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LODE > SEC Filings for LODE > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Annual Report

Item 7. 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 consolidated financial statements and accompanying notes also included in this 10-K.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the year ended December 31, 2012, as well as our future results.


The Company is a producing, 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 the exploration project into production.

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 expanded our understanding of geology of the project area through vigorous surface mapping and drill hole logging. The volume of geologic data is immense, and thus far the reliability has been excellent, particularly in the various Lucerne Mine areas. We have amassed a large library of historical and current data and detailed surface mapping of Comstock District properties. As we continue our detailed exploration mapping, close spaced drilling, and initial mine production, new details emerge that significantly influence our understanding of the local and regional geology.

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 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.

The near term goal of our business plan is to deliver stockholder value by: 1) validating qualified resources (measured and indicated) and reserves (proven and probable) of at least 3,250,000 gold equivalent ounces from our first two resource areas, Lucerne and Dayton; 2) achieving initial commercial mining and processing operations in the Lucerne Mine with annual production rates of approximately 20,000 gold equivalent ounces; and 3) growing production through the commercial development and expansions of both the Lucerne and Dayton Mine plans.

As part of this plan, the Company has developed the exploration and development drilling programs intended to validate mine design for the Lucerne and Dayton Mines and also, to identify qualified resources and reserves in these two resource areas with three intermediate objectives of validating measured and indicated resources containing 1,000,000, 1,500,000 and 2,000,000 gold equivalent ounces, respectively and the remaining planned objective of 3,250,000 gold equivalent ounces. The Company has already met the first three intermediate resource validation objectives by validating measured and indicated resources containing over 2,000,000 gold equivalent ounces.

The Company has also developed a mine plan intended to achieving initial commercial mining and processing operations in the Lucerne Mine and ramp those annual production rates to approximately 20,000 gold equivalent ounces. The Company achieved initial production and held its first pour of gold and silver on September 29, 2012, with three remaining intermediate objectives from ramping up production to rates of 15,000, 17,500 and 20,000 gold equivalent ounces per annum, respectively.

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 5,900 acres of mining claims and parcels in the Comstock and Silver City Districts. The acreage is comprised of approximately 1,350 acres of patented claims (private lands) and surface parcels (private lands) and approximately 4,550 acres of unpatented mining claims, which the Bureau of Land Management ("BLM") administers.

Automatic conversion of Series A-2 preferred stock (the "Series A-2 Preferred Stock") and Series B Preferred Stock

If the daily volume weighted average price exceeds $4.50 for any 20 Trading Days during any 30 consecutive trading day period, then all outstanding shares of the Series A-2 Preferred Stock and Series B Preferred Stock will be forced to convert into shares of common stock, based on the then-effective conversion price. The Company will provide each holder with notice within one trading day of meeting the requirements specifying the shares of Preferred Stock held by each holder and the date three trading days later when the conversion will take effect.

Equity Raises

In October 2010, the Company raised approximately $35.75 million in gross proceeds (approximately $33.2 million, net of issuance costs) by issuing shares of the Series B Preferred Stock pursuant to a the Series B Purchase Agreement, representing in the aggregate about one-third of the common equity of the Company, on a fully diluted and as converted, in-the-money basis. Each share of the Series B Preferred Stock is convertible at the holder's election into 606.0606 shares of common stock, therefore converting into common stock at a conversion price per share of $1.65. The common stock underlying the Series B Preferred Stock is issuable at a fixed conversion rate (subject to anti-dilution adjustments) currently equal to 18.0 million shares of common stock.

In February 2012, the Company raised $17.25 million in gross proceeds (approximately $15.3 million, net of issuance costs) through an underwritten public offering of 9,078,948 shares of common stock at a price of $1.90 per share.

In November and December 2012, the Company raised $9.3 million in gross proceeds (approximately $8.5 million, net of issuance costs) through an underwritten public offering of 4,246,573 shares under the Company's Registration Statement on Form S-3, of our common stock at a price of $2.19 per share.

Our Team

We believe we have exceptional geological, geo-statistical, engineering, regulatory, environmental, financial and operating competencies on our management team. As of December 31, 2012, we have 73 full-time employees and 1 part-time mining employee. We also have 3 full-time and 12 part-time hospitality employees working for the Gold Hill Hotel, Inc. In addition, we have strengthened our system through agreements and relationships with certain key partners.


