The following interview with Corrado De Gasperis, CEO of Comstock Mining, was conducted by Mr. Peter Epstein, CFA of Epstein Research (http://epsteinresearch.net/) and is re-posted here with permission.
I will start with the obligatory question, can you please tell readers about Comstock Mining?
Comstock Mining (NYSE: LODE) has accumulated an unprecedented, ten square mile land position, consolidating an historic, world-class gold and silver district. We rezoned the property, identified millions of NI 43-101 compliant ounces of gold & silver, permitted and built facilities with substantial capacity, and placed our first low-cost mine into production. We are drilling in our Lucerne and Dayton Resource Areas with the objective of developing two new mines in Nevada and generating strong cash flow growth in one of the best mining jurisdictions in the world.
News of the Company’s rejuvenated capital structure was a hit, sending the stock up 58% on 15x average daily trading volume. Why is this transaction so important?
This is truly a watershed moment, opening the new Comstock Mining to a greater universe of investors. Our new capital structure eliminated all preferred stock, making it much cleaner and simpler. We now have common shares, cash and a modest amount of debt. We continue to enjoy a very high quality institutional shareholder base and have strengthened our Board’s independence.
Notwithstanding the above, Comstock Mining is perceived to be as a Company ALWAYS spending money, rarely cash flow positive, even when gold prices were higher. Can you please comment?
I appreciate that that perception is out there. The reality is that we consolidated a massive land position (100% owned or controlled), with little to no future royalties, rezoned it, successfully traversed significant environmental, social and operational obstacles, and sustainably re-positioned potentially one of the most prolific mining districts in the world back into operation. This was accomplished with a relatively small amount of capital considering the land we purchased, and the considerable logistical issues addressed. Now, we are positioned to commence development of two new mines. We hope to demonstrate solid growth in cash flow in one of the largest, high-grade properties in Nevada.
With less required explaining of the prior capital structure, and diminished funding concerns, what will you do with all of your free time?
We remain highly focused on drilling high-grade targets in Lucerne. We have positioned the mine to drill two high-grade targets and develop a drift and tunnel. We believe these two targets present the most immediate opportunity for stakeholders. We commenced an 800-foot drift development. We are targeting high-grade gold and silver structures with grades averaging 8x-10x that of what we’ve been mining. All of our painstaking work readies us to drill these targets with the objective of establishing a long-lived, profitable mining enterprise. The first phase of tunnel development began on September 5, 2015, and will continue for the next three months.
We are also drilling our Dayton area, a second deposit that we hope to be able to commence permitting on in 2016. Dayton is roughly a mile south of Lucerne.
Please comment on cost containment. Has there been a meaningful move in any parts of you cost profile?
These days, containing costs is synonymous with survival. We have dramatically streamlined and reduced mining, support and administrative costs. We have recently developed new partnerships with American Mining & Tunneling Inc. and American Drilling, moving a larger component of our cost structure from fixed to variable. This added flexibility should allow Comstock to continue delivering lower costs from existing infrastructure.
Can you comment on Mr. Winfield’s willingness to enter into this broad restructuring? Why now? Who are your pro forma largest shareholders?
Mr. Winfield remains our largest, and most supportive shareholder. These changes are a tremendous vote of confidence by him, and other shareholders, in our operating model and goals moving forward. The timing was right from every perspective. We’ve built the right team, grown our land position and proven the operating model and key economic variables (such as grade, metallurgy, strip ratios and costs). We are proud to include Century Asset Management, U.S. Global Investors, Sun Valley Master Gold Funds, Gabelli Asset Management, Loews Corporation, Solus Asset Management, and of course, the Winfield Group, in our top ten list of shareholders. They all supported the restructuring.
Do you believe that existing and new institutional shareholders will take another look at Comstock Mining after the revision of the capital structure?
Great question. It’s already happening and I’m confident that will prove to be one of the most