Business Context and Reporting Period
Comstock Mining Inc. (identified in the request metadata as Comstock Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company is a Nevada-based gold and silver exploration, development and former production company with mining and real estate segments. Mining and processing at the Lucerne Mine ceased in 2015 and 2016, respectively; consequently, the company reported no mining revenue in the quarter.
Management is focused on developing the Dayton resource area, evaluating a potential restart of Lucerne through its Tonogold option arrangement, monetizing non-mining assets, reducing debt and controlling operating costs.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 |
|---|---|---|
| Total revenue | $22,850 | $19,294 |
| Mining revenue | $0 | $0 |
| Real estate revenue | $22,850 | $19,294 |
| Loss from operations | $1.9 million | $2.4 million |
| Net loss | $2.5 million | $2.8 million |
| Basic and diluted loss per share | $0.05 loss | $0.07 loss |
| Net cash used in operating activities | $1.1 million | $2.0 million |
| Capital expenditures | $0 | $1.7 million |
The filing does not present a conventional operating or net margin percentage; reported revenue was minimal relative to expenses and the company remained loss-making. Total costs and expenses were $1.9 million, including $0.7 million of mining-related costs, $0.7 million of general and administrative expense, and $0.2 million of exploration and mine development expense.
At March 31, 2018, cash and cash equivalents were $2.0 million, current assets were $7.7 million, current liabilities were $1.6 million and working capital was approximately $6.1 million. Total debt, net of discounts and issuance costs, was $10.3 million, including $9.97 million classified as long-term debt and $0.30 million of current maturities. The company also reported a $7.4 million long-term reclamation liability and an accumulated deficit of $225.1 million.
Cash declined by approximately $39,000 during the quarter. Financing activities provided $1.0 million, primarily from net equity proceeds, while investing activities provided $26,000. The company issued 4.68 million shares for gross proceeds of approximately $1.4 million, or an average of $0.30 per share.
Material Changes Versus the Prior Comparable Period
- Revenue increased by approximately $4,000, entirely from real estate operations; mining revenue remained zero.
- Loss from operations improved by approximately $557,000, and net loss improved by approximately $289,000.
- Total costs and expenses decreased by approximately $554,000, led by lower environmental and reclamation costs, mining-related costs, mine claims costs and exploration expenses. General and administrative expense increased by approximately $66,000.
- Operating cash use improved by approximately $861,000, primarily due to lower expenditures and cost-reduction initiatives.
- No capital expenditures were recorded in the 2018 quarter, compared with $1.7 million in the 2017 quarter.
- Weighted-average shares outstanding increased to 49.9 million from 37.4 million, reflecting substantial equity issuance and dilution.
- The company adopted the new revenue recognition standard and updated cash-flow classification guidance effective January 1, 2018; management reported no material impact.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2018 operating expenses of approximately $3.6 million, excluding approximately $3.2 million of depreciation and $1.1 million of interest expense. Management also stated that Tonogold collaboration could reduce annual expenses by an additional $1.25 million, although these are forward-looking estimates.
- Management targeted advancing Dayton toward an updated resource, preliminary economic feasibility work and technical reporting during 2018. Tonogold paid $2.0 million on April 3, 2018 to continue its Lucerne option; Comstock used $1.4 million to reduce debenture debt and reported an additional $0.25 million debt reduction during April.
- Under the Tonogold arrangement, Tonogold may earn a 51% interest in Comstock Mining LLC by satisfying specified capital expenditure and payment requirements. The agreement also provides options relating to American Flat equipment and property.
- The company stated that it expects sufficient resources to fund operations for the next 12 months, based on cash, working capital, available financing, equity capacity and planned asset sales. However, recurring losses, operating cash consumption, debt obligations and dependence on additional financing and asset sales create material liquidity risks.
- The company had $7.0 million of unused borrowing capacity under its loan commitment agreement and $3.2 million of unused capacity under its Leviston equity purchase agreement.
- Assets held for sale totaled $5.4 million and included the Industrial Park, Daney Ranch and Gold Hill Hotel. Proceeds are required to satisfy obligations under the secured debenture.
- A $216,000 make-whole liability was recorded for the pending acquisition of a 25% interest in Pelen, LLC. The acquisition had not closed as of March 31, 2018.
- The Comstock Residents Association litigation continued on a remaining due-process claim. Discovery was scheduled to conclude by June 23, 2018, followed by a court ruling. Management stated that no other pending matters were expected to have a material adverse impact.
- Key risks include the lack of current mining production, permitting and development uncertainty, commodity-price volatility, reclamation and environmental obligations, debt repayment requirements, potential equity dilution, reliance on asset sales and financing, and the possibility that insufficient funding could raise substantial doubt about the company’s ability to continue as a going concern.
Investor Verification Checklist
- Verify whether Tonogold completed the required option payments and capital expenditures and whether the Lucerne development plan remains commercially viable.
- Verify the timing, pricing and proceeds of planned non-mining asset sales and the application of proceeds to secured debt.
- Reconcile the April 2018 debt reductions with the debenture balance, make-whole obligations and future interest requirements.
- Assess cash burn, available borrowing and equity capacity against the company’s stated 12-month liquidity outlook.
- Review the impact of additional equity issuance and the resulting dilution to existing shareholders.
- Monitor the Dayton feasibility, permitting, exploration and metallurgical work before assigning value to potential future production.
- Check the outcome of the remaining CRA due-process litigation and any related permitting or development effects.