Business Context and Reporting Period
Comstock Mining Inc. is a Nevada-based gold and silver exploration, development and real estate company operating primarily in the Comstock and Silver City districts. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparative results for the three months ended March 31, 2016.
The company completed leaching from its existing Lucerne mine pads in December 2016 and is transitioning from production to exploration and development, principally at the Dayton and Lucerne projects.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $19,294 | $2.02 million | Down $2.00 million |
| Mining revenue | $0 | $1.98 million | Down $1.98 million |
| Real estate revenue | $19,294 | $39,757 | Down $20,463 |
| Loss from operations | $(2.44) million | $(3.83) million | Improved $1.38 million |
| Net loss | $(2.77) million | $(4.05) million | Improved $1.28 million |
| Loss per diluted share | $(0.01) | $(0.02) | Improved |
| Cash used in operations | $(1.96) million | $(0.70) million | Use increased $1.25 million |
Mining costs applicable to revenue were $0.9 million, consisting entirely of depreciation on temporarily idled equipment, processing facilities and heap leach pads. Total operating expenses were $2.46 million versus $5.85 million in the prior-year quarter. The filing does not present a meaningful positive gross margin because mining revenue ceased while certain mining-related costs continued.
Interest expense declined to $456,082 from $553,605. Depreciation, amortization and depletion were $1.16 million, compared with $1.69 million in Q1 2016.
Balance Sheet, Debt and Liquidity
| Metric | March 31, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $388,571 | $184,359 |
| Current assets | $6.56 million | $7.96 million |
| Current liabilities | $1.81 million | $2.42 million |
| Working capital | $4.74 million | $5.54 million |
| Total debt, including current portion | $11.36 million | $9.47 million |
| Accumulated deficit | $214.8 million | $212.0 million |
Assets held for sale were $5.9 million. Total assets were $32.95 million and stockholders’ equity was $12.23 million at March 31, 2017.
In January 2017, the company issued an 11% senior secured debenture with $10.723 million of principal due in 2021. The debenture refinanced substantially all existing obligations other than Caterpillar Finance and the Lynch House note. It is secured by substantially all company assets and requires net proceeds from asset sales to be applied to debt-related obligations, including a make-whole payment of approximately $688,000 if paid before or at maturity.
In March 2017, the company entered into an additional loan commitment of up to $5 million at 11%, with approximately $4.7 million of capacity available at quarter-end. No borrowings had been made under this commitment.
Material Changes Versus the Prior Comparable Period
- Mining revenue fell to zero because processing from the existing leach pads ended in December 2016.
- Total revenue declined approximately 99%, but the net loss improved by $1.28 million because of lower exploration and development, general and administrative, and mining-related costs.
- Cash used in operating activities increased to $1.96 million from $0.70 million, reflecting ongoing exploration, environmental, mine claim and administrative spending and unfavorable working-capital movements.
- Financing activities generated $2.16 million of net cash, including $9.48 million of net debenture proceeds, approximately $7.62 million of debt repayments and $0.31 million of net ATM equity proceeds.
- Shares outstanding increased to 187.7 million at March 31, 2017 from 185.4 million at December 31, 2016. The weighted-average diluted share count increased to 186.8 million from 162.9 million.
- The company acquired a property adjacent to its processing facility for approximately $1.7 million, funded through prior deposits, common stock and debt.
Guidance, Outlook, Risks and Unusual Items
Management expects 2017 operating expenses of approximately $3.5 million, excluding approximately $4.4 million of depreciation and amortization, and interest expense of approximately $1.3 million. Management expects to operate with approximately 10 employees.
Management plans to sell non-mining land, buildings and water rights for expected net cash proceeds exceeding $14 million over the next 12 to 18 months. The company expects to use proceeds first to repay debt obligations under the GF Comstock debenture, fund Dayton exploration and strengthen liquidity. There is no assurance that these assets will sell on favorable terms or at all.
The company targets a production-ready Dayton mine plan within two years and plans to begin reverse-circulation drilling in the second quarter of 2017. Longer-term objectives include developing Dayton and Lucerne resources capable of supporting more than 100,000 gold-equivalent ounces of annual production and delivering up to $500 million of accretive stockholder value by 2020. These are forward-looking goals and are not assurances of performance.
First-quarter environmental costs included approximately $327,000 of special water management activity related to multiple extreme precipitation events; management identified $159,152 as excess costs not expected to recur. The company also incurred a $127,000 loss on early retirement of long-term debt.
Liquidity remains a central risk. The company has recurring operating losses, used $2.0 million of cash in operations during the quarter and held only $0.4 million of cash at quarter-end. Management believes available resources will fund operations for the next 12 months, but cautions that failure to obtain financing or complete planned asset sales could materially impair liquidity and raise substantial doubt about the company’s ability to continue as a going concern.
Additional risks include gold and silver price volatility, exploration and permitting uncertainty, environmental and reclamation obligations, equipment and operational risks, debt repayment requirements, potential equity dilution, and the possibility that Dayton or Lucerne development plans will not achieve economic feasibility.
Subsequent to quarter-end, the company received approximately $50,000 under its ATM program and approximately $400,000 under an equity purchase agreement with Leviston Resources. The Leviston agreement allows purchases of up to $7.25 million of common stock, subject to stated limits and restrictions, and may result in additional dilution.
A pending legal matter involving the Comstock Residents Association remains before the Nevada District Court on a due-process claim. Management does not expect the matter to have a material adverse impact. The CFO announced a resignation effective May 19, 2017, and the CEO was appointed interim CFO.
Important Facts for Investors to Verify
- Whether planned non-mining asset sales generate the expected proceeds and whether those proceeds are sufficient to repay the debenture and fund development.
- The company’s ability to replace discontinued Lucerne production with economically viable Dayton or underground Lucerne operations.
- Actual cash burn, financing availability and compliance with the 11% secured debenture’s asset-sale and repayment provisions.
- The extent of future equity issuance and dilution under the ATM and Leviston programs.
- Results of Dayton drilling, feasibility work, permitting and reserve or resource updates.
- Actual environmental, reclamation and water-management costs, including the adequacy of the $7.37 million reclamation liability.
- Gold and silver prices, recovery assumptions and the economic feasibility of future mine plans.