Comstock Inc. annual report, FY2013

Comstock Mining Inc. 2013 Form 10-K Summary

Business context and reporting period

Comstock Mining Inc. is a Nevada-based gold and silver mining company operating primarily in the historic Comstock and Silver City districts. The filing covers the fiscal year ended December 31, 2013, with quarterly information included for the fourth quarter. The Company also operates the Gold Hill Hotel hospitality business.

2013 was the Company’s first full year of production from the Lucerne Mine. It produced more than 20,000 gold-equivalent ounces, including 17,739 ounces of gold and 186,482 ounces of silver. The Company controlled approximately 7,447 acres and had not established proven or probable mineral reserves under SEC Industry Guide 7.

Financial performance and key metrics

Metric	2013	2012	Change
Total revenue	$24.8 million	$5.1 million	+$19.7 million
Mining revenue	$24.1 million	$4.5 million	+$19.6 million
Hospitality revenue	$0.7 million	$0.6 million	+$0.1 million
Costs applicable to mining revenue	$26.5 million	$3.6 million	+$22.9 million
Loss from operations	$(20.9) million	$(30.3) million	Improved by $9.4 million
Net loss	$(21.3) million	$(30.8) million	Improved by $9.4 million
Net loss available to common shareholders	$(25.4) million	$(35.1) million	Improved by $9.8 million
Basic and diluted loss per share	$(0.42)	$(0.87)	Improved

Approximate consolidated gross margin was negative 11.2%, operating margin was negative 84.3%, and net margin was negative 86.0%. Mining generated a $20.5 million operating loss, while hospitality generated a $0.4 million operating loss.

The Company realized average 2013 prices of $1,361.70 per ounce of gold and $21.97 per ounce of silver, below reported average market prices of $1,411.03 and $23.83, respectively. Fourth-quarter realized prices were $1,324.29 per ounce of gold and $20.68 per ounce of silver.

Cash flow, liquidity, debt, and capital structure

Cash and cash equivalents declined to $2.4 million at December 31, 2013, from $6.0 million at year-end 2012.
Current assets were $6.0 million versus current liabilities of $13.1 million, producing a $7.1 million working-capital deficit.
Cash used in operating activities was $10.3 million, compared with $22.4 million in 2012.
Cash used in investing activities was $6.7 million, including approximately $6.0 million of capital asset purchases and $1.3 million of additional reclamation bond deposits.
Cash provided by financing activities was $13.4 million, including $18.75 million of gross equity proceeds and approximately $4.9 million of debt repayments.
Debt and capital lease obligations declined to $7.9 million from $13.7 million. The Company paid off the $5.0 million Auramet facility, reduced equipment debt, and issued shares to settle a portion of the Golden Goose obligation.
Reclamation liabilities were $5.4 million, and reclamation bond deposits were $2.7 million at year-end.
The Company raised $10.0 million in March 2013 and $8.75 million in August 2013 through common-stock offerings, resulting in substantial equity dilution.

Material changes versus the prior comparable period

Mining revenue increased substantially because 2013 included a full year of production, compared with only fourth-quarter production in 2012.
Production and processing were constrained for most of 2013 by a permit limitation restricting throughput to approximately 1.0 million tons annually. A November 2013 permit modification increased authorized capacity to 4.0 million tons annually.
Two new leach-pad cells and related infrastructure were completed in December 2013.
Reclamation and exploration expense declined by $9.8 million as the Company shifted focus from exploration toward production.
General and administrative expense declined by $1.3 million, and consulting and professional fees declined by $1.7 million, primarily due to lower stock-based compensation, legal costs, and outsourcing.
Costs applicable to mining revenue included $4.7 million of depreciation and a $1.5 million inventory and leach-pad write-down caused primarily by lower gold prices.
Reported cash costs declined from more than $2,190 per ounce in the first quarter to $989 per ounce in the fourth quarter, according to management.
Shares outstanding increased from 48.5 million at year-end 2012 to 70.2 million at year-end 2013. Convertible preferred stock, warrants, options, and restricted shares represented additional potential dilution.

Guidance, outlook, commentary, and unusual items

Management planned to produce approximately 40,000 gold-equivalent ounces in 2014, approximately double the 2013 production rate.
Management expected cash costs below $750 per ounce at a stabilized 40,000-ounce annual run rate and annual mining and processing operating expenses below $25 million.
The Company identified approximately $3.5 million of expected reductions in non-mining expenses and planned $2 million to $3 million of 2014 capital expenditures.
Management stated that higher production rates, improved grades, expanded leach capacity, and lower unit costs were necessary to improve cash flow and liquidity.
The financial statements were prepared on a going-concern basis. The Company reported recurring losses, negative operating cash flow, and an accumulated deficit of approximately $179.0 million.
Management cited a March 2014 commitment from a significant investor to provide support sufficient to pay debts as they become due through March 31, 2015. The filing does not indicate that this commitment had been fully funded at year-end 2013.
In February 2014, the Company entered into a secured $5.0 million revolving credit facility at 9.5% interest and drew approximately $4.6 million. Repayments of $357,143 were scheduled twice monthly from August 2014 through February 2015, subject to the facility terms.
The reclamation surety requirement increased to approximately $6.35 million in March 2014, from $5.2 million previously.
The Company received a temporary NDEP stop order in August 2013 relating to emissions-control equipment. It was lifted after one week, and a subsequent final warning stated that no air-emission violations occurred and required no further action.
Substantially all mining receivables and revenues were associated with one customer, although management stated that gold could be sold through numerous market traders.

Principal risks and contingencies

The Company had no proven or probable reserves; resource estimates, grades, recoveries, production levels, and project economics remain uncertain.
Profitability depends on gold and silver prices, metallurgical recoveries, operating costs, fuel and energy prices, and the ability to achieve planned production rates.
Liquidity remains a significant risk because cash flow from operations was negative, current liabilities exceeded current assets, and the Company depends on debt, equity financing, investor support, and production growth.
Mining activities are subject to permitting, environmental, reclamation, water, air-quality, safety, and BLM requirements. Substantially all land holdings are within the Carson River Mercury Superfund Site study area, creating potential investigation, remediation, cost, and delay risks.
The Company faces substantial reclamation and remediation obligations, including surety requirements and a $4.1 million tax indemnification accrual related to the Winfield Group.
The Northern Comstock operating agreement with Chairman John V. Winfield’s affiliates includes future preferred-stock or cash contributions, royalties, related-party obligations, and potential accelerated dilution.
At December 31, 2013, preferred shares and warrants were convertible into or exercisable for approximately 55.3 million additional common shares, excluding other restricted shares and potential future issuances.
The Company’s common stock is subject to penny-stock trading restrictions, and the Winfield Group held approximately 68.8% of voting interests on an as-converted basis.

Most important facts for investors to verify

Whether 2014 production reached the approximately 40,000 gold-equivalent-ounce target and whether cash costs fell below $750 per ounce.
Whether operating cash flow became positive and whether the Company maintained sufficient liquidity to meet scheduled debt, lease, reclamation, and revolving-credit repayments.
The current status and funding of the increased reclamation surety requirement of approximately $6.35 million.
Whether the Company established any proven or probable reserves and how subsequent technical studies changed resource estimates.
The amount of additional dilution from preferred-stock conversions, restricted stock, warrants, equity financing, and related-party obligations.
The outcome of the Golden Goose contingent payment obligation, the Winfield-related tax indemnification, and other related-party commitments.
The impact of gold and silver price changes on inventory valuations, recoveries, revenue, and mine economics.
The status of environmental permitting and any further requirements associated with the Carson River Mercury Superfund Site or NDEP compliance matters.