Comstock Mining Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013; filed October 30, 2013. 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.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $6.8 million, versus $0.2 million | $17.6 million, versus $0.5 million |
| Mining revenue | $6.6 million, versus none | $17.1 million, versus none |
| Loss from operations | $(4.4) million, versus $(7.8) million | $(15.8) million, versus $(24.5) million |
| Net loss | $(4.5) million, versus $(9.0) million | $(15.8) million, versus $(25.3) million |
| Net loss available to common shareholders | $(5.5) million, versus $(10.1) million | $(18.8) million, versus $(28.6) million |
| Loss per common share | $(0.09), versus $(0.24) | $(0.33), versus $(0.74) |
| Cash flow from operations | Not separately provided | $(11.6) million, versus $(17.8) million |
Mining costs applicable to revenue were $6.4 million in the third quarter and $18.4 million for the first nine months, representing approximately 108% of recognized mining revenue for the nine-month period. Nine-month costs included approximately $2.4 million of depreciation, depletion and amortization and a $1.0 million inventory and stockpile write-down caused primarily by lower gold prices. The filing does not provide a consolidated operating margin or adjusted EBITDA measure.
At September 30, 2013, cash and cash equivalents were $5.9 million, total current assets were $11.2 million, and total assets were $46.5 million. Total liabilities were $24.8 million and stockholders’ equity was $21.7 million. Debt and capital lease obligations totaled $10.2 million, including $2.8 million current and $7.4 million long term. The company reported no derivative liabilities at period-end.
Investing activities used $2.6 million of cash and financing activities provided $14.1 million during the first nine months. Financing included approximately $18.3 million of net proceeds from March and August common-stock offerings, partly offset by approximately $4.2 million of debt principal repayments. Capital expenditures were approximately $2.5 million, excluding equipment acquired under capital leases.
Operations and material changes
- The company transitioned from exploration to production at the Lucerne Mine. It shipped 5,214 ounces of gold and 59,731 ounces of silver in the third quarter, and 12,429 ounces of gold and approximately 119,238 ounces of silver for the first nine months.
- Production averaged more than 400 gold-equivalent ounces per week during the third quarter and more than 500 ounces per week in September, exceeding the interim 20,000-ounce annualized target.
- Mining revenue increased substantially because the prior-year comparable periods had no mining revenue. Hospitality revenue was $0.2 million in the quarter and $0.5 million year to date and remained immaterial to consolidated results.
- Reclamation and exploration expense declined by $2.5 million in the quarter and $8.4 million year to date, primarily because the 2012 drilling program had been completed.
- General and administrative and consulting expenses declined year over year, primarily due to lower stock-based compensation, legal, administrative and professional costs.
- The Auramet gold-repayment facility was fully settled during the first half of 2013 through cash and gold transfers. The company recognized a nonrecurring $0.3 million gain on settlement.
- In September, the company entered into approximately $4.3 million of capital leases for mining vehicles and equipment. It also reduced the Caterpillar equipment facility balance, including through the transfer of mining vehicles.
- Common shares outstanding increased to 67,925,430 at September 30, 2013 from 48,466,267 at December 31, 2012, reflecting equity offerings, preferred-stock conversions and other issuances.
Guidance, outlook, risks and unusual items
Management expected the expanded heap-leach facility to increase production during the fourth quarter of 2013 after receiving required permits. The company targeted approximately 40,000 gold-equivalent ounces for calendar year 2014 and expected annual Lucerne operating expenses of approximately $26 million to $28 million. It planned to spend up to $2 million on remaining 2013 capital projects and repay an additional approximately $0.7 million of debt.
In October 2013, the company received an expanded Water Pollution Control Permit increasing permitted processing capacity from 1.0 million to 4.0 million tons per year. A temporary August stop order concerning emissions controls was lifted after one week; management stated that it caused no material delays or revenue impact. The company had not established proven or probable reserves under SEC Industry Guide 7.
The financial statements were prepared on a going-concern basis despite recurring losses, an accumulated deficit of $173.4 million and negative operating cash flow since inception. Management stated that insufficient financing, lower-than-expected production or lower gold prices could adversely affect liquidity and could raise substantial doubt about continued operations. The filing also highlights commodity-price volatility, permitting and environmental compliance, operational failures, title and exploration risks, dilution, litigation, labor issues and the need for additional financing.
Contractual obligations totaled approximately $50.4 million, including $32.4 million of operating leases and royalty-related payments, $7.8 million of debt including estimated interest, $4.2 million of capital leases, $4.8 million of reclamation obligations and $1.1 million of other obligations. A related-party operating agreement requires annual payments of $862,500 through October 2049, with approximately $31.9 million remaining at September 30, 2013.
The company entered into gold forward contracts covering 2,400 ounces at an average price of $1,352 per ounce, expected to settle within three months. These contracts had a $59,289 asset fair value at September 30, 2013. Gold averaged $1,387.44 per ounce for the first nine months, below the company’s stated market-price comparison of $1,457.22.
Facts investors should verify
- Whether the heap-leach expansion achieved the planned fourth-quarter production increase and whether the 40,000-ounce 2014 target was attainable.
- Whether mining costs could decline below revenue as production scaled, particularly after the inventory write-down and other ramp-up costs.
- Cash burn, near-term debt and capital-lease maturities, and the company’s ability to obtain additional financing without substantial dilution.
- Gold and silver prices, realized sales prices, forward-derivative settlements and their effect on revenue and cash flow.
- The status of environmental permits, reclamation obligations, the expanded processing permit and any follow-up from the Nevada Division of Environmental Protection.
- The significance and economic viability of stated mineral resources, noting that the filing reported no proven or probable reserves.
- Long-term related-party lease obligations and the potential dilution from convertible preferred stock, warrants, options and restricted stock.