Comstock Mining Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2011, filed November 14, 2011. The company was an exploration-stage gold and silver mining company developing approximately 6,099 acres in Nevada’s Comstock District and preparing to resume production. It also operated the Gold Hill Hotel, acquired May 1, 2011.
Key financial metrics
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Revenue | $179,071, entirely hotel revenue | $299,246, entirely hotel revenue |
| Loss from operations | $3,632,808 | $12,084,160 |
| Net loss | $1,974,414 | $9,103,502 |
| Net loss available to common shareholders | $3,130,564 | $12,689,431 |
| Loss per common share | $0.12 basic and diluted | $0.54 basic and diluted |
| Net cash used in operating activities | Not separately reported | $9,414,425 |
Hotel operating costs were $219,159 for the quarter and $319,154 for the nine-month period, resulting in hotel segment operating losses of $40,088 and $19,908, respectively. Mining generated no revenue during either comparable period. Reclamation, exploration and test-mining expense was $2,256,590 for the quarter and $7,492,079 year to date.
At September 30, 2011, cash and cash equivalents were $12,957,566 and available-for-sale securities were $2,950,348, for total cash and liquid securities of $15,907,914. Total current assets were $16,514,184 versus current liabilities of $5,599,549. Total assets were $26,570,360 and total liabilities were $10,011,607.
Debt obligations totaled approximately $1,067,340, including $53,567 classified as current. Other significant obligations included a $1,995,100 derivative liability for contingent preferred-stock dividends, a $1,403,185 reclamation liability and a $3,861,340 tax indemnification accrual. Stockholders’ equity was $16,558,753.
Material changes versus the prior comparable period
- Revenue increased from zero to $179,071 in the quarter and from zero to $299,246 for the nine months because of the Gold Hill Hotel acquisition; mining revenue remained zero.
- Operating loss increased from $1,657,424 to $3,632,808 for the quarter and from $4,901,929 to $12,084,160 year to date, primarily because of increased drilling, metallurgical testing, mine-development activity and staffing.
- Net loss improved substantially from $20,082,994 to $1,974,414 for the quarter and from $26,635,800 to $9,103,502 year to date. The improvement primarily reflected the absence of 2010 fair-value losses on convertible-debt and warrant derivatives and lower interest expense following the 2010 debt-for-equity exchange.
- The company recognized fair-value gains of $1,661,584 for the quarter and $2,878,092 year to date from reducing the contingent-dividend derivative liability. These gains were non-operating and non-cash.
- Cash and liquid securities declined from approximately $29.8 million at December 31, 2010 to $15.9 million at September 30, 2011. Operating cash use increased from $4.5 million to $9.4 million year to date.
- Common shares outstanding increased from 21,154,663 at December 31, 2010 to 28,002,349 at September 30, 2011, principally due to preferred-stock conversions and stock dividends.
Guidance, outlook, risks and unusual items
Management expected to transition to mining production in late 2011 or early 2012, subject to permitting, construction and operational execution. Planned production infrastructure included a new crushing facility, refurbishment of the Merrill-Crowe plant and refinery, expansion of the heap-leach operation and construction of process-solution ponds. Metallurgical testing reported average gold recovery of 72.1% and silver recovery of 47.9% in column heap-leach tests.
Management estimated approximately $10 million of additional equipment purchases over the following twelve months, with approximately $3 million of anticipated net cash outlays after leasing or equipment financing. The company also anticipated increasing its reclamation bond by approximately $2 million to $4 million as its updated reclamation plan was finalized.
The company stated that it had sufficient positive working capital and cash investments to fund operations for the next twelve months, but emphasized that continued operations depended on transitioning into production, achieving profitability and/or raising additional funds. The filing presents the financial statements on a going-concern basis despite recurring losses, negative operating cash flow and no mining revenue.
- Effective October 17, 2011, the company exercised its option to purchase the 95-acre Dayton property for $3 million plus a 3% net smelter royalty. The arrangement required a $500,000 upfront payment and a $2.5 million, interest-free seller note.
- On October 7, 2011, the company acquired the 84.05-acre Dondero property for $710,000, consisting of $280,000 cash and $430,000 in common stock.
- The company remained subject to an EPA Toxic Release Inventory audit. Management believed any resulting penalties would not be material.
- Management reported that disclosure controls and procedures were not effective at September 30, 2011 because of a material weakness involving monitoring and accounting for complex transactions. Remediation included third-party valuation and control consultants and additional accounting personnel.
- The company had approximately $1.2 million of preferred-stock dividends in arrears and was restricted from paying common-stock cash dividends under its preferred-stock agreements.
- Principal risks included permitting and construction delays, inability to commence production, exploration and resource uncertainty, fluctuating gold and silver prices, environmental and reclamation obligations, financing needs, dilution from preferred-stock conversions and deficiencies in internal controls.
Facts investors should verify
- Whether the planned late-2011 or early-2012 production start was achieved and whether required air-quality, water, mining and local permits were obtained.
- Actual remaining capital requirements for the crushing, Merrill-Crowe, heap-leach and mobile-equipment projects, including equipment financing terms.
- Cash burn, available liquidity and the timing or terms of any required equity, debt or royalty financing.
- Progress in remediating the material weakness in internal controls and the status of any restatements or complex derivative valuations.
- The final reclamation plan, required bond increase and potential changes to the $1.4 million reclamation liability.
- Potential dilution and payment obligations associated with the preferred stock, accrued dividends, contingent dividend derivative and registration rights.