Comstock Inc. annual report, FY2015

Comstock Mining Inc. — FY2015 Form 10-K Summary

Business context and reporting period

Comstock Mining Inc. is a Nevada-based gold and silver producer operating primarily in the historic Comstock and Silver City districts. The Company also owns a real estate segment, including the Gold Hill Hotel, which was leased to independent operators beginning April 1, 2015. The filing covers the fiscal year ended December 31, 2015, with quarterly information for the fourth quarter of 2015. Deloitte & Touche LLP issued an unqualified audit opinion.

The Company produced from the Lucerne Resource area but had not established proven or probable reserves under SEC Industry Guide 7. Its 2015 strategy increasingly shifted from surface production toward underground exploration at Lucerne and development planning for Dayton.

Financial and operating metrics

Metric	FY2015	FY2014	Change
Total revenue	$18.5 million	$25.6 million	Down $7.1 million
Mining revenue	$18.2 million	$24.7 million	Down 26.2%
Real estate revenue	$0.2 million	$0.8 million	Down $0.6 million
Loss from operations	$(12.4) million	$(8.7) million	Worsened $3.7 million
Net loss	$(10.5) million	$(9.6) million	Worsened $0.8 million
Net loss available to common shareholders	$(15.9) million	$(13.3) million	Worsened $2.6 million
Basic and diluted loss per share	$(0.14)	$(0.17)	Improved per share due primarily to dilution
Net cash used in operating activities	$(3.0) million	$(2.4) million	Higher cash use
Capital expenditures and property purchases	$5.8 million cash purchases	$2.6 million	Higher investment

Total revenue less mining and real estate operating costs was approximately $7.5 million, implying a gross margin of approximately 40.5%. The operating margin was approximately negative 67.2%, and the net margin was approximately negative 56.5%.

Gold-equivalent production was 18,455 ounces, versus 22,925 ounces in 2014, a decrease of approximately 19.5%.
Gold production was 15,451 ounces and silver production was 221,723 ounces, compared with 19,601 gold ounces and 222,416 silver ounces in 2014.
The Company crushed and stacked 491,691 tons in 2015, versus 700,754 tons in 2014. Average grades improved to 0.031 ounces of gold per ton and 0.659 ounces of silver per ton, compared with 0.030 and 0.527, respectively.
Mining costs applicable to revenue fell to $10.7 million from $19.1 million. Management attributed the reduction to a lower strip ratio, reduced labor, drilling and blasting costs, and lower fuel costs.
Exploration and mine development expense increased to $7.0 million from $2.7 million, primarily reflecting the Lucerne underground drift and drilling program and Dayton drilling.
At December 31, 2015, cash and cash equivalents were $1.7 million, total current assets were $5.6 million, and current liabilities were $12.1 million. Current liabilities exceeded current assets by approximately $6.5 million.
Total assets were $43.2 million, stockholders’ equity was $18.8 million, and debt and capital lease obligations totaled $13.3 million, including $8.5 million due within one year.
Reclamation and remediation liabilities were $6.8 million. Reclamation surety bonds totaled $11.6 million, supported by approximately $2.5 million of cash collateral.

Fourth-quarter 2015 results

Metric	Q4 2015	Q4 2014
Revenue	$2.6 million	$6.8 million
Gross profit	$2.3 million	$2.0 million
Loss from operations	$(5.6) million	$(0.8) million
Net loss	$(5.9) million	$(1.4) million
Net loss available to common shareholders	$(5.9) million	$(2.1) million

Fourth-quarter revenue declined sharply as production and mining activity were reduced during the transition from surface operations toward exploration and underground development. The quarterly loss included substantial exploration, development, corporate and other costs despite positive gross profit.

