Comstock Inc. (LODE) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Comstock Mining Q3 Update Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Corrado De Gasperis. Please go ahead.

Thank you, Brittany, and good morning, everyone. It's Corrado here, and welcome to our 2018 third quarter conference call. Last night, we filed our Form 10-Q with a clean review as typical from our auditors, Deloitte & Touche. I'll provide a brief summary of the information included in both the 10-Q and the press release from this morning. We are advancing diligently and technically both of our mining projects and we announced some very good use today on our non-mining land sales. If you don't have a copy of today's release, you'll find a copy on our website at www.comstockmining.com under News/Press Releases. On that note, I'm also please announce that we're just a few weeks away from launching a new website with a dramatically enhanced Investor Relations section. Please be on the lookout for that announcement and launch, which will certainly be some time before Thanksgiving. Please also let me remind you that in addition to the outlook, I may make forward-looking statements on this call. Any statement related to matters that are not historical facts may constitute forward-looking statements. These statements are based on current expectations and are subject to the same risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed by the company and the SEC and in this morning's release. And all forward-looking statements made during the call are subject to the same and other risks that we can't identify. I'm going to focus the remarks similar to the last call, starting with the Lucerne and Dayton progress, the efforts on monetizing and some of the success that we're now having on monetizing of the non-mining assets and how we expect to deliver higher values now this quarter and into 2019. First, let me highlight the mining progress so far this year. With Lucerne, as most of you know, during the second quarter this year, we received the $2 million payment for the Lucerne option from Tonogold. This was important because it moved Tono into the second phase of the option, where they can earn a 51% interest in the Lucerne Mine by advancing its exploration development and mining activities by making a cumulative capital investment of $20 million by April of 2021, which includes $7 million that has to be spent within 12 months, of which the [indiscernible] of that has already been expended. So in summary, there is $3 million spent to date and $4 million to go in the next 12 months. Of that $3 million to date also, 1/3 fully represents reimbursements to our fixed Lucerne-related costs. Just as importantly, Tono is engaged with Mine Development Associates, an independent Nevada-based mining firm, to publish an updated 43-101 compliance in a resource report for the Lucerne this quarter. Tono is synchronizing a number of critical activities, including all the activities around the resource development and working meticulously toward that end for one of our biggest draft value drivers that will be encapsulated in that upcoming technical report. With Dayton, we continue to make remarkable geological process. Earlier this year, we had announced a major new discovery in the Dayton when the heavy rainfall revealed multiple newly recognized mineralized zones. Recall back then that we initially sampled the exposed zone and discovered 3 feet of very, very high-grade minerals. We had 3 feet of over 0.25 ounce per ton of gold and over 3.5 ounces per ton of silver. Just last week, we announced that we expanded the sampling and mapping in an attempt to really define the full extent of not the one shear zone, but multiple shear zones. The expanded program included a systematic collection of continuous channel samples along consistent intervals. Based on the visible minerals and the scope of what the geologists could see, the [indiscernible] around it and we did some exhaustive sampling. I mean, literally, every 3 feet along extremely tight intervals. The program's success was overwhelming. We have closed over 90 feet of mineralized materials in the shear zone, which resulted in an average for the entire 90 plus feet of over 0.04 ounces per ton of gold and over 0.4 ounces per ton of silver, including a 7.5-foot segment that averaged almost 0.125 ounce of gold per ton and over 0.75 ounce of silver per ton. For the metric folks, that's over 4 grams per ton of gold and well over 25 grams per ton of silver. In terms of [indiscernible] mining, these aren't only outstanding rates, but incredibly expensive, contiguous lands that will contribute directly to the economic feasibility of that project. Normally, when we do those samples, we'd only focus on the gold and silver. But we further analyzed for 23 additional elements that confirm the original identification of elevated values of other minerals, including molybdenum, cadmium, selenium and tungsten. There's also zinc and other minerals found that previously really never elevated to detectable levels in our sampling process. So that's a new discovery as well. We expanded the latest testing for those other materials mainly because of the work that we're doing on these alternative processing solutions, where we do have an expectation of very low, potentially zero waste, significant uses and recyclings of these materials. And so when we're working on those kind of processes, let's say, the non-cyanide processes, these additional materials and these additional minerals become valuable and could be quite additive to the equation with respect to the Dayton economic feasibility. So for us, it's very exciting insofar as all the work that's being done with Dayton, we also have separately engaged Behre Dolbear to do a 43-101 on the Dayton. Our schedule has been updated, where we now expect that report to be published in the first quarter of 2019. So we're looking at consecutive quarters of updated technical reports, one standalone from the Lucerne and one standalone now from the Dayton. From a corporate perspective, I would love to congratulate our whole team, who recently accepted the 2018 Sustainable Mineral Development Award in Washington, D.C. from the BLM that's related to the exceptional community sense of realignment of State Route 342. Most people are aware of how dramatically the road benefited the community and how it came out. Many are not aware that we not only safely realigned the road, but