Comstock Mining Inc. 2016 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Comstock Mining Inc. is a Nevada-based gold and silver mining and exploration company with a separate real estate segment. The filing covers the unaudited three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company reported 182.5 million common shares outstanding at September 30, 2016.
Mining activity was transitioning from surface mining toward exploration and development of the Lucerne and Dayton resource areas. Production during 2016 was limited primarily to processing existing heap-leach pad material. The company stated that it had not established proven or probable reserves for the Comstock Lode Project under SEC Industry Guide 7.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $1.1 million | $4.3 million | $4.6 million | $15.9 million |
| Mining revenue | $1.1 million | $4.3 million | $4.5 million | $15.7 million |
| Loss from operations | $(1.7) million | $(4.0) million | $(7.8) million | $(6.8) million |
| Net loss | $(2.2) million | $(4.3) million | $(9.1) million | $(4.5) million |
| Net loss per common share | $(0.01) | $(0.07) | $(0.05) | $(0.11) |
| Cash flow from operations | Not separately provided | Not separately provided | $(3.2) million | $0.4 million |
Operating loss margins were approximately negative 147% of revenue in Q3 2016 and negative 167% for the first nine months of 2016. The company recorded no income tax expense and maintained a full valuation allowance against deferred tax assets.
Q3 production was 853 ounces of gold and 17,510 ounces of silver. Nine-month production was 3,810 ounces of gold and 69,079 ounces of silver, or approximately 4,731 gold-equivalent ounces. The company realized average Q3 prices of $1,327.27 per ounce of gold and $19.24 per ounce of silver; nine-month realized prices were $1,220.94 and $15.78, respectively.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | September 30, 2016 | December 31, 2015 |
|---|---|---|
| Cash and cash equivalents | $0.4 million | $1.7 million |
| Total current assets | $10.0 million | $5.6 million |
| Assets held for sale | $5.9 million | None |
| Total debt and capital lease obligations | $8.9 million | $13.3 million |
| Current debt and capital lease obligations | $5.6 million | $8.5 million |
| Total liabilities | $18.8 million | $24.5 million |
| Accumulated deficit | $208.2 million | $199.1 million |
Current assets exceeded current liabilities by approximately $2.2 million, but cash was only $0.4 million. The company’s $10 million Auramet revolving facility was fully repaid on April 1, 2016 and had no outstanding balance at quarter-end. The company also had a $5 million at-the-market equity program, of which 417,500 shares had been sold for approximately $0.2 million net proceeds through September 30, 2016.
Debt reduction included approximately $5.6 million of principal payments during the first nine months. The company issued common stock to settle or reduce certain obligations, including obligations associated with Varilease and property notes. A new $3.3 million secured loan was entered into to purchase the Silver Springs property and water rights; the loan carries interest rates escalating from 9% to 14% depending on its duration.
Cash Flow and Capital Activities
- Operating activities used $3.2 million in the first nine months of 2016, compared with $0.4 million provided in the prior-year period.
- Investing activities provided $3.1 million, primarily from approximately $3.3 million of proceeds from property, plant and equipment sales.
- Financing activities used $1.1 million, reflecting approximately $5.6 million of debt repayments, partly offset by equity proceeds.
- Cash declined by $1.2 million from December 31, 2015 to $0.4 million at September 30, 2016.
- In March and April 2016, the company raised approximately $4.0 million gross through an offering of 11.5 million common shares.
Material Changes Versus the Prior Comparable Period
- Revenue declined 74% in Q3 and 71% for the first nine months, primarily because of substantially lower gold and silver production.
- Q3 net loss improved by $2.1 million because lower production-related costs, general and administrative expenses, exploration costs and land-development costs more than offset the revenue decline.
- Nine-month net loss increased by $4.6 million. Lower revenue and the absence of approximately $3.2 million of prior-year other income more than offset lower mining costs and reduced general and administrative expenses.
- Net costs applicable to mining revenue declined 65% for the first nine months, to approximately $3.5 million, as the company shifted from surface mining to exploration and development.
- Exploration and mine-development expense increased by approximately $1.4 million for the first nine months, reflecting underground exploration, the Succor drift and development-related depreciation.
- The estimated gold recovery rate on leach-pad material increased to 88.5%, producing an approximately $0.5 million favorable inventory and mining-cost impact in Q3.
- Common shares increased substantially, with weighted-average shares rising to 174.2 million for the first nine months from 94.0 million in the prior-year period, reflecting equity issuances and stock-based debt settlements.
Guidance, Outlook, Commentary and Risks
Management expected leaching of existing material to continue into the fourth quarter of 2016, likely through December. It planned to focus on approximately 15 employees and continue reducing general and administrative costs. Management planned limited Dayton core drilling in the first quarter of 2017, with the stated objective of advancing Dayton toward permitting and a production-ready mine plan within approximately two years. These plans are forward-looking and are not assurances of production, reserves or financing.
The company planned to sell non-mining lands, buildings and water rights valued at more than $14 million over the following twelve months, expecting more than $7 million of net cash proceeds and intending to use proceeds to eliminate current debt. The filing states that the company believed it had sufficient funds to sustain operations for the next twelve months, but also warns that failure to obtain additional funds or complete asset sales could create immediate liquidity pressure and substantial doubt about its ability to continue as a going concern.
- Material risks include low production, lower gold and silver prices, adverse metallurgy, rising fuel and power costs, exploration failure, permitting delays, equipment failures, environmental obligations and inability to obtain financing.
- The company had a long-term reclamation liability of $7.0 million and a reclamation bond deposit of $2.6 million.
- Assets held for sale totaled $5.9 million at quarter-end; the success and timing of planned sales were uncertain.
- A Nevada Supreme Court decision remained pending in litigation concerning zoning and mining activity in the Silver City area. Management did not expect pending matters to have a material adverse effect.
- Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2016, with no material changes during the quarter.
Important Facts for Investors to Verify
- Whether planned non-mining asset sales occurred at the expected valuations and generated the projected net cash proceeds.
- Whether cash generation, equity sales or additional borrowing was sufficient to fund operations after September 30, 2016.
- Progress, costs and results of Lucerne and Dayton drilling, development, permitting and reserve-definition activities.
- Actual fourth-quarter 2016 leach-pad recoveries, production, commodity prices and mining costs.
- The maturity, interest rates, collateral and repayment requirements of the Silver Springs loan and other remaining debt.
- Whether the company ultimately established proven or probable mineral reserves; the filing expressly stated that none had yet been established.
- The outcome of the pending Nevada Supreme Court litigation and any related permitting or regulatory consequences.