Comstock Inc. quarterly report, Q1 FY2013

Comstock Mining Inc. — Form 10-Q Summary

Business Context and Reporting Period

Comstock Mining Inc. is a Nevada-based gold and silver mining company focused on the Comstock and Silver City districts, with a smaller hospitality segment operating the Gold Hill Hotel. This unaudited report covers the three months ended March 31, 2013, during the company’s early transition into commercial production. The company reported 57,145,462 common shares outstanding at March 31, 2013 and 57,206,068 at May 3, 2013.

Financial Performance and Position

Revenue: $3.790 million, including $3.668 million from mining and $0.122 million from hospitality. Mining revenue was zero in the prior-year quarter because production had not yet commenced.
Production and sales: The company shipped approximately 2,261 ounces of gold and 15,599 ounces of silver and crushed and stacked more than 234,000 dry tons of mineralized material.
Operating results: Operating loss was $5.738 million versus $7.661 million in the prior-year quarter. Mining revenue was exceeded by mining costs of $3.836 million, implying a negative mining gross margin of approximately $0.168 million before corporate, exploration and other costs.
Net loss: $5.763 million versus $7.333 million. Net loss available to common shareholders was $6.797 million, or $0.13 per basic and diluted share, compared with $8.438 million, or $0.24 per share.
Expenses: Reclamation and exploration expense declined to $2.089 million from $4.770 million, while general and administrative expense increased to $2.751 million from $2.195 million. Hospitality operating costs increased to $0.206 million from $0.152 million.
Cash flow: Operating activities used $5.610 million, investing activities provided $0.019 million, and financing activities provided $9.210 million. Cash increased by $3.620 million to $9.593 million.
Liquidity: Current assets were $17.837 million and current liabilities were $15.371 million, producing a current ratio of approximately 1.16. Inventories, stockpiles and mineralized material on the leach pad totaled $6.144 million.
Debt: Total debt obligations were $10.513 million, including $5.612 million classified as current and $4.900 million long term, down from $13.732 million at December 31, 2012. The company reduced debt by approximately $3.7 million during the quarter.
Equity financing: A March public offering of 5.0 million common shares at $2.00 per share generated $10.0 million gross and $9.738 million net proceeds.
Balance sheet: Total assets were $47.765 million and stockholders’ equity was $22.423 million at March 31, 2013. The accumulated deficit was $163.386 million.

Material Changes Versus the Prior Comparable Period

Mining operations generated $3.668 million of revenue in the current quarter versus none in the prior-year quarter, reflecting the commencement of production in late 2012.
Total revenue increased from $0.112 million to $3.790 million, while the net loss narrowed by $1.570 million.
Operating cash use increased from $4.468 million to $5.610 million despite the lower net loss, partly because of working-capital investment in accounts receivable, inventories and leach-pad material.
Depreciation, depletion and amortization increased to $1.083 million from $0.181 million as production assets entered service.
Interest expense increased to $0.463 million from $0.045 million, primarily due to the Caterpillar equipment facility and Auramet production financing.
The company sold mining equipment with a $3.166 million book value for approximately $1.6 million and recorded a $1.015 million loss, included in general and administrative expense. Approximately $1.0 million of related debt was repaid.
Weighted-average common shares increased to 51.7 million from 34.8 million, reflecting equity issuance and preferred-stock conversions.

Guidance, Outlook, Risks and Unusual Items

Management reported production above its 400 gold-equivalent-ounce weekly target and an average above 425 gold-equivalent ounces per week for the six weeks ended April 27, 2013, equivalent to an annualized rate above 20,000 ounces.
The company’s 2013 goal was approximately 20,000 gold-equivalent ounces. It expected Lucerne annual operating and processing costs of approximately $15.9 million, excluding approximately $1.0 million of additional haulage costs, plus approximately $1.5 million of mine administration costs.
Management planned $3 million to $4 million of capital expenditures over the following twelve months, primarily for heap-leach and production-capacity expansion, and intended to repay approximately $6 million of debt, including the Auramet Facility.
The Auramet Facility was secured by company assets and required repayment through delivery of 3,720 ounces of gold. Six installments totaling 1,860 ounces had been delivered through April 30, 2013; the facility was scheduled for repayment by July 2013 unless redrawn.
Management stated that available cash and anticipated operating cash generation were expected to fund operations for the next twelve months. However, recurring losses and negative operating cash flow create going-concern risk; weaker production, lower gold prices or other adverse factors could require additional debt or equity financing on terms that may not be available.
Key risks include gold and silver price volatility, production ramp-up and recovery risk, exploration uncertainty, permitting and regulatory requirements, environmental and reclamation obligations, equipment and haulage constraints, debt-service requirements, potential dilution, and dependence on future financing.
A $5.0 million accelerated payment obligation to Northern Comstock Mining, LLC could be triggered when an additional 200,000 gold-equivalent ounces are estimated and validated. The company expected to issue Series A-1 preferred stock for this obligation during the second quarter of 2013.
Contractual obligations totaled approximately $53.952 million, including $14.973 million of debt, $32.613 million of operating leases, $4.666 million of reclamation and remediation obligations, and $1.700 million of other obligations.
A legal challenge by the Comstock Residents Association was denied on April 24, 2013, with summary judgment in favor of the company and Storey County. Management reported no other pending matters expected to have a material adverse effect.

Investor Verification Checklist

Verify whether production rates, recoveries, costs and gold-equivalent-ounce output met the 2013 plan after the reported ramp-up period.
Reconcile cash generation from mining operations with the company’s liquidity projections and debt repayment schedule.
Confirm repayment or refinancing of the Auramet Facility and the effect of gold deliveries on available production and cash flow.
Assess the company’s ability to fund the planned $3 million to $4 million of capital expenditures and approximately $6 million of debt repayment without further equity dilution.
Review the valuation and recoverability of inventories, stockpiles, leach-pad material, mineral rights and plant and equipment.
Monitor gold and silver prices, mining costs, haulage arrangements, permitting, reclamation collateral and environmental obligations.
Determine whether the potential $5.0 million related-party accelerated payment was triggered and whether the planned preferred-stock issuance occurred.
Consider dilution from convertible preferred stock, warrants, options and restricted stock; approximately 65.3 million potentially dilutive securities were excluded from diluted loss per share because they were antidilutive.