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LODE > SEC Filings for LODE > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for COMSTOCK MINING INC.

Form 10-K for COMSTOCK MINING INC.


17-Mar-2014

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, 2013, as well as our future results.

Overview

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 the 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 historic data and detailed surface mapping of Comstock District properties and continue to obtain historic information from private and public sources. We use such data in conjunction with information obtained from our current mining operations, to target geological prospective exploration areas and plan exploratory drilling programs.

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.

Our business plan is to deliver stockholder value by 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; and significantly grow the commercial development of our operations through coordinated district wide plans that are economically feasible and socially responsible. The Company has already met the first three intermediate resource validation objectives by validating measured and indicated resources containing more than 2,000,000 gold equivalent ounces. The Company achieved initial production and held its first pour of gold and silver on September 29, 2012 and produced more than 20,000 gold equivalent ounces in 2013. The Company has developed a mine plan intended to ramp those annual production rates to approximately 40,000 gold equivalent ounces.

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 7,447 acres of mining claims and parcels in the Comstock and Silver City Districts (a 26 % increase from 2012). The acreage is comprised of approximately 1,376 acres of patented claims (private lands) and surface parcels (private lands) and approximately 6,071 acres of unpatented mining claims, which the Bureau of Land Management ("BLM") administers.

Automatic conversion of 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 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.

In March 2013, the Company raised $10.0 million in gross proceeds (approximately $9.7 million, net of issuance costs) through an underwritten public offering of 5,000,000 shares under the Company's Registration Statement on Form S-3, of our common stock at a price of $2.00 per share. In August 2013, the Company raised $8.75 million in gross proceeds (approximately $8.6 million, net of issuance costs) through an underwritten public offering of 4,146,920 shares of our common stock at a price of $2.11 per share under the Company's Registration Statement on Form S-3.

Our Team

We believe we have exceptional mine engineering, geological, geo-statistical, metallurgical, safety, regulatory, environmental, financial and operating competencies on our management team. As of December 31, 2013, we have 118 full-time employees. We also have 12 full-time and 5 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.

Corrado De Gasperis has been President and CEO of Comstock Mining since April 2010, and appointed to the Board of Directors in June 2011. He brings over 26 years of industrial metals and mining manufacturing, operational and financial management, and capital markets experience. Previously, he served as the Chief Executive Officer of Barzel Industries Inc. (formerly Novamerican Steel Inc.) from April 2006 through September 2009. Barzel operated a network of 15 manufacturing, processing and distribution facilities in the United States and Canada that offered a wide range of metal solutions to a variety of industries, including construction, infrastructure development and mining. From 2001 to 2005, he served as Chief Financial Officer of GrafTech International Ltd., a global manufacturer of industrial graphite and carbon-based materials, in addition to his duties as Vice President and Chief Information Officer, which he assumed in 2000. He served as Controller of GrafTech from 1998 to 2000. From 1987 to 1998, Mr. De Gasperis was a certified public accountant with KPMG LLP. As a Senior Assurance Manager in the Manufacturing, Retail and Distribution Practice, he served major clients like General Electric and Union Carbide Corporation. KPMG announced his admittance, as a Partner, effective July 1, 1998.
Mr. De Gasperis holds a BBA from the Ancell School of Business at Western Connecticut State University, with honors and is a Member of the NYSE Markets Advisory Committee, the Northern Nevada Development Authority and the Northern Nevada Network. Mr. De Gasperis is also a founding member and the Chairman of the Board of Directors of the Comstock Foundation for History and Culture and is also a Director of the Gold Hill Hotel Inc., the most historic, continuously operating Hotel in Nevada.
Harold "Hal" Galbraith joined Comstock Mining in March 2014 as Director of Mining and brings over 30 years of experience in open pit, gold, silver and copper operations, as well as surface coal mining operations, maintenance systems, technical services, and industrial engineering support. He has held a variety of positions including Mine Manager, Mine Production Superintendent, Sr. Production Engineer, Assistant Superintendent of Production, Senior Mining Engineer, Senior Projects Engineer, Long and Short Range Planner, and Safety Coordinator.
Mr. Galbraith holds a Bachelor of Science in Mining Engineering from the Pennsylvania State University.


