Comstock Mining Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2012. Comstock Mining Inc. is a Nevada-based gold and silver exploration, development and emerging production company operating in the Comstock District, with a hospitality segment consisting primarily of the Gold Hill Hotel. The company commenced mining production during the quarter and poured its first gold and silver doré bars on September 29, 2012. The financial statements are unaudited and presented under interim GAAP.
Financial performance and position
- Revenue: Hospitality revenue was $182,792 for the quarter and $477,037 for the first nine months, compared with $179,071 and $299,246, respectively, in 2011. Mining revenue was not recognized in the reported periods under the company’s revenue recognition policy.
- Operating loss: The company reported an operating loss of $7.8 million for the quarter and $24.5 million for the first nine months, versus $3.6 million and $12.1 million in the comparable 2011 periods. Operating margins are not meaningful because reported revenue consisted only of hospitality revenue while mining activities were largely in development and start-up.
- Net loss: Net loss was $9.0 million for the quarter and $25.3 million for the first nine months, compared with $2.0 million and $9.1 million in 2011. Loss available to common shareholders was $10.1 million for the quarter and $28.6 million for the first nine months. Basic and diluted loss per share was $0.24 and $0.74, respectively.
- Major cost drivers: Nine-month reclamation and exploration expense was $13.8 million, general and administrative expense was $7.4 million, and consulting and professional fees were $2.3 million. Stock-based compensation included in operating costs totaled approximately $5.1 million for the first nine months.
- Cash flow: Cash used in operating activities was $17.8 million for the first nine months, compared with $9.4 million in 2011. Cash used in investing activities was $10.7 million, including $12.7 million for mineral rights, property, plant and equipment. Financing activities provided $24.7 million, including $9.7 million of debt proceeds and $15.8 million of net common-stock proceeds.
- Liquidity: At September 30, cash and cash equivalents were $3.2 million and available-for-sale securities were $0.7 million, for total cash and short-term securities of $3.9 million. Current assets were $8.1 million versus current liabilities of $18.8 million, producing negative working capital of approximately $10.7 million based on the balance sheet.
- Debt: Total debt obligations were $14.1 million, including $7.4 million classified as current and $6.7 million classified as long term. The company had drawn $5.0 million under a Caterpillar equipment facility and $5.0 million under the Auramet gold-linked facility.
- Balance sheet: Total assets increased to $42.2 million from $27.0 million at December 31, 2011, principally reflecting mining property and equipment additions. Total liabilities increased to $30.0 million from $10.4 million, while stockholders’ equity declined to $12.2 million from $16.6 million.
Material changes versus the prior comparable period
- First-nine-month net loss increased by $16.2 million, primarily because of higher exploration, mine development, administrative, professional and depreciation costs and less favorable derivative valuation changes.
- Operating cash use increased by approximately $8.4 million, reflecting higher exploration and mine development spending, administrative costs, professional fees and working-capital requirements.
- Derivative results shifted from $2.9 million of income in the first nine months of 2011 to $0.4 million of expense in 2012. Derivative liabilities at September 30, 2012 totaled $1.4 million, including gold calls, gold forwards and a contingent preferred-stock dividend obligation.
- Common shares issued and outstanding increased to 43.3 million at September 30, 2012 from 29.0 million at December 31, 2011. The company raised approximately $15.3 million net in a February public offering and issued common stock for preferred dividends and conversions.
- Mining assets expanded materially: mineral rights and properties increased to $7.7 million from $4.9 million, and net property, plant and equipment increased to $20.8 million from $9.4 million.
- The company recorded $3.3 million of inventory, stockpiles and mineralized material on leach pads at September 30, 2012, reflecting the transition into production.
Guidance, outlook, commentary and risks
- Management’s strategic plan targets validation of up to 3.25 million gold-equivalent ounces in resources and reserves in 2013 and eventual annual production of approximately 20,000 gold-equivalent ounces.
- The company planned approximately 300,000 feet of reverse-circulation drilling and 13,000 feet of core drilling over approximately 21 months, at an estimated cost of approximately $12 million.
- Through October 31, 2012, the company reported shipments of approximately 1,258 ounces of gold and 14,802 ounces of silver, plus a commemorative-bar delivery. Combined metal sales and amounts due exceeded $2.5 million. These subsequent production figures were not included in reported third-quarter revenue.
- Management estimated annual Lucerne mine operating expenses of approximately $13.3 million at a processing rate of one million tons per year, excluding corporate overhead, exploration and mine development. Temporary higher haulage costs of approximately $2.25 million were expected during the first nine months of 2013.
- Management stated that current cash resources, expected production revenue and existing financing arrangements should fund operations for the next twelve months if planned production is achieved. However, delays or underperformance could require additional debt or equity financing, which may not be available on acceptable terms.
- The Auramet facility requires repayment through delivery of 3,720 ounces of gold beginning in February 2013 and includes a minimum liquidity covenant of $3.0 million. The company also faces a requirement to post approximately $2.3 million of collateral by December 31, 2012 for a $4.67 million reclamation surety bond.
- Key risks include the speculative nature of mineral exploration and start-up mining, commodity-price volatility, recovery and grade uncertainty, operational and equipment failures, permitting and environmental compliance, title and regulatory disputes, financing and liquidity constraints, debt covenant compliance, and reliance on key personnel.
- The company disclosed recurring losses, an accumulated deficit of approximately $152.2 million and historical limited mining revenue, creating substantial going-concern and execution risk despite management’s liquidity assessment.
- A complaint by the Comstock Residents Association concerning a Storey County special-use-permit trucking condition was pending as of the filing date. The company joined the county’s motion to dismiss and stated that it believes the complaint is without merit.
Most important facts for an investor to verify
- Whether production ramp-up, recoveries, grades and metal shipments met or exceeded the company’s stated expectations after September 30, 2012.
- Actual cash generation from mining operations and whether the company maintained the Auramet minimum liquidity covenant.
- Availability and terms of any additional financing needed to fund operations, debt service, exploration and the required reclamation collateral.
- The repayment burden and economics of the Auramet gold-delivery facility, Caterpillar equipment debt and other current obligations.
- Reconciliation of reported subsequent metal shipments and sales with recognized revenue and cash collections.
- Changes in estimated recoverable ounces, stockpile and leach-pad valuations, reclamation liabilities and related potential write-downs.
- Outcomes of permitting, environmental, reclamation and litigation matters, including the Comstock Residents Association proceeding.
- Potential dilution from convertible preferred stock, restricted stock, options, warrants and future equity financing; approximately 69.0 million common-stock-equivalent shares were excluded from diluted loss per share because they were antidilutive or subject to performance conditions.