we extracted over 300,000 tons of contaminated material in the waterway, resulting in the removal of well over 2,000 pounds of legacy mercury that was left behind by the old-timers. And that we also extracted about $9 million worth of gold and silver in the process. So that was a true win-win-win-win-win, I think, for the community, the county, the state, the BLM and certainly the company. We're most proud that, that project was completed on time and on budget and without any real disruption. It puts us at the top of the food chain when it comes to social responsibility, environmental leadership, especially with having gotten also the 2017 and 2015 Nevada Excellence in Reclamation Awards voted unanimously by the Division of Minerals, the Department of Environmental Protection, Department of Wildlife, U.S. Forest Service and the BLM. So great work from our team there. It gives us an incredibly sound foundation for everything that we want to do moving forward. As I mentioned earlier though, we're reaching even higher with these clean technologies and our clean technology partners to build new processes and new alternatives for potentially breakthrough renewable zero waste solutions, all of which are nontoxic. Our collaboration with Itronics has expanded now. And we recently announced that we have provided them higher-grade virgin ore materials from the Dayton. We delivered the new sample with really -- the new samples of this material really with 2 objectives. First, we want to model the same process flow that we've developed for processing our leached material, where we had success in that previously leached material testing and extracting silver with potentially very efficient results. And second, to see if the solution, the KAM-Thio liquid solution that's proprietary to Itronics, will recover the gold as effectively as our first battery of tests recovered silver. If it shows the same regenerative features that we saw with leached materials, it could be a very, very compelling breakthrough and very compelling economic solution for us. So we are doing all that work sort of coincidentally with the hope of aggregating it into an updated technical report, as I said, first quarter 2019. Financially, we continue reducing cost and liability across the spectrum with our debt down by over $1 million since the end of last year but more importantly, finally consummating our non-mining transactions. Just this month, we reached a new agreement to sell the Daney Ranch for $3.25 million. It's an all-cash transaction with no material closing contingencies and a fast close schedule to be consummated on or before November 30. The company has also significantly advanced the sale of the Gold Hill Hotel to an experienced boutique hotelier for about $0.75 million with the closing anticipated also this quarter. We had one material contingency for that sale, which was resolved last week. It was just a simple sewer hookup that took a while to be done but it's done. And that was [indiscernible] with 2 real estate transactions this quarter totaling almost $4 million, which will effectively slash our debt to almost 50% of the current balance, bringing the debenture to about $4.5 million. We're also working very diligent with a number of financial and strategic counterparties on transactions to sell the Silver Springs asset. To this end, we have deferred the purchase that we announced last quarter on 160 acres of water rights. We still own the option. We are current on all deposits. But we've pushed off the payments and closing of that property until March of 2019. That time frame allows us to monetize the Silver Springs assets in their entirety. And that will result in the elimination of our debenture, targeted again for the first quarter of 2019 funding of operation and it also coincides with the publishing of these technical reports. For us, it really creates a very, very strong focus. The sale of these non-mining assets will now eliminate our debt, remove the material overhang that sits on our stock because of it and provide us funding. It's critical for not only stabling our operations and strengthening our balance sheet, but it gives [indiscernible] for many of our target investors as we look to move forward. Obviously, we can't get that done soon enough. We're very happy to have harder, faster transaction finally in place and that we're moving forward to monetize the whole of this $50 million worth of value. For Lucerne, it's a little premature to talk about valuations now only because Tono is partnering with us to develop and deliver a technical resource reassessment and publishing the new resource report, which will provide a very, very strong foundation for both of us on our preliminary economic feasibility. It's not yet available, so we'll defer the discussion, but it's coming very soon this quarter. With Dayton, we've done a tremendous amount of economic profiling. We have economic shells, putting the work through that resource at a minimum of $40 million, assuming a $1,200 gold base. But that's really short of the economic feasibility work that we want to complete. We know that there's some development required to doing that. But our intention ultimately is to work very hard to triple that resource and more than triple that value. There are a number of other strategic initiatives that we're working on. Again at this point, we can't speak specifically about them, but that we're very, very active. Outside of monetizing the non-mining assets, it's really the only thing that I've been working on. Our board has made it very, very great, very supportive that we're refocused on the mining in precious metal and related technologies that come from our foundation. We're a mining company. We're a precious metal company. And monetizing these non-mining assets clears the path for us to really pursue the strategic growth through resource growth, through future mining, through future development, through joint development, through resource acquisition, through expansion that we have laid out in front of us. That's what we're finally getting to. With gold stabilizing and showing a potential turn here, we feel we strongly weathered this downturn and we're in path to benefit from these transactions, consummating them, the ones that we know about this quarter, the ones that are coming and moving to almost solely resource growth-focused. So Brittany, I'm going to stop there with the prepared remarks and let us turn to questions.

