I have received several requests from readers to have a look at Comstock Mining, Inc (OTCBB: LODE) and, given that the company just got reorganized and recapitalized resulting in the company having $25 million in cash in the bank, while simultaneously reducing its debt from around $23 million to $5.5 million, and given that the stock is being actively promoted, this seemed like a very good time to do just that.
According to the company’s website, “Comstock Mining Inc. is a well-capitalized, Nevada-based gold and silver mining company with extensive, contiguous property in the Comstock Lode District. The Company began acquiring properties in the Comstock in 2003. Since then, the Company has consolidated a significant portion of the Comstock Lode District, amassed the single largest known repository of historical and current geological data on the Comstock Lode region, secured permits, built an infrastructure and brought the exploration project into test mining production. The goal of its strategic plan is to deliver stockholder value by validating qualified resources (at least measured and indicated) and reserves of 3,250,000 gold equivalent ounces by 2013, and commencing commercial mining and processing operations in 2011, with annual production rates of 20,000 gold equivalent ounces.”
To date the company lists a total of 424 mining claims (by our count) in their most recent 10K so they certainly have been busy amassing, that’s for sure.
A look back at the historic filings of Comstock Mining, Inc (fka Goldspring, Inc) shows that the company actually was producing mining revenues from 2004 through 2007 but had to discontinue mining operations due to lack of cash, the result of ongoing multi-million dollar losses every year, despite the revenues.
Over the course of the next few years, the company kept projecting the eminent restart of mining operations, only to keep moving the goal posts further away in each subsequent quarter.
Next, the company implemented some revisionist history and slowly modified their disclosure to suggest their shut down in 2007 was strategic in order to expand their holdings while furthering their testing and drilling exploration.
Of course, in April 2010 there was a change of management, with Corrado De Gasperis taking the CEO reigns so one can remain hopeful that, with Corrado at the helm, a new era of success may have dawned. The only thing dampening our enthusiasm in this regard is this simple statement from the company’s 10K, “we have not established proven or probable reserves, there can be no assurance that we will be able to produce sufficient quantities of gold or other mineralized material to recover our investment and operating costs.”
So, despite a long series of promising sounding press releases hailing drilling and exploration successes, the company has yet to identify any proven or even probable reserves in any of their 424 mining claims, a sad state of affairs for a company that has been focused on acquisition and exploration for the past 4 years. Without proven reserves, initiating production possesses far greater risk and chance that the mining operation will be a losing proposition from the get-go. We think this also calls into question the company’s projections of mining operations commencing in 2011.
We think it’s too soon to determine if the new management team is following the old penny stock concept that it’s easier to promote a stock and raise money on the promise of exploration than it is to find funding when your mining at a loss. But, given the price of gold these days, its really a pity that the company has apparently squandered tens of millions of dollars on property and exploration and yet doesn’t have a single ounce of proven or probable reserves to show for it.
An additional consideration is that a majority of the Comstock Mining claims are on Bureau of Land Management (BLM) land which means that the regulations regarding permitting, mining restrictions and reclamation requirements are onerous and discouraging. Still, the company has more than enough non-BLM claims to give them ample opportunity to demonstrate they can locate and extract meaningful amounts of gold and silver at a profit and to prove the value of the company, so that isn’t a material detractor for me.
Finally, while it’s true that large mining operations can mine concentrations far below the 899.00 ounces of measured and indicated resources at 0.03 oz/ton claimed by Comstock Mining but with the company’s processing plant several miles from the Silver City mine and even farther from the Dayton mine, their costs per ton to extract, deliver and process the ore will be necessarily higher, not only because of the time and costs involved but the fact the company is not in a position to use the normal economies of scale that are available to open pit mining companies where the processing plant is on site and they can use the 300+ ton ore trucks that are typically used in large open pit mining operations. This is not to say that the company can’t mine profitably both at a gross but as a net to the shareholders as well. The point here is that, at a current market cap (fully diluted) around the $300 million mark, I think it’s important that the company demonstrate what it can actually deliver in order to justify that kind of market cap.
Still, until I can see some material developments in the way of proven reserves in EDGAR filings or profitable mining operations, I can’t justify a rating of the business strategy above an 8 out of 20.
Potential for Exponential Growth
As much as I’d like to believe new management means new opportunity, the stock is currently trading at a market cap of around $270 million fully diluted and, in order to experience exponential growth from here, the company is going to have to either prove a significant amount of reserves or they are going to have to turn in some attention grabbing quarterly revenues after they resume mining operations.
While any development and exploration operation possesses the possibility of hitting the mother-load, until Comstock Mining Inc can produce some real definitive results, over a few promising core testing results and some management additions, I’m going to hold a skeptical eye toward the idea of exponential potential for Comstock Mining stock and give it a rating of 4 out of 10.
