Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company as of and for the
six
month period ended
June 30, 2019
. It should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in this Form 10-Q and our Annual Report on Form 10-K as of, and for the fiscal year ended
December 31, 2018
.
Overview
The Company is a Nevada-based, gold and silver mining exploration, development and production company with extensive, contiguous property in the historic Comstock and Silver City mining districts (collectively, the “Comstock District”) and additional commercial and industrial properties located in Storey and Lyon Counties, Nevada. The Comstock District is located within the western portion of the Basin and Range Province of Nevada, near 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 historic Comstock District, secured permits, built an infrastructure and brought exploration projects into production, and completed major reclamations with distinction, establishing a social and legal license for growth.
The Company and its subsidiaries now own or control approximately
9,358
acres of mining claims and parcels in the broader Comstock District and surrounding area. The acreage includes approximately
2,396
acres of patented claims and surface parcels (private lands) and approximately
6,962
acres of unpatented mining claims (public lands), which the Bureau of Land Management (“BLM”) administers. The Company's headquarters is on American Flat road, immediately north of the Lucerne resource area and just south of Virginia City, Nevada.
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 advisors and researchers. We have expanded our understanding of the geology through vigorous surface mapping and drill hole logging. The volume of geologic data is immense, particularly in the Lucerne and Dayton resource 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 integrate this data with information obtained from our recent mining operations, to target geological prospective exploration areas and plan exploratory drilling programs, including expanded surface and underground drilling.
The Company continues evaluating and acquiring properties, expanding its footprint and evaluating all of our existing and prospective opportunities for further development and profitable growth. The near-term goal of our business plan is to maximize intrinsic stockholder value realized, per share, by continuing to assess, acquire and develop properties, exploring, developing and validating qualified resources (measured, indicated and inferred) and reserves (proven and probable) and enabling the commercial development of all our properties both through extended, long-lived mine plans that are economically feasible and socially responsible, and other feasible and responsible development opportunities.
Our Dayton resource area and the adjacent Spring Valley exploration targets are located in Lyon County, Nevada, approximately six miles south of Virginia City. Access to the properties is by State Routes 341 and 342, both paved roads.
Our Lucerne resource area is located in Storey County, Nevada, approximately three miles south of Virginia City and 30 miles southeast of Reno. The Lucerne resource area was host to the Company’s most-recent test mining operations from 2012 through 2015. The processing facility is in American Flat, approximately three quarters of a mile west of Lucerne.
The Company achieved initial production and its first pour of gold and silver on September 29, 2012. The Company ceased mining in 2015 and concluded processing in 2016. From 2012, through 2016, the Company mined and processed approximately 2.6 million tons of mineralized material, and produced 59,515 ounces of gold and 735,252 ounces of silver.
During the first quarter of 2019, the Company’s Board of Directors approved a strategy focused on high-value, high cash-generating, precious metal-based activities, (the “Strategic Focus”) including, but not limited to, metals and mining and related supply chain asset acquisitions, exploration, engineering, resource development, economic feasibility assessment, mineral production, metal processing and environmentally-friendly, conservation-based, economically enhancing technologies and processes. The Board of Directors also approved the formation of and participation in a Qualified Opportunity Zone Fund, enabling a more strategically aligned capital resource partner for maximizing the most productive returns from Company’s property position within qualified opportunity zones in both Storey County and Silver Springs, in Lyon County.
Figure 1 - Comstock Mining Corporate Structure
The Company completed the realignment during the second quarter of 2019, such that the new corporate structure is now well aligned with the Strategic Focus. Comstock Mining Inc. remains as the parent company that wholly owns the realigned subsidiaries. As shown on Figure 2 below, Comstock Mining LLC owns or controls the Lucerne properties, including those contained in the Northern Comstock Joint Venture. Comstock Processing LLC owns the American Flat processing facility and additional land for potential expansion. Comstock Northern Exploration LLC owns or controls the remaining Storey County mining claims and exploration targets, primarily located north of the Lucerne properties, including the Gold Hill targets and the Occidental Lode. Comstock Exploration & Development LLC owns or controls the Lyon County mining claims and exploration targets, including the Dayton Resource Area and the Spring Valley target. Comstock Industrial LLC owns the Silver Springs properties and water rights. Comstock Real Estate Inc. owns the Daney Ranch and the Gold Hill Hotel.
Figure 2 - Comstock Mining's Land Position in the Comstock District
Current Projects
The Company has identified many exploration targets on its land holdings in the Comstock District, but has focused, to date, on the Dayton resource area and the Lucerne resource area (including surface and underground exploration). We are working to develop comprehensive exploration plans for the remaining areas, which include the Spring Valley group, Occidental group, and Gold Hill group of exploration targets. Exploration activities will proceed subsequent to and in some cases concurrent with the ongoing exploration and development of the Dayton and Lucerne resource areas.
