|Shares Out. (in M):||87||P/E||NM||NM|
|Market Cap (in $M):||247||P/FCF||NM||NM|
|Net Debt (in $M):||0||EBIT||0||0|
Summary: Large amounts of gold and silver ore were left behind in the late 1800’s when the rich Comstock Lode in Nevada was abandoned due to the limitations of the technology and economics of that time. Until now complex legal disputes prevented any major effort to recover those minerals. Over many years Comstock Mining (LODE) has assembled ownership of land and claims covering nearly all of the area, and has the capital and permits to begin mining again this year. Rising cash flow and resource estimates should support a higher stock price over the next few years, even if gold and silver prices don’t do well.
History: One of the most famous mining areas in US history was the Comstock Lode in western Nevada, out of which about $15 billion worth (at today’s prices) of gold and silver was extracted, mostly from 1860-80. The Comstock mining industry was centered in Virginia City, now remembered mainly as the place where failed miner Samuel Clemens first started writing under the “Mark Twain” name. Commerce and finance connected with the mines were major factors in the development and growth of San Francisco.
The cause of the success of the Comstock was the existence of extremely high grade concentrations (the “Bonanza’s”) and veins of ore throughout the district, much of it, at least what was initially mined, close to the surface. As the mines followed the gold veins deeper underground, costs soared. The ground was unstable, making the shafts hard to shore up, and as depth increased the mines became unbearably hot and filled with scalding water that needed constant pumping.
In addition, there were huge additional costs not inherent in the resource itself that made the mines expensive to run. There were literally thousands of different mining companies and individual miners operating in the area, of which over 400 in the 1870’s were public companies. Nevada wasn’t an official territory of the US when mining began, and the process for making and establishing claims was so chaotic that the Comstock became a lawyer’s dream world, where every mining company had to devote a big part of its budget to suing and being sued by its neighbors. Many claims covered minuscule parcels, and lacking GPS they were often so vague—X number of feet from a certain tree stump to the edge of some other vague claim—that they could easily be “floated” some distance to try to cash in on someone else’s mining success.
By 1890, Comstock, based upon the technology and cost structure of that day, felt played out. Mining with picks and shovels, transporting ore in horse-drawn wagons, and extracting the gold and silver using 1800’s technology were so high cost that as soon as the richest veins were depleted mining became uneconomic. In the 100+ years since then, exploration, mining, and ore processing technology have all made huge leaps in efficiency, allowing a modern mine to profit nicely from ore with only a tiny fraction of the gold and silver concentration of what was needed in the 1800s.
People have long predicted that there is a massive amount of low-grade ore still available at the Comstock, but the competing claims and small size of the holdings made mining it inefficient and difficult, at best. Even Howard Hughes in the 1960s, through Hughes Tool, Union Pacific and Houston Oil and Minerals in the 1970s, all tried and gave up in the face of much lower gold prices.
Enter LODE: Starting in 2003, a company then called GoldSpring Inc. began acquiring property and claims in the Comstock Lode District. This company, primarily through debt financing, consolidated the substantial majority of the Comstock Lode District. Most recently, through the financial backing of entrepreneur John Winfield, the company completed a restructuring and recapitalization that included a change of CEO, a conversion of substantially all of its debt to equity, further consolidations of land and a major capital raising that fully funds its business plan. The Company also changed its name to Comstock Mining Inc., better reflecting what it had already achieved. The company controls over 6500 acres of property, including over six miles of contiguous area over the main lode geological structures and mineralized fault zones. It effectively controls nearly all of the mineable district.
Test production was first conducted in 2004-6 on a small part of the property, and exploratory drilling has been conducted since then so that when the company goes back into production, which it expects to do this coming summer, it will be a well planned and managed operation.
Compared to many small exploratory gold/silver mining companies that you might invest in, LODE has some edges:
1. Detailed records exist of tens of thousands of test holes and mine shafts, starting 150 years ago, which the company is using in its geological modeling. One can’t guess how much it would cost for that amount of information to be gathered from scratch today, but it would be very, very expensive. The impact on the resulting models was seen in the results of LODE’s exploratory drilling program last spring, where nearly every hole hit at least some precious metal mineralization.