Despite a $60 million loss in 2010, accumulated primarily around the reorganization of the company, as it sits today, Comstock Mining has a very appealing balance sheet. According to the 10K “On October 20, 2010, we raised approximately $35.75 million in gross proceeds (approximately $33.2 million, net of issuance costs, by issuing shares of our newly created Series B Convertible Preferred Stock (the “Series B Preferred Stock”). Special attention should be paid to the heavily dilutive effect of these Preferred shares which are covered further in the Financial Statements segment of this report. With $31.8 million in current assets against only $5.57 million in current liabilities, Comstock Mining seems set, at least for the near future… certainly sufficiently funded to launch the promised mining operations should they choose to do so. However the company does have a burn rate exceeding $5 million a year and perhaps even higher so, if the company steps up its game, we could be looking at funding for no better than a few years at best. Still, that’s a far cry better than most micro cap mining companies so their financial statements, today, are definitely a Comstock Mining strong suit. I give the company’s financial statements a 20 out of 30.
Stock and the Market
Since the stock began to gain support in November (following a necessary reverse split) and, as the reorganization finished up, the stock has shown signs of stability, trading between a high of $4.30 and a low of $2.85. I like the trading level as it lends an air of legitimacy to the market that a stock under a nickle simply can’t project. The stock has decent liquidity and enough volatility to encourage day trading as well as investing. These are the good points.
I can’t say I’m thrilled with the idea of the company having 3.9 billion shares authorized but, as long as the company treats the stock as precious, it shouldn’t be a problem.
Of some concern, however, is the Convertible Preferred shares issued and outstanding. The Series A-1 and Series A-2 are convertible into 1,536 shares of common stock each at $.65. With 30,157 issued, this represents 46,321,152 new shares of common stock, more than twice the current issued and outstanding number of common shares.
The Series B Preferred shares are convertible into 606 shares each of common stock at $1.65 and force conversion if the stock stays over $4.50 for more than 20 out of 30 consecutive trading days. With 35,749 shares Series B issued, that represents another 21,663,894 shares. However with a cost basis for the shares of an additional $1.64, these shares don’t represent a significant overhang at the current prices.
Combined this represents an additional $65.85 million in funding, when converted but, with the Preferred A stock in the money nearly $3 per share, it’s natural to expect the holders could execute a “cashless exercise” whereby, they sell stock into the market to fund the conversion, thereby being able to convert all their Preferred shares into common stock without having to invest another dime of their own money. Depending on the mood and intent of the Preferred shareholders, this overhang could theoretically drive the stock down by more than 50% from its current levels. With the Winfield Group owning the lions share of the Series A Preferred and since the Winfield Group doesn’t have a history as penny stock players, I think the risk of a wholesale dumping is far less than it’s potential suggests.
Still, the 67,985,046 common shares, represented by the Preferred stock, represents significant dilution to common shareholders once they are converted and the outstanding shares rises to a whopping 89,712,112.
With this kind of staring the shareholders in the face, I can’t rate the Stock and Market at higher than a 12 out of a possible 20.
If there was a single overriding characteristic that best describes the management of Comstock Mining, Inc, I would have to say it was the overall lack of relevant mining experience found in the majority of the Officers and Directors.
Company CEO, Corrado De Gasperis was trained as a CPA and has a varied history in various manufacturing situations but anyone looking at his resume, would never naturally conclude this was a mining man. His resume does mention mining twice and, thus, should be noted here He was previously the CEO of Barzel Industries, Inc, a publicly traded steel manufacturing company he ran from its beginning in 2006 until its liquidation in Bankruptcy in 2009. His bio suggests Barzel had mining activities but a quick check of the company’s last 10K reveals this sole mention of mining. “We intend to accelerate our growth by identifying and pursuing additional market segments in which we can sell our production capacity. We have identified numerous end markets and we intend to incrementally exploit these market segments to fully utilize our existing capacity. For example, we intend to expand our sales end markets to transportation, non-residential construction, energy, aerospace and defense, railroad manufacturing and mining machinery.” In our opinion, this does not qualify as relevant mining experience.
Additionally, Mr. De Gasperis lists his directorship on GBS Gold international. Checking SEDAR, Canada’s equivalent of EDGAR, indicates that during his tenure as Director from 2006 until 2009, the company went from being “an emerging gold producer with 2.1M oz of Measured and Indicated Resources and 1.5Moz of Inferred Resources of gold at its Union Reefs Operations Centre located in historically productive goldfields in the Northern Territory of Australia” to having its shares suspended then delisted by Canadian authorities and its assets liquidated. While it is true that he was connected to the mining industry through this role as Director, I can choose to weigh this as relevant but very negative mining experience or I can conclude his involvement was limited and therefore he wasn’t responsible for the company’s failure but, as a result he didn’t gain a material amount of relevant experience. I think the latter is more appropriate in this situation.
Still, given his accomplishments over the past year in reorganizing and recapitalizing the company, his organizational skills are evident but one can’t presume that his experience thus far has given him the intuitive ability to comprehend and respond effectively to the complex nature when geology, and exploration and governmental regulations collide. Since failure is often the best education, I don’t think his past failures are an indication of future failure but neither is it an indication of future success. Accordingly, I find no compelling reason to conclude he either can or can’t bring Comstock Mining to profitability.