The Dayton resource area is south of Virginia City in Lyon County, Nevada. It generally includes the historic Dayton, Kossuth and Alhambra patents, including the old Dayton Consolidated mine workings, south to where the Kossuth patent crosses State Route 341. The historic Dayton mine was the last meaningful underground mining operation in the Comstock District, before being closed after the War Production Board published Limitation Order L-208, 7 F. R. 7992 on October 8, 1942, that closed down all gold mining operations in the United States and its territories. The Dayton resource area ranks as one of the Company’s top exploration and potential mine development targets. In January 2014, the Lyon County Board of Commissioners approved strategic master plan and zoning changes on the Dayton, Kossuth and Alhambra mining patents and other properties located in the Dayton resource area, enabling a more practical, comprehensive feasibility study for mining. Geological studies and development planning are currently underway utilizing data from extensive metallurgical testing and assessment during 2017, 30,818 feet of additional drilling completed in 2015, geophysical analysis and interpretation completed in 2013, and extensive geological data from pre-2013, drill programs.
The Spring Valley group of exploration targets lies adjacent to the Dayton resource area at the southern end of the Comstock District, where the mineralized structures, trending to the south from the Dayton resource area, lie mostly concealed beneath a veneer of sediment gravels. Spring Valley includes the southern portion of the Kossuth patented claim and the Dondero, Daney and New Daney claims, as well as the Company’s placer mining claims in Spring Valley and Gold Canyon.
The Lucerne resource area has been the primary focus of the Company’s exploration and development efforts since 2007. It includes the previously mined Billie the Kid, Hartford and Lucerne mining patents, and extends east and northeasterly to the area of the historic Woodville (southern-most of the historic Comstock bonanzas), Succor and Lager Beer patents and north to the historic Justice and Keystone mines. The Lucerne resource area is approximately one mile along strike, with explored widths from 600 to 1,800 feet, representing less than three percent of the land holdings controlled by the Company. The Lucerne is the site of our previous mining activities and ongoing exploration program, and the Company holds the key mining permits required to resume surface or underground mining of this area.
Our Lucerne exploration activities included open pit gold and silver test mining from 2004, through 2006, and from late 2012 through 2015. As defined by the Securities Exchange Commission (“SEC”) Industry Guide 7 and by the 2018 amendments to Regulation S-K, we have not yet established any proven or probable reserves at our Lucerne mine.
On January 24, 2019, the Company entered into an agreement with Tonogold (the “Tonogold Agreement”). Under the terms of the Tonogold Agreement, the Company will sell Tonogold its interests in Comstock Mining LLC, a wholly-owned subsidiary of Comstock (“CML”) whose sole assets are the Lucerne Mine properties and related permits. Upon closing, the Company and Tonogold will terminate the Option Agreement (the “Option Agreement”), dated October 3, 2017.
The purchase price for CML is $15 million, plus Tonogold will also guarantee the Company’s financial responsibility for its membership interest in Northern Comstock LLC ("Northern Comstock"), who leases certain mineral properties in the Lucerne area, and assume certain reclamation liabilities, in total relieving some $8 million in future lease and reclamation liabilities. The Company also retains a 1.5% net smelter return royalty on the Lucerne properties.
Tonogold has paid the Company
$3.4 million
in non-refundable cash deposits, as of
August 7, 2019
, of the total $11.5 million of the cash component of the purchase price. An additional $3.5 million was received in the form of convertible preferred shares of Tonogold.
The Company and Tonogold also agreed that commencing upon the closing of the sale of CML, it will enter into a new Option Agreement to lease its permitted American Flat mining property, plant and equipment to Tonogold for crushing, leaching and processing material from the Lucerne mine. Under this new Option Agreement, Tonogold will be required to reimburse the Company for an additional $1.1 million per year to maintain the processing facility lease option. If such option is exercised, Tonogold will then pay the Company a rental fee of $1 million per year plus $1 per processed ton, in addition to all the costs of operating and maintaining the facility, up to and until the first $15 million in rental fees are paid, and then stepping down to $1 million per year and $0.50 per processed ton for the next $10 million paid to the Company.
The Company has also agreed, upon the closing of the sale of CML, to enter into a ten-year mineral lease for additional mineral properties in Storey County, Nevada, granting Tonogold the right to explore, develop and mine these properties. Tonogold will assume approximately $100,000 in annual costs for these properties and will assume work commitments totaling more than $200,000 in 2019. The Company will retain a 3% net smelter return royalty on these additional leased properties, which will be reduced to 1.5% one year after the commencement of mining operations. The lease is renewable for an additional ten-year term.
The Tonogold Agreement would replace the October 2017 Option Agreement between the Company and Tonogold. The October 2017 Option Agreement will remain in place until the Tonogold Agreement closes.
On April 30, 2019, the Company and Tonogold entered into the Purchase Agreement Amendment ("Amendment"), which allows Tonogold the option to extend the closing until August 30, 2019, upon the payment of three additional $1 million non-refundable deposits and other considerations. In addition, the Amendment requires Tonogold to reimburse the Company the monthly interest expense on the Senior Secured Debenture (GF Comstock 2) beginning on May 31, 2019, through the latest possible closing of August 30, 2019.