2. In the 1800s their inability to use anything other than the highest-grade ore forced mines to follow the veins deep underground. But as LODE’s exploratory drilling has shown, there is a large amount of lower grade but potentially lucrative ore available very close to the existing surface. This can be mined using low cost open pit mining to get the ore and heap leaching to get the metal out of the ore. The “strip ratio”, which measures the amount of useless dirt and rocks that need to be removed to get to the valuable ore, is extremely low. Accordingly, the company believes that, even using very conservative estimates of both ore grade and the percentage of gold and silver extracted from the ore in processing, the cost per gold equivalent ounce should not exceed $500/oz to start. And that cost has room to drop as LODE scales up its operations over the next several years and can optimize its processes. So while gold rising from its present $1350/oz. level would certainly be welcome and increase investor interest in more speculative mining companies such as this one, there is room for gold prices to fall substantially and LODE would still show positive cash flow and growth in earnings over the next several years.
3. With all except two minor permits in place, LODE expects to start mining this summer, and believes it can reach cash flow breakeven by the end of 2011 and be positive in 2012 despite an aggressive exploration budget. Generally, gold/silver companies that are bringing in cash from mining are valued at a premium to exploration-only companies, for a variety of obvious reasons. LODE will be moving to the stronger status this year.
;New CEO and financing: 2010 was the year in which LODE, previously trading under the Goldspring name for under a penny per share, became a more credible speculation through a one for 200 reverse split, a complete debt for equity conversion, a new name, new CEO, and a major successful equity capital raise.
The company had been surviving for several years on increasing loans from John Winfield and some of his associates. Had he wanted to do so, he could easily have called his loans, thrown the company into bankruptcy, wiped out the common shareholders, and owned the entire company himself. The fact that he didn’t, and instead converted his loans to a convertible preferred position in connection with the sale of $32.7 MM net in other convertible preferred to outside investors (managed by Moelis & Co.), removed a major risk to the stock. It also justifies, in my mind, his super voting position that gives him voting control of the common stock. He controls approximately 33 million shares through his preferred stock, representing just under 40% economic ownership. His special voting rights do not transfer, indicating John Winfield is a long term, foundational shareholder for this company. The capital raise more than sufficiently funds the production start up, the acquisition of more land or claims, and the maintenance of a strong exploration budget. If production starts up this summer on schedule and cost targets achieved, the company should be self-funding going forward.
Brought in initially as an advisor on the business planning and restructuring and then made CEO last spring, Corrado DeGasperis is not directly from the mining industry, but has broad experience in discrete, industrial metals and mining process industries. He is a strong believer in specific, achievable goals for an organization, and has a significant part of his total compensation based upon progress toward two specific near term targets for the company: 1) Using the Canadian standard 43-101 categories, that LODE achieve at least 3.25 million gold equivalent ounces of Measured and Indicated Resources by 2013 (most recent number was 1.06 million in the August report by Behre Dolbear Group) and 2) achieve gold equivalent production of at least 20,000 ounces next year. If LODE can produce that amount, and if gold sells for $1300 on average, and if production costs come in at about $500, that would produce about $19 million in cash flow next year, before exploration and administrative expenses.
Production plans: The first production facility, expected to start up this summer, will be on private land (under existing permits) in Storey County in what LODE calls the Lucerne Resource Area. Mining and processing would be conducted through a “heap leach” where ore is dug out of the ground, crushed, piled up on an impermeable liner, and a cyanide solution is sprayed on top. As it works its way through the pile the liquid combines with gold and silver, and that solution is removed from the bottom of the pile and further processed to remove the metal. Heap leaching is cheap way to remove 65% to 85% of the metal (depends on porosity and size of crush) from low-grade ore.