In January 2012, the Company launched its current exploration and development-drilling program (the "Drill Program"). The Drill Program has been revised to focus on three significant objectives: 1) infill drilling and expansion of the Lucerne Mine; 2) infill drilling in the Dayton Resource area for the development of our second mine; and 3) step-out and infill drilling in the east-side of the Lucerne Resource area. The Drill Program does not currently contemplate exploration drilling on the Company's other high priority targets, including Spring Valley, Occidental, Oest and the Northern Target areas. The Company did complete some exploration drilling in Spring Valley in early 2012.

The majority of the Drill Program activities in 2012 focused on infill and development drilling in the Lucerne Resource area, comprised of 391 holes totaling 146,274 feet. The drilling program consisted of 364 reverse circulation (RC) holes, totaling 138,521 feet, and 27 core holes, totaling 7,754 feet. The drilling totals also included fourteen widely-spaced exploration holes in Spring Valley and 22 step-out and infill holes in the east Side target. The total cost of the program was $4.87 million, with an average cost per foot of $33.26.


The Lucerne Resource area includes the previously operated Lucerne, Hartford, and Billie the Kid pits; the historic Justice and Keystone surface cuts and underground mines; and the historic Woodville bonanza. The modeled mineralization covers approximately 5,400 feet of strike length. The Lucerne Resource area is also host to the Company's Lucerne Mine, opened in 2012, with an associated heap leach and Merrill-Crowe processing facility.

Although the Company only drilled a limited number of east-side holes, the results led to the discovery and interpretation of the "Chute Zone" by Company geologists. This intersection between the northwest striking and northeast dipping Silver City fault, and a series of northeast striking and southeast dipping structures hosts a zone of enhanced mineralization. The zone currently mapped dimensions of 100 to 150 feet by 100 feet by 450 feet. The Company's geologists have recognized the enhanced grades of precious metals when northeasterly striking mineralized structures intersected the Silver City fault zone.

Spring Valley

The Spring Valley exploration target lies at the southern end of the Comstock District, where the mineralized structures lie mostly concealed beneath a veneer of sediment gravels. The area includes the Kossuth claim south of State Route 341, the Dondero property, the New Daney lode mining claims, and the Company's placer mining claims in Spring Valley and Gold Canyon.

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).

On-Going Drill Program

The ongoing Drill Program includes continuing infill drilling, metallurgical testing, and geotechnical testing for a second mine in the Dayton Resource area. In addition, the Company is designing a new phase of exploration drilling to include its highest-potential targets, including fully-developing the east Side and Chute targets in the Lucerne Resource area, and the continuation of the mineralization from the Dayton Resource area.

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.


During 2012, we completed the expansion of the heap leach pad from its three existing cells to five cells. We also installed the crushing facility, including the jaw and cone crusher, the super stacker, conveyors and related components on site and received and installed the new Merrill Crowe facility. We also 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, recording our first revenue from metal sales in the fourth quarter of 2012. Metal sales in the fourth quarter 2012 totaled $5.4 million, with gold revenues of $4.5 million. We also produced $0.9 million of silver. Silver is accounted for as a by-product credit in costs applicable to mining revenue for financial reporting purposes. In 2012, we shipped 2,583 ounces of gold and 27,008 ounces of silver.

The Company continues ramping up its production and plans to achieve a production rate of 400 gold-equivalent ounces poured per week, or over 20,000 gold-equivalent ounces per annum. Since pouring commenced, the Company has averaged approximately 220 gold-equivalent ounces poured per week. The Company is continuously adjusting its operations to improve grade, maximize yields and increase tons crushed and stacked. The Company continues to advance activities in each of these areas on a weekly basis keeping it on track for achieving the 400 gold-equivalent ounce target rate, by late April 2013.

During 2012, the Company crushed and stacked over 294,000 dry tons of mineralized material starting from the time that production began, delivering 5,764 estimated ounces of recoverable gold and over 51,414 estimated ounces of recoverable silver to the leach pad, positioning the Company well for growth. Material placed on the heap leach pad remains under solution until the target recovery rates are achieved. 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 Company has recovered 67% of the estimated recoverable gold and 51% of the estimated recoverable silver from the portion of the heap under leach the longest. Preliminary laboratory metallurgical test results suggest that ultimate heap leach recovery will meet or exceed the estimated ounces of recoverable gold and silver.

Through December 31, 2012, the Company realized an average price of $1,744.36 price per ounce of gold, including the benefits of the first commemorative bar, and a $32.56 average sales price per ounce of silver. In comparison, commodity market prices in the fourth quarter of 2012 averaged $1,721.79 per ounce of gold and $32.68 per ounce of silver.