On May 22, 2019, the Company and Tonogold entered into the Second Purchase Agreement Amendment ("Second Amendment"), which allowed Tonogold to forgo funding the remaining $0.7 million in cash payments due in May 2019, as required in the First Amendment. The total cash consideration for the Tonogold Agreement remains at $11.5 million in cash. The Second Amendment required that Tonogold issue the Company $3.5 million in convertible preferred shares ("Preferred Shares"), subject to certain pricing conditions and restrictions. Tonogold also issued an additional $0.4 million in Preferred Shares as a commitment fee.
On June 21, 2019, the Company and Tonogold entered into the Third Purchase Agreement Amendment (“Third Amendment”), which allowed Tonogold the option to reduce the July non-refundable deposit to $0.5 million with the payment of an extension fee of $0.5 million in Preferred Shares. The total purchase price remains $15.0 million. The Third Amendment also provided Tonogold the option to pre-pay the monthly interest on the Senior Secured Debenture, through August 30, 2019, in Preferred Shares.
The Occidental group and Gold Hill group of exploration targets represent longer-term exploration target areas that contain many historic mining operations, including the Overman, Con Imperial, Caledonia, and Yellow Jacket mines. We believe that our consolidation of the Comstock District has provided us with opportunities to utilize the historical information available to identify drilling targets with significant potential.
Exploration & Development
The Company's long-term, district-wide plans contemplate the exploration and development of specific, identified geological target areas across the District, which the Company has grouped into the Lucerne resource area, the Dayton resource areas, and Spring Valley, Occidental, and Gold Hill groups of exploration targets. These exploration targets represent over 7 miles of mineralized strike length, with current and historical grades of gold and silver.
Figure 3 - General Overview of Priority Exploration Targets
Lucerne Resource Area
In December, 2018, the Company received unanimous approval from the Storey County Board of Commissioners to extend its landmark Special Use Permit (“SUP”) for mining and processing for the Lucerne Mine Project for the maximum allowable, 20-year term, extending the original, 10-year permit until September 2, 2034. This permit represents one of the most significant, progressive and collaborative permit approvals in the Company’s history, and its extension strengthens the foundation for the future growth of the Company and its partner in Lucerne’s development, Tonogold Resources, Inc.
The amendment significantly extends the duration of the permitted and allowable uses for the entire Lucerne Mine Project, including the Lucerne Mine and resource area and the fully permitted American Flat processing area. The permit applies to both surface and underground mining, processing, milling, exploration and development, and other ancillary uses.
As described in the Current Projects section, the Company entered into an agreement to sell the Lucerne properties. Under the terms of the Tonogold Agreement, the Company will sell its interests in the Lucerne properties and related permits.
Dayton Resource Area
The Company plans to advance the Dayton Project to full feasibility, with a production ready mine plan within two years of commencing that work. This work has not yet commenced. The plan includes expanding the current resource at the Dayton resource area and continuing southerly into Spring Valley with incremental expansion programs that include exploration and definition drilling of targets identified by the prior conventional percussion, RC and diamond core drill programs and magnetic, IP and resistivity geophysical surveys (see Figure 4).
The Company has retained the independent mining advisory firm of Behre Dolbear to produce a National Instrument 43-101 (“NI 43-101”) compliant technical report for the Dayton resource area, scheduled for completion in 2019. The reporting scope includes an updated, robust mineral resource estimate, plans for expanding and further developing the mineral resource, and most of the prerequisite data for a subsequent Preliminary Economic Assessment (“PEA”). The PEA is the first major step in determining overall economic feasibility for the Dayton project.
The Company previously estimated a mineral resource for Dayton as part of a broader technical report for the Comstock Mine Project, but this new, Behre Dolbear commissioned technical report represents the first stand-alone NI 43-101 technical report to be published specifically for the Dayton resource area. Since our last Dayton resource estimate, the Company has:
|
|
•
|
Increased the Dayton project property position, both mining claims and private land, including more than 350 acres of contiguous private lands suitable for a dedicated mineral processing site;
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|
|
•
|
Achieved a landmark, Lyon County Master Plan and zoning change that broadened the potential land uses and restored mining as an appropriate use for the historic mining patents;
|
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|
•
|
Submitted our project estimates for due diligence reviews by SRK Consulting in both Reno and Denver offices;
|
|
|
•
|
Restored several historic Dayton mine portals for safe exploration of the accessible mine workings;
|
|
|
•
|
Completed underground geologic mapping of the accessible mine workings and completed underground sampling;
|
|
|
•
|
Completed significant assaying and other analysis for furthering the geologic interpretation;
|
|
|
•
|
Identified new, broader mineralized zones and structures;
|
|
|
•
|
Drilled 408 shallow holes totaling 30,819 feet, identifying new mineralized structures covered by shallow alluvium;
|
|
|
•
|
Improved, meaningfully, the geologic mapping of the area;
|
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|
•
|
Expanded trials by Cycladex, a strategic investee, testing their patented, cycladextrin lixiviant, a potential alternative to cyanide heap leaching for our Dayton materials; and
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|
•
|
Commenced trials with Itronics, Inc., using their KAM-Thio metallurgical recovery processes, another potential alternative to cyanide heap leaching for our Dayton materials.
|
The new information is supporting the development of a completely updated, detailed, three-dimensional model of the Dayton project. The Company’s technical staff is currently compiling a detailed structural interpretation of the Dayton resource area, which will provide the framework for the new resource model. The detailed interpretation is leading to a list of highly prospective drill targets to further define and expand the mineral resource.
