Comstock Mining Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Comstock Mining Inc. reported for the fiscal year ended December 31, 2020. Although the request identifies 2020 Q4, this filing is an annual Form 10-K covering the full fiscal year. The company is a Nevada-based exploration, mineral development, processing and strategic-metals business focused on the Comstock District, mercury remediation, mineral royalties, real estate and related investments. It controls approximately 9,358 acres in Storey and Lyon Counties, Nevada, and had nine full-time employees at year-end.
The company ceased mining in 2015 and completed processing in 2016. It had no mining production or mining revenue in 2020 or 2019. Its principal strategic assets include the Dayton and Spring Valley exploration areas, the American Flat processing facility, royalties on properties leased to Tonogold, and investments in mercury remediation and strategic-mineral ventures.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $0.2 million | $0.2 million | +$0.02 million |
| Mining revenue | $0 | $0 | No change |
| Real estate revenue | $0.2 million | $0.2 million | Increase of $22,068 |
| Loss from operations | $(5.5) million | $(5.3) million | Operating loss increased $0.1 million |
| Net income attributable to Comstock | $14.9 million | $(3.8) million | Improvement of $18.7 million |
| Basic and diluted EPS | $0.49 | $(0.20) | Improved |
| Cash used in operating activities | $(3.8) million | $(2.3) million | Use increased $1.5 million |
| Cash and cash equivalents | $2.4 million | $1.0 million | +$1.4 million |
| Total assets | $43.1 million | $39.6 million | +$3.6 million |
| Total liabilities | $11.3 million | $16.1 million | $(4.7) million |
| Accumulated deficit | $(221.0) million | $(235.9) million | Improved by $14.9 million |
The 2020 net profit was primarily non-operating. The company recorded an $18.3 million gain on the sale of its remaining interest in Comstock Mining LLC, owner of the Lucerne Mine, to Tonogold. Other income was $2.6 million, including fair-value gains on investments and derivatives, Tonogold securities transactions, reimbursements and PPP proceeds, partly offset by a $0.6 million fair-value loss on the Tonogold note receivable.
Operating expenses totaled $5.7 million. General and administrative expense was $3.6 million, exploration and pre-development expense was $0.8 million, real estate operating costs were $0.8 million, and mining-related costs were $0.2 million. Real estate operating costs rose substantially because depreciation was recognized after the Gold Hill Hotel and Daney Ranch were reclassified from held for sale to held for use.
Net cash provided by investing activities was $3.2 million, mainly from Tonogold securities sales and redemptions, Tonogold payments and asset-sale proceeds. Net cash provided by financing activities was $2.0 million, including $4.2 million of net common-stock proceeds and $5.5 million of promissory-note proceeds, partly offset by $7.6 million of debt repayments.
Debt, liquidity and capital structure
- Debt totaled $3.7 million in face amount, or $3.6 million net of discounts, at December 31, 2020. All reported debt was classified as current, with maturities on or before November 2021.
- The company had a $4.475 million face-value Tonogold note receivable, carried at a $5.5 million fair value, bearing 12% interest and due September 20, 2021 unless extended.
- Reclamation liabilities totaled $6.1 million. Reclamation surety bonds totaled approximately $7.3 million, supported by approximately $2.7 million of collateral.
- At year-end, the company held 13.1 million Tonogold common shares valued at $3.9 million, plus $6.3 million of assets held for sale and $7.1 million of current notes receivable and advances.
- Management stated that planned proceeds from the Tonogold note, Tonogold share sales, Silver Springs property sales and subsequent equity financing were expected to fund operations for the following twelve months. The filing nevertheless highlights recurring operating losses, negative operating cash flow and substantial going-concern risk if expected funding sources are delayed or unavailable.
- Common shares outstanding increased to 35.0 million at December 31, 2020 from 27.2 million at December 31, 2019. A subsequent March 2021 offering of 4.0 million shares at $4.00 per share generated expected net proceeds of $15.0 million.