High-grade ore is worth sending through a mill, which is very capital intensive but can result in up to 95% recovery. LODE probably won’t do that anytime soon, although it will save aside very high grades of ore for future processing in a mill. LODE’s drilling program has come across various high-grade segments in certain holes, and it has developed a theory of the area that suggests where there might be more bonanza type finds that were overlooked in the 1800s. But however exciting that prospect might be, the CEO doesn’t want the company to divert its efforts from the immediate goals of positive cash flow from inexpensive mining of lower grade ore and building its resource base to a level that might attract the attention of a major mining company looking to expand.
LODE expects to be using 0.05 ounces/ton ore on average in its first plant. That should be ample—Allied Nevada (ANV) is doing quite well processing ore averaging under 0.02 ounces/ton. The Lucerne facility can run for perhaps two years before the heap begins to reach capacity. Intermediate plans call for expanding the existing heap leach and ultimately, constructing another one.
The production goal seems reasonable. The first production facility is permitted to handle 720,000 tons of ore per year. If the ore averages 0.05 ounces per ton, that means it contains 36,000 ounces, but no process completely strips the ore of all gold. The lower end of heap leach results is viewed to be around 65%, which means LODE would produce 23,400 ounces with that volume and grade of ore. Higher grade ore and/or better results from the process would recover substantially more than that.
Meanwhile, LODE is working through the permit process for another production facility to be located in the Dayton Resource Area toward the southern end of its property, in Lyon County. There are still approvals needed, but there is an established procedure for getting them that doesn’t allow much room for local demagoguery. The 170 residents of Silver City across from the proposed Dayton mine aren’t happy about the potential for noise, but LODE management has been holding regular meetings with them to try to mitigate any ill effects. The commission in Lyon County that could say no has only one out of five commissioners from Silver City; since the taxes will flow to the county, which would decide how much Silver City versus the rest of the county gets, at least four out of the five commissioners should be open minded, or better. The goal is that Dayton should start up in about two years.
Staffing: One of the good things about open pit mining is the relatively lower labor cost compared to an underground mine. The production workers, of which LODE anticipates it may need about 25-35 in the first facility once it has ramped up, are mostly skilled in using heavy construction equipment, and should be in good supply. The company is actively looking for two higher-level employees with skills in engineering, metallurgy, and mine operations. Although there has been a bidding war for high quality mining execs, LODE has some attractive things to offer: location in the US (many gold mines are in places where US engineers wouldn’t want their familes to live), and involvement in a legendary project that controls the totality of a large, known, geological district, and thus could plausibly provide continued employment for decades.
Finances: The $32.6 million net capital raise last October, combined with preferred for debt exchange has yet to be reflected in a published balance sheet. The Use of Proceeds summary says that $8MM will be used for capital items related to production, $15MM for exploration, and $4MM for possible land acquisitions of a few stray pieces in the area that LODE doesn’t already control. At the same time as the offering, all of the company’s senior debt, $29.4 MM worth mostly held by John Winfield, was converted to preferred, as discussed above.
Valuation: As will soon be obvious, I am not a specialist in mining stock valuation. I’ve been long gold and silver for many years through the ETFs and Central Fund of Canada, but have stayed away from the mining companies other than a few tiny gambles. I am interested in them now because gold and silver prices have had big enough moves that it is conceivable that, even if gold truly is on its way to $3000+ in a few years, prices for the metals could easily be stagnant or down for a while first. A mining company that is growing its reserves and changing from a cash burning exploration company to a cash flow positive producer over the next year, has a chance to do well even if gold and silver prices decline.
Given the hundreds of mining companies in the world, and the ample statistical data available on their reserves and finances, in theory it shouldn’t be too hard to see which are relatively under or overvalued. In reality it is very hard, since so much depends on how heavily you weight the various factors, and which risks you are willing to take, and which you won’t. For example, I would pay a good bit more for a mine in North America than in Mongolia or certain South American and African countries, but maybe you wouldn’t. Given the massive amount of gold and silver found at Comstock ($15 billion worth at today’s prices) using primitive technology by people who mined only the richest veins, and the various legal and economic issues that discouraged much mining since then, that strongly suggests to me that over time LODE could find many times its initial 3.25 million ounce goal; you may be skeptical of that assertion, and give it no credit yet for any resources not identified on an official 43-101 report.
