Comstock Inc (LODE) 2019 Q4 法說會逐字稿

Good day and welcome to the Comstock Mining Year-End Update Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Corrado De Gasperis. Please go ahead, sir.

Thank you, Jeff, and good morning, everyone. It's Corrado De Gasperis, CEO of Comstock Mining on the line. And I also have Zach Spencer, our Director of External Relations, on the line today as well. And welcome you -- welcoming you to the Comstock Mining Full Year 2019 Conference Call.

I'll provide a brief summary of information included in our press release from this morning, including our progress on our strategic initiatives. 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. We will file our annual report on Form 10-K timely. All the accounting and reporting is done, and it will be filed when the audit processes and documentations are complete. I can answer any and all relevant questions regarding our financials, and we provided a brief summary of most of those in our press release.

Please also let me remind you that we may make forward-looking statements on this call, including the review of our 2020 outlook, but any statements relating to numbers that are not historical facts may also 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 previous reports filed by the company with the SEC and in this morning's press release. And all forward-looking statements made during this call are subject to those same risks and other risks that we can't identify.

Okay. So over the last few years and especially last year, we dedicated ourselves to repositioning the company for precious metal-based growth. And in 2020, we'll only be talking about gold and silver for most all intents and purposes, with extreme focus on driving value through our properties and our partners. We legally realigned Comstock's existing gold and silver assets, as depicted in the press release, simply to facilitate growth of our mineral properties, growth of our natural resources in the ground and the acceleration of value to our shareholders from our growing exposure to gold and silver, again, through our properties, our partners, our royalties and our future goal revenues.

We partnered twice with Tonogold, first in selling 50% of Lucerne last November, and again, in leasing some of our mineral properties. We also helped found and partnered with Mercury Clean Up LLC to leverage our existing 100% owned, permitted operating platform that launched the mercury remediation business that we're now commercializing in 2 different locations. And lastly, we established and partnered with Sierra Springs Opportunity Fund to sell our nonmining assets in Silver Springs for $10-plus million. The sale is moving full speed ahead, and we expect to close on all asset sales in the next 45 to 60 days. For sure, the corona impact has recently slowed down some of the progress, but not very much at all for us. We're picking up very good interest and we're still fully expecting to close despite this recent turmoil.

In all of these ventures, we've positioned growth, while retaining meaningful equity ownership in all of our partners.

In 2019, we also won the CRA lawsuit, I guess, again and again and again, despite repeated appeals against us and the county relating to the zone changes for the Dayton Resource mineral claims. It cleared the path for us to proceed and expand the current Dayton Resource area and the Silver -- and the Spring Valley complex, both of which are contiguous in Lyon County. Our geologists are doing an incredible amount of work in expanding that resource towards publishing updated stand-alone technical report later this year.

Let me turn to the financials, where we significantly improved our financial position throughout 2019 -- really continuously throughout 2019. The improvement is shocking to quite a few folks and us as our assets increased by almost 40%. Our debt decreased by over 40%, putting the debt in the crosshair to final pay off next quarter. Specifically, we closed on 50% of Lucerne sale that I just mentioned, while still retaining full control of the entity. In doing so, we received $5.9 million in nonrefundable cash. We received $6.1 million of nonrefundable stock valued at year-end at over $9 million. And we received $2.2 million in expense reimbursements throughout the year. We also, with Tonogold, leased the Occidental Lode claim grouping to the north of the Lucerne and some other mineral claims in a second partnership, which ultimately through those mineral leases, requires up to $20 million in drill commitments and 3 progressive technical reports to be published, with $4 million in drilling expected -- required, I'm sorry, in this fiscal year.

We've also been leading and working directly with Tono continuously. With our combined technical teams, with our regulators together, often them with our regulators, with the county towards the launching of a very exciting drill program that has been very, very well researched and planned out that we expect to commence in the second quarter. That would be Tonogold drilling in Storey County in the second quarter.

As also mentioned, we partnered and launched the Mercury Clean Up LLC company, which is a global mercury remediation cleaning technology growth company, with a project starting this year, both on the Comstock and in the Philippines. Equipment started to arrive last month. Meaningful equipment has arrived on site. We've already put test material from multiple sample locations around the Comstock through the spirals, with both mercury and gold sighted just in the small sample process test through those spirals.