Material changes versus 2019
- On September 8, 2020, Tonogold acquired 100% of Comstock Mining LLC and full control of the Lucerne properties. Comstock retained a 1.5% net smelter return royalty. The transaction produced an $18.3 million gain and removed Lucerne-related assets and liabilities from consolidation.
- The company converted $3.9 million face value of Tonogold preferred stock into 21.8 million Tonogold common shares and redeemed the remaining preferred stock for $2.6 million.
- Mining costs declined by $1.3 million because certain assets became fully depreciated and Lucerne was sold. Operating cash use increased by $1.5 million.
- Debt declined from $5.6 million gross at year-end 2019 to $3.7 million at year-end 2020, principally because the senior secured debenture was retired in August 2020 and other debt was repaid or refinanced.
- The company invested $2.0 million in Mercury Clean Up LLC, obtaining a 15% fully diluted interest and rights to participate in future joint ventures. It also invested in MCU Philippines, Inc. and held a 50% interest in that venture at year-end.
- The company completed the acquisition of a 25% interest in Pelen LLC, acquired an option to purchase the remaining 75%, and entered into a new Sutro Tunnel mineral lease.
- Assets held for sale declined from $10.5 million to $6.3 million as Lucerne was sold and the Gold Hill Hotel and Daney Ranch were reclassified as held for use.
Guidance, outlook, commentary and risks
Management’s three-year strategic plan focuses on producing per-share value through: establishing a maiden Dayton resource estimate; expanding and advancing the Dayton-Spring Valley complex toward feasibility; commercializing mercury remediation systems; validating the royalty portfolio; and monetizing more than $25 million of non-strategic assets. Planned 2021 operating expenditures were approximately $6.0 million, with approximately $2.0 million expected to be reimbursed under Tonogold agreements.
- The company expected the Silver Springs property transactions, totaling approximately $10.0 million, to close during the second quarter of 2021. Proceeds were intended in part to repay promissory notes.
- MCU-P shipped its first processing unit to the Philippines, with reclamation operations targeted for March 2021. MCU also planned continued testing at the American Flat facility.
- Tonogold was conducting exploration at the Occidental and Gold Hill targets under a lease requiring at least $1.0 million of annual exploration, permitting and engineering spending.
- The company has no proven or probable mineral reserves. Mineralized-material estimates, recoveries, project economics and future production remain uncertain.
- COVID-19 delayed MCU mercury-recovery testing in Nevada and the Philippines, and the duration and financial impact of those delays were unclear.
- Key risks include dependence on external financing and asset sales, recurring operating losses, lack of mining revenue, commodity-price volatility, permitting and environmental obligations, reclamation costs, water availability, title and regulatory risks, dependence on Tonogold and other counterparties, equity dilution, and potential inability to continue as a going concern.
- The filing identifies significant related-party and valuation exposure, including the Tonogold note, investments in Tonogold and SSOF, Northern Comstock obligations, and management involvement in SSOF, MCU and MCU-P.
Important facts for investors to verify
- Whether Tonogold paid or refinanced the $4.475 million principal Tonogold note due September 20, 2021, and whether the note’s fair value assumptions remain supportable.
- Whether the Silver Springs property sales closed and generated the expected approximately $10.0 million of proceeds.
- Whether the company’s subsequent $15.0 million equity financing and debt repayment materially improved liquidity after year-end.
- Whether MCU and MCU-P achieved technical, commercial and permitting milestones, including Philippine remediation operations and the increase in Comstock’s MCU ownership to 25%.
- Whether the Dayton-Spring Valley resource estimate and planned S-K 1300 technical report were completed, and whether any proven or probable reserves were established.
- The carrying values and liquidity of Tonogold securities, SSOF advances, assets held for sale and other Level 3 or otherwise illiquid investments.
- The adequacy of the $6.1 million reclamation liability, $7.3 million surety bonds and $2.7 million collateral deposit, particularly as environmental requirements evolve.
- The effect of additional equity issuance, performance awards, LiNiCo transactions and other strategic investments on existing shareholder dilution and future cash requirements.