock and Silver City districts. The company also owns real estate assets, including the Gold Hill Hotel, land and water rights. This filing reports the fiscal year ended December 31, 2016, with comparisons to 2015 and 2014.
The company completed leaching of existing Lucerne materials in December 2016 and transitioned from production toward exploration and development, principally at the Lucerne and Dayton resource areas. The company has not established proven or probable mineral reserves under SEC Industry Guide 7.
Financial and operating metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $5.1 million | $18.5 million | Down 72.6% |
| Mining revenue | $4.9 million | $18.2 million | Down $13.3 million |
| Real estate revenue | $0.1 million | $0.2 million | Down $0.1 million |
| Loss from operations | $10.2 million | $12.4 million | Improved $2.2 million |
| Net loss | $13.0 million | $10.5 million | Worsened $2.5 million |
| Basic and diluted loss per share | $0.07 | $0.14 | Improved per share, partly due to share issuance |
| Operating cash flow | $(2.6) million | $(3.0) million | Use declined $0.4 million |
| Cash and equivalents at year-end | $0.2 million | $1.7 million | Down $1.5 million |
| Total assets | $33.8 million | $43.2 million | Down $9.4 million |
| Debt and capital lease obligations | $9.5 million | $13.3 million | Down $3.8 million |
| Stockholders’ equity | $14.4 million | $18.8 million | Down $4.3 million |
Mining production totaled 4,086 ounces of gold, 75,657 ounces of silver and approximately 5,099 gold-equivalent ounces in 2016. Production was limited to processing existing leach-pad material; no mining occurred during 2016, and no inventories or mineralized material remained on the leach pads at year-end. Reported recovery rates were approximately 88.5% for gold and 59.5% for silver.
Net cash used in investing activities was $2.6 million provided, primarily from equipment sales, partly offset by property purchases. Net cash used in financing activities was $1.4 million, reflecting equity proceeds and debt repayments. Year-end current assets were $8.0 million versus current liabilities of $2.4 million, including $5.9 million of assets held for sale.
Material changes versus the prior comparable period
- Revenue declined materially because production fell sharply as the company completed its first phase of mining and moved toward exploration and development.
- Mining revenue costs declined 58% to $4.5 million, while general and administrative expense declined 48% to $3.5 million. Exploration and mine development expense declined to $4.6 million from $7.0 million.
- Operating loss improved because of lower production-related and corporate costs, but net loss increased because 2015 included approximately $3.2 million of other income from a reduced loss contingency that did not recur.
- The company raised approximately $4.0 million gross in March and April 2016 and approximately $0.5 million gross through its ATM program, issuing 13.3 million shares in total through these offerings.
- The company issued additional shares to settle debt, lease obligations, property obligations and related-party contributions. Shares outstanding increased to 185.4 million at December 31, 2016 from 159.9 million at December 31, 2015.
- Debt repayments and refinancing activity reduced certain near-term obligations, but liquidity remained constrained.
Guidance, outlook, risks and unusual items
Management expects 2017 operating expenses of approximately $3.5 million, excluding depreciation and amortization, and interest expense of approximately $1.3 million. Management planned to commence Dayton reverse-circulation drilling in the second quarter of 2017, advance Dayton toward full feasibility and a production-ready mine plan within two years, and continue Lucerne drilling and development.
Management expected to sell non-mining land, buildings and water rights for more than $14 million of net proceeds and use the proceeds to eliminate debt. The filing does not establish that these sales will occur or that the projected proceeds and profit will be realized.
In January 2017, the company issued an 11% senior secured debenture with principal of $10.7 million due in 2021. The debenture refinanced substantially all prior obligations, is secured by substantially all company and subsidiary assets, and permits interest for the first two years to be paid in cash, additional debentures or a combination. In March 2017, the company obtained an additional loan commitment of up to $2.0 million at 11% interest.
- The financial statements disclose recurring losses, an accumulated deficit of $212.0 million, limited cash and dependence on asset sales, financing and future mining success. Management states that sufficient funds are expected for the next twelve months, but acknowledges that failure to obtain funding could raise substantial doubt about going-concern prospects.
- The company has no proven or probable reserves, and mineralized material estimates and future recoveries are uncertain.
- Material risks include gold and silver price volatility, permitting and environmental obligations, water availability, reclamation costs, operational hazards, financing constraints, dilution, debt covenants and possible inability to achieve commercial production.
- The company’s reclamation liability was $7.4 million and its reclamation surety bonds totaled approximately $7.7 million, supported by $2.5 million of cash collateral.
- Substantially all mining revenues were attributable to one customer, although management states that gold can be sold to numerous market traders.
- A legal challenge to Lyon County zoning remains pending only on a due-process claim after the Nevada Supreme Court affirmed the company’s position on the other claims.
- The filing contains inconsistent references to 2015 gold-equivalent production: audited operating tables report 18,455 ounces, while other narrative sections cite 22,925 ounces or different underlying gold totals. This discrepancy should be reconciled with the filing’s notes and subsequent reports.
Most important facts for investors to verify
- Whether planned non-mining asset sales occur on the expected timing and terms and generate the projected cash proceeds.
- The post-refinancing debt balance, collateral package, interest-payment mechanics and compliance with debenture covenants.
- Actual 2017 and subsequent cash burn relative to the projected $3.5 million operating expense budget.
- Results of Dayton and Lucerne drilling, hydrologic studies, feasibility work, permitting and any eventual SEC-compliant reserve estimates.
- The resolution and potential financial impact of the remaining Lyon County due-process litigation.
- Future equity issuance, ATM activity and stock-based debt settlements that could dilute existing shareholders.
- The company’s ability to fund reclamation, exploration and development without relying on favorable metal prices or additional financing.