Operating Costs

During the fourth quarter 2012, actual Lucerne Mine operating expenses were approximately $4.5 million, $3.6 million net of silver credits (or approximately $18 million annualized). These costs include higher hauling costs due to our inability to use an existing haul road that crosses Lot 51 as discussed below.

The estimated operating expenses do not include corporate administration or other general and administrative costs, nor do they include exploration and mine development costs. The Company is not currently drilling and does not plan on resuming these activities until the second half of 2013.

Haulage and the BLM

During February 2013, the Company announced that the United States Department of the Interior - Bureau of Land Management (BLM) made a determination to allow the Company to move forward with a Class 1 Color-of-Title Act claim ("CoT claim") with respect to Lot 51, a 25-acre parcel in Gold Hill, Nevada. As part of this process, the BLM is allowing for the Company's limited interim use of the existing haul road segment that crosses Lot 51, providing a more efficient connection to a previously granted, non-exclusive Right-of-Way ("RoW") for access to its processing facility in American Flat.

In order to comply with the guidelines in the currently authorized RoW grant, the Company will use different, highway-rated vehicles. The vehicles will travel a shorter distance while carrying a larger load, thus decreasing overall traffic on American Flat Road, while also reducing haul truck traffic on the State Route. These vehicles will also un-block the mine area from logistical constraints imposed by the previously used vehicles, increase throughput by increasing the haul per trip and reduce costs significantly by reducing the number of trips. We are renting ten of these highway-rated vehicles for one year, at a cost of $12,000 per month, per vehicle. Each vehicle is rented pursuant to a separate agreement that may be individually terminated by us at our discretion and returned to the lessor, subject to a termination fee, in certain instances. In February 2013, the Company sold five Caterpillar 773 Haul Trucks, a loader, two dozers and a fuel truck for 1.6 million in cash. The company used a portion of the proceeds to pay down $1.0 million in debt and expects to record a loss in the first quarter of 2013 of approximately $1.0 million associated with the sale of those assets.

2013 Outlook

During the first quarter of 2013, modifications and optimizations have been engineered into the Company's mine planning, hauling, crushing and recovery systems. The Company has updated its financial analysis for the Lucerne Mine and anticipates annual operating expenses, including all mining and processing costs of approximately $15.9 million per annum, excluding approximately $1 million of additional haulage costs, with an anticipated production schedule currently processing at the rate of one million tons per annum, but also including plans for ramping up to a 1.5 million tons per annum run rate. Mine administration costs are anticipated to be approximately $1.5 million. The Company currently anticipates production rates beyond the 400 gold-equivalent ounces per week in the second half of the year, as it ramps up production with the goal of producing between 18,000-20,000 gold-equivalent ounces in 2013.

Recent Developments

From January 1, 2013 through March 15, 2013, preferred shareholders converted 2,220 shares of convertible preferred stock into 2,601,021 common shares.

On January 31, 2013, the Company published its fourth National Instrument 43-101 (NI 43-101) technical report (the "2013 Report") authored by Behre Dolbear & Company (USA), Inc. of Denver Colorado.

On January 31, 2013, the Company determined that an accelerated capital contribution was required pursuant to Section 3.2(c) of the Limited Liability Company Agreement of Northern Comstock Mining LLC, dated October 20, 2010 (the "Operating Agreement"). Pursuant to the Operating Agreement, the required capital contributions of the Company are automatically accelerated by $5,000,000 (in reverse order beginning with its last capital contribution due on the thirty-ninth anniversary of the Operating Agreement) at such time after the date of the Operating Agreement that 200,000 "gold equivalent ounces" on the properties subject to the Operating Agreement are validated through an independent external report. The Company made such determination based on the Company's geological model estimates, as validated by the 2013 Report. The capital contribution is required to be made within 60 days of such validation. The capital contributions will be made in the form of Series A-1 convertible preferred stock.

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 principal amount 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.

During the year ended December 31, 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 twelve
months ended December 31, 2012, 2011 and 2010.

