Comstock Inc. annual report, FY2014

Comstock Mining Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are included in the annual and quarterly disclosures. Comstock is a Nevada-based gold and silver producer operating primarily in the Comstock and Silver City districts, with a smaller hospitality segment operating the Gold Hill Hotel.

Business Context and Operations

The Lucerne Mine was the company’s principal producing asset. The company also pursued exploration and development at Dayton, Spring Valley, and other Comstock District targets.
2014 was the company’s second full year of production. Gold-equivalent production increased to 22,925 ounces from 20,815 ounces in 2013, consisting of 19,601 ounces of gold and 222,416 ounces of silver.
The company mined 4.1 million tons, crushed and stacked 700,754 tons, and increased production in each quarter. Fourth-quarter production was 6,200 gold-equivalent ounces, and December production was 3,176 gold-equivalent ounces.
The company owned or controlled approximately 8,306 acres and had not established proven or probable reserves under SEC Industry Guide 7.

Financial Results and Key Metrics

Metric	2014	2013	Change
Total revenue	$25.6 million	$24.8 million	+3.0%
Mining revenue	$24.7 million	$24.1 million	+2.6%
Hospitality revenue	$0.8 million	$0.7 million	+17.0%
Gross profit	$6.2 million	$(2.8) million	Improved
Gross margin	Approximately 24.2%	Approximately (11.2)%	Improved
Operating loss	$(8.7) million	$(20.9) million	Improved by $12.2 million
Operating margin	Approximately (34.0)%	Approximately (84.3)%	Improved
Net loss	$(9.6) million	$(21.3) million	Improved by $11.7 million
Net loss available to common shareholders	$(13.3) million	$(25.4) million	Improved by $12.1 million
Basic and diluted loss per share	$(0.17)	$(0.42)	Improved

Mining costs applicable to revenue declined 28% to $19.1 million, despite higher production. Management attributed the reduction to lower mining, maintenance, hauling, drilling, blasting, staffing, and production-startup costs, as well as the absence of the $1.5 million inventory write-down recorded in 2013.
General and administrative expense declined 34% to $6.4 million, primarily due to lower stock-based compensation, consulting, and administrative costs.
Interest expense was $1.0 million. Other expense, net, was $0.9 million, including a $0.96 million unfavorable change in derivative fair values, partially offset by approximately $1.0 million of other income from a reduction in a tax indemnification accrual.
Average realized prices were $1,272.28 per ounce of gold and $18.93 per ounce of silver. Fourth-quarter realized prices were $1,232.79 and $16.70, respectively.

Cash Flow, Liquidity, Debt, and Capital Structure

Cash and cash equivalents were $5.3 million at December 31, 2014, compared with $2.4 million at December 31, 2013.
Current assets were $8.6 million versus current liabilities of $12.6 million, resulting in negative working capital of approximately $4.0 million.
Net cash used in operating activities was $2.4 million, compared with $10.3 million in 2013.
Net cash used in investing activities was $3.3 million, including $2.6 million of capital asset purchases and $0.8 million of additional reclamation-bond deposits.
Net cash provided by financing activities was $8.6 million. The company raised approximately $11.0 million net from a May 2014 offering of 7,475,000 common shares and drew approximately $4.6 million under the Auramet revolving facility, partially offset by approximately $7.0 million of debt repayments.
Total debt and capital lease obligations were $11.6 million, including $5.9 million classified as current. The company also had a $5.9 million long-term reclamation liability.
The Auramet facility carried a 9.5% interest rate and required minimum liquidity of $1.0 million. In January 2015, the facility was increased from $5.0 million to as much as $8.0 million and extended to February 2017.
Contractual obligations totaled approximately $49.2 million, including $12.3 million of debt and estimated interest, $31.0 million of operating leases, and $5.9 million of reclamation and remediation obligations.
The company had an accumulated deficit of $188.6 million and approximately $2.0 million of accrued preferred-stock dividends. No cash dividends were expected for common shareholders.

Material Changes Versus the Prior Comparable Period

Production increased approximately 10%, while mining revenue increased only 3%, reflecting lower realized gold prices compared with 2013.
Mining cost efficiency improved materially, with costs applicable to mining revenue declining by approximately $7.4 million and management reporting approximately $11.7 million of total year-over-year operating and administrative savings.
Operating and net losses narrowed substantially, although the company remained unprofitable and cash-flow negative from operations.
Common shares outstanding increased from 70.2 million to 82.5 million, primarily reflecting the equity offering, stock issued for property and equipment, preferred-stock dividends paid in common shares, and other equity transactions.
Stockpiles and mineralized material on leach pads increased to $1.7 million from $0.5 million. Management increased its estimated gold recovery rate from 68% to 81%, which increased inventory and reduced mining costs by approximately $2.1 million. A 1% or 2% decline in the recovery estimate could require write-downs of approximately $0.5 million or $0.9 million.

Guidance, Outlook, Risks, and Unusual Items

Management expected positive net income and positive cash flow from operating and investing activities during the first half of 2015. The filing does not provide a formal production or revenue guidance range.
Management projected annual Lucerne operating expenses, including mining and processing, of less than $18 million and identified up to $1.5 million of additional non-mining cost reductions. Planned 2015 capital expenditures were up to $2.8 million, with approximately $5.9 million of additional debt repayment planned.
The company received approvals expanding permitted mining, processing, exploration, and development uses across the Lucerne Resource Area. It also received a five-year renewal of its water pollution control permit and authorization for a ninth heap-leach cell.
The company launched a 2014–2015 exploration and development program targeting Lucerne East, underground mining feasibility, Dayton, and Spring Valley. Planned investment was approximately $1 million for the initial Lucerne program, with additional planned drilling and investment across the district.
The financial statements were prepared on a going-concern basis. Management stated it expected sufficient funding for the following 12 months, but warned that lower production or gold prices, inability to obtain additional financing, or failure to reduce costs could materially impair liquidity and operations.
The company’s principal risks include the absence of proven or probable reserves, uncertain mineralized-material estimates and recoveries, gold and silver price volatility, permitting and environmental obligations, water availability, reclamation costs, equipment and operating risks, litigation, and reliance on external financing.
Substantially all mining accounts receivable and current-period mining revenue related to one customer, although management stated that the global market for gold provides alternative potential buyers.
A lawsuit challenged Lyon County approvals relating to mining-related zoning and master-plan changes. Management stated that it was aggressively opposing the action and did not expect pending matters to have a material adverse effect.
Substantially all land holdings were within the Carson River Mercury Superfund Site study area or related risk areas, creating potential future sampling, remediation, regulatory, and cost exposure.
The company had no material open hedge positions, although short-term gold forward and call-option contracts covered approximately 4,100 ounces at year-end.

Important Facts for Investors to Verify

Whether production growth and the planned Lucerne East and underground expansions can generate sustained positive operating cash flow and net income.
The company’s ability to refinance or repay approximately $5.9 million of current debt and satisfy its minimum-liquidity covenant.
Actual heap-leach recoveries compared with the 81% gold recovery estimate and the potential for inventory or asset impairment charges.
Progress toward establishing SEC-compliant proven or probable reserves; none had been established as of December 31, 2014.
The outcome of the Lyon County zoning litigation and the status of pending BLM right-of-way and environmental approvals.
The sufficiency of cash, financing availability, and operating performance given negative working capital, recurring losses, and the company’s stated going-concern uncertainty.
Potential dilution from convertible preferred stock, warrants, restricted shares, the Northern Comstock agreement, and additional equity financing.
Related-party obligations, including Northern Comstock contributions, royalties, long-term leases, and the approximately $3.2 million tax indemnification liability.