Larry Martin has been the Director of Exploration & Mineral Development since 2010 and Chief Geologist since 2008. He brings over 31 years of successful precious metals exploration, mine development and production experience. He participated and supervised exploration projects in Northwest Territories, Canada, Liberia, West Africa, Mexico, Honduras, and areas within the western region of the United States. Mr. Martin's production experience is exemplified by supervisory positions in the following Nevada mines: Manhattan, Borealis, Hog Ranch, and Denton-Rawhide.
Mr. Martin's geologic technical expertise overlapped into the environmental and civil engineering disciplines of geology. He was instrumental in the evaluation of geologic design parameters at the proposed nuclear repository site located at Yucca Mountain, Nevada. Mr. Martin participated in the geo-technical evaluation of the environmentally sensitive sites of Hanford Nuclear Reservation, Washington and Anniston military depot, Alabama; and the rock product dam project, East Side Reservoir Project, California. Most recently, Larry's focus has been in Nevada precious metals exploration projects including: the Sleeper Gold Project and, currently, the Comstock Mine Project. Mr. Martin received his Bachelor of Science in Geologic Engineering from Colorado School of Mines in 1978. He is a Qualified Person (QP) and a Certified Professional Geologist (CPG) accredited by American Institute of Professional Geologists (AIPG). Mr. Martin is a certified expert witness by the 9th District Appellate United States Federal Court in the categories of Exploration and Structural Geology. Steve Russell became Senior Mine Geologist in 2010 and brings in excess of 35 years of experience in precious metal mine planning, grade control, open pit mine production, including extensive heap leaching processing, and exploration. Mr. Russell has extensive Nevada mine planning and production experience and is a recognized authority in the Comstock District. He also has international exploration experience in Chile and China. Mr. Russell's exemplary career includes extensive and specific project work in the Comstock Lode District as a Mine Geologist, Exploration Geologist, and Mine Project Planning, including direct experience in the Company's near term production areas including the Lucerne, Dayton and Spring Valley Projects.
Mr. Russell is a graduate of California State University in Fresno, where he obtained a B.A. in Industrial Technology in 1971, a B.A. in Geology in 1974, and a Masters in Geology in 1976, with a thesis on stratigraphy and structure of Mesozoic meta-volcanic rocks. He is an industry-published author of unique Western U.S. structural geology.
Brett (Randy) Harris has been the Director of Safety since 2010 and has over 35 years of experience in the fields of occupational health, safety and security. He has worked with organizations like Round Mountain Gold Corp. in Round Mountain, NV, Golden Predator Mines in Winnemucca and Imlay, NV and was most recently with the Turquoise Ridge Joint Venture between Barrick Gold and Newmont Mining Corporation. Mr. Harris also spent five years with the State of Nevada Mine Safety and Training Section as a Safety Specialist.
Mr. Harris has been involved with volunteer firefighting, search and rescue, EMT and ambulance services with Storey County, Silver City and Round Mountain. His safety training includes certification by the International Society of Mine Safety Professionals, OSH Standards 1910 Level I & II, and International Loss Control. Important to Comstock Mining's near-term and longer-term plans, he has strong safety expertise in both surface and underground mining.
Judd Merrill became Chief Accounting Officer in 2014 and has been our Controller since 2011. Mr. Merrill brings strong financial planning, treasury and cash management experience in the mining sector in addition to his broader financial accounting, reporting and internal control experience, having worked as Controller of Fronteer Gold Inc. and Assistant Controller at Newmont Mining Corp., both in Nevada. He also worked for Meridian Gold Company and Deloitte & Touche LLP.