                                                                                                    Difference             Difference
                                              2012              2011              2010           2012 versus 2011       2011 versus 2010
Revenue - Mining                          $   4,504,457     $           -     $           -     $        4,504,457     $                -
Revenue - Hospitality                           634,159           473,386                 -                160,773                473,386
Costs applicable to mining revenue            3,554,727                 -                 -              3,554,727                      -
Hospitality operating costs                     928,897           570,039                 -                358,858                570,039
Reclamation and exploration expenses         18,305,303         9,501,327         3,938,560              8,803,976              5,562,767
General and administrative                    9,277,944         4,474,726         2,104,018              4,803,218              2,370,708
Consulting and professional fees              3,391,379         1,481,835         1,021,238              1,909,544                460,597
Loss for Operations                         (30,319,634 )     (15,554,541 )      (7,063,816 )          (14,765,093 )           (8,490,725 )
Loss on extinguishment of debt                        -                 -       (26,350,890 )                    -             26,350,890
Change in fair value of debt beneficial                                                                                                 -
conversion feature                                    -                 -       (17,964,161 )                    -             17,964,161
Change in fair value of warrant                       -                 -        (2,642,084 )                    -              2,642,084
Change in fair value of derivatives             438,519         3,864,146        (2,869,504 )           (3,425,627 )            6,733,650
Interest expense                               (929,837 )         (80,630 )      (3,291,274 )             (849,207 )            3,210,644
Interest Income                                  17,309            72,928            24,557                (55,619 )               48,371
Other, net                                       31,370            15,785          (169,247 )               15,585                185,032
Income tax benefit                                    -            76,081                 -                (76,081 )               76,081
Net Loss                                  $ (30,762,273 )   $ (11,606,231 )   $ (60,326,419 )   $      (19,156,042 )   $       48,720,188

The Company began selling gold and silver in October 2012. There was no mining revenue or costs applicable to mining revenue prior to 2012.

On May 1, 2011, we acquired the historic Gold Hill Hotel and five related cottages. The hospitality revenue increased $160,773 for the year ended 2012, compared to the same period in 2011. The increase is primarily the result of the hotel being owned for only a portion of 2011. There was no hospitality revenue prior to 2011.

Hospitality operating costs increased $358,858 for the year ended 2012, compared to the same period in 2011. The increase is primarily the result of the hotel being owned for only a portion of 2011. There were no hospitality operating costs prior to 2011.

Reclamation and exploration expenses increased by $8,803,976 for the year ended 2012 as compared to the year ended 2011. The increase primarily resulted from activities associated with preparation and commencement of mining activities for the Lucerne Mine, including increases of $2,517,115 associated with a one-time soil sampling program required prior to the commencement of mining activities; $2,218,792 for higher mining and geological labor and related expense, including $1,765,963 related to stock-based compensation expense; and $1,578,750 associated with permitting and related mine development costs for our Lucerne Resource area. Reclamation, exploration and test mining expenses increased by $5,562,767 for the year ended 2011 as compared to the year ended 2010. The increase was primarily caused by expenditures associated with increased reverse circulation development drilling and related metallurgical, assay and mine development activity in and for our Lucerne and Dayton Resource areas in 2011, including higher labor costs related to the expansion of the geological staff.

General and administrative expenses increased by $4,803,218 for the year ended 2012 as compared to the year ended 2011. This increase is primarily the result of $3,644,601 expense related to stock-based compensation expense and, to a lesser extent, increases in director's fees, travel, insurance and other administrative costs. General and administrative expenses increased by $2,370,708 for the year ended 2011 as compared to the year ended 2010. This increase resulted primarily from stock grants issued to our outside directors valued at $980,000, $350,000 in payroll related costs related to the addition of professional staff in 2011, and $300,000 increase in marketing and financial services.

Consulting and professional fees increased $1,909,544 for the year ended 2012 as compared to the year ended 2011. The 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. Consulting and professional expenses increased $460,597 for the year ended 2011 as compared to the year ended 2010. The increase resulted primarily from an increase in valuation services, audit services, risk management including internal control compliance and business consulting services.

Loss on extinguishment of debt of $26,350,890 was recorded during the year ended 2010, resulting from the exchange of all of our $29,394,705 in senior secured convertible debentures, promissory notes and associated interest obligations for our Series A Preferred Stock. We recorded a non-cash loss on the extinguishment of debt based on the fair value of the Series A Preferred Stock and the net carrying value of the senior secured convertible debentures and promissory notes on the date of the extinguishment. The difference in the respective fair value of $26,350,890 was recorded as a loss on the extinguishment of debt. No such transactions occurred in 2011 or 2012.

Change in fair value of debt beneficial conversion feature and warrants decreased $20,606,245 to zero in 2011. The convertible debentures were . . .

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