One thing is clear, though, that moving from exploration to production status has a big positive impact on a mining company’s valuation. The company included some charts to that effect in the investor presentation from November 2010 on its website http://www.comstockmining.com/files/comstockmining-overview-20101116.pdf Comparing North American junior miners of about the size that LODE expects to be within the next two years, the market cap per ounce of measured and indicated resources of the non-producing companies was about $72/oz., while the producers came in at $182/oz. That chart was assembled in late September 2010, and most of the stocks are nicely higher than that now.
If LODE achieves its goal of 3.25 million gold equivalent M&I resources in two years, and being a profitable producer then can get even $150/oz. valuation, that would almost double the stock to $5.30 from here. I am using 92 million fully diluted shares, which is 5 million greater than the maximum potentially existing at present, but it allows shares to be issued to management and employees for achievement of production and resource expansion goals.
Risks: These should be obvious. No one knows for sure what is underground. Unexpected problems can crop up getting permits or operating the production process. Although John Winfield so far has been much fairer to shareholders than legally required, he does control a majority of votes and could behave badly in the future. Although I doubt this is likely, gold prices could collapse. Much less unlikely is that rising energy, labor and other costs could squeeze potential margins. This is a speculative stock, and one should diversify among companies such as this.
Bear in mind that if every possible convertible and warrant were turned into common shares today, the total share count is about 87 million. But actual common outstanding is only about 21 million shares, making it less liquid than the potential share count would imply. Other Resources: Lode’s website is useful: www.comstockmining.com
If you know geology, which I don’t, you’ll find a massive amount of information in this 400+ page scientific book from 1882, which you can read or download for free online at openlibrary.org, entitled “Geology of the Comstock Lode and the Washoe District, with Atlas”: http://www.archive.org/stream/geologyofcomstoc00beck#page/n13/mode/2up
Here is a very bullish write-up on Comstock from last October at a gold oriented website: http://www.321gold.com/editorials/moriarty/moriarty102910.html The author is an experienced gold stock analyst, and feels more comfortable than I do at this stage making certain forecasts.
Startup of mine this summer
Breakeven by year end
Positive cash flow 2012
Large expansion of gold and silver resources
|Entry||02/11/2011 01:52 PM|
What is the $35MM raise being spent on? How much do they need to spend on mining equipment to start production?
When is the next reserve estimate going to be released? Has management discussed timelines for targeting 2mm, 3.25mm and 5mm gold equivalent ozs?
Whats the read thru on the recent acquisition of Frontier by Newmont? Should LODE get a premium to the comp group considering they work in a low risk mining district?
How much of the old Comstock mining district do they own today? Is LODE still acquiring land today?
|Entry||02/11/2011 04:15 PM|
1. Use of funds from capital raise: The $35MM capital raise was really about $32.7MM after fees and expenses. Of that, capital expenses are planned to be $8MM, of which $2.5MM goes to mobile mine equipment, $2.5MM to leach pad expansion, and $3MM to a crushing plant and improvement of the lab. The biggest amount, $15MM, goes to exploration and mine development, which includes an extensive drilling program to expand resources. Fortunately for LODE, it possesses massive records going back to the 1800s of what was found in drill holes and mine shafts. Almost none of that is in a form where it can count as is toward an official 43-101 report, but it gives the company a nice leg up on knowing where to drill, and to develop computer models of what is going on underground. Another $4MM is budgeted for production start up expenses.
2. Reserve estimates timing: I believe the next 43-101 should be out by about May. The 3.25MM Au equivalent ounce goal is two years from now - I'm not sure whether it will be December 2013 or earlier in the year. I don't think they have a target date yet for hitting 5MM ounces. Based upon what we know about how rich by today's standards was the ore that was uneconomic using 1880's technology and therefore ignored, there could conceivably be vastly more than 5MM ounces there, but until proven that is just a guess.