Mr. Merrill holds a Bachelor of Science in Accounting from Central Washington University and a Masters of Business Administration from the University of Nevada, Reno and is a Certified Public Accountant.


Exploration

Drill Program (Lucerne Resource Area)

In the Spring of 2013, the Company approved specific drilled locations along the west side of State Route 342 within the current Lucerne Resource area including, from south to north, The Billie the Kid, Lucerne, Justice and Keystone mine areas. The areas are located within the current mine plan and after reviewing the geologic sections, the decision was made to drill additional Reverse Circulation (RC) holes to confirm projected mineralization and collect material for additional metallurgical study. The drilling did confirm the predicted geological structures, elevations and extents of mineralization. The metallurgical studies enhanced our understanding of predicted recoveries compared to prior metallurgical analysis. The drilling and metallurgical studies (including electron micro-probe) found no evidence of reactive sulfide mineralization and no other mineralogical properties that would negatively affect the recoveries from our cyanide heap leach operation. The 2013 drilling program (the "Drill Program") included a total of 22 drill holes and 4,065 feet. For Billie the Kid; we drilled six holes with an average depth of 340 feet. For Lucerne, we drilled thirteen holes with an average depth of 120 feet. For Justice, we drilled six holes with an average depth of 160 feet and for Keystone we only drilled one well-positioned hole down to 120 feet. The Drill Program was defined for specific information and collected information that confirmed predicted geologic and attributes and metallurgical properties.

Kentuck Drill Program

In the fall of 2013, the Company conducted a second more narrowly scoped drill program at the Kentuck mine dump ("Kentuck Program"). The Kentuck Program evaluated certain mine dump material located on Sutro Mining Co. lands. The mine dump was waste rock from historic mining on the Kentuck. The area tested was approximately 100 feet by 250 feet. The drill holes were arranged in a grid pattern that included 116 drill holes. The drill holes ranged from 20 feet to 60 feet, with an average depth of 24 feet. Analytical and metallurgical results are pending.

On-Going Drill Programs

The Company's continues to evaluate high priority targets, including The East Side, Spring Valley, Occidental, Oest and the Northern Target areas. The Company did complete a successful phase of exploration drilling in Spring Valley in 2012.

The drilling in the northern portion of Spring Valley was partially predicated to confirm buried mineralization by drilling specific magnetic geophysical anomalies that had similar magnetic signatures as defined by mineralization defined by drill holes, drilled prior to the geophysical surface survey. The drilling was successful and the drill program is currently being expanded to test the full extent of the geophysical target.

The East Side Drill Program includes continuing infill drilling, metallurgical testing and geotechnical analysis to confirm the mineral potential and expand the mine plan on the East Side of State Route 342. In addition, the Company is designing a new phase of exploration drilling to include its highest-potential targets, including scoping studies of the Chute Zone in the Lucerne Resource area and plans for expanded exploration and development drilling in the Dayton Resource area that will allow for proper mineral assessment and mine plan development.

Production

During 2013, the Company completed the ramp up and stabilization activities of the production system, including significant improvements to the metal extraction processes, particularly in the Merrill-Crowe facility. We invested approximately $1.5 million for certain productivity enhancing actions associated with pump, pipe, filtration and press capacities, so the Merrill-Crowe and heap leach facilities could operate at fluid processing rates of over 1,000 gallons per minute. For substantially all of 2013, we were processing only 1.0 million tons of ore per annum due to a permit limitation. This limitation was unblocked during the fourth quarter when major modifications of our permits were approved. Accordingly, we surpassed our 2013 revenue guidance, exceeding the estimated 20,000 gold equivalent ounces, and producing over 20,800 gold equivalent ounces during the Company's first full year of production.

On November 12, 2013, the Company received a major modification to its water pollution control permit, increasing our authorized capacity and our processing rate from a previous maximum of 1.0 million tons per annum to 4.0 million tons per annum. In December 2013, the Company completed the construction of two new leach pad cells and the supporting ponds and related infrastructure. The system is now operational and materials are being stacked, leached and processed. Our first five existing cells continue under solution, as typical, until the target gold and silver recovery rates have been achieved.


