Comstock Mining Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012; filed August 14, 2012. The unaudited filing identifies the company as an exploration-stage gold and silver mining company with a hospitality segment. Mining operations generated no revenue during the periods; reported revenue came from the Gold Hill Hotel.
Business Context and Reporting Period
The company was preparing to transition from exploration and development to commercial production at its Lucerne mine in Nevada. Management expected production to begin during the third quarter of 2012, with the first gold and silver pour anticipated in September 2012, subject to commissioning, permitting and operating execution.
At June 30, 2012, the company controlled approximately 5,869 acres in the Comstock District and had completed substantial drilling, mine-development and processing-facility work. The filing states that the financial statements were prepared on a going-concern basis despite recurring losses, negative operating cash flow and no significant mining revenue since 2006.
Financial Results and Key Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $182,523, versus $120,175 | $294,245, versus $120,175 |
| Loss from operations | $(9.1) million, versus $(5.3) million | $(16.7) million, versus $(8.5) million |
| Net loss | $(9.0) million, versus $(4.7) million | $(16.3) million, versus $(7.1) million |
| Loss available to common shareholders | $(10.1) million, versus $(5.9) million | $(18.5) million, versus $(9.6) million |
| Loss per common share | $(0.26), versus $(0.26) | $(0.50), versus $(0.43) |
| Net cash used in operating activities | Not separately provided | $(10.1) million, versus $(5.9) million |
Revenue increased because the hotel was owned for the full comparable period in 2012. Mining revenue was zero. Operating losses substantially exceeded revenue, resulting in a negative operating margin; a conventional revenue margin is not meaningful because the company was not yet producing gold or silver.
- Major six-month expenses: reclamation, exploration and test mining expenses of $9.7 million; general and administrative expenses of $4.9 million; consulting and professional fees of $1.4 million; and depreciation and amortization of $589,013.
- Stock-based compensation: $4.1 million was included in operating cash-flow reconciliation, including $3.2 million of expense recorded in operating categories during the six months.
- Cash and investments: Cash and cash equivalents were $4.6 million and available-for-sale securities were $739,473 at June 30, 2012, for total cash and securities of $5.3 million, compared with $9.2 million at December 31, 2011.
- Liquidity: Current assets were $6.3 million and current liabilities were $10.1 million, producing negative working capital of approximately $3.8 million.
- Debt: Total debt obligations were approximately $4.2 million, including $391,637 classified as current, compared with approximately $1.4 million at December 31, 2011. Long-term liabilities also included a $540,300 contingent dividend derivative liability and a $2.1 million reclamation liability.
- Capital investment: Net cash used in investing activities was $7.5 million, including $8.3 million for mineral rights, properties and equipment and $693,933 for the reclamation bond deposit. Property, plant and equipment increased to $19.1 million from $9.4 million at year-end 2011.
- Financing: The company received $15.8 million of net proceeds from common-stock issuance, primarily from a February 2012 underwritten offering that generated $17.25 million of gross proceeds.
Material Changes Versus the Prior Comparable Period
- Six-month net loss more than doubled to $16.3 million from $7.1 million, primarily because of higher exploration, mine-development, staffing, stock-compensation and administrative costs.
- Six-month operating cash use increased by approximately $4.2 million, to $10.1 million, reflecting increased exploration and mine-development spending and higher overhead.
- Reclamation, exploration and test mining expense increased by approximately $4.5 million, including soil sampling, stock-based compensation and expanded geological and mine-development staffing.
- General and administrative expense increased by approximately $2.6 million, primarily due to stock-based compensation and higher director, travel, insurance and other administrative expenses.
- Mineral rights and properties increased to $7.7 million from $4.9 million, including the Dayton “Golden Goose” and Diez Senores properties. Property, plant and equipment increased by approximately $9.7 million as the company acquired land, buildings, mining equipment and processing assets.
- Common shares outstanding increased to 39.5 million at June 30, 2012 from 29.0 million at December 31, 2011; 41.2 million shares were outstanding as of August 14, 2012. Preferred-stock conversions and stock dividends also contributed to dilution.
- The fair value of the contingent dividend liability declined to $540,300 from $1.0 million, producing other income of $484,700 for the six months.
Guidance, Outlook, Risks and Unusual Items
Management targeted approximately 20,000 gold equivalent ounces of annual production and validation of at least 3.25 million gold equivalent ounces of resources and reserves in 2013. The Lucerne plan contemplated processing approximately one million tons per year, with annual operating expenses of approximately $13 million, excluding corporate overhead, exploration and mine-development costs. Temporary haulage costs were expected to add approximately $1.5 million during the first six months of operations.
In July 2012, the company obtained additional financing arrangements: a Caterpillar equipment facility permitting up to $5 million of borrowings, of which $2 million was drawn on July 30, and a Resource Income Fund facility permitting up to $5 million outstanding, of which $5 million was drawn in July. The latter is repayable through delivery of 3,720 ounces of gold and includes a call option for 5,950 ounces of gold at a $2,000-per-ounce strike price.
The company also placed a $4.67 million reclamation surety bond in July 2012. Approximately $3.1 million remained to be paid under construction and equipment commitments at June 30, 2012. Management expected to require that funding for remaining production-related capital expenditures and debt service.
Management stated that liquidity could support the next twelve months if planned production and revenue targets were achieved. If production were delayed or below expectations, additional debt or equity financing would be required, and availability on acceptable terms was not assured. Key risks include the speculative nature of mineral exploration and start-up mining, permitting and regulatory compliance, commodity-price volatility, equipment or supply interruptions, environmental and reclamation obligations, financing availability, dilution, title disputes and litigation.
A May 2012 BLM trespass notice was resolved after corrective action and issuance of an alternative right-of-way grant. The filing reports no other pending matters expected to have a material adverse effect. Disclosure controls and procedures were concluded to be effective, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether Lucerne production, ore hauling, processing commissioning and the first gold and silver pour occurred on schedule after June 30, 2012.
- Actual production volumes, recoveries, realized metal prices, operating costs and cash margins once production began.
- Availability, draw conditions, collateral, repayment terms and covenants for the July 2012 Caterpillar and Resource Income Fund financings.
- Whether the company generated sufficient operating cash flow to fund approximately $3.1 million of remaining capital expenditures and debt service without additional financing.
- The effect of gold-delivery obligations, the RIF call option and potential default interest on future liquidity.
- Outstanding preferred-stock dividends, conversion rights, contingent dividend obligations and potential dilution from preferred stock, warrants, options and restricted awards.
- Updated reclamation estimates, surety-bond requirements, permitting status and compliance with BLM and Nevada regulatory requirements.
- The source filing identifies the registrant as Comstock Mining Inc.; investors should verify the requested company name of Comstock Inc. against the issuer’s SEC identity and ticker.