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LODE > SEC Filings for LODE > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for COMSTOCK MINING INC.

Form 10-Q for COMSTOCK MINING INC.


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. It should be read in conjunction with the condensed consolidated financial statements and accompanying notes also included in this 10-Q and our Annual Report on Form 10-K as of and for the fiscal year ended December 31, 2011.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2012, as well as our future results.

Overview

The Company is a Nevada-based, gold and silver mining company with extensive, contiguous property in the historic Comstock and Silver City mining districts (collectively, the "Comstock District"). The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City. The Company began acquiring properties and developing projects in the Comstock District in 2003. Since then, the Company has consolidated a substantial portion of the Comstock District, secured permits, built an infrastructure and brought exploration projects into production.

The goal of our strategic plan is to deliver stockholder value by validating qualified resources (measured and indicated) and reserves (probable and proven) of at least 3,250,000 gold equivalent ounces in 2013, and commence commercial mining and processing operations with annual production rates of approximately 20,000 gold equivalent ounces.

Because of the Comstock District's historical significance, the geology is well known and has been extensively studied by the Company, our advisors and many independent researchers. We have amassed a large library of historical and current data and detailed surface mapping of Comstock District properties. We use such data in conjunction with our drilling programs to expand our understanding of the Comstock District's structural geology as well as its broader geological footprint.

The Company has 1,357 RC and core holes, representing over 410,500 feet of drill data in the Lucerne Resource Area. This data has furthered our knowledge of the Lucerne's mineralization and provided the information used to develop the mine plan for commencing production on the west side of the Lucerne. We also have 323 RC and core holes, representing over 59,000 feet of drill data in our Dayton Resource Area. In our exploration and development campaigns, all drilling, surface and down-hole surveying, hole abandonment, geologic logging, sampling, and assays were performed to industry-recognized standards.

Our Lucerne Resource Area is located in Storey County, Nevada, approximately three miles south of Virginia City and 30 miles southeast of Reno. Our Dayton Resource Area, the proposed site for our second commercial mining activities, is located in Lyon County, Nevada, approximately six miles south of Virginia City. Access to the properties is by State Route 342, a paved highway.

We continue acquiring additional properties in the Comstock District, expanding our footprint and creating opportunities for exploration and mining. The Company now owns or controls approximately 5,869 acres of mining claims in the Comstock District. The acreage is comprised of 1,336 acres of patented claims (private lands) and surface parcels (private lands) and 4,533 acres of unpatented mining claims, which the Bureau of Land Management, ("BLM") administers.

Exploration

The goal of our strategic plan includes validating qualified resources (measured and indicated) and reserves (probable and proven) of 3,250,000 gold equivalent ounces in 2013, requiring execution of planned exploration and development drilling. Mr. Larry Martin, our Vice President of Exploration and Mine Development and a Certified Professional Geologist (CPG), manages these drill programs.

In January 2012, the Company launched its 2012-2013, exploration drilling program, with the initial drilling activities in its Spring Valley Area. The program is anticipated to be the Company's largest drilling program, significantly exceeding the aggregate depths of the program from October 2010 through August 2011, which was comprised of 128,671 feet of reverse circulation drilling and 3,583 feet of core drilling. The Company anticipates about 300,000 feet of reverse circulation and 13,000 feet of core drilling, at a total cost of approximately $12 million. This drilling is scheduled to last approximately 21 months.

The Spring Valley drilling began January 24, 2012, and was completed March 22, 2012. The initial Spring Valley drilling was designed as a follow up of the Company's successful 2009 Spring Valley discovery and to verify the continuity of the Dayton geological model southward beyond State Route 341 into this predominantly unexplored area. Two drill rigs were used in this initial phase, completing14 reverse circulation (RC) holes, totaling 10,235 feet, and two core holes totaling 1,627 feet.

Spring Valley assay results have been received for all of the RC drilling, showing that all 14 RC holes encountered intervals of significant mineralization (gold grades greater than 0.010 ounces per ton or silver grades greater than 0.100 ounces per ton, and length of at least ten feet).

Following the initial drilling in Spring Valley, the Company began definition drilling in the Lucerne mine in March 2012. The definition drilling program was designed to optimize and expand the life of the Lucerne mine, on patented mining claims west of State Route 342. The definition drilling continued concurrently with the commencement of mine production. To date, 236 RC holes, totaling 86,926 feet, and 25 core holes, totaling 6,126 feet have been completed. The Lucerne mine definition drilling is scheduled to be completed in November 2012.

