Comstock Mining Inc. — 2015 Q2 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015; filed July 21, 2015. The company is a Nevada-based gold and silver producer operating primarily in the Comstock and Silver City districts. Production remains concentrated in the Lucerne Mine, with exploration and development focused on Lucerne and Dayton. The filing identifies the registrant as Comstock Mining Inc.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|
| Total revenue | $5.49 million | $6.22 million | $11.53 million | $11.98 million |
| Mining revenue | $5.44 million | $5.98 million | $11.37 million | $11.59 million |
| Loss from operations | $(1.18) million | $(3.10) million | $(2.85) million | $(6.50) million |
| Operating margin | (21.5%) | (49.8%) | (24.8%) | (54.3%) |
| Net loss | $(1.51) million | $(3.39) million | $(0.22) million | $(7.21) million |
| Net loss available to common shareholders | $(2.47) million | $(4.35) million | $(2.10) million | $(9.13) million |
| Basic and diluted loss per share | $(0.03) | $(0.06) | $(0.03) | $(0.12) |
- Mining costs applicable to revenue declined 42% in Q2 and 32% for the first half, to $3.22 million and $6.94 million, respectively. Management attributed the reduction to lower labor, fuel, equipment, drilling and blasting costs, improved grades, and a lower strip ratio.
- Six-month net income benefited from approximately $3.2 million of other income resulting from the lapse of a tax indemnification contingency. This was an unusual, non-operating item and was not indicative of recurring earnings.
- Gold production was 4,575 ounces in Q2 and 9,270 ounces for the first half, essentially unchanged from the first half of 2014. Silver production increased to 116,594 ounces for the first half from 97,984 ounces.
- First-half weighted average grades improved to 0.034 ounces per ton of gold and 0.688 ounces per ton of silver, compared with 0.028 and 0.420, respectively, in the prior-year period. Management reported an approximately 81% gold recovery rate.
Cash flow, liquidity and debt
| Balance sheet item | June 30, 2015 | December 31, 2014 |
|---|
| Cash and cash equivalents | $6.78 million | $5.31 million |
| Total current assets | $10.82 million | $8.64 million |
| Total current liabilities | $12.42 million | $12.60 million |
| Total debt and capital lease obligations | $17.22 million | $11.60 million |
| Total liabilities | $26.84 million | $24.21 million |
| Stockholders’ equity | $22.02 million | $22.24 million |
| Accumulated deficit | $188.83 million | $188.61 million |
- Six-month operating cash flow was positive $0.37 million, compared with negative $2.28 million in the prior-year period.
- Investing cash flow was negative $3.73 million, including approximately $1.9 million for heap-leach expansion and infrastructure and approximately $1.8 million for strategic land purchases.
- Financing cash flow was positive $4.84 million. The company received approximately $4.4 million of net proceeds from a $5 million Auramet borrowing and $5 million from the Varilease financing, partially offset by approximately $4.6 million of debt repayments.
- The Auramet facility permits borrowings of up to $8 million, subject to conditions, and matures February 6, 2017. The company had drawn $5 million under a note requiring 25 semi-monthly $200,000 principal payments beginning April 30, 2015. The facility includes a $1 million minimum liquidity covenant; management stated that the company was in compliance.
- The Varilease financing requires 24 monthly payments of $228,820 and is secured by mining equipment. The transaction was accounted for as financing rather than a sale-leaseback.
- Management stated that available cash, operating cash flow and financing arrangements should fund operations for the next 12 months, but warned that lower production or gold prices, or an inability to obtain additional financing, could adversely affect liquidity and raise substantial doubt about going-concern status.
Material changes, outlook and unusual items
- Revenue declined 12% in Q2 and 4% for the first half, primarily because of lower realized gold prices and lower hospitality and lease revenue. The Gold Hill Hotel was leased to independent operators effective April 1, 2015.
- Operating losses improved substantially because of cost reductions, despite $0.86 million of land and road development expense for the SR-342 realignment. The first phase was completed in Q2; remaining project costs were estimated at approximately $2 million through December 2015.
- Management increased its 2015 cost-savings target to $7 million for mining costs and $3 million for non-mining costs, or $10 million in total versus 2014. It expected mining cash costs to remain below $650 per gold ounce through Q3.
- For the remainder of 2015, management planned approximately $2.1 million of road and capital expenditures, approximately $3 million for the Lucerne underground drift and related drilling, and approximately $5.5 million of additional debt repayments, including $2.4 million on the Auramet facility.
- Storey County approved modifications to the operating plan for a Lucerne underground portal and drift. The first phase was expected to require approximately $3 million, with PQ target work planned through December 2015 and Woodville target work planned through March 2016.
- Dayton drilling was ongoing. As of July 17, 2015, 241 holes had been completed, with 303 ten-foot-or-longer intercepts grading at least 0.015 ounces of gold per ton. These results are exploration results and do not establish proven or probable reserves.
- The company stated that it had not established any proven or probable reserves for the Comstock Lode Project, creating significant exploration and development risk.
- Outstanding gold forward, call and put contracts covered 9,675 gold ounces and silver calls covered 50,000 silver ounces. Related derivative liabilities were $107,569 at June 30, 2015.
- From July 1 through July 20, 2015, the company issued 3,082,713 common shares as preferred-stock dividends, creating potential dilution for common shareholders.
- The company had no material pending legal proceedings and reported effective disclosure controls and internal control over financial reporting.
Investor verification points
- Verify production, recovery, grade and cash-cost trends against the company’s stated targets, particularly the expectation of cash costs below $650 per gold ounce.
- Assess liquidity relative to $12.42 million of current liabilities, scheduled debt repayments, the $1 million Auramet liquidity covenant and planned 2015 expenditures.
- Separate recurring operating performance from the approximately $3.2 million one-time benefit from the lapsed tax indemnification contingency.
- Confirm the timing, remaining cost and permitting status of the SR-342 realignment and Gold Canyon Creek restoration.
- Evaluate whether Dayton and Lucerne exploration results translate into economically feasible resources or reserves; the filing states that no proven or probable reserves had yet been established.
- Review dilution from preferred-stock dividends, convertible preferred stock, restricted stock and other potentially issuable securities.
- Monitor gold and silver prices, fuel and other input costs, derivative settlement exposure, reclamation obligations and the company’s ability to refinance or repay debt.