Combined, Robert Reseigh and Scott Jolcover, Directors of Comstock Mining, Inc do bring relevant experience to the board room but, given they were both also part of the previous management team, we must temper our desire to find confidence in the value of their potential contribution to the company’s future success.
While Robert Reseigh’s bio indicates extensive experience in mine construction, his expertise suggests his core competency is more in the area of underground construction (40 years) than it is in extraction of precious minerals. The 10K also fails to reveal that Mr. Reseigh is currently working in Bozeman, Montana for Barnard Construction which limits his ability to contribute to the day to day operations of the company. Still, despite the fact that Comstock Mining’s operations to date are of the open pit variety, since the company has stated that it has not ruled out underground mining in the future, his experience could be considered relevant and substantial when it comes to the underground tunnel based segments of the company’s possible future mining plans.
Likewise Scott Jolcover is the other director with relevant experience. According to the 10K, he “has over 30 years experience in Nevada mining, land and mine acquisitions and divestitures, mineral leasing, royalty and commercial real estate. Mr. Jolcover is also a consultant to the Company, providing critical land and mine acquisition and management services. Prior to the Company’s acquisition of the Plum Mine in 2003 and until 2006, Mr. Jolcover also served as General Manager of the Plum Mine. Mr. Jolcover’s knowledge of the Nevada mining industry, state and local practices and agencies and the Nevada real estate industry, provides insight to the Board and support to the management team.” Given the resistance being mounted by local residents as indicated in the Virginia City News this would seem both relevant and important. This lengthy article in the Virginia City News further lays out a local perspective and contains more information.
The only other corporate officer, Robert Faber, the company’s Chief Accounting Officer’s background is in waste management. He has no relevant mining experience beyond his time with Comstock Mining. He also is a Director for LODE. Finally, Chairman of the Board, William Nance is the President and CEO of Century Plaza Printers, Inc., a company he founded in 1979 and is also active in the real estate business in Southern California but, aside from LODE has no apparent, relevant mining experience.
With three of the five executives of the company being trained as CPA’s, we know they are absolutely capable at accounting for the company’s profits or losses and, and if the company ever needs any beans counted, they’ve got that covered in spades as well. As to whether than can bring Comstock Mining to profitability remains to be seen but should be come clearer by the end of the year and beyond.
I also can’t say I’m thrilled with the Director’s decision to all pay themselves $100,000 each from the proceeds for “all the additional work that went into restructuring and recapitalization of the Company.” It seems to me that three of them were part of the problem long before they had to work so hard at being part of the solution. Still, it tells us where the Directors place their priorities and that’s always a good thing.
Finally, the recent acquisition of the Gold Hill Hotel near Virginia City (see news article) suggests significant influence (control?) of John Winfield, CEO of Portsmouth Square, Inc (OTCBB: PRSI) and holder of the Series A preferred giving him a 38% equity interest and 75% voting control. Despite the fact that Mr. Winfield is neither a director nor officer of the company, his 75% voting interest gives him the ability to influence and affect the company going forward. Accordingly, I will include his resume in forming my rating of management as I think think his influence is a good thing.
While everyone involved has a serious resume, but none more impressive than John Winfield. However, based upon the lack of heavy relevance to the mining business along with their willingness to wet their respective beaks at the expense of the shareholders, I am going to rate Management at a 10 out of 20.
On the surface, Comstock Mining, Inc looks like a promising company. It has lots of acreage under its control and boasts, literally, hundreds of mining claims. Having just completed a complete reorganization and recapitalization, the company’s balance sheet says this company is ready, willing and able to march toward revenues and profitability unfettered by economic concerns. With gold hovering over $1.500 it’s hard to imagine a company with a brighter future.
However, like mining, due diligence requires digging and, when one digs into Comstock Mining, Inc, one discovers that all that glitters isn’t necessarily gold. Promises of resumed mining operations within the year are tempered by a history of similar promises that died unkept.
The 21.7 million shares outstanding, a rational number to be sure, turns into 89+ million as the terms of the Preferred shares are revealed and, despite providing another $65 million in funding. Hence, when considering the true value versus market cap of this company one should use the 89 million figure.
New management may well prove to be just what this company needed and they could turn this company into something to be really be proud of but it’s not going to happen today or tomorrow for that matter. I think the near term risk of downside today outweighs the potential of any possible short term upside. I further think that, assuming the company actually resumes mining operations later this year, there will be ample opportunity to judge their success before jumping into the stock for the long haul. Our combined rating of 54 out of 100 further justifies our opinion. Still, this rating would likely change for the better or worse over the course of the next 8 months depending upon developments. We wish them and Comstock Mining Inc shareholders good luck as your combined futures unfold.
Disclosure: We do not have an equity interest in Comstock Mining, Inc stock either long or short nor have we been compensated in any way to write and publish this article. As always, consult a professional before investing in any stock.