Comstock Inc. quarterly report, Q3 FY2015

Comstock Mining Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The filing presents unaudited interim results. The company is a Nevada-based gold and silver producer and exploration company operating primarily in the Comstock and Silver City districts.

Financial performance and key metrics

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Total revenue	$4.35 million	$6.79 million	$15.87 million	$18.77 million
Mining revenue	$4.30 million	$6.51 million	$15.67 million	$18.10 million
Loss from operations	$(3.97) million	$(1.43) million	$(6.82) million	$(7.94) million
Net loss	$(4.31) million	$(1.05) million	$(4.53) million	$(8.26) million
Net loss available to common shareholders	$(7.95) million	$(1.98) million	$(9.98) million	$(11.07) million
Loss per common share	$(0.07)	$(0.02)	$(0.11)	$(0.14)

Mining revenue declined 34% year over year in Q3 and 13% for the nine-month period, reflecting lower gold production and lower realized gold prices.
Mining costs applicable to revenue were $3.45 million in Q3 and $10.39 million for nine months, down 21% and 29%, respectively, from the comparable periods. Silver credits reduced reported mining costs by approximately $0.9 million in Q3 and $2.9 million year to date.
Operating results remained loss-making despite cost reductions. The filing does not provide a consolidated gross margin measure; based on reported revenue and operating loss, operating margins were approximately negative 91% in Q3 and negative 43% for the nine-month period.
Nine-month other income included approximately $3.2 million from the release of a tax-indemnification loss contingency. No income-tax expense was recorded, and deferred tax assets were fully reserved.

Production and operating metrics

Q3 production was 3,847 ounces of gold and 62,480 ounces of silver. Nine-month production was 13,117 ounces of gold and 179,074 ounces of silver, compared with 14,272 gold ounces and 159,080 silver ounces in the prior-year period.
Nine-month weighted average grades improved to 0.031 ounces of gold per ton and 0.663 ounces of silver per ton, versus 0.027 and 0.473, respectively, in 2014.
The company reported an 81% gold recovery rate and reduced the average strip ratio from 4.83 in 2014 to less than 1.0.
Average realized prices for the first nine months were $1,212.03 per gold ounce and $15.96 per silver ounce. Q3 realized prices were $1,116.44 and $14.83, respectively.

Cash flow, liquidity and capital structure

Nine-month operating cash flow was positive at $428,803, compared with $(2.59) million in 2014.
Investing cash flow was $(4.84) million, primarily reflecting capital expenditures, heap-leach expansion and strategic land purchases. Financing cash flow was $1.59 million.
Cash and cash equivalents declined to $2.48 million at September 30, 2015, from $5.31 million at December 31, 2014.
Current assets were $5.10 million versus current liabilities of $12.77 million, indicating a substantial working-capital deficit. The accumulated deficit was $193.1 million.
Total debt and capital lease obligations were $15.82 million, including $9.79 million classified as current and $6.02 million long term. The company also had a $6.76 million long-term reclamation liability.
The Auramet revolving credit facility permits borrowings of up to $8 million and matures in February 2017. It includes a $1 million minimum-liquidity covenant; management stated that the company was in compliance.
On October 19, 2015, the company issued 10,169,492 common shares and reported net proceeds of approximately $5.9 million. The filing inconsistently states the offering price as $0.059 per share in the subsequent-events note and $0.59 per share in MD&A; this should be verified.

Material changes versus the prior comparable period

Revenue decreased while operating losses worsened in Q3, primarily because of lower gold production and realized prices, increased exploration activity, and $818,474 of new land and road development costs related to the SR-342 realignment.
For the nine-month period, the net loss improved by $3.73 million, mainly because of lower mining and non-mining costs and the $3.2 million release of the tax-indemnification contingency, partly offset by lower revenue and $1.68 million of SR-342 costs.
All outstanding convertible preferred stock was converted into approximately 53.6 million common shares. Approximately 6.2 million additional common shares were issued as a one-time dividend. Future preferred-stock dividends and related special rights were eliminated.
Northern Comstock capital contribution obligations were reduced from $31.05 million to $9.75 million, with ongoing monthly and annual contributions beginning in October 2015.
The company acquired more than 897 acres of land and buildings for approximately $5.6 million, including the issuance of approximately 1.55 million restricted shares.
The Gold Hill Hotel was leased to independent operators beginning April 1, 2015, reducing the significance of the hospitality segment.

Outlook, commentary, risks and unusual items

Management expected positive operating cash flow in Q4 despite weaker revenue during the transition from surface mining to underground exploration and development.
Management raised its 2015 cost-savings target to $10 million versus 2014, comprising more than $7 million in mining savings and $3 million in non-mining savings.
SR-342 realignment was scheduled for completion in November 2015, with approximately $1 million of remaining estimated costs at September 30. Phase 1 cost approximately $862,000 and Phase 2 costs were approximately $819,000 through the reporting date.
The company planned approximately $1.0 million of remaining road and capital expenditures, approximately $1.4 million for underground drift and drilling activities, and approximately $3.0 million of additional debt repayments during the remainder of 2015.
Lucerne underground exploration began in September 2015. The first phase had an expected investment of approximately $3 million, with work on the PQ target expected through December 2015 and a subsequent Woodville phase expected through April 2016.
The company had not established proven or probable mineral reserves under SEC Industry Guide 7. Exploration results and mineralized material therefore remain subject to substantial geological, metallurgical, permitting and economic risk.
Principal risks include metal-price volatility, production and recovery variability, permitting and environmental obligations, construction delays, equipment and labor issues, financing needs, debt maturities, dilution, and the company’s recurring losses and working-capital deficit.
Management stated that available resources, financing arrangements and the October equity offering were expected to fund operations for the next 12 months, but warned that inability to obtain additional financing could create substantial doubt about going-concern viability.
A legal appeal challenging Lyon County’s zoning decision remained pending; management did not expect the matter to have a material financial impact.

Most important facts for investors to verify

Reconcile the October 2015 equity-offering price discrepancy of $0.059 versus $0.59 per share and confirm the resulting proceeds and dilution.
Assess whether $2.48 million of cash, the Auramet facility, operating cash flow and subsequent financing are adequate against $12.77 million of current liabilities and scheduled debt payments.
Review the timing and remaining cost of the SR-342 project and its effect on production, cash flow and capital spending.
Evaluate whether the stated $10 million cost-savings target is recurring and achievable, excluding one-time items such as severance and the tax-contingency release.
Monitor gold and silver prices, production volumes, recoveries and grades, particularly during the transition to underground exploration.
Confirm the economic significance and permitting status of the PQ, Woodville and Dayton targets, noting that no proven or probable reserves had been established.
Review debt maturities, the $1 million liquidity covenant, reclamation obligations and the reduced but continuing Northern Comstock capital-contribution commitments.