The full system is something quite different than just the spirals. It's impressive. It's over 18 feet tall. It's quite a technological spectacle, in our opinion. It's been manufactured for all intents and purposes in California. It's being finally assembled and intended to be shipped on to the Comstock. In certain regions, second quarter expectation is in April. There have been additional slowdowns, again, resulting to just everyone's lives being sort of semi-paralyzed for the last 2 weeks. But we're not -- I would say, the impact to us overall on the circumstance have been less -- dramatically less than our empathy for a lot of other companies out there. We have a small team. We're all working full time. We are now, effective this past week, all working remotely and just trying to schedule around certain obstacles, which we've been so far been able to do effectively.

And lastly, as you all know, we've escrowed the $10-plus million sale of those 2 nonmining assets to the fund in Silver springs. We've also received $400,000 in nonrefundable deposits in escrow. And we are looking forward to closing them in the second quarter and extinguishing all of our remaining debt next quarter.

Financially, as I mentioned, we'll be filing the 10-K this month on time. All that work is done. We're just finalizing some of the audit procedures towards publishing. But overall, let me share some of the details. Year-on-year, our overall operating expenses were down 27%. We anticipate another 10% reduction from those numbers in 2020, as we focus primarily on lower administrative costs. Much of this work has already been done. And we expect to see at least a 10% reduction in general and administrative cost. General and administrative costs were down year-on-year, but only slightly. We expect that to be more significant next year. Again, most of that work has already been completed, and those results will already be evident in the first quarter of 2020.

Our exploration and development costs are down 22%. Our environmental costs were down almost 200%, but that was really driven by a remarkable result of our reclamation efforts. We finished a big part of the Lucerne reclamation requirements early, resulting in the Nevada Department of Environmental Protection releasing almost $400,000 worth of our reclamation liability. So that reduction was reflected in that expense line. But it was real savings and real reduction of liabilities, so we're quite proud of that. Overall, that resulted in our net loss decreasing by almost $6 million for this year. We'll have a $3.8 million loss for the full year with a loss of $0.20 per share resulting from that.

We certainly believe that we are going to have net income for the first time in 2020, not only because of dramatically lowering costs, which I'll talk about in just a second, but also resulting from some of these transactions actually being consummated. So we're very happy about that. We're also happy about the tax-free nature of those incomes, because we can shelter all of that with our net operating losses.

Overall, our -- most impressively, I think, in my mind, our total assets grew by almost 40% to almost $40 million. This includes the investments that we have in our partners. It includes the investment, as I said, in Tonogold, but a tremendously strong growth in the asset side of our balance sheet. That's coupled with the dramatic reduction in our liabilities, including our total debt being reduced by over 41% to just over $5 million.

Cash and cash equivalents at the end of the year were over $1 million. Our net assets alone now at year end, you'll see in the balance sheet, were just about $24 million in net assets. That will grow to almost $35 million when we consummate these transactions. So our net assets alone show a value of over $1.30 per share. So the fact that we're undervalued is still becoming more and more evident just on the face of the balance sheet. Most importantly, we have not sold any stock in 2020 to date. You'll see that when we file the 10-K. It's not happening and it hasn't happened. So that's good.

I'm just going to summarize all of these points now with an outlook. So I'll give you 6 summary bullet points in the outlook, and I'll turn it back to Jeff for questions right after I do that: So number one, during the second quarter of 2020, we expect to close on the sale of Silver Springs. We expect to bring in the remaining net proceeds from those sales of $9.7 million. We expect to extinguish all of our debt, approximately $5 million, when that happens.

Number two, Tonogold is going to launch their drilling program in the second quarter. We've never been closer in the working relationship. We've never been closer in the activities and planning. And we're extremely excited about it.

Number three, we're advancing commercializing MCU. In the second quarter, the Comstock System will be on display. It will be operating. There will be videos. There will be photos. People will be impressed. And we're very excited about all the work that goes into commercializing that system in the third quarter. We're going to do something very similar in the Philippines. The equipment will be tailored to the specific circumstance, and we're very excited about that.

Number four, we're currently planning to expand our 100% owned Dayton Resource. We plan on publishing an updated technical report later this year. And depending on resources and timing of resources, we're looking to do some real drilling and development on that property this year.

Number five, our annual operating expenses net are planned to be $2.6 million. That's the lowest that they've ever been. We're proud of that. We're proud that we can have very, very low operating profile and remain fully functional with our assets and our partners at the same time.