3. NEM's acquisition of Fronteer: That certainly doesn't hurt the argument that LODE might be acquired some day. NEM has a lot of operations in Nevada where FRG's main project is. The purchase price of C$2.3 billion is for a company with a total of 4.2MM oz's Measured and Indicated, which is somewhat above where LODE hopes to be in two years (3.25MM), but it gives an idea of the potential value of LODE if it can achieve its goals. The difference is that FRG has 43-101s that say it has that amount of gold now, and LODE may have that or more, but has to spend money to prove it. Still, with a fully diluted market cap about one tenth of the FRG buyout price, it give one a sense of the possible upside.
4. LODE's land position: With 6500 acres (more than 10 sq. miles) LODE effectively controls nearly all of the old Comstock district. There are still some small holdings and claims around, and depending upon exploration results there might be reason to expand out further, but this is pretty much it. Still, one other use of funds from the capital raise, that I didn't mention above, is $4M for land acquisitions, if the right parcel comes along at the right price.
Thanks for the questions. BTW, the CEO Corrado DeGasperis is very articulate and worth calling if you get interested in the idea.
|Entry||02/14/2011 07:41 AM|
Do you mind providing some background on John Winfield? Thanks
|Entry||02/14/2011 11:15 AM|
I don't know him personally, have never spoken with him nor emailed him either. I do have a friend who knows him and thinks highly of him. Winfield is in his early 60s. As I understand it, some years ago he was a broker in L.A., did well, and now owns large pieces of a few thinly traded holding companies whose assets are mostly real estate and hotel related: They are INTG, SFEF, and PRSI. He is Chairman and CEO of all of them.
I started buying LODE when it was Goldspring and trading for about a penny +/-, which translates to $2.00 after the 1/200 reverse split and name change to Comstock Mining. I was actually thinking of writing it up for VIC then, but what held me back was two things: 1) There was a risk I would be laughed out of VIC for writing up a stock trading at a penny or less, and, more important 2) With Winfield holding most of the debt, which, before the recent capital raise and conversion of the debt to preferred, was in default, Winfield had the legal right to demand payment and when the company couldn't pay, throwing it into bankruptcy and taking all the equity for himself. Although the friend who knows him said he wouldn't do that, he had every legal right to.
These days there is no level of the financial world so high up and so well off that the people in it won't grab every cent in sight if they can do so legally. The fact that Winfield could have done that, but chose not to, makes him a very good guy in my book.
|Entry||10/27/2011 07:37 PM|
any news on this one?
|Entry||11/28/2011 03:34 PM|
First, apologies to MSG257 whose request for an update a month ago I happened to miss. The lousy performance in the stock to date is I would say about 90% due to macro factors and maybe 10% due to any specific issues the company.
Macro: Using the closing prices on the day I wrote up the stock last February, gold itself has gone up about 25%, so no problem there. Since gold mining is a leveraged play on the price of gold, one would have expected even stronger percentage gains from the miners, but that isn't what has happened. GDX, the ETF of the relatively blue chip gold mining companies, is virtually unchanged over that time period. GDXJ, the ETF of the junior gold mining companies, is actually down 23% since the date of my LODE recommendation. I don't know if there is an ETF or other good proxy for those that are still exploring and haven't begun mining yet, but if one exists I would guess it is off 40% or more since last February.
Some of this poor performance of the gold miners, the smaller the worse, comes from ownership. The smaller the company, the greater percentage of its shares are in the hands of individual investors, who have been liquidating stocks all year. I think the GDX type companies are under pressure from shareholders to increase dividends rather than make acquisitions with their rising cash flow, and that has hurt the lower part of the food chain. Then there is tax loss selling.
LODE itself: There have been plenty of announcements since last February, but I’ll just mention three things of interest.
The only clearly bad news has been regulatory delays that have put off the start of mining around year end, which is when the company thought it would commence, until next June or so. There have been dozens of legal hoops that the company has had to jump through, more than I originally thought, and still more to come. The requirements are all being met, it has just taken a lot longer than expected for some of them. This has been disappointing, but the company has been using the extra time to fine tune the mine design and plan, and will perform better in the long run as a result.
