Comstock Mining Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed July 22, 2014. The filing identifies the registrant as Comstock Mining Inc. and reports two segments: mining and hospitality.
Business Context and Reporting Period
Comstock operates a producing gold and silver business in Nevada, primarily the Lucerne Mine and related heap-leach processing facilities, with a smaller Gold Hill Hotel hospitality segment. The company transitioned from exploration to production in late 2012 and had approximately 7,460 acres of mining claims and parcels in the Comstock and Silver City districts.
The company reported 4,645 ounces of gold and 48,621 ounces of silver shipped during the second quarter, and 9,152 ounces of gold and 97,979 ounces of silver during the first six months. The filing states that no proven or probable reserves had been established under SEC Industry Guide 7.
Financial Results and Key Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $6.2 million, versus $7.0 million | $12.0 million, versus $10.8 million |
| Mining revenue | $6.0 million, versus $6.8 million | $11.6 million, versus $10.5 million |
| Hospitality revenue | $0.2 million, versus $0.2 million | $0.4 million, versus $0.3 million |
| Loss from operations | $(3.1) million, versus $(5.7) million | $(6.5) million, versus $(11.4) million |
| Net loss | $(3.4) million, versus $(5.5) million | $(7.2) million, versus $(11.3) million |
| Loss available to common shareholders | $(4.3) million, versus $(6.6) million | $(9.1) million, versus $(13.4) million |
| Basic and diluted loss per share | $(0.06), versus $(0.11) | $(0.12), versus $(0.24) |
Margins: The consolidated operating loss margin was approximately 49.8% in the quarter and 54.3% year to date, compared with approximately 81.1% and 105.8%, respectively, in the prior-year periods. The filing does not present a non-GAAP gross margin. Second-quarter cash cost per gold ounce was reported as slightly below $840.
Cash flow: Net cash used in operating activities was $2.3 million for the first six months, compared with $8.4 million used in the prior-year period. Investing cash use was $1.9 million, including capital expenditures, property and equipment purchases, and a reclamation bond deposit. Financing activities provided $14.0 million, including approximately $11.0 million of net equity proceeds and approximately $4.6 million from debt borrowings.
Liquidity and balance sheet: Cash and cash equivalents were $12.2 million at June 30, 2014, compared with $2.4 million at December 31, 2013. Total current assets were $15.5 million and total current liabilities were $17.5 million. Total debt and capital lease obligations were $12.7 million, including $7.6 million classified as current. Total liabilities were $28.2 million and stockholders’ equity was $24.5 million.
Material Changes Versus the Prior Comparable Period
- First-half total revenue increased 11.2%, driven by higher gold and silver production, despite lower realized gold prices.
- Second-quarter revenue declined 11.0%, primarily because gold ounces sold and realized gold prices were lower than in the prior-year quarter.
- Mining costs applicable to revenue declined 22.7% for the quarter and 15.2% for the six-month period. The prior-year six-month period included an approximately $1.0 million inventory and stockpile write-down.
- General and administrative expense declined approximately 19% in the quarter and 29% year to date, primarily due to lower legal, advisory, consulting and stock-based compensation costs.
- The six-month operating loss improved by $4.9 million, while net loss improved by $4.1 million. The improvement was partially offset by unfavorable derivative fair-value changes and the absence of a prior-year debt-settlement gain.
- Common shares issued and outstanding increased to 80.6 million at June 30 from 70.2 million at December 31, primarily reflecting the May equity offering and other equity issuances.
- In May 2014, the company issued 7.475 million common shares at $1.59 per share, generating approximately $11.0 million of net proceeds.
Guidance, Outlook, Risks and Unusual Items
- Management targeted a 40,000 gold-equivalent-ounce annual production rate during the latter half of 2014, approximately double the 2013 production rate.
- Management expected cash costs below $750 per gold ounce and annual mining and processing operating expenses below $25 million once the targeted production rate was stabilized.
- The company planned up to $3.0 million of additional 2014 capital expenditures and approximately $5.3 million of additional debt repayments, including $3.9 million on the Auramet revolving credit facility.
- The company planned approximately $9 million of 2014–2015 drilling, including approximately 135,000 feet of reverse-circulation drilling and 25,000 feet of core drilling across Lucerne, Dayton and Spring Valley.
- The $5.0 million Auramet revolving credit facility was fully drawn, with approximately $4.6 million of net proceeds received. It required minimum liquidity of $1.0 million and scheduled 14 biweekly principal payments of $357,143 beginning August 8, 2014. The company stated that it was in compliance with its covenants.
- Management stated that available resources should fund operations for the next 12 months, but warned that lower production or gold prices, or inability to obtain additional financing, could materially impair liquidity and raise substantial doubt about continuation as a going concern.
- The company recorded $529,170 of derivative liabilities at June 30, including gold collars, gold call and forward contracts, and contingent debt payment obligations.
- The company received a June 2014 notice of alleged environmental permit violations from the Nevada Division of Environmental Protection related to an earlier investigation. It did not admit a violation and stated that production had not been interrupted. It agreed to a $225,000 supplemental environmental project to resolve the allegations.
- The company had approximately $5.6 million of long-term reclamation liabilities and an approximately $2.0 million retirement obligation asset.
- Related-party lease obligations included annual payments of $880,500 under an operating agreement extending through October 2049; approximately $31.05 million remained due at June 30, 2014.
Most Important Facts for Investors to Verify
- Whether production can reach the targeted 40,000 gold-equivalent-ounce annual rate and whether cash costs can fall below $750 per ounce.
- The timing and funding of scheduled debt repayments, particularly the Auramet facility and other current obligations.
- Whether operating cash flow becomes sustainably positive without additional equity or debt financing.
- The effect of gold and silver prices, hedging and derivative settlements on revenue, margins and liquidity.
- The status and cost of the Nevada environmental matter and ongoing permitting compliance.
- The absence of proven or probable reserves under the cited SEC reporting framework and the implications for mine-life and production assumptions.
- The potential dilution from preferred stock, options, warrants, restricted stock and future equity financings; approximately 56.2 million common-stock-equivalent securities were excluded from diluted loss per share because they were antidilutive.