In-house Dayton engineering and mine planning have resulted in profiling various economic shells with multiple cutoff grade scenarios. Multiple layout plans for the mine and corresponding processing facilities have been conceptually developed and located on lands 100% privately held by the Company, thus simplifying and shortening the critical permitting chain. The new technical report will provide not only a new resource estimate, but also a phased drilling plan for further defining and expanding the resource for sustainable, profitable mining.
Dayton Metallurgy
The Dayton mineralized material has been subjected to metallurgical testing by independent laboratories as well as in the Company’s on-site lab. Column tests were conducted by McClelland Laboratories in 2011 on medium grade and high grade composites from the Dayton Pit area, at 1” and ½” crush sizes for each sample. The gold recovery after 154 days averaged 86.7% for gold and 47.4% for silver. The final report stated that at the end of the test, the curves had flattened, but recovery was still increasing.
In early 2018, the Company’s in-house lab ran column tests on bulk samples from three different locations in the Dayton resource area: Glory Hole mid-grade, Glory Hole high-grade, and Dayton Adit. Two columns were loaded from each bulk sample. The recovery after 74 days averaged 84% for gold and 55% for silver. The metal recovery had not stopped after 74 days, but the daily incremental increases were below the Company’s analytical detection limits.
Figure 4 - Dayton and Spring Valley Magnetic Geophysics with Interpreted Veins and Structures
Dayton - Spring Valley Group Targets
Spring Valley is south of the Dayton resource area, extending to the south and east of State Route 341. The volcanic host rocks and structural controls of the mineralization defined to date for the Dayton resource area are known to continue south into Spring Valley. Potentially economic gold mineralization has been intercepted in several widely spaced holes drilled during prior Spring Valley drilling programs.
Ground magnetic geophysical surveys identified a linear anomalous corridor, defined by a series of relative magnetic lows. Altered volcanic host rocks have been intercepted by limited drilling and identified several mineralized zones, the global Dayton resource foot print is outlined with reference to the technical report authored by Behre Dolbear in January 2013. The exploration of Spring Valley will include phased drilling programs that will continue southerly from SR 341 to the historic Daney mine site (Figure 5), with a potential strike length of approximately 9,600 feet.
Figure 5 - Dayton and Spring Valley Group Targets
The technical staff reviewed historic geologic and geophysical studies and prior drill programs that focused upon the Dayton resource area and extensions south into Spring Valley. The few drill holes that were completed in Spring Valley intercepted altered Miocene volcanic rock known to host the economic mineralization of the Dayton resource. Specific drill holes that encountered highly mineralized zones are highlighted on Figure 4. Collectively, several specific locations were selected and are targeted for future drilling. The Dayton resource area has open ended economic mineralization requiring additional drill holes to delineate the geometry for mine planning. South of the Dayton resource area the limited drilling coupled with the geophysical interpretation indicates the targeted exploration model extends an additional 8,000 feet (length of geophysical magnetic survey) into Spring Valley.
Ground magnetic geophysical surveys identified a linear anomalous corridor, defined by a series of relative magnetic lows. Altered volcanic host rocks have been intercepted by limited drilling and identified several mineralized zones. Selected drill hole intercepts are highlighted (see Figure 4). The mid-level magnetic lows define a zone (up to 500 feet wide) beginning at the Dayton resource and continuing southerly approximately 8,000 feet (length of geophysical magnetic survey) towards the Daney patent. The zone is further defined by the trace of interpreted north/south trending vein swarms depicted on Figure 4. In the Dayton resource area the increased density of the vein swarms with intersecting cross structures has been indicative to host the higher grades and larger volumes of economic mineralization. This scenario is part of the exploration model and has generated a multiple drill target environment.
The Spring Valley exploration program is designed to target areas that have similar magnetic signatures of known economic grade mineralization. The magnetic geophysical survey was further studied and a structural interpretation was developed that illustrated multiple cross cutting structures (colored green) that are oblique to the southerly projected north/south vein trend (colored red), refer to Figure 4. Though rare due to alluvial cover, the outcropping quartz veins and outcropping crosscutting structures had definitive diagnostic magnetic signatures. The interpretation of the structures and veins were derived by connecting these specific magnetic attributes as identified on each 25-meter spaced survey line. Similar structures have been identified in the Dayton resource area and were found to be important components for the development of economic grades of mineralization.
New Technologies
The Company is working with strategic partners to test alternative, greener technologies for mineral processing and remediation. This includes Itronics Inc. (“Itronics”), Cycladex, Inc. (“Cycladex”) and Mercury Cleanup LLC (“MCU”).