Number six, as I just mentioned, we're significantly undervalued, in my opinion, by any measure we look at. But just using the most basic net asset plus the Tono receivable to us, plus the Silver Springs transaction puts us at over $1.30 a share. That's just the next stop for this train in terms of the value journey. We grow much more stably from there with our growth activities.

So Jeff, that's my briefer summary. Let me stop there and turn to questions. Look forward to answering any questions.

(Operator Instructions) And we can take our first question from [James Dell], who is a private investor.

Okay. Listen, are you going to replace Giron any time soon?

I'm sorry, can you...

Are you going to replace Giron any time soon?

Yes. But we don't have any immediate plans to replace the position. We've really congregated very strongly as a team. I think, ultimately, it's a role that we will want as the company is growing, but there is no immediate plans to do that.

Okay. Your asset report. Can you give us now a date when you tend to put out -- you said it's coming. But is it going to be second quarter, third quarter, what do you think?

In terms of the Dayton, Jim?

Yes, Dayton, Springs Valley.

Yes. So there's been a tremendous amount of work. I can't exaggerate the amount of work that primarily Larry Martin, our Chief Geologist; and [Mike Cohen] and Mike Norred and certain technical core team have put into Dayton. I mean it's almost a comprehensive reevaluation of every aspect of it. And none of that is meant to be negative at all. There been a tremendous amount of surface mapping and a tremendous amount of surface drilling that was never incorporated into the first technical report. Some people aren't even aware that there is a technical report out there, because it was buried in the sort of in the appendix of the Comstock report that, let's say, emphasized the Lucerne. So we're finding so much more connectivity of information, so much more connectivity of data, so much more stronger sort of geological control, and it's resulting in our ability to update the resource estimate and -- 3 things, right, update the resource estimate, propose a very, very precise next phase of drilling program and also start to put in most of the variables that would contribute to sort of, they call it PEA, preliminary economic assessment. So I think the next report, not only will it be stand-alone just for the Dayton and Spring Valley complex, which I think a lot of people will appreciate, because it's really an unrecognized asset in our portfolio. We can say with a straight face that none of the net asset dollars I just mentioned have any reflection of the Dayton -- any material reflection of the Dayton asset in them. So it's an unvalued asset in our portfolio. So that stand-alone report, I think, will have a tremendous impact on people's awareness and appreciation of that. But secondly, the preliminary economic dialogue, because some of the shelves that have been developed show average grades of 1.75 grams per ton, over 0.05 ounces per ton, very, very much higher than we've previously talked about and then maybe a path for drilling and a path for permitting. We're going to move forward on the permitting regardless. We currently have a permit in Lyon County that allows us to do an extensive amount of exploration and development. We're going to expand that, for sure. And we're going to encroach on a broader Special Use Permit, which we'll ultimately need. The drilling will be initiated off of: a, the finalization of that plan, which they're very close. Larry knows where he wants to drill. He's just documenting it all, so the rest of us can catch up to them. And then the confirmation of some of these transactions, which will allow us to fund the first phase of that program. So I think if everything worked out well, we could be reporting in the third quarter and hopefully starting to do some of that geological work in the third quarter as well. I think that's likely, just not certain, because we have to close these other transactions first. But if we go on our current schedule, that's what would happen.

Okay. Could you outline a mine plan to it at any time?

So could you just say that a little -- one more time a little slower. I just keep missing your comments, I'm sorry.

You were doing permitting and everything else. I could take it that you're -- it's creating the basis of a mine plan to it, correct?

Yes. The preliminary economic assessment, which ultimately -- I think the steps are resource estimate, preliminary economic assessment of that resource, prefeasibility of a mine plan, full feasibility of a mine plan. So when you do preliminary economic activity, you have to have concepts of a pit shell, you have to have concepts of a mine plan, be it, albeit, a surface or underground, whatever the delineations of these economic ore bodies would be, have to start to take shape. So it's exciting for us to start talking about PEA, because then you start talking about economics in the context of a mine plan, correct.

Okay. And bearing in mind, we're still talking about very shallow surface mine here, correct?

We -- so I have to wait for all of Larry's work to be done. There is a tremendous amount of near surface, less than 200 feet from the surface, gold and silver. So that's just factual. There is a tremendous amount of it. The work that Larry is doing is extending structures deeper and extending structures south and correlating structures to each other, which is remarkable. So the answer to your point is, yes, with more to come from there.

Okay. Would you expect Tonogold to start actually mining -- digging and sending stuff to your processing plant?