LODE put out an updated 43-101 document that increased the Measured and Indicated Resource estimate to 1.78 million gold equivalent ounces versus 1.07 million from 2010, and increased Measured, Indicated and Inferred Ounces to 2.77 million from 1.6 million gold equivalent ounces. That is certainly on track toward its goal of 3.25 million gold equivalent ounces of at least Measured and Indicated by 2013. As I pointed out in comment #2, last winter when gold prices were much lower, Newmont made an acquisition of a Nevada gold miner with resources not much more than that, for C$2.3 billion.
Another significant data point is that metallurgical tests now predict gold recoveries in its heap leach facility to be about 72%, which is significantly above the 65% the company was estimating last February.
So depending upon how significantly you weight the delay in production start up versus the exploration success and increased prospects for cash flow once production begins, it appears that events at the company have not been a major cause of the stock’s bad performance compared to the macro factors discussed above. I wouldn’t rule out additional impact from tax loss selling, or a further rise in the dollar, which hurts gold prices and any gold mine whose costs are dollar based, but I like the risk/reward here.
|Subject||RE: RE: Update|
|Entry||03/22/2012 03:05 PM|
DipseaAD: Thanks for your interest. Things do seem to be going along well at LODE. On Feb. 15th the Nevada DEP issued the air quality permit which had been the last remaining hurdle, that I know of, to getting production going this summer. The exploration program seems to have hit some gold and silver in nearly every hole. No question that there is a huge amount of gold and silver at fairly shallow levels all over the Comstock area, albeit in fairly low concentrations, and probably plenty of bonanza grade ore at deeper levels which will probably require underground mining at some future date.
The only thing that bothers me is the stock offering the company did in February at $1.90; it didn't seem that it really needed the cash then, and waiting several months until the mine should be in production in theory should have brought in a much higher price. It makes one wonder if the company is as confident as it says. Then again, the volatility in gold and the recently persistent downtrend in the gold mining stocks even when the gold price is flat (defying my expectations, that's for sure) suggests maybe the company was just being extra prudent.
If you are interested in these kind of things, I'd suggest taking a look at RXE CN (RXEXF) that I wrote up here a month or so after my LODE report, because although I still have a decent position in LODE I think the risk/reward is much more favorable now with RXEXF. http://www.rxgold.com/
RXEXF has had a lot of turmoil in the last year, starting with a proxy battle last spring in which the management tried to oust the board, but failed and got replaced by a new management with much better credentials. A month ago another mining company that owned a big chunk of RXEXF spun off its shares to its shareholders, and as is usually the case with spinoffs, many have dumped the stock, knocking it down another 30%. RXEXF is similar to LODE in that it was a hugely successful mining area in the 1800s, but different in that there are only very narrow but extremely rich veins, rather than as in LODE's case a little bit of gold everywhere. This kind of field doesn't rack up huge ounce resource totals, but there is good reason to think that there is still a large amount of gold that they lacked the technology to find or weren't able to go after because of complex legal battles between the two main mining companies in the old days. In addition it is already mining under a small miner exemption and is bringing in enough cash that I think it can ramp up extensively without any further equity raises. I hope to do either an extensive update on RXEXF or possibly another full writeup on it sometime in the next few weeks when I get a chance.
|Subject||RE: RE: RE: Update|
|Entry||03/22/2012 04:11 PM|
I agree with you about RXE. A lot more information has come out since you posted it on VIC so it's become much easier to analyze the valuation.
|Subject||re: Author Exit rec.|
|Entry||07/23/2012 09:04 AM|
LODE's management has done a terrific job of moving the company to the beginning of production, despite some local opposition and much regulatory hoop jumping. The stock is up about 8% from my original recommendation price, which certainly isn't great, but during the same time, the GDXJ, an ETF of junior gold and silver miners, has fallen in half, and sub juniors and other pre-production companies have done at least that bad and probably much worse. Given the strong outperformance of LODE, I think it makes sense to get out and redeploy the money in some other much cheaper miners.
|Subject||RE: re: Author Exit rec.|
|Entry||01/18/2013 12:34 AM|
Still following? Curious what you make of their starting production yet still have a stock price below 2?