The Company is collaborating with Itronics, Inc., to test their KAM-Thio metallurgical recovery processes as an alternative to cyanide heap leaching for processing the Dayton mineralized material. Previous trials by Itronics showed promising results for recovering substantially all the residual silver from the Company’s previously leached material. The Company delivered a bulk sample of higher-grade, Dayton mineralized material to Itronics in August. The Company and Itronics will collaborate to finalize a proposed processing flow sheet and screening level economics with the KAM-Thio based recovery process for use in the preliminary economic assessment of the Dayton resource.
The Company is also collaborating with Cycladex, a strategic investee, previously funded in part by the National Science Foundation for extensive testing of their patented cycladextrin lixiviant, which is a potential alternative to cyanide leaching.
The Company recently entered into an agreement with MCU, for piloting, testing and commercializing an organic-solution based, clean technology for remediating mercury from soils and rivers. On June 28, 2019, the Company announced that Comstock Processing LLC (CPL) had entered in to an agreement with MCU, in collaboration with Oro Industries Inc. (“Oro”), for the manufacture and global deployment of mercury remediation systems with proprietary mechanical, hydro, electro-chemical and oxidation processes to reclaim, treat and remediate mercury from tailings and industrial effluents derived from mining and industrial applications.
Worldwide unregulated activity has released thousands of tons of mercury into the environment. The continued worldwide use of mercury in unregulated activities, primarily outside of the United States, is polluting air, soils, and waters and poisoning marine life and endangering lives. Ongoing, unregulated artisanal mining outside of the U.S. represents more than 40% of the ongoing mercury contamination and represents a tremendous opportunity for cleaning up the environment in a sustainable, profitable manner. Mercury will not go away by itself and must be removed to stop the pollution. Mercury can’t be broken down or destroyed, and MCU, in collaboration with Oro and the Company, is pioneering an effective solution.
Over the past seven years, Comstock has implemented several approved plans, by the Nevada Division of Environmental Protection (“NDEP”), intended to address NDEP’s and the U.S. Environmental Protection Agency (“EPA”) protocols, guidance and goals for sampling, characterizing, transporting and managing mercury within the Carson River Mercury Superfund Site. These plans and Comstock’s existing permitted infrastructure provide an ideal platform for evaluating and fine-tuning the MCU process. MCU will work closely with NDEP for any additional approvals, engineering design changes (EDC) or permits.
Comstock will invest $2 million in MCU to demonstrate the feasibility of the Mercury Remediation System within the historic, world-class, Comstock Lode mining district. Comstock will provide the platform for testing the Mercury Remediation System and MCU will conduct the initial trials starting with a 2 ton per hour pilot operation that could scale up to 25 ton per hour and deliver the final feasibilities. With successful feasibility, Comstock and MCU would create a new, 50-50 venture called Comstock Mercury Remediation LLC for pursuing global business opportunities. Comstock will own up to 25% of MCU and separately, 50% of Comstock Mercury Remediation LLC.
The ongoing testing of all of these alternative technologies underpins the Company’s commitment to responsible development. A breakthrough with any of these cleaner technologies could result in higher, faster recoveries with reduced waste, as well as a streamlined permitting process and lower long-term reclamation costs.
Pelen-Sutro Tunnel Company Acquisition
In January 2018, the Company issued 1,475,410 shares of restricted common stock as initial payment to acquire 25% of the total membership interests of Pelen, LLC. Pelen, LLC is the 100% owner of the historic Sutro Tunnel Company that owns the Town of Sutro, the historic 6-mile Sutro Tunnel, the federal land grants and mining rights spanning 1,000 feet on each side of the 6-mile span, the rights to the tunnel’s water and the patented mining claims and private lands on Gold Hill.
The purchase of the membership interests will close by December 31, 2019, once the seller of the membership interests has received total cash proceeds of at least $585,000 either through sale of the restricted common stock received or through additional cash payments made by the Company. If all of the shares of restricted common stock have been sold by the seller of the membership interests and the aggregate proceeds received are less than $585,000, then the Company is required to pay the shortfall in either additional shares of the Company’s common stock or cash, at the Company’s election.
The Company issued 1,758,181 additional shares in November 2018.
Non-mining Real Estate
On February 25, 2019, the Company entered into an agreement to sell the Industrial Park and water rights, for a cash purchase price of
$7.2 million
. After closing, the Company will retain a right to receive
3%
of the amount of the carried interest that the general partner of the fund that purchased such party is due to receive after all costs, expenses, investor hurdles and returns are deducted from the gross proceeds arising from any gain with respect to such property by the buyer.
Downtown Silver Springs, LLC, a wholly-owned subsidiary of the Company, holds a contract for the purchase of approximately
160
acres of centrally located land in Silver Springs, Nevada. On February 25, 2019, the Company entered into an agreement to sell its rights under the purchase agreement for
$3.4 million
, as adjusted, dollar for dollar, for any additional deposits made by the purchaser of the option to the seller of the property, on behalf of DTSS. The purchaser has not paid the deposit of $12,500 that was due on February 25, 2019. After closing, the Company will retain a right to receive 3% of the amount of the carried interest that the general partner of the fund that purchased such property is due to receive after all costs, expenses, investor hurdles and returns are deducted from the gross proceeds arising from any gain with respect to such property by the buyer.