Yes. So most recent activity has been a tremendous amount while they progress and remain current with us on their Lucerne work. And as an aside -- just as an aside, before I answer your question, most of the work that they did internally on Lucerne, obviously, was based on more like a $1,200 gold range. With gold sort of continuously bouncing around $1,500, there is some reassessment of that going on right now, which obviously is positive. But I have to say that they've just done a tremendous amount of work and they've attracted a tremendous -- I mean, they've done a tremendous amount of incredibly good work. They've done a tremendous amount of very, very impressive geological assessment. And I'm quoting my guys when I say that. My guys are tough and skeptical, but we've seen some incredible amount of analysis relating to historic grades, historic structures, an incredible consolidation of data, new data and all data that's developing a remarkable drill program. The drilling will be both, I'm going to say, we're seeing drill targets of 700 and 800 feet, and we're seeing drill targets of 1,500-plus feet. But you're talking about targeting grades of 0.5 ounce per ton, 3/4 of an ounce per ton and multi-ounce per ton. I mean it's really the stuff of the Comstock lore, and I mean that seriously. The fundamental thesis is that the old timers had head grades of 50 grams per ton, which in English is 1.5 ounces per ton. And once they put exploration drifts in place, they had head grades of 33 grams per ton, like 1 ounce per ton in English, right? And what that means is that they were only knowingly taking grades that were there and above. And so as we calibrate areas where we know drifts were put in and we know material wasn't taken out, it just leaves a tremendous amount of opportunity there that's exciting. When I say it's exciting, they're tracting. It's smart capital. Like, we're seeing the trend of investment go from astute high net worth people, not flipped people, I mean, serious people who pay attention to extremely technical filings. So we like that development.

If you want to say that Lucerne has slowed down or taken a little bit of a back seat to that, that's -- that would be probably true. I can't speak for that, because I do know that they're reassessing the Lucerne pit shell and they're reassessing -- they're not going to be assessing the mine plans with current gold prices, which is a positive thing. But there is so much interest in this drilling program that it's really taken -- I mean I would -- I could safely say like 90-plus percent of their collective calories. And we've gotten much more involved in those programs. So right now, we're pretty excited about everything that they're working on. And I would think that the conversation is going to be more about drilling and development. I would expect some drilling to happen in Lucerne. It's not the immediate priority, though, based on -- if you list out their top 30 or top 40 drill holes, most of them, if not substantially all of them, are attacking some of these high-grade targets. So I think they're looking at this whole Lucerne-Occidental corridor a little bit more holistically. I think that's very intelligent, right? If you're familiar with the Occidental Lode, we have some 40 claims congregated. I think we were one of the few people that were able to congregate all the private and private patented and unpatented claims into one grouping. But most people aren't as aware that, that Occidental tail goes all the way right down into the -- right just to the east of the whole Lucerne property right down to the Storey County, Lyon County border. So it's a big trend. So there is a lot of attention. So they're starting to -- rather than it being Lucerne, Lucerne, Lucerne, they're starting to correlate Lucerne to Occidental up the stream to Virginia City. I mean it's coming together very nicely, and it's being talked about more holistically. And I think that's intelligent. I think that's where you're going to get your long life mine plans from. And so I think we just have to wait to see some of these results, but I think it's going to start right now in the second quarter. They're going to start doing some drilling. And we're working -- by the way, we're working with them, Jim in almost every way to enable that, right? Like, we have royalties on all of those properties, not just Lucerne, but all of the Occidental and all those properties. We're in the same boat. Obviously, Lucerne has the nearest-term extraction mining opportunity and that's not lost on anybody. But it's not the whole pie. The whole pie is bigger.

Okay. Are they going to produce a new resource report with all this activity that they're doing?

Yes. So -- that's a great question. So in the leases that we've signed with the Occidental and otherwise, we've put -- not only do we have about $20 million of drill commitments required certainly over a longer period of time, but we have immediately required a minimum of $1 million a year. My understanding is they're hoping to spend over $5 million this year. So our minimums aren't really meaningful to their intentions, but at least we know. But also, to your point, over the course of the lease's period, there is 3 progressive technical reports required. One will be a resource estimate, one will be a prefeasibility, and one will be a full feasibility. So we have very, very strong -- and it's mutual between us and them, right? No one's here for promotion. We want to progress this thing to technical reports, okay? And so we've got control that every single year, we have to make progress towards those technical reports, ultimately the 3 being published over the lives of the leases that get us to production. So it's exciting. I mean when you combine that activity with Lucerne, you're going to get a lot going on in the north. Throw in Dayton, Spring Valley, which is 100% owned by us, we're going to get activity to the south. And I think for the first time, we'll have -- even though we're doing it with partners, we'll have all of the properties in some way, shape or form active towards development, which to me is the driver of value. So it's been a long time coming for (inaudible) to be back here, and now let's get them moving forward, either directly with us or us working directly with our partners.