[Operator Instructions]. Our first question comes from Jon Howe with Wedbush Securities.

Kind of talking about Lucerne and Dayton. I mean, the Lucerne Resource was -- it seems like it was overstated. And I'm just wondering how that could possibly could lead to Dayton having the same kind of issue.

No, it's a good question. So when the Lucerne Resource was published in 2012/2013, there were certainly different parameters that were contemplated. For example, the resource wasn't constrained by any, let's say, any economic variable that we would think about today. And I'll be specific, we didn't constrain the resource to depths. We didn't constrain the resource to a cutoff grade that we would consider economic for mining. Those weren't the considerations. It really was to try to estimate the broadest resource that we could identify. Having said that, what we expect in the next resource report is a very practical cutoff, a very good, constrained economic shell. But I would take it a step further and say the work that Tono is doing is it's very advanced when it comes to contemplation of mineable allowances. So it seems some of the assumptions that are embedded, even beyond the ones that I just referred to, like size and shell and grade, they're being much more pedantic. So I think that the word robust is very applicable to the new estimates that we expect to see, maybe not in terms of the total size of the resource but in terms of the quality of the resource. So we don't expect it to be small. Having said that, we have never published reserves. And we're really seeing the work that Tono is doing to be a strong foundation for establishing reserves for the first time. Now we have done a cross-assessment with the Dayton. And in terms of putting an economic shell around it, in terms of constraining it in an area, we'll do the same things, right, in the context, where we're not only tightening the resource, but more importantly, we're establishing the foundation for the preliminary economic assessment and the reserves. However, the Dayton Resource didn't -- doesn't have, in my opinion certainly, but I would say even our geologists' and engineers' opinions, doesn't have the breadth and some of the complexities of Lucerne. It's much nearer to the surface. It's a relatively average higher grade. So we don't -- I don't expect to see some of the reductions in Dayton that we saw in Lucerne in certain contexts. In others, they will intentionally be there with the focus of achieving a reserve. So we feel great about a stand-alone Dayton Resource. We feel great about moving that to preliminary economic assessment. The Dayton Resource, even in our first pass with the economic shell, has almost twice the grade, something like 70%, 75% higher average grade. It's a smaller resource. But it's a really good quality resource as well. So I think the update will be positive. I think it's critical for our investors to have foundationally updated, current, reconciled clear view of the resources. Of course, having said that, the resource, it really is just a prelude to the reserve, which is what we really want to get to. So the good news, I think, is the work that's happening is showing 2 clear paths to reserves. There's still work to do. There's still potential to grow them. And we expect them to be economic. So that's ultimately the end goal. So in other words, what I'm saying is there's a number of reasons why the resource estimate could change. A positive reason is that you're tightening up the economic shell, you're increasing the grade cutoffs and you've got a strong eye to make that more economic. So I think for us, it will be a great reestablishment of what the potential of the Comstock is overall.

