Comstock Mining Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Comstock Mining Inc. is a Nevada-based gold and silver exploration, development and production company with approximately 9,272 acres in the Comstock and Silver City districts, plus real estate holdings. The filing covers the fiscal year ended December 31, 2017, with comparative information for 2016 and 2015.
The Company ceased mining in 2015 and completed leaching of existing pads in December 2016. Consequently, it had no gold or silver production or mining revenue in 2017. Activities shifted toward exploration and development of the Dayton and Lucerne resource areas and related asset sales.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $0.1 million | $5.1 million | Down $5.0 million |
| Mining revenue | $0 | $4.9 million | Down $4.9 million |
| Real estate revenue | $0.1 million | $0.1 million | Down $0.02 million |
| Loss from operations | $(8.9) million | $(10.2) million | Improved $1.3 million |
| Net loss | $(10.6) million | $(13.0) million | Improved $2.4 million |
| Basic and diluted loss per share | $(0.26) | $(0.37) | Improved $0.11 |
| Cash used in operating activities | $(6.5) million | $(2.6) million | Use increased $3.9 million |
| Cash and cash equivalents | $2.1 million | $0.2 million | Increased $1.9 million |
| Total assets | $31.0 million | $33.8 million | Down $2.9 million |
| Total debt, net of discounts | $10.3 million | $9.5 million | Increased $0.8 million |
| Stockholders’ equity | $11.9 million | $14.4 million | Down $2.6 million |
Operating expenses totaled $9.0 million, including $3.4 million of mining-related costs, $1.1 million of exploration and mine development, $1.0 million of mine claims and costs, $0.8 million of environmental and reclamation costs, and $2.6 million of general and administrative expense. The Company reported no meaningful operating margin because mining revenue had ended.
Capital expenditures were $1.8 million. Investing activities provided $1.0 million, primarily from approximately $1.1 million of land, water rights and equipment sales. Financing activities provided $7.4 million, including approximately $7.1 million of net equity proceeds and a $0.2 million Tonogold option fee, partly offset by approximately $9.2 million of debt repayments.
Material changes versus the prior comparable period
- Mining revenue fell to zero after completion of leaching activities in 2016.
- Costs applicable to mining revenue declined to $3.4 million from $4.5 million, primarily reflecting the cessation of mining and processing; 2017 costs consisted largely of depreciation on temporarily idled assets.
- Exploration and mine development expense declined by $3.4 million to $1.1 million, primarily because substantial Lucerne underground development work was completed in 2016.
- General and administrative expense declined by $0.9 million to $2.6 million, and the Company reported no severance costs in 2017 versus approximately $0.3 million in 2016.
- Interest expense increased by $1.0 million to $1.7 million following the January 2017 refinancing with an 11% Senior Secured Debenture.
- The Company issued 9.5 million common shares for gross proceeds of approximately $7.3 million, increasing shares outstanding to 47.2 million at year-end from 37.1 million.
- Effective November 9, 2017, the Company completed a one-for-five reverse stock split; reported share and per-share amounts reflect the split.
Liquidity, debt and going-concern considerations
At December 31, 2017, current assets were $7.7 million, current liabilities were $1.1 million and net working capital was $6.6 million. Cash was $2.1 million, while accumulated deficit was $222.6 million. Management stated that available resources were expected to support operations for the following 12 months, but also disclosed that failure to obtain additional funding could raise substantial doubt about the Company’s ability to continue as a going concern.
Debt included an $10.7 million 11% Senior Secured Debenture issued in January 2017, with principal and an approximately $0.7 million make-whole payment due in January 2021. The debenture is secured by substantially all Company assets and requires asset-sale proceeds to be applied to debt obligations. The Company also had approximately $7.0 million of unused borrowing capacity under a loan commitment agreement and $4.4 million of aggregate unused equity-offering capacity.
Contractual obligations totaled approximately $28.2 million, including $15.0 million of debt payments, $5.8 million of lease obligations and $7.4 million of reclamation and remediation obligations. Reclamation surety bonds totaled approximately $7.4 million, supported by $2.5 million of cash collateral.
Guidance, outlook and management commentary
- Management targeted up to $500 million of accretive shareholder value by 2020 and production capacity exceeding 100,000 gold-equivalent ounces annually; these are forward-looking objectives, not established results.
- 2018 operating expenses, excluding depreciation, amortization and depletion, were expected to be approximately $3.6 million, with interest expense of approximately $1.2 million.
- Management planned to sell non-mining land, buildings and water rights for expected net proceeds of approximately $14 million, with proceeds primarily directed to debt repayment and Dayton exploration.
- The Dayton project was targeted for full feasibility and a production-ready mine plan within approximately two years, subject to exploration, engineering, permitting, financing and economic results.
- Under the October 2017 Tonogold agreement, Tonogold may earn a 51% interest in Comstock Mining LLC by spending $20 million on the Lucerne property within 42 months and making specified payments totaling up to $2.2 million. Tonogold also has an option to purchase 51% of certain American Flat equipment and property for $25 million if conditions are satisfied.
- Dayton metallurgical column tests produced reported cyanide recoveries of 82% to 85% of gold in 25 days. Economic feasibility and commercial recoverability remain unproven.
Unusual items, risks and contingencies
- The Company has not established proven or probable mineral reserves under SEC Industry Guide 7. Mineralized material and resource estimates remain subject to substantial geological, metallurgical and economic uncertainty.
- The Company recorded a provisional $27.3 million fourth-quarter 2017 tax expense related to the Tax Cuts and Jobs Act, while maintaining a full valuation allowance on deferred tax assets. The filing states that the accounting was not yet complete and could be revised.
- Most Company land holdings are within or near the Carson River Mercury Superfund Site study area, creating potential investigation, remediation, permitting and cost risks.
- A reclamation liability of $7.4 million was recorded, but actual future reclamation costs may differ materially from estimates.
- The Company remains dependent on external financing, equity issuances, asset sales and potential partners because it has no current mining revenue and recurring operating losses.
- A remaining due-process claim by the Comstock Residents Association continued in Nevada District Court; the filing stated that no pending matters were expected to have a material adverse effect, although the outcome was uncertain.
- Gold and silver prices, permitting, water availability, environmental regulation, operating hazards, contractor performance, title to unpatented claims and access to capital could materially affect future results.
2017 fourth-quarter snapshot
| Metric | Fourth quarter 2017 |
|---|---|
| Revenue | $30,705 |
| Gross loss | $(712,596) |
| Loss from operations | $(1,843,190) |
| Net loss | $(2,372,265) |
| Basic and diluted loss per share | $(0.05) |
Most important facts for investors to verify
- Whether planned non-mining asset sales close on the expected timeline and generate the approximately $14 million of net proceeds needed for debt repayment and exploration.
- Whether Tonogold satisfies the option agreement requirements, including required payments and $20 million of Lucerne expenditures, and the resulting ownership impact.
- Whether Dayton exploration and feasibility work establishes economically viable reserves and a financeable production plan; no proven or probable reserves had been established as of filing.
- The Company’s ability to fund approximately $6.5 million or more of annual cash operating needs without mining revenue.
- Debt-service requirements under the 11% secured debenture, including the January 2021 maturity, make-whole amount and asset-sale sweep provisions.
- Potential dilution from equity offerings, Northern Comstock contributions and other stock-based obligations.
- Final accounting for the provisional $27.3 million Tax Cuts and Jobs Act tax adjustment and any effect on future reported results.
- Changes in reclamation obligations, environmental requirements and the remaining Carson River Mercury Superfund Site and litigation matters.