Business Context and Reporting Period
Comstock Mining Inc. is a Nevada-based gold and silver producer with a hospitality segment operating the Gold Hill Hotel. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, filed August 8, 2013. The company had recently transitioned from exploration to commercial production at its Lucerne Mine.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $7.0 million | $10.8 million |
| Mining revenue | $6.8 million | $10.5 million |
| Hospitality revenue | $0.2 million | $0.3 million |
| Loss from operations | $(5.7) million | $(11.4) million |
| Net loss | $(5.5) million | $(11.3) million |
| Net loss available to common shareholders | $(6.6) million | $(13.4) million |
| Loss per diluted share | $(0.11) | $(0.24) |
| Net cash used in operating activities | Not provided | $(8.4) million |
- Mining costs applicable to revenue were $8.2 million in the quarter and $12.1 million for the first half, or approximately 121% and 115% of reported mining revenue, respectively. Total operating margins were approximately negative 81% for the quarter and negative 106% for the first half.
- The company shipped 4,921 ounces of gold and 42,992 ounces of silver in the quarter, and 7,206 ounces of gold and 59,542 ounces of silver for the first half. Average realized prices were $1,384 per gold ounce and $21.65 per silver ounce in the quarter, and $1,454 and $23.87, respectively, for the first half.
- Cash and cash equivalents were $2.4 million at June 30, 2013, down from $6.0 million at December 31, 2012. Current assets were $8.4 million versus current liabilities of $12.2 million.
- Total debt obligations were $6.4 million, including $2.0 million current and $4.4 million long-term, compared with $13.7 million at December 31, 2012. The company also reported $4.7 million of long-term reclamation liabilities.
- Stockholders’ equity was $16.9 million, and accumulated deficit was $168.9 million at June 30, 2013.
- Capital expenditures were approximately $1.3 million in the first half, primarily for heap-leach expansion and Merrill Crowe and related infrastructure upgrades.
Material Changes Versus the Prior Comparable Period
- Mining revenue began contributing materially in 2013; the comparable 2012 periods had no mining revenue because production had not yet commenced.
- Second-quarter total revenue increased to $7.0 million from $0.2 million, while the operating loss narrowed to $5.7 million from $9.1 million. Six-month revenue increased to $10.8 million from $0.3 million, and the operating loss narrowed to $11.4 million from $16.7 million.
- Reclamation and exploration expense declined 58% in the quarter and 57% for the first half, primarily because the 2012 drilling program had been completed.
- General and administrative expense, including consulting and professional fees, declined substantially, primarily due to lower stock-based compensation, legal and administrative costs.
- The March 2013 equity offering generated $10.0 million of gross proceeds, or approximately $9.7 million net, through the issuance of 5.0 million common shares at $2.00 per share.
- The Auramet facility was fully settled through cash and gold transfers. The company recognized a nonrecurring $0.3 million gain on the settlement.
- Inventory, stockpiles and mineralized material were written down by approximately $1.0 million to net realizable value because of declining gold prices.
- Weighted-average common shares increased to 57.4 million in the quarter and 54.6 million for the first half, from 39.5 million and 37.1 million, respectively, reflecting equity issuance and conversions.
Guidance, Outlook, Risks and Unusual Items
- Management reported production above the 400 gold-equivalent-ounce-per-week target, averaging more than 413 ounces per week in the second quarter.
- Management targeted approximately 600 gold-equivalent ounces per week by September 2013 and 770 ounces per week, or a 40,000-ounce annualized rate, by the first quarter of 2014, subject to permits and operating performance.
- Management projected 2013 annual cash costs applicable to mining revenue of approximately $26 million to $28 million and expected a 2 million-ton annualized processing rate during the fourth quarter. The filing projected run-rate cash costs of approximately $725 to $795 per ounce by early 2014.
- Expansion of the heap-leach facility was dependent on permit modifications. The company expected final Water Pollution Control Permit approval by the end of September 2013 and planned to expand production beginning in the fourth quarter.
- The company planned up to $3 million of additional capital expenditures during the remainder of 2013 and approximately $1 million of additional debt repayment.
- The financial statements disclose substantial going-concern risk: the company has recurring losses and negative operating cash flow, had only $2.4 million of cash, and stated that its mine plan requires additional financing or use of financing arrangements. Failure to obtain funds, achieve expected production, or realize expected gold prices could materially impair liquidity and operations.
- The company had not established proven or probable reserves for the Comstock Lode Project. Its resource and production plans remain subject to exploration, geological, permitting, operating, environmental and commodity-price risks.
- Contractual obligations totaled approximately $46.3 million, including $32.4 million of operating leases, $7.8 million of debt payments including estimated interest, and $4.7 million of reclamation obligations. A related-party operating agreement requires annual payments through 2049, with $30.45 million remaining at June 30, 2013.
- Preferred-stock conversions and stock issuances after June 30, 2013 resulted in substantial additional common shares, including 4.2 million shares issued upon preferred conversions through August 2, 2013.
Important Facts for Investors to Verify
- Whether Lucerne production achieved the targeted ramp-up rates and whether the required permits were obtained on schedule.
- Actual cash costs, recoveries, grades, tonnage processed and gold-equivalent ounces produced versus management’s projections.
- Available liquidity, operating cash burn and the company’s ability to raise additional equity or debt financing.
- The effect of gold and silver price volatility on inventory valuations, revenue, margins and the going-concern assessment.
- The amount and timing of remaining debt, reclamation, surety-bond collateral, lease and related-party obligations.
- The dilution impact of preferred-stock conversions, stock dividends, compensation issuances, options, warrants and other convertible securities.
- Progress toward establishing proven and probable reserves; the filing states that none had yet been established.