The Gold Hill Hotel is listed for sale for $1 million. The Gold Hill Hotel has been consistently cash positive over the past two years. The Daney Ranch is listed for sale for $3.9 million.
Outlook
Our annual operating expenses are planned at just over $4.0 million, with approximately $1.2 million of that amount currently being reimbursed under the existing Tonogold Option Agreement. We anticipate an additional $1 million in annualized savings, or a total of $2.2 million annually, upon closing the Tonogold Agreement, on or before August 31, 2019. This would result in an early extinguishment of the entirety of our approximately
$6.1 million
outstanding Senior Secured Debenture obligation as of
July 29, 2019
, eliminating about
$0.7 million
in annualized interest expense.
The Company’s 2019 plans include advancing the commercialization of certain mining and processing technologies that the Company has been collaborated on, with partners such as MCU, Cycladex Inc. and Itronics, and additional technologies, that present nearer term revenue opportunities, and enhance our potential project economic feasibilities.
The Company plans on updating Dayton’s current resource estimate and commence activities for obtaining the local permits for the Dayton Project. The Company will also continue exploration activities southerly into Spring Valley with incremental exploration programs that include exploration and definition drilling of targets identified by geophysical surveys, surface mapping, prior drilling and deeper geological interpretations that all lead to publishing an updated, NI 43-101 compliant, mineral resource estimate for the Dayton Project and expanded exploration in Spring Valley in 2019.
Equity Raises
For the
six months ended
June 30, 2019
, the Company issued
9,095,949
common shares through the 2019 Equity Agreement and the 2018 Sales Agreement. Gross proceeds were approximately
$1.5 million
at an average share price of
$0.16
.
Following is a reconciliation of the common stock based transactions as of
June 30, 2019
:
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|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Shares outstanding as of beginning of period
|
|
75,338,273
|
|
|
47,236,103
|
|
Shares issued for:
|
|
|
|
|
Equity issue agreements
|
|
9,095,949
|
|
|
6,429,310
|
|
Purchase of Pelen, LLC membership interest
|
|
—
|
|
|
1,475,410
|
|
Payment for equity issue costs
|
|
1,065,778
|
|
|
615,605
|
|
Shares outstanding as of end of period
|
|
85,500,000
|
|
|
55,756,428
|
|
On June 28, 2019, the Company issued
1,083
preferred shares with gross proceeds of
$1.1 million
, that was received on July 1, 2019.
Subsequent to quarter-end and through August 6, 2019, the Company issued a total of 9,491,386 shares of common stock as follows:
•
4,500,000 shares of common stock with a value of $850,000 to MCU;
•
3,054,796 shares of common stock for $450,000, under the 2019 Equity Agreement;
•
1,936,590 shares of common stock were issued to Temple, upon conversion of 274 Preferred Shares.
Comparative Financial Information
The Company had two operating segments as of
June 30, 2019
: mining and real estate.
The comparative financial information is reflected in the following table:
Three Months Ended:
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June 30, 2019
|
|
June 30, 2018
|
|
Change
|
Revenue - mining
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Revenue - real estate
|
44,184
|
|
|
28,815
|
|
|
15,369
|
|
|
|
|
|
|
|
|
Costs applicable to mining revenue
|
505,393
|
|
|
728,559
|
|
|
(223,166
|
)
|
Real estate operating costs
|
12,288
|
|
|
9,880
|
|
|
2,408
|
|
Exploration and mine development
|
241,538
|
|
|
248,648
|
|
|
(7,110
|
)
|
Mine claims and costs
|
136,901
|
|
|
91,025
|
|
|
45,876
|
|
Environmental and reclamation
|
(362,826
|
)
|
|
62,186
|
|
|
(425,012
|
)
|
General and administrative
|
964,268
|
|
|
827,542
|
|
|
136,726
|
|
Total costs and expenses
|
1,497,562
|
|
|
1,967,840
|
|
|
(470,278
|
)
|
|
|
|
|
|
|
Loss from operations
|
(1,453,378
|
)
|
|
(1,939,025
|
)
|
|
485,647
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
Interest expense
|
(181,907
|
)
|
|
(330,887
|
)
|
|
148,980
|
|
Other income (expense)
|
(442,459
|
)
|
|
(145,420
|
)
|
|
(297,039
|
)
|
|
|
|
|
|
|
NET LOSS
|
$
|
(2,077,744
|
)
|
|
$
|
(2,415,332
|
)
|
|
$
|
337,588
|
|
The Company ceased processing material from its leach pad in December 2016, resulting in no mining revenues for the
three
months ended
June 30, 2019
, and
2018
, respectively.
Real estate revenues for the
three
months ended
June 30, 2019
increased
$15,369
as compared to the same period ended
June 30, 2018
, primarily related to the additional rental of a building at our processing site.
Real estate operating costs were essentially flat for the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
.
Costs applicable to mining revenue decreased by
$0.2 million
during the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, as a result of certain assets becoming fully depreciated. These costs consist solely of depreciation expense on temporarily idled mining equipment, processing facilities and heap leach pads.
Exploration and mine development costs decreased slightly during the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
.
Mine claim and costs increased by
$45,876
during the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, due to the timing of the recognition of reimbursements related to the Tonogold Option Agreement in 2018, as compared to 2019, due to the Option Agreement becoming effective in April 2018.
Environmental and reclamation decreased by
$0.4 million
during the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, primarily related to a reduction of
$0.4 million
in the long-term reclamation liability.
General and administrative expenses increased by
$0.1 million
during the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
. Governance costs, including legal and audit increased approximately
$0.4 million
partially offset by certain lower, non-recurring payroll costs and by lower personal property taxes.
Interest expenses decreased by
$0.1 million
, during the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, a result of the pay-down on the Senior Secured Debentures in 2019 offset by an increase in additional make-whole expense and fees expense recognized as a result of those pay-downs, as well as interest expense reimbursements from the Tonogold Purchase Agreement, that began in June 2019.
Other expenses increased by
$0.3 million
during the
three
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, primarily related to the
$0.4 million
cost of issuance of the preferred shares offset by the approximately
$0.2 million
in make-whole expense on principal pay-downs in 2018.
Net loss was
$2.1 million
for the
three
months ended
June 30, 2019
, as compared to a net loss of
$2.4 million
for the
three
months ended
June 30, 2018
. The
$0.3 million
improvement in net loss is a result of decrease in depreciation expense of
$0.3 million
due to assets becoming fully depreciated, a
$0.4 million
reduction in the long-term reclamation liability, a net decrease in interest expense of
$0.1 million
, offset by the
$0.4 million
cost of issuance of preferred shares.
Six Months Ended
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
|
Change
|
Revenue - mining
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Revenue - real estate
|
81,782
|
|
|
51,665
|
|
|
30,117
|
|
|
|
|
|
|
|
Costs applicable to mining revenue
|
1,010,785
|
|
|
1,457,463
|
|
|
(446,678
|
)
|
Real estate operating costs
|
22,711
|
|
|
16,971
|
|
|
5,740
|
|
Exploration and mine development
|
466,379
|
|
|
458,186
|
|
|
8,193
|
|
Mine claims and costs
|
287,855
|
|
|
271,256
|
|
|
16,599
|
|
Environmental and reclamation
|
(308,349
|
)
|
|
120,254
|
|
|
(428,603
|
)
|
General and administrative
|
1,624,634
|
|
|
1,554,163
|
|
|
70,471
|
|
Total costs and expenses
|
3,104,015
|
|
|
3,878,293
|
|
|
(774,278
|
)
|
|
|
|
|
|
|
Loss from operations
|
(3,022,233
|
)
|
|
(3,826,628
|
)
|
|
804,395
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
Interest expense
|
(643,045
|
)
|
|
(714,227
|
)
|
|
71,182
|
|
Other income (expense)
|
(247,531
|
)
|
|
(359,381
|
)
|
|
111,850
|
|
|
|
|
|
|
|
NET LOSS
|
$
|
(3,912,809
|
)
|
|
$
|
(4,900,236
|
)
|
|
$
|
987,427
|
|
The Company ceased processing material from its leach pad in December 2016, resulting in no mining revenues for the
six
months ended
June 30, 2019
, and
2018
, respectively.
Real estate revenues for the
six
months ended
June 30, 2019
increased
$30,117
as compared to the same period ended
June 30, 2018
, related a deposit forfeiture on the termination of the sale of the Gold Hill Hotel and to the rental of an additional building at our processing site.
Real estate operating costs increased slightly for the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
.
Costs applicable to mining revenue decreased by
$0.4 million
during the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, as a result of certain assets becoming fully depreciated. These costs consist solely of depreciation expense on temporarily idled mining equipment, processing facilities and heap leach pads.
Exploration and mine development costs increased slightly during the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
.
Mine claim and costs increased by
$16,599
during the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
.
Environmental and reclamation costs decreased
$0.4 million
during the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, primarily related to a reduction of
$0.4 million
in the long-term reclamation liability.
General and administrative expenses increased by
$70,471
during the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
. Governance costs, including legal and audit increased approximately
$0.4 million
, offset by lower costs in 2019, from lower personal property taxes, payroll and other costs.
Interest expenses decreased by
$71,182
, during the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, a result of the pay-down on the Senior Secured Debentures in 2019 offset by an increase in additional make-whole expense and fees expense recognized as a result of those pay-downs, as well as interest expense reimbursements from the Tonogold Purchase Agreement, that began in June 2019.
Other income and expense decreased by
$0.1 million
, during the
six
months ended
June 30, 2019
, as compared to the same period ended
June 30, 2018
, related a decrease in Pelen make-whole expense of approximately
$0.2 million
, make-whole expense of approximately
$0.2 million
due to principal pay-downs in 2018, and an interest income recorded on the reclamation bond of approximately
$65,000
, offset by the
$0.4 million
costs of issuance of preferred shares.
Net loss was
$3.9 million
for the
six
months ended
June 30, 2019
, as compared to a net loss of
$4.9 million
for the
six
months ended
June 30, 2018
. The
$1.0 million
improvement in net loss is primarily a result of decrease in depreciation expense of
$0.5 million
, the decrease in the Pelen make whole expense of
$0.2 million
and a credit of
$0.4 million
to expense related the reduction in the long-term reclamation liability, offset by the
$0.4 million
costs of issuance of preferred shares.
Liquidity and Capital Resources
The Company had total assets of
$34.2 million
, total current assets of
$11.7 million
, current liabilities of
$10.6 million
and net current assets of
$1.1 million
, including cash and cash equivalents of
$0.1 million
at
June 30, 2019
. The Company’s current capital resources include cash and cash equivalents and other net working capital resources, along with a loan commitment agreement with
$10.0 million
in unused capacity, before consideration of fees due at the time of borrowing and the 2019 Equity Agreement with Murray FO, LLC ("Murray"), with aggregate unused capacity of
$4.3 million
as of
June 30, 2019
, pursuant to the Company’s shelf registration statement on Form S-3, filed on February 26, 2019. These capital resources are in addition to certain planned non-mining asset sales and proceeds of the transaction contemplated by the Tonogold Agreement, including an additional
$0.5 million
received subsequent to
June 30, 2019
.
Net cash used in operating activities was
$1.6 million
for the
six
months ended
June 30, 2019
, as compared to net cash used in operating activities of
$2.2 million
for the
six
months ended
June 30, 2018
, a decrease of
$0.5 million
, resulting from a decrease in costs, including an increase in the Tonogold reimbursement of costs per the Option Agreement and Purchase Agreements.
Net cash provided by investing activities for the
six
months ended
June 30, 2019
, was
$1.9 million
, primarily relating to
$3.1 million
deposits on the sale of the Lucerne mine properties and related permits to Tonogold, offset by
$1.1 million
in deposits and payments on the purchase of DTSS and the related non-refundable deposits on the option on the purchase of land. Net cash used in investing activities for the
six
months ended
June 30, 2018
, was
$0.2 million
, primarily a non-refundable deposit on the option to purchase land.
Net cash used by financing activities for the
six
months ended
June 30, 2019
, was
$0.6 million
, comprised of the pay-down of long-term debt of
$1.9 million
offset by the net proceeds of
$1.3 million
from the sale common shares. Net cash provided by financing activities for the
six
months ended
June 30, 2018
, was
$1.8 million
, comprised of the
$2.0 million
payment received from Tonogold on the Option Agreement and the net proceeds of
$1.7 million
from the sale common shares, offset by the pay-down of long-term debt of
$1.9 million
.
The Tonogold Agreement is expected to provide up to
$11.5 million
in cash to the Company in 2019. When received, the cash will be used to pay-down the Senior Secured Debenture. The Tonogold Agreement also relieves the Company of $8 million in long-term obligations, primarily $7.2 million for the Northern Comstock annual mine claims and $0.8 million other Lucerne-specific reclamation liabilities with Storey County, Nevada and the State of Nevada. The Tonogold Agreement subsidizes an additional $1 million of annual costs (in addition to current reimbursements of approximately $1.2 million per annum, for a total, post-transaction-closing reduction of approximately $2.2 million of operating savings per annum).
On
February 25, 2019
, the Company entered into agreements to sell one non-mining asset, that is, the 98-acre certified industrial site and related water rights, and to sell the purchase agreement and option on the 160 acres of land, all located in Silver Springs, NV, for a total of
$10.6 million
plus a residual
3%
future share of the profit. The transactions are expected to be finalized in 2019, and the Company expects to record a gain of approximately
$5.0 million
.
The Company has recurring net losses from operations and an accumulated deficit of
$236.0 million
as of
June 30, 2019
. If the Company was unable to obtain any necessary additional funds, this could have an immediate material adverse effect on liquidity and could raise substantial doubt about the Company’s ability to continue as a going concern. In such case, the Company could be required to limit or discontinue certain business plans, activities or operations, reduce or delay certain capital expenditures or sell certain assets or businesses. There can be no assurance that the Company would be able to take any such actions on favorable terms, in a timely manner or at all. While the Company has been successful in the past in obtaining the necessary capital to support its operations, including registered equity financings from its existing shelf registration statement, borrowings, or other means, there is no assurance that the Company will be able to obtain additional equity capital or other financing, if needed. However, the Company believes it will have sufficient funds to sustain its operations during the next 12 months from the date the financial statements were issued as a result of the sources of funding detailed above.
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplates continuation of the Company as a going concern.
Critical Accounting Policies and Estimates
There have not been any material changes to the critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2018
.