During the third quarter, the Company also began a step-out drilling program on the East-side of the Lucerne Resource Area. The drilling was designed to test the continuity and down-dip extension of the mineralization encountered in the 2010 and 2011, East-side drilling, with depths planned of up to 1,400 feet. Eighteen East-side holes were completed during the quarter. The East-side step-out drilling was completed in early October, 2012 with 20 holes drilled, totaling 21,310 feet. Assay results for the holes showed that all 20 encountered significant mineralization. Fourteen of the holes had multiple intervals of significant mineralization totaling 150 feet or more, including 10 of the holes with contiguous intervals of 100 feet or more. The east-side step-out drilling was completed in early October 2012.

The Company's exploration and development drilling outside of the mine area, on the East-side, Dayton and Spring Valley, have all resulted in a prevalence of higher-grade intercepts. Examples of these higher-grade intercepts on the East-side include an assay of 1.693 ounces of gold per ton in hole E12-05, contained in a 20 foot interval averaging 0.621 ounces of gold and 1.408 ounces of silver per ton. Hole E12-05 also had total significant mineralization in multiple zones of 370 feet, including contiguous significant mineralized intervals of 120 feet (0-120'), 90 feet (965-1055'), and 55 feet (1065-1120'). Hole E12-10 had an assay with 6.000 ounces of silver per ton, contained in a 75-foot interval averaging 0.111 ounces of gold and 1.382 ounces of silver per ton. Hole E12-15 had an assay of 1.589 ounces of gold and 6.500 ounces of silver per ton, contained in a 60-foot interval averaging 0.187 ounces of gold and 2.961 ounces of silver per ton. Hole E12-16 had an assay of 6.200 ounces of silver per ton, contained in a 20-foot interval averaging 0.176 ounces of gold and 2.383 ounces of silver per ton. Hole E12-17 had total significant mineralization in multiple zones of 320 feet, including contiguous significant mineralization of 220 feet (825-1045'). The contiguous interval contained a 165-foot interval averaging 0.086 ounces of gold and 0.694 ounces of silver per ton.

The 2012-2013 drilling program is continuing with three significant objectives:
1) infill drilling in the Dayton Resource Area 2) step-out and infill drilling in the east-side of the Lucerne Resource Area and 3) exploration drilling on high priority targets, including Spring Valley.

The infill drilling in the Dayton Resource Area will provide detailed information needed to create a preliminary mine plan for the proposed Dayton mine, to be developed in parallel with the expanded Lucerne mine. With that plan, the Company will complete a feasibility study, a prerequisite before commencing the permitting for the second mine.

The step-out drilling phase in the east-side of the Lucerne Resource Area will test the continuity of mineralization to the north and south, and at greater depths to the east. The infill-drilling phase will then provide the detailed information needed to develop an expanded mine plan for the Lucerne mine. That mine plan will position the Company to complete an economic feasibility study, a prerequisite before any permitting for the expanded mine becomes foreseeable.

Production Outlook

Our strategic plan called for a return to mine production during the third quarter of 2012. During the second quarter of 2012, we completed the expansion of the heap leach pad from its three existing cells to five cells. We also received and installed the new Merrill Crowe facility. We installed the crushing facility, including the jaw and cone crusher, the super stacker, conveyors and related components on site.

We have hired essentially all of our planned mine and processing staff. This includes the mining operations, crushing plant, Merrill Crowe facility, laboratory, and metallurgical process staff. With the additions of these staff, we are able to run our full mining operations.

In the third quarter of 2012, we commissioned the crushing and Merrill Crowe facilities including successful calibration and testing. We commenced the haulage of mineralized material from the mine to the crushing facility, and crushing and stacking material. Once material was stacked, we commenced processing and poured doré beginning in late September 2012.

Through October 31, 2012, the Company shipped 1,258 ounces of gold and 14,802 ounces of silver. In addition, the Company delivered 28 ounces of gold and 292 ounces of silver to the Northwest Territorial Mint, In Dayton, Nevada, to facilitate the minting of the commemorative bar celebrating the first pour. The combined sale of metal (received payments and payments due on gold and silver sold) was in excess of $2.5 million.

Through October 31, 2012, the Company has crushed over 175,000 dry tons of mineralized material. Material placed on the heap leach pad after crushing remains under solution for as long as the pad is utilized. Throughout this period, the recovery of gold and silver continues, but the most effective economic recovery of gold and silver takes between 45 to 60 days to complete. The recovery of gold and silver from the first month represents only a portion of the expected recovery. Once initiated, the Merrill-Crowe process is continuous. Likewise, the heap is continuously expanded as new material is brought from the mine and sent through the crusher. As a result, the amount of gold and silver recovered and shipped for payment always represents only a fraction of the ultimately recovered amount of gold and silver potential in the amount actually on the heap.