Okay. One last question. (inaudible) I'm concerned about this Mercury venture in the Philippines being a high startup and old-style politics and everything else associated with dealing with that. It's pretty much a business-eating culture out there. Do you know the local joint venture partner that's going to be pretty stable?

Are you referring to Tono, MCU? Like, who...

Talking about the Mercury Clean Up venture in the Philippines.

Yes. So no. So the partner there is incredibly stable. It's the largest claim owner -- or one of the 3 largest -- 3 principal mining concerns. It's one of the longest-lived operating. We've been advising them well before MCU on some of their processing. When I say we, I mean, like, our partners, Paul and our team at MCU, on their processing. When the government moved to shut down Mercury, they were one of the strongest supporters of the action. They really looked to see all of the artisanal mercury mining being eradicated from the district. And I think we're in a position both to introduce clean processing technology together, but also provide ultimately -- this isn't in the current plan, but ultimately, provide clean processing solutions for the artisanal miners, right? So it's not just mining. It's not just cleaning the river and the mountain, which is our #1 priority. It's not just mining the claims, which is their priority. It's providing the community and the district a clean solution that avoids them having to go back to Mercury.

So this breakthrough is tremendous, where certainly just going out and cleaning up contaminated areas is a breakthrough, and it's remarkable. But if we don't have a solution that we can then provide, people will still continue to use Mercury in the absence of any alternative. And so we have that solution as well. And so that's -- we've always viewed that as the second and third phase of our growth, either partnering with Clean Ore Solutions there or partnering with the local community, to provide, let's say, a shared processing facility or a toll processing facility. That's all part in the grander scheme of things. So what we've only announced and what we're only focused on is cleaning up the river, but doing that with stable, solid partners should create add-on opportunities to us to proliferate the clean technology.

So the opportunities with this are endless. We're putting a tremendous amount of -- I personally have been there twice already, tremendous amount of time, legally, financially, organizationally, partnership-wise, regulatorily, government, politically into making sure, for us, doing the first one and second one right, lay the foundation for this global opportunity. So we're very much in early stages of laying that foundation, but we're taking great care. And most of our decisions are based on the operation being successful over all other things. Because for us, it's not just the success that we get there, it's setting the stage for the rest of the world.

Okay. I just want to -- that's my concern there. I hope most of your (inaudible) is going to be a technological transfer versus a "boots on the ground" stuff?

Yes. It's -- every single project will be different. Obviously, you're referring to non-U.S. Obviously, in the U.S., we have boots on the ground. Like, last week, the week before, we were processing samples.

You think it's difficult (inaudible)

Yes. Each jurisdiction will be different, right? Some we'll be joyous to have boots on the ground. Some we won't want to touch with a 10-foot pole. Some we'll only want to lease equipment to protect the technology. I mean all of the above, right? In some cases, the government may just hire us to clean something up. It's a full spectrum of possibilities. We're just trying to stay very focused on the first two to really ensure -- improve the area that we have and the solution that works.

We can take our next question from David Brigham from Brigham Investments. It appears Mr. Brigham has stepped away for a moment.

It would appear that this concludes today's question-and-answer session. At this time, I'd like to hand the call back to you, sir, for any additional or closing remarks.

Yes. I just -- first of all, I want to thank everyone for their interest. I want to thank everybody for their patience through the last couple of 3 years. I really feel we're at that turning point here. 2020 is going to be very exciting for us. I also want to just really emphasize to everybody to take caution. There are so many various opinions out in the world about this coronavirus, but I think the simplest, most fundamental one is, stay remote, work from home, get all your work done remotely, minimize interaction. And let's just flatten this curve out, so we can get the damn thing behind us. And we wish everyone and their families safe next 2, 3, 4, 5 weeks, whatever this is going to entail. And we're available for follow-up directly with any of our investors. So thank you all.

Thank you. This concludes today's call, ladies and gentlemen. Thank you for your participation. You may now disconnect.