Comstock Mining Inc. — Form 10-Q Summary
Business Context and Reporting Period
Comstock Mining Inc. is a Nevada-based gold and silver mining company operating primarily through the Lucerne Mine, with a smaller hospitality segment consisting of the Gold Hill Hotel. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company had 74,011,212 common shares outstanding as of April 25, 2014.
The company shipped 4,546 ounces of gold and 49,292 ounces of silver during the quarter. It had not established proven or probable mineral reserves under SEC Industry Guide 7.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $5.76 million | $3.79 million | +52% |
| Mining revenue | $5.61 million | $3.67 million | +53% |
| Loss from operations | $3.40 million | $5.74 million | Improved $2.33 million |
| Net loss | $3.82 million | $5.76 million | Improved $1.94 million |
| Net loss available to common shareholders | $4.89 million | $6.80 million | Improved $1.91 million |
| Basic and diluted loss per share | $0.07 loss | $0.13 loss | Improved |
| Cash used in operations | $2.39 million | $5.61 million | Improved $3.22 million |
Operating loss margin was approximately 59% of revenue, and net loss margin was approximately 66%. Mining costs applicable to revenue were $4.76 million, up 24% despite production increases of more than 100% for gold and more than 215% for silver. General and administrative expense declined 35% to $2.19 million. Derivative fair-value changes produced a $235,207 expense, compared with $437,814 of income in the prior-year quarter.
| Balance-sheet metric | March 31, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $2.60 million | $2.41 million |
| Current assets | $7.49 million | $5.96 million |
| Total assets | $45.59 million | $44.00 million |
| Current liabilities | $17.65 million | $13.10 million |
| Total debt and capital lease obligations | $13.46 million | $7.91 million |
| Total liabilities | $28.79 million | $23.76 million |
| Stockholders’ equity | $16.80 million | $20.24 million |
| Accumulated deficit | $182.80 million | $178.97 million |
Cash increased by $193,498 during the quarter. Investing activities used $1.28 million, including capital expenditures and a reclamation bond deposit. Financing activities provided $3.86 million, primarily from the Auramet facility, partially offset by $764,243 of debt repayments.
Material Changes Versus the Prior Comparable Period
- Gold production increased to 4,546 ounces from 2,261 ounces, while silver production increased to 49,292 ounces from 15,599 ounces.
- Revenue rose $1.97 million, driven primarily by higher ounces sold, partially offset by lower gold prices. The company reported an average realized gold price of $1,251.39 per ounce versus a Q1 2013 market average of $1,630.47 per ounce.
- Operating and net losses narrowed substantially because of higher production, cost reductions, and lower general and administrative expenses.
- Cash used in operating activities declined from $5.61 million to $2.39 million, although operations remained cash-flow negative.
- Debt increased materially following the February 2014 draw of approximately $4.6 million under a new $5 million Auramet revolving credit facility and the addition of approximately $1.3 million of Caterpillar equipment financing.
- Derivative liabilities increased to $653,638 from $250,000, reflecting gold collars, gold forwards and call options, and contingent debt-payment obligations.
- Common shares issued and outstanding increased to 72.29 million from 70.19 million, primarily through preferred-stock conversions, stock dividends, restricted stock and shares issued for financing fees.
Guidance, Outlook, Risks and Unusual Items
Management expects 2014 production of approximately 40,000 gold equivalent ounces, roughly double the 2013 rate, with targeted cash costs below $750 per ounce and annual mining and processing operating expenses below $25 million. Management also identified up to $3.5 million of additional reductions in non-mining activities and expects to spend up to $3.3 million on capital expenditures during the remainder of 2014.
The company planned approximately $9 million of exploration drilling for 2014–2015, including work at the Lucerne, Dayton and Spring Valley areas. The company’s permit allows up to 4 million tons of mineralized material to be placed on the leach pad annually, increased from 1 million tons during 2013.
Liquidity remains a significant concern. The company has recurring losses, negative operating cash flow and an accumulated deficit of $182.8 million. Management disclosed a significant investor’s commitment to provide sufficient financial support to pay debts as they become due through March 31, 2015, and therefore believes it has adequate funds for the next 12 months. The filing states that the financial statements contain no adjustments related to the uncertainty surrounding the company’s ability to continue as a going concern.
The Auramet facility bears interest at 9.5%, requires a minimum liquidity balance of $1 million, and is scheduled to be repaid through 14 semi-monthly payments of $357,143 beginning August 8, 2014. Management planned to repay approximately $6 million of debt during the remainder of 2014, including $3.9 million under the Auramet facility.
Key risks include volatility in gold and silver prices, production and recovery uncertainty, mining and permitting risks, the absence of proven or probable reserves, potential dilution, environmental and reclamation obligations, reliance on additional financing and the ability to achieve planned production and cost reductions. The company reported no material litigation, no reportable mine-safety violations and no material changes to previously disclosed risk factors. On April 11, 2014, it increased its surety bond by $1.15 million at the request of Nevada regulators.
Important Facts for Investors to Verify
- Whether the company achieves the 40,000 gold equivalent ounce 2014 production target and cash costs below $750 per ounce.
- Whether operating cash flow becomes positive before the scheduled Auramet repayments begin.
- The terms and enforceability of the significant investor’s liquidity-support commitment through March 31, 2015.
- Compliance with the Auramet facility’s $1 million minimum-liquidity covenant and repayment schedule.
- The effect of gold and silver prices, derivative contracts and recovery rates on revenue and cash flow.
- Funding sources for planned capital expenditures, exploration spending and debt repayment.
- Potential dilution from convertible preferred stock, options, warrants, restricted stock and other equity-linked obligations.
- The company’s progress toward establishing economically viable reserves, since no proven or probable reserves had been established as of the filing date.