The Company has completed a financial analysis for the Lucerne mine and anticipates annual operating expenses, including mining, processing, royalties and mine administration costs of approximately $13.3 million per annum, with a production schedule that commences processing at a rate of one million tons per annum. The Company anticipates temporary, higher haulage costs of $2.25 million for the first nine months of operations in 2013, associated with hauling on an alternative route until a new Right of Way permit is issued to us by the BLM. These mining, processing and related costs do not include corporate administration or other general and administrative costs, nor do they include exploration and mine development costs.

Land and Mineral Right Acquisitions

We will continue to increase our footprint in the Comstock District through strategic acquisitions. We consider the historic Comstock district central to our growth strategy. The following acquisitions were completed in 2012.

On January 4, 2012, we completed the purchase of four patented lode claims totaling 95 acres known as the "Dayton". These mineral claims are contiguous with our Spring Valley mineral holdings. The purchase price was $3,000,000. The purchase included a $500,000 upfront payment. We issued a $2,500,000, 0% interest note to finance the balance of the purchase price. The note is payable in equal quarterly installments of $50,000 increasing to $125,000 in October 2013 with a balloon payment for the remaining principle due in five years. At June 30, 2012, the note payable was net of imputed interest of $353,130.

On February 15, 2012, we purchased a property in Storey County, Nevada near existing claims. The purchase price was $25,000 paid in cash.

On February 22, 2012, we completed the purchase of the Diez Senores property, adjacent to our Dayton properties, including 100% of the surface rights and 50% of the mineral rights on 18 patented acres in Lyon County, Nevada. The purchase price was $237,500 paid in cash.

On March 9, 2012, we completed the purchase of the 38 acres known as the Railroad and Gold property. The purchase price was $400,000 comprised of $160,000 paid upfront ($60,000 in cash and $100,000 in Company stock) and a $240,000 note at 4.5% interest per annum maturing in three years.

In April 2012, we purchased the White House property. The purchase price consisted of a $100,000 cash payment and the issuance of a $300,000 note payable. The note bears interest at 4.5% and is payable in monthly installments of $1,520 with a final remaining principal payment due on April 1, 2017. The note is secured by a first deed of trust on the land.

In the nine months ended September 30, 2012, we purchased additional properties of which $166,400 was paid via the issuance of debt obligations.

Comparative Financial Information

Below we set forth a summary of comparative financial information for the three and nine months ended September 30, 2012 and 2011.

Three Months Ended September 30, 2012 and September 30, 2011:



                                         2012            2011          Difference
Revenue - Hospitality                 $   182,792     $   179,071     $      3,721

Hospitality operating costs               200,457         219,159          (18,702 )
Depreciation and amortization             321,395          54,837          266,558
Reclamation and exploration expense     4,095,553       2,256,590        1,838,963
General and administrative              2,494,662       1,007,832        1,486,830
Consulting and professional fees          876,603         273,461          603,142
Loss from operations                    7,805,878       3,632,808        4,173,070
OTHER INCOME (EXPENSE)
Change in fair value of derivatives      (884,556 )     1,661,584       (2,546,140 )
Interest expense                         (332,286 )       (14,494 )       (317,792 )
Interest income                             2,171          11,304           (9,133 )
Other                                      26,370               -           26,370
Net loss                              $ 8,994,179     $ 1,974,414     $  7,019,765

The hospitality revenue from the cottages, hotel rooms, restaurant and bar was stable for the three months ended September 30, 2012, compared to the same quarter in 2011, increasing $3,721.

Hotel operating costs decreased $18,702 for the quarter ended September 30, 2012, compared with the same quarter in 2011. The hotel operating costs represents costs incurred for providing room, banquet, restaurant and bar services at the hotel.

Depreciation and amortization increased $266,558 for the quarter ended September 30, 2012, compared to the same quarter in 2011. The increase is primarily related to the increase in depreciable building and mining equipment.

Reclamation and exploration expenses increased by $1,838,963 for the quarter ended September 30, 2012, compared to the same quarter in 2011. The increase is primarily the result of $480,449 related to stock-based compensation expense, $415,984 environmental and permitting and $348,460 associated with required soil sampling. The remainder of the increase is associated with exploration and related mine development costs for our Lucerne Resource Area in 2012, including higher labor costs related to the expansion of the geological, mine development and mining staff.