The completed expansion and improvements represent the next major phase of growth for the Company, enabling production growth of 100%, with the goal of reducing unit costs and increasing cash flow. The Company plans to exceed a production rate of 40,000 gold equivalent ounces in 2014.

The Company averaged over 400 gold-equivalent ounces poured per week in 2013. The Company continuously adjusted its operations to improve grade, maximize yields and increase tons crushed and stacked throughout 2013, and averaged over 500 gold-equivalent ounces poured per week throughout the second half of 2013. Overall during 2013, the Company crushed and stacked 1,072,000 dry tons of mineralized material, delivering 22,192 estimated ounces of recoverable gold and 396,082 estimated ounces of recoverable silver to the leach pads, positioning the Company well for growth. Material placed on the heap leach pads 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 68% of the estimated recoverable gold and 48% 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.

For the quarter ended December 31, 2013, the Company realized an average sales price of $1,324.29 per ounce of gold and $20.68 per ounce of silver. In comparison, commodity market prices averaged $1,272.47 per ounce of gold and $20.76 per ounce of silver.

For the year ended December 31, 2013, the Company realized an average sales price of $1,361.70 per ounce of gold and $21.97 per ounce of silver. In comparison, commodity market prices in 2013 averaged $1,411.03 per ounce of gold and $23.83 per ounce of silver.

Operating Costs

During 2013, actual Lucerne Mine costs applicable to mining revenue were $26.5 million, net of silver by-product credits. Cost applicable to mining revenue include mining and processing labor, maintenance, drilling and blasting and assaying costs associated with higher production rates and higher absorbed inventory costs incurred in advance of achieving the targeted production rate.

Costs applicable to mining revenue for the twelve months of 2013 include $1 million of higher hauling costs, including the previously incurred redundancy associated with our inability to use an existing haul road that crosses Lot 51 for most of the first quarter, and the transition costs associated with renting new haul vehicles while transitioning out of the existing, temporary vehicles. Costs applicable to mining revenue also include $4.7 million of depreciation and a $1.5 million write-down of inventory to market value during 2013. Management believes the system is now capable of operating at twice the production rates of 2013 and is ramping up operations to those higher levels during the first quarter of 2014, now that final applicable permits have been approved.

During the third and fourth quarters, once production had stabilized, the Company continued focusing on stream-lining the organization and reducing general, administrative, consulting and other related costs. The Company has also focused on reducing costs applicable to mining and leveraging the existing fixed operating expenses for the production of higher ounces in the latter part of 2014. Costs applicable to mining, dropped sequentially, on a per ounce basis, every quarter during the year. Overall, cash costs dropped 55% from the first quarter to the fourth quarter, starting at over $2,190 per ounce during initial ramp up down to $989 per ounce in the fourth quarter. Once stabilized at the 40,000 ounce per annum run rate, the Company expects cash costs per ounce of gold mined of less than $750.

2014 Outlook

Through the end of 2013, the Company began transitioning into production at higher rates and grades with lower sustainable costs. The recently acquired permit now allows processing rates of up to 4 million tons of mineralized material to be placed on the leach pad per annum, and the Company's 2014 business plan calls for processing and shipping 40,000 gold equivalent ounces. This expected 2014 production rate is double the 2013 rate. Two additional cells were constructed in 2013 and stacking on these cells has already commenced. The Company is also fully permitted to add an additional cell when needed.


