Comstock Mining Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Comstock Mining Inc. is a Nevada-based gold and silver producer operating primarily in the Comstock and Silver City districts. The unaudited filing covers the three months ended March 31, 2015, with comparative results for the three months ended March 31, 2014. The company also operated a hospitality segment through the Gold Hill Hotel, which was leased to independent operators effective April 1, 2015.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $6.04 million | $5.76 million |
| Mining revenue | $5.93 million | $5.61 million |
| Loss from operations | $(1.67) million | $(3.40) million |
| Net income (loss) | $1.29 million | $(3.82) million |
| Net income (loss) available to common shareholders | $0.39 million | $(4.89) million |
| Basic earnings (loss) per share | $0.01 | $(0.07) |
| Net cash provided by operating activities | $0.21 million | $(2.39) million |
Operating margin was approximately negative 27.7% in Q1 2015, compared with negative 59.0% in Q1 2014. Net margin was approximately 21.4%, although net income included a nonrecurring $3.2 million benefit from the lapse of a tax indemnification contingency.
- Gold ounces poured and sold increased 4.2% to 4,695; silver ounces increased 14.4% to 56,482.
- Average realized prices were $1,280.25 per gold ounce and $15.94 per silver ounce.
- Mining costs applicable to revenue declined 22.0% to $3.72 million, primarily due to lower labor, drilling and blasting, equipment, fuel and strip-ratio costs.
- Capital expenditures were approximately $3.52 million, including heap-leach expansion, infrastructure and property acquisitions.
- Cash and cash equivalents were $4.18 million at March 31, 2015, down from $5.31 million at December 31, 2014.
- Current assets were $8.23 million versus current liabilities of $12.43 million, leaving a $4.21 million working-capital deficit.
- Total debt and capital lease obligations were $14.12 million, including $8.53 million classified as current and $5.59 million classified as long term.
- Accumulated deficit was $187.3 million.
Material changes versus the prior comparable period
- Revenue increased 4.8%, while the operating loss narrowed by $1.73 million.
- Net income improved by $5.11 million, primarily because of the $3.2 million tax-contingency benefit and lower operating costs, rather than solely from recurring operating profitability.
- Operating cash flow improved by $2.59 million, moving from a $2.39 million use of cash to $0.21 million of cash generation.
- The company mined 316,199 tons versus 947,852 tons in Q1 2014, but processed higher-grade material. Gold grade increased to 0.039 ounces per ton from 0.024, and silver grade increased to 0.734 ounces per ton from 0.345.
- On March 6, 2015, the company drew $5 million under an amended $8 million Auramet revolving credit facility, receiving approximately $4.4 million net of prepaid interest and fees. The note bears interest at 9.5% and requires 25 semi-monthly $200,000 principal payments beginning April 30, 2015.
- The company reduced its mining workforce by 29 employees and incurred approximately $0.4 million of severance costs.
- The Gold Hill Hotel was leased beginning April 1, 2015; management expects no future hospitality operating losses and potentially positive rental income.
Guidance, outlook, risks and unusual items
Management expects positive net income and positive cash flow from operating and investing activities throughout 2015. It plans to expand Lucerne mining, advance underground development, develop a second Dayton mine plan and begin Dayton permitting. Management targets approximately $5 million of additional 2015 mining cost reductions and has identified approximately $1.5 million of potential reductions in non-mining activities.
The company expects to spend approximately $3.5 million on capital expenditures during the remainder of 2015 and plans to pay down approximately $6.6 million of debt, including $3.4 million under the Auramet facility.
- The company is funding an estimated $3 million, two-phase realignment of State Route 342 after roadway instability caused a closure. Phase 1 was expected to finish in June 2015, with the project expected to continue through December 2015.
- The Auramet facility requires minimum liquidity of $1 million and is secured by certain real estate and substantially all personal property of the company and Comstock Mining LLC. The company reported compliance with its covenants.
- Management disclosed recurring historical operating losses, a $187.3 million accumulated deficit and a $4.2 million working-capital deficit. Management believes available resources will support operations for the next 12 months, but warned that lower production or gold prices, or an inability to obtain additional financing, could materially impair liquidity and raise substantial doubt about going-concern prospects.
- Gold and silver derivative contracts outstanding at March 31, 2015 covered 13,150 gold ounces at an average price of $1,206 and 45,000 silver ounces at an average price of $18.44; the contracts were expected to settle or expire within ten months.
- The company received 300,000 HOPE Coins as consideration under a mineral-rights license agreement but recognized no revenue or gain because no market value had been established.
- The company has not established proven or probable reserves for the Comstock Lode Project. Exploration results and resource estimates therefore remain subject to significant geological, permitting, technical and economic uncertainty.
- Future obligations include annual contributions of $862,500 under a related-party operating agreement through October 2049, with approximately $30.2 million remaining due as of March 31, 2015, plus reclamation and royalty obligations.
Facts investors should verify
- Whether production, realized metal prices and recurring operating cash flow support management’s full-year profitability and cash-flow outlook.
- The company’s ability to meet the Auramet repayment schedule, maintain the $1 million liquidity covenant and fund planned capital expenditures and debt reduction.
- The recurring earnings impact after excluding the $3.2 million tax-contingency benefit and other unusual items.
- The cost, schedule, permitting status and operational benefits of the State Route 342 realignment.
- Updated reserve, resource, drilling and metallurgical results for Lucerne, Dayton and underground targets, noting that proven and probable reserves had not been established.
- The potential financial impact of reclamation liabilities, related-party commitments, commodity-price volatility, derivative contracts and future equity dilution.