General and administrative expenses increased by approximately $1,486,830 for the quarter ended September 30, 2012, compared to the same quarter in 2011. The increase is primarily the result of $1,155,948 expense related to stock-based compensation expense and, to a lesser extent, increases in director's fees, travel, insurance and other administrative costs.

Consulting and professional fees increased by $603,142 for the quarter ended September 30, 2012, compared to the same quarter in 2011. This increase results primarily from increased legal fees associated with permitting and related appeals, preparation of our sampling and analysis plan and related environmental compliance and, to a lesser extent, fees associated with internal control compliance and related business process improvement activities.

Change in fair value of derivatives decreased $2,546,140 for the quarter ended September 30, 2012, compared to the same quarter in 2011. This decrease resulted primarily from a $1,566,084 change in the fair value calculation of the contingent dividend payment derivative liability associated with our convertible preferred stock. This change in fair value resulted primarily from the shorter time remaining on the contingent dividend feature and from a decrease in outstanding convertible preferred shares with this contingent dividend feature, partially offset by the increase in the value of common stock. The remaining decrease of $980,056 is from the change in the fair value calculation on gold calls, puts, and forwards held by the Company.

Interest expense increased by $317,792 for the quarter ended September 30, 2012, compared to the same quarter in 2011. This increase resulted from financing agreements entered into with Resource Income Fund associated with our $5 million working capital revolving credit facility and Caterpillar Financial associated with our $5 million equipment financing loan, both entered into in 2012.

Interest income decreased $9,133 for the quarter ended September 30, 2012, compared to the same quarter in 2011. This decrease resulted from an overall decrease in income generating cash and cash equivalents, and available-for-sale securities during the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Nine Months Ended September 30, 2012 and September 30, 2011:



                                          2012             2011          Difference
Revenue - Hospitality                 $    477,037     $    299,246     $    177,791

Hospitality operating costs                543,227          319,154          224,073
Depreciation and amortization              910,408          122,119          788,289
Reclamation and exploration expense     13,809,831        7,492,079        6,317,752
General and administrative               7,412,880        3,302,356        4,110,524
Consulting and professional fees         2,320,606        1,147,698        1,172,908
Loss from operations                    24,519,915       12,084,160       12,435,755
OTHER INCOME (EXPENSE)
Change in fair value of derivatives       (399,856 )      2,878,092       (3,277,948 )
Interest expense                          (430,234 )        (38,869 )       (391,365 )
Interest income                             16,513           65,354          (48,841 )
Other                                       26,370                            26,370
Income tax benefit                               -           76,081          (76,081 )
Net loss                              $ 25,307,122     $  9,103,502     $ 16,203,620

On May 1, 2011, we acquired the historic Gold Hill Hotel and five related cottages. The hospitality revenues from the cottages, hotel rooms, banquets, restaurant and bar increased $177,791 for the nine months ended September 30, 2012, compared to the same period in 2011. The increase is primarily the result of the hotel being owned for only five months of the nine month period in 2011.

Hotel operating costs increased $224,073 for the nine months ended September 30, 2012, compared with the same period in 2011. The increase is primarily due to the hotel being owned for the full nine month period in 2012 compared to being owned for only five months of the nine month period in 2011. The hotel operating costs represents costs incurred for providing room, banquet, restaurant and bar services at the hotel.

Depreciation and amortization increased $788,289 for the nine months ended September 30, 2012, compared to the same period in 2011. The increase is primarily related to the increase in depreciable building and mining equipment.

Reclamation and exploration mining expenses increased by $6,317,752 for the nine months ended September 30, 2012, compared to the same period in 2011. The increase is primarily the result of $2,074,885 associated with required soil sampling, $1,560,156 expense related to stock-based compensation expense and $868,728 related to higher labor resulting from the expansion of the geological, mine development and mining staff. The remainder of the increase is associated with permitting and related mine development costs for our Lucerne Resource Area.

General and administrative expenses increased by $4,110,524 for the nine months ended September 30, 2012, compared to the same period in 2011. The increase is primarily the result of $3,243,516 expense related to stock-based compensation expense and, to a lesser extent, increases in director's fees, travel, insurance and other administrative costs.

Consulting and professional fees increased by $1,172,908 for the nine months ended September 30, 2012, compared to the same period in 2011. This increase results primarily from increased legal fees associated with permitting and related appeals, preparation of our sampling and analysis plan and related environmental compliance and, to a lesser extent, fees associated with internal control compliance and related business process improvement activities.