Under our current mine plan, we anticipate doubling ounces produced when compared to 2013, for both gold and silver, targeting 40,000 gold equivalent ounces of production for 2014. These increases come with lower costs applicable to mining due to focused cost reduction efforts, as well as lower non-mining operating expenses. Once stabilized at the 40,000 ounce per annum run rate, the operating expenses per ounce mined will be significantly lower in 2014 than in 2013. The Company expects cash costs per ounce of gold mined of less than $750 per ounce. The Company updated its financial analysis for the Lucerne Mine and anticipates annual operating expenses, including all mining and processing costs, of less than $25 million per annum, a more than a $6 million reduction over prior year 2013. The Company has also identified $3.5 million of cost reductions in all other non-mining activities, including general, administrative and environmental areas.

Recent Developments

From January 1, 2014 through March 14, 2014, preferred shareholders converted 1,009 shares of convertible preferred stock into 611,514 common shares.

Subsequent to December 31, 2013, the Company entered into an agreement to purchase 78 Acres in American Flat, Storey County, Nevada for $1,107,000. The purchase price includes $10,000 cash and the remaining amount in Company restricted common stock. Escrow is expected to close on or before December 25th, 2014.

Subsequent to December 31, 2013, the Company entered into an agreement to purchase buildings and mining claims adjacent to it's processing facility on American Flat Road, Storey County, Nevada for $893,000. The purchase price includes $10,000 cash and the remaining amount in Company restricted common stock. Escrow is expected to close on or before February 25th, 2015. On February 11, 2014, the Company entered into a new, lower cost $5 million revolving credit facility (the "Revolving Credit Facility") with Auramet International, LLC, pursuant to which the Company may borrow up to $5 million outstanding at any one time. The proceeds of the Revolving Credit Facility will be used for working capital, including production ramp up and preparations for expansion of the Lucerne Mine, including targeted drilling on the east side of the Lucerne Resource area. Interest is payable at 9.5% per annum, and was paid in advance on the closing date of the Revolving Credit Facility. The indebtedness under the Revolving Credit Facility is secured by a security interest in certain real estate owned by the Company within the Company's starter mine and a first priority security interest in all personal property of the Company and its wholly-owned subsidiary Comstock Mining LLC, subject to any existing or future Permitted Liens (as defined under the Revolving Credit Facility). Provided that no default has occurred and is continuing, and the Company has already repaid the principal amount of borrowings under the Revolving Credit Facility in an amount of not less than $1,000,000, the Company has the option until October 6, 2014 to re-borrow funds under the Revolving Credit Facility. The Revolving Credit Facility contains a covenant that requires the Company to maintain a minimum liquidity balance of $1 million (including cash and cash equivalents, plus 90% of the value of any doré that has been picked up by a secured carrier but not yet paid for, as of any date of determination). The Revolving Credit Facility additionally contains customary representations, warranties, affirmative covenants, negative covenants, and events of default, as well as conditions to borrowings. On February 12, 2014, the Company drew down proceeds of approximately $4.6 million. The Revolving Credit Facility will be repaid through 14 semi-monthly cash payments of $357,143 beginning August 8, 2014 and ending February 6, 2015.

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 described below were completed in 2013.

On October 11, 2013, we entered into a purchase agreement for 5 vacant lots near our mining and processing operation. The purchase price of $200,000 comprised of a $40,000 cash payment and $160,000 in Company restricted common stock. No transfer of deed will take place prior to Seller receiving the proceeds from the sale of shares. On October 22, 2013, the Company issued 88,888 of Rule 144 restricted shares of common stock to Greg Hess towards the purchase of this property. Escrow is scheduled to close on June 30, 2014.
On October 30, 2013, we exercised an option to purchase 212 Acres vacant land by our process facility in American Flat, Storey County, Nevada. The purchase price was $1,500,000 comprised of $30,000 cash payment and $1,470,000 in Company restricted common stock. No transfer of deed will take place prior to Seller receiving the proceeds from the sale of shares. On December 19, 2013, the Company issued 650,000 of Rule 144 restricted shares of common stock to V&T Management LLC as payment towards the purchase of this land.


Comparative Financial Information

Below we set forth a summary of comparative financial information for the twelve
months ended December 31, 2013, 2012 and 2011.

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