Our next question comes from Harvey Mordick [ph] from Investor.

I'm looking at the number of shares that we went from 53.8 million up to 70.8 million. So of that, you addressed 9.3 million that's company equity. And this is what you and other personnel in the company have purchased at roughly $0.165 a share?

No. So there should be three major components of those equity sales. The number that you referred to was the sale of equity at $0.165 that we made. I did purchase some shares at $0.165, actually. But that was not -- I think mine was 16.8% -- $0.168. That -- those were the sales that we made for raising capital through the Leviston facility that we have. And then there were 2 other private placements: one, which was to an individual investor of about 2.7 million shares; and one was to make the Northern Comstock joint venture payment in August of about 2.7 million shares. So that should cover that as well.

Okay. And there appears to be still a couple of 100 -- at least 2 million more that isn't being addressed from the 17 million that came through. I'm showing 9.3 million to company equity. I'm showing 2.7 million to the private placement, 2.7 million to Northern Comstock. That still leaves a couple of million that is unaccounted for.

Yes, it's accounted for. I just -- it might not -- let me just see where -- give me 1 second.

[Operator Instructions].

Yes, Brittany, I'm still on with this one question. Hold on a second, please. Just 1 second, Harvey, I just want to make sure I don't misspeak. Yes, so there -- I don't see -- there's no other shares other than those 3 categories that I can see. So it has to be relating to the Leviston facility. And I might just have to double check that 9.9 million number because...

How much more liability do we have to Northern Comstock?

So the Northern Comstock liability, it's just a little over $6 million over the next nine years.

And that's being issued at $0.165 or it's determined by...

No, the way that it's structured is that it's $812,500 of value per annum. However, we pay $30,000 a month in cash for 11 months. And then on the 12th month, which is August, we have the option to pay in cash or stock. So we have the option to pay it in cash. We pay about half of it every year in cash. Ultimately, we'd love to pay all in cash. But the way that we determined the payment in August is under the current [indiscernible]. So the third quarter with the share price hitting a bottom leaves us a little bit. But hopefully, we've turned that around and we're moving forward now to a better place.

Okay. So that's roughly 31% dilution. The private placements, are there any new institutionals coming in the game? Or is this all...

Yes, we have a good [indiscernible]. I mean, currently there's a lot of eyes on the stock if you can imagine the volume that's been trading over the last 4 or 5 weeks. But we've got 5 or 6. I would put them in the category of both high net worth and institutional new investors that are coming in. We don't have a new one that's over 5%. But in this sort of million to couple million, almost 3 million sort of share category, we do see accumulation. So the good news is there's a lot of eyes on the stock. There's liquidity in the stock. And I think with these non-mining asset sales finally coming to fruition, I know that some of the investors, even despite the lower share price, were hesitant until they started to see some of this debt reduction happening. So I think we're going to get some good traction from this point forward. We're seeing it already, just not -- it's not -- it's overwhelming in the absolute amount of volume but not necessarily in individual accumulations yet.

Okay. What else is happening over at Silver Springs? [indiscernible] looking at us. And what's the probability of something happening quickly?

I think there's two major discussions going on, right? One is with the financial [indiscernible] forming just for the sole purpose of investing in this area. And the other is with a strategic land developer. So they're very serious people. They're very knowledgeable, which is probably the best variable. I mean, over the last 18 months, we've had a lot of people speculating but really didn't understand the area, didn't understand some of the prerequisites required to get going in developing. These people do. I think that the probability in the next 4 to 5 months is very high. So we're looking to getting -- the transactions that we've got, the contingencies are clear. So they're just marching to the close. That's obviously critical. We'll announce them as soon as they're closed because the market wants to see the debt go down, not just hear that it's going to. So that will be in the next four weeks or so. And then as soon as we have transactions agreed to for the rest of it, we'll move to do the same thing. So personally, up until mid-October, I was spending almost all of my time doing that. Now I'm spending about 60% of my time still trying to make sure that that's the #1 priority because it sort of clears the deck for us to do everything else. And obviously, it has a dramatic impact on dilution. So it's positive from here if we can just get these things closed. I think it's all happening. The area -- the area has gone through a lot of assessment. But now it seems like the serious players are hunkering down there [indiscernible]. The overall picture is that we're not just in a housing crisis, we're in a industrial capacity crisis. There's literally no capacity for anything. So as people are building it, that is getting filled out right away. So the environment remains excellent. It's just -- they're just with extraordinarily lead time to get to where we are, I guess, longer than we expected, but it's happening.