Change in fair value of derivatives decreased $3,277,948 for the nine months ended September 30, 2012, compared to the same period in 2011. This decrease resulted primarily from a $2,297,892 change in the fair value calculation of the contingent dividend payment derivative liability associated with our convertible preferred stock. This decrease in fair value resulted primarily from the shorter time remaining on the contingent dividend feature and from a decrease in outstanding convertible preferred shares with this contingent dividend feature, partially offset by the increase in the value of common stock. The remaining decrease of $980,056 is from the change in the fair value calculation on gold calls, puts and forwards held by the Company.

Interest expense increased by $391,365 for the nine months ended September 30, 2012, compared to the same period in 2011. This increase resulted from financing agreements entered into with Resource Income Fund associated with our $5 million working capital revolving credit facility and Caterpillar Financial associated with our $5 million equipment financing loan, both entered into in 2012 and from an increase in promissory notes issued to acquire additional properties.

Interest income decreased $48,841 for the nine months ended September 30, 2012, compared to the same period in 2011. This decrease resulted from an overall decrease in income generating cash and cash equivalents, and available-for-sale securities during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

Liquidity and Capital Resources

Cash, cash equivalents and available-for-sale securities on hand at September 30, 2012, totaled $3,928,640. Finished goods inventory at September 30, 2012, totaled $425,588.

For the nine months ended September 30, 2012, we used cash from operating activities of approximately $17.8 million compared to $9.4 million in the same period of 2011. The increased use of operating cash flow of approximately $8.4 million was primarily as a result of increased use of cash for exploration and mine development expenses of $5.8 million, general administrative expenses of $0.9 million, and consulting and professional fees of $1.2 million, and a $0.4 million increase in cash used in operating activities from changes in working capital.

Net cash used in investing activities included $12.7 million for the purchase of mineral rights and properties, plant and equipment, including approximately $1.3 million for mining vehicles and equipment, $9.5 million for processing equipment and $1.9 million for land and buildings.

The Company has recurring net losses from operations, an accumulated deficit of $152.2 million as of September 30, 2012, and has had no significant mining revenues since 2006. For the nine months ended September 30, 2012, the Company incurred a net loss of $25.3 million and had negative working capital (i.e. current liabilities in excess of current assets) of $10.3 million. The Company commenced production in August 2012, and poured its first gold and silver doré bars on September 29, 2012.

Surety Bond

In July 2012, the Company placed a $4.67 million reclamation surety bond, through the Lexon Surety Group with the State of Nevada's Bureau of Mining Regulation Reclamation. The bond insures for the estimated costs required to safely reclaim the natural environment to the regulatory standards established by the State of Nevada's Division of Environmental Protection with the purposes of ensuring public safety, protecting the waters of the state, and providing for post mining land use. The Company is required to post $2.3 million dollars with Lexon as collateral on the surety bond by December 31, 2012.

Working Capital and Equipment Financings

In July 2012, the Company entered into a Master Loan and Security Agreement and other arrangements with Caterpillar Financial Services Corporation (the "Cat Equipment Facility") pursuant to which the Company may borrow up to $5 million secured by certain equipment of the Company. As of September 30, 2012, the Company had borrowed $5 million under the Cat Equipment Facility. The Cat Equipment Facility bears interest at a rate of 5.85% with a term of 30 months except in the event of a default, including the occurrence of certain liquidity events, in which case the principal balance will bear interest at a rate of the lesser of 18% per annum or the highest applicable rate allowed by law.

In July 2012, the Company entered into an agreement with Resource Income Fund ("RIF"), with Auramet Trading, LLC ("Auramet") acting as gold agent, pursuant to which the Company may borrow up to $5 million outstanding at any one time (the "Auramet Facility"). The Company's obligations under the Auramet Facility are secured by a security interest in all personal property of the Company and certain real estate owned by the Company within the Company's starter mine. The proceeds will be repaid through the delivery of 3,720 ounces of gold payable in 12 semi-monthly deliveries of 310 ounces each beginning February 2013 and ending July 2013, or December 2013, if any amounts are redrawn under the agreement. The agreement is non-interest bearing except in the event of a default, in which case the balance would then bear interest at the lesser rate of 15% per annum or the highest applicable rate allowed by law. In connection with entry into the Auramet Facility, the Company has also entered into a purchase and sale agreement with Auramet, and the Company entered into a trading agreement the . . .

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