Material changes versus the prior comparable period

Mining revenue declined by $6.5 million because of lower production and lower gold prices compared with 2014.
Mining cost applicable to revenue decreased by approximately 44%, or $8.5 million, and management reported total 2015 cost savings of approximately $10.5 million.
The average strip ratio improved from 4.83 in 2014 to less than 1.0 in 2015, while the estimated gold recovery rate increased from 81% to 85%. The recovery estimate change increased recorded recoverable ounces and reduced mining costs by approximately $1.3 million.
The Company completed the State Route 342 realignment under the original $3.0 million budget and extracted approximately 304,000 tons of material beneath the roadway for processing.
All outstanding Series A-1, Series A-2 and Series B convertible preferred stock was automatically converted into common stock. Approximately 53.6 million common shares were issued upon conversion, and an additional approximately 6.2 million shares were issued as a one-time common-stock dividend. Future preferred-stock dividends were eliminated.
The Northern Comstock joint venture amendments reduced remaining capital contribution obligations from $31.05 million to $9.75 million, but require monthly and annual contributions through 2027 and may require stock settlement.
The Company raised $6.0 million gross, or approximately $5.9 million net, through an October 2015 offering of 10,169,492 common shares at $0.59 per share.
Other income included a nonrecurring approximately $3.2 million benefit from the lapse of a tax indemnification obligation. This benefit materially reduced the reported net loss but did not represent operating cash generation.

Liquidity, debt and cash flow

Operating cash flow remained negative at $3.0 million, while investing activities used $5.1 million. Financing activities provided $4.5 million, including equity proceeds and debt financing, partially offset by approximately $10.9 million of debt and lease principal repayments.

The Auramet facility permits borrowings of up to $10.0 million, subject to conditions and consents. The Company drew $5.0 million in March 2015, receiving approximately $4.4 million net of prepaid interest and fees, and extended availability through April 28, 2018.
The Varilease equipment financing provided $5.0 million and requires 24 monthly payments of approximately $247,830. The transaction was accounted for as financing rather than a sale-leaseback.
The Auramet facility requires minimum liquidity of $1.0 million and contains customary restrictive covenants and events of default. Management reported compliance with the covenants at year-end.
Contractual obligations totaled approximately $30.7 million, including $13.9 million of debt and capital lease obligations, $9.9 million of operating lease obligations, and $6.8 million of reclamation obligations.
Management stated that existing resources and financing arrangements were expected to fund operations for the next 12 months, but also warned that lower production, lower metal prices or inability to raise additional capital could create substantial doubt about the Company’s ability to continue as a going concern.

Outlook, commentary, risks and unusual items

2016 production was expected to be limited primarily to processing existing leach-pad material, with limited new stacking in January and February. The current leach cycle was expected to continue into the second quarter, potentially through May or later.
The Company expected to operate with fewer than 25 employees during 2016 exploration and development activities and projected more than $3 million of non-mining cost savings versus 2015.
Management planned to complete Lucerne underground drifting, drilling and metallurgical work during the first and second quarters of 2016, focusing on the PQ, Succor and Woodville targets.
Management planned additional Dayton drilling and permitting during 2016 and 2017, with the objective of developing a mine plan and establishing potential reserves.
The Company had no proven or probable reserves, and exploration results may not support economically viable mining. Internal resource and recovery estimates remain subject to geological, metallurgical, commodity-price and operating uncertainty.
Mining is exposed to gold and silver price volatility, fuel and electricity costs, equipment and weather disruptions, water availability, permitting delays, environmental requirements, reclamation costs and potential litigation.
Substantially all mining receivables and revenues were associated with one customer, although management stated that the Company was not economically dependent on a limited number of gold market traders.
Most land holdings are within or near the Carson River Mercury Superfund Site study area, creating potential future sampling, investigation, remediation and cost obligations.
The pending appeal by the Comstock Residents Association regarding Lyon County zoning remained unresolved as of the filing date. The Company prevailed in the lower court and stated that it intended to oppose the appeal.

Most important facts for investors to verify

Whether the Company can fund near-term debt maturities and lease payments with only $1.7 million of year-end cash and negative operating cash flow.
Whether Lucerne underground exploration and Dayton drilling convert into independently validated resources, reserves and economically viable mine plans.
The effect of the expected 2016 production slowdown on revenue, cash flow, liquidity covenant compliance and going-concern risk.
The sustainability of the reported 85% gold and 57% silver recovery assumptions and the sensitivity of inventory values and mining costs to recovery-rate changes.
The timing and final authorization of planned heap-leach capacity expansions, including Cell 10, and the related permitting and capital requirements.
The potential dilution from common-stock financing, stock-settled obligations, Northern Comstock contributions and other equity-linked arrangements.
The ultimate cost and timing of reclamation, remediation and Carson River Mercury Superfund Site obligations.
Commodity-price assumptions, customer concentration, debt covenants and the terms of secured borrowing arrangements.