Business Context and Reporting Period
Comstock Mining Inc. filed a Form 10-K for the fiscal year ended December 31, 2011. The company was an exploration-stage gold and silver mining company focused on approximately 6,315 acres in Nevada’s Comstock District, with a hospitality segment added through the May 2011 acquisition of Gold Hill Hotel. The filing is annual rather than a quarterly filing, although the requested period is identified as 2011 Q4.
Mining operations had not commenced during 2011, and the company reported no mining revenue. Management planned to begin Lucerne mine production in 2012 and targeted annual production of at least 20,000 gold-equivalent ounces, subject to further development, permitting and exploration results.
Financial Highlights
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $473,386 | $0 |
| Operating loss | $15,554,541 | $7,063,816 |
| Net loss | $11,606,231 | $60,326,419 |
| Net loss available to common shareholders | $16,302,997 | $61,603,321 |
| Basic and diluted loss per share | $0.66 loss | $3.18 loss |
| Cash used in operating activities | $11,647,901 | $7,891,375 |
| Cash and cash equivalents | $6,955,010 | $25,383,309 |
| Available-for-sale securities | $2,211,287 | $4,410,237 |
| Total assets | $26,974,152 | $37,121,524 |
| Total liabilities | $10,376,477 | $12,455,519 |
| Total stockholders’ equity | $16,597,675 | $24,666,005 |
- Hospitality revenue was $473,386, while hospitality operating costs were $499,777, producing a $26,391 operating loss.
- Mining operating expenses were $15,528,150, including $9,324,097 of reclamation, exploration and test-mining expenses.
- Capital expenditures totaled approximately $10.3 million, including approximately $9.2 million in the mining segment and $1.1 million in hospitality.
- Debt obligations totaled approximately $1.44 million, including $138,245 classified as current. The former $29.4 million of secured convertible debt had been exchanged for preferred equity in 2010.
- Liquidity at December 31, 2011 consisted of approximately $9.17 million of cash, cash equivalents and available-for-sale securities.
Material Changes Versus the Prior Comparable Period
- Revenue increased from zero to $473,386 following the Gold Hill Hotel acquisition, completed May 1, 2011.
- Operating loss increased by approximately $8.5 million, primarily because of higher exploration, mine development, staffing, professional and administrative costs.
- Reclamation, exploration and test-mining expenses increased by approximately $5.5 million, reflecting increased drilling and development activity in the Lucerne and Dayton areas.
- General and administrative expense increased by approximately $2.35 million, including approximately $980,000 of stock grants to outside directors.
- Net loss improved substantially because 2010 included non-cash charges of $26.35 million for extinguishment of debt and $20.61 million for changes in the fair value of debt conversion features and warrants.
- Cash used in operations increased by approximately $3.76 million, while year-end cash and investments declined by approximately $20.6 million.
- Net property, plant and equipment increased to $9.38 million from $625,621 as the company acquired mining and processing equipment and expanded infrastructure.
- The company issued 1,174,604 common shares in 2011 to pay preferred-stock dividends and ended the year with 28,990,630 common shares outstanding. Preferred shares and warrants were convertible into or exercisable for substantial additional common shares.
Guidance, Outlook, Risks and Unusual Items
- Management planned approximately 300,000 feet of reverse-circulation drilling and 13,000 feet of core drilling during an 18-month 2012–2013 program, at an estimated cost of approximately $12 million.
- The Lucerne mine was scheduled to begin production in 2012. The company’s internal analysis estimated annual operating expenses of approximately $12 million at processing of roughly one million tons annually; the filing does not provide a completed feasibility study or a guaranteed production outcome.
- The company had no proven or probable mineral reserves under SEC Industry Guide 7. Reported resource and production targets therefore remain subject to exploration, engineering, permitting, recovery and commodity-price risks.
- In February 2012, after year-end, the company raised $17.25 million gross, or approximately $15.3 million net, through the issuance of 9,078,948 common shares at $1.90 per share.
- Management stated that existing liquidity, together with the February 2012 offering, was expected to fund operations for the next 12 months, but acknowledged recurring losses, negative operating cash flow and substantial going-concern risk if additional financing or mine revenues are not obtained.
- Reclamation liabilities increased to $2.01 million from $1.33 million. The approved reclamation plan was increased to approximately $1.82 million in January 2012, and an additional $520,000 reclamation bond deposit was paid.
- Most company land holdings were within or near the Carson River Mercury Superfund Site study and risk areas. Potential sampling, remediation, permitting and environmental obligations could increase costs or delay operations.
- The company had a $3.86 million tax indemnification accrual related to the 2010 debt-for-preferred-equity exchange and a $1.03 million contingent preferred-dividend derivative liability at year-end.
- The company’s largest shareholder group, associated with Chairman John V. Winfield, held approximately 75.9% of voting security interests on an as-converted basis at December 31, 2011. Preferred-stock terms also restrict certain financing, acquisition, dividend and change-of-control decisions.
- Management reported that the material weakness in controls over complex accounting transactions identified in 2010 had been remediated during 2011. The independent auditor audited the financial statements but did not provide an attestation opinion on internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether Lucerne actually commenced commercial production in 2012 and achieved planned production rates and cost assumptions.
- Whether subsequent technical reports established SEC-compliant proven or probable reserves, rather than only exploration-stage resources.
- Cash burn, remaining liquidity, financing requirements and the company’s ability to operate without continued equity issuance.
- The dilution implications of convertible preferred stock, warrants, restricted stock awards and the Northern Comstock capital-contribution obligations.
- The status and potential cost of Carson River Mercury Superfund Site requirements, reclamation bonding and other environmental obligations.
- The effect of related-party arrangements with the Winfield Group, including annual preferred-stock or cash contributions, royalties and voting controls.
- Whether the February 2012 equity offering and subsequent property acquisitions materially changed the company’s capital structure, liquidity or project economics.