Okay. For my last question, are there any other miners looking at venturing with us on the rest of the assets?

So that's a great question. There has been a marked increase and interest in mining properties. And so to be more specific, there are miners and mining investors that are making increase that have -- that aren't speculative, that aren't in the unfinanced category. I mean, this is meaningful capital with meaningful resources prioritizing Nevada. So I would put that in the category of very early but markedly increased from 0 to 3 to 4.

Our next question comes from Paul Bornstein with Black Diamond.

Making through the volatile markets, looking at mining shares since maybe some more money will come into the sector, given the lack of performance over the last couple of years. So I'm just curious, you've got a little cash on the balance sheet. And I'm trying to see -- I know you're working on a lot of potential deals or hookups with other players or maybe other -- and other investor. But how much money do you need, if you got a check right now, to really move your -- on your mining side of the equation to really get some real positive things in a short period of time instead of -- I mean, you've been trying to pay down the debt and you're starting to do that. And I'm just -- I'm trying to look at if you had some money coming in, what results could we see on the mining side, nothing else because obviously hopefully you're going to sell more real estate or whatever to pay down the debt. I'm just looking on the mine on its own on the mining side.

All right, sure. So first and foremost, you know that the capital for Dayton is covered through the option -- for Lucerne, is covered through the Option Agreement that's happening as we speak with the technical report coming this quarter and another one with preliminary economic assessment coming next year. So Lucerne is [indiscernible] its own pace, it's a good pace. And we're happy about it. That's a capital from us. On the Dayton, if I just step back for a minute, consummating the first land transactions we talked about cuts the debt in half. But consummating the second one puts about $4 million to $5 million cash in the bag. And the Dayton, we're going to publish a technical report just based on the work that we've already done internally. And then with that kind of funding, we were looking at a $2.5 million to $3 million drill program for Dayton that we're looking to expand in resource material. So I think we're in a good place to move both the Lucerne and the Dayton forward. And you'll get two technical reports in the next two quarters, regardless.

Yes, because you want to get it up to a reasonable opportunity level, where these potential people looking at investing at mining companies can feel comfortable to move forward. And it looks like you're still not in that range yet, where they'll take the opportunity and do something.

We're very close.

Yes, you're getting there. But that's why I'm just...

We're very close.

Because if there's more opportunities in the space and you're not there yet, it's going to take a little while before they go on to looking at yours versus other assets out there that people are looking at also. So you want to be up on the radar screen with everybody else that's looking at this space and especially if price has moved up a little.

Yes, I think this does get us there. Certainly, by the time [indiscernible], I think it does get us there. So we're still chopping the wood, but it's real time.

Okay. And yes, hopefully, you'll start getting recognized in the marketplace since you're still down there. But at least you upped your bottom. So hopefully, some of this news will start filtering through.

It seems like it. Thanks, Paul.

Thank you. Ladies and gentlemen, the time allotted for questions and answers has come to a close. I would now like to turn the call back over to Mr. De Gasperis for closing remarks.

Thanks, Brittany. I just want to thank everyone for the time, the interest. We've got a lot of eyes on the stock and getting traction in non-mining sales. So I'll just talk about, which is the resource developments and the updates on that. So it's all happening real time. We look forward to updating you, not next year but at least a few times coming through here between now and the end of the year. So have a great day, and I look forward to talking to you all soon. Bye-bye.

Thank you, everyone. This concludes today's teleconference. You may now disconnect.