Comstock Mining Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014; filed October 16, 2014. The filing identifies the registrant as Comstock Mining Inc. The company operates a Nevada gold and silver mining business centered on the Lucerne Mine, with a smaller hospitality segment.
Business Context and Reporting Period
Comstock was producing gold and silver from the Lucerne Mine while pursuing exploration, resource validation, mine expansion and heap-leach processing capacity. Management stated that the company had validated more than 2 million gold-equivalent ounces of measured and indicated resources but had not established proven or probable reserves under SEC Industry Guide 7.
Third-quarter production was 4,997 ounces of gold and 61,001 ounces of silver. Nine-month production was 14,267 ounces of gold and 158,731 ounces of silver, up 15% and more than 33%, respectively, from the comparable 2013 periods.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $6.8 million | $6.8 million | $18.8 million | $17.6 million |
| Mining revenue | $6.5 million | $6.6 million | $18.1 million | $17.1 million |
| Loss from operations | $(1.4) million | $(4.4) million | $(7.9) million | $(15.8) million |
| Net loss | $(1.0) million | $(4.5) million | $(8.3) million | $(15.8) million |
| Net loss available to common shareholders | $(2.0) million | $(5.5) million | $(11.1) million | $(18.8) million |
| Loss per common share | $(0.02) | $(0.09) | $(0.14) | $(0.33) |
Revenue was approximately flat year over year in the third quarter and increased 7% for the first nine months. Based on reported revenue and operating loss, the operating margin was approximately negative 21% in Q3 2014 and negative 42% for the first nine months, versus approximately negative 65% and negative 90%, respectively, in the comparable 2013 periods.
Mining costs applicable to revenue declined to $4.4 million in Q3 2014 from $6.4 million and to $14.6 million for the first nine months from $18.4 million. General and administrative expense declined 45% in the quarter and 35% year to date. Other income in Q3 included approximately $1 million from the lapse of a tax indemnification contingency. Derivative fair-value changes produced a $366,000 expense in Q3 and a $583,000 expense for the first nine months.
Cash Flow, Debt and Liquidity
| Balance sheet or cash-flow item | September 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $9.3 million | $2.4 million |
| Total current assets | $11.9 million | $6.0 million |
| Total debt and capital lease obligations | $12.2 million | $7.9 million |
| Total liabilities | $25.4 million | $23.8 million |
| Stockholders’ equity | $24.2 million | $20.2 million |
| Derivative liabilities | $885,000 | $250,000 |
- Net cash used in operating activities was $2.6 million for the first nine months of 2014, compared with $11.6 million in 2013.
- Net cash used in investing activities was $2.5 million, including capital expenditures, land and equipment purchases, and an increase in the reclamation bond deposit.
- Net cash provided by financing activities was $11.9 million, including approximately $11.0 million of net equity proceeds and approximately $4.6 million of revolving-credit proceeds, partially offset by $3.7 million of debt repayments.
- In May 2014, the company issued 7,475,000 common shares at $1.59 per share, generating approximately $11.0 million net proceeds.
- The company had a $5 million Auramet revolving credit facility bearing interest at 9.5%. The facility was extended on October 9, 2014 from February 6, 2015 to February 5, 2016. It requires minimum liquidity of $1 million; management reported compliance with applicable covenants.
Material Changes Versus the Prior Comparable Period
- Production increased, but Q3 mining revenue declined slightly because lower gold ounces sold and lower realized gold prices offset higher silver sales.
- Cost reductions drove a substantial improvement in operating loss, including lower mining, maintenance, hauling, drilling, blasting, consulting and administrative costs.
- Nine-month gold revenue rose $1.0 million despite a lower realized gold price of $1,267.47 per ounce versus $1,387.44 in 2013, due to higher gold shipments.
- Debt increased primarily because of the Auramet facility and approximately $3.0 million of Caterpillar equipment financing. The current portion of debt and capital lease obligations increased to $6.8 million from $2.7 million.
- Common shares issued and outstanding increased to 83.3 million at September 30, 2014 from 70.2 million at December 31, 2013, reflecting equity financing, stock-based awards, preferred-stock conversions and stock dividends.
- Derivative liabilities increased to $885,000, primarily because of the contingent payment obligation associated with the Golden Goose debt settlement and new gold contracts.
Guidance, Outlook, Risks and Unusual Items
Management targeted an annual production rate of approximately 40,000 gold-equivalent ounces, described as roughly double the 2013 rate. The company expected cash costs below $750 per gold ounce, all-in sustaining cash costs of $1,050 per ounce and annual mining and processing operating expenses below $24 million once the target run rate was stabilized. Management also targeted more than $7 million of 2014 mining cost reductions and $3.5 million of reductions in non-mining costs.
For the remainder of 2014, the company planned up to $1 million of capital expenditures, primarily for Lucerne expansion and heap-leach infrastructure, and expected to repay approximately $3.3 million of debt, including $2.5 million under the Auramet facility.
Storey County approved an expanded special-use permit covering more than 1,200 acres and allowing expanded surface and underground mining, processing, exploration and related infrastructure. The company also disclosed subsequent renewal of its Nevada Water Pollution Control Permit and approval of an environmental sampling plan.
- The company has incurred operating losses and negative operating cash flow every year since inception and reported an accumulated deficit of $187.2 million.
- Management concluded that available cash, working capital, operating cash generation and financing arrangements should fund operations for at least the next 12 months, but warned that lower production or gold prices could materially impair liquidity and raise substantial doubt about continued operations.
- Gold and silver prices, production rates, grades, permitting, mining and processing execution, environmental obligations, reclamation costs and access to additional capital are significant risks.
- The company’s long-term reclamation liability was $5.7 million, and it remained subject to related-party lease payments of $862,500 annually through October 2049, payable in cash or Series A-1 preferred stock.
- A contingent payment derivative related to a prior debt settlement had a fair value of $789,000 at September 30, 2014 and could require an additional payment based on the value and sale of issued shares.
- The company reported no material pending legal matters, no defaults upon senior securities and no material changes to previously disclosed risk factors. Management assessed disclosure controls as effective.
Important Facts for Investors to Verify
- Whether the Lucerne Mine can reach the targeted 40,000 gold-equivalent-ounce annual production rate and sustain the projected cost structure.
- Actual cash costs, all-in sustaining costs, grades, recoveries and realized metal prices relative to management’s targets.
- The timing and amount of required debt repayments, including the Auramet facility and Caterpillar equipment financing.
- Whether operating cash flow becomes positive without further equity issuance or additional borrowing.
- The potential dilution from common-stock issuances, preferred-stock conversions, stock dividends, options, warrants and other convertible securities.
- The status of the Eastside exploration and expansion program, permitting, capital requirements and whether any reserves are ultimately established.
- The impact of derivative settlements and the contingent debt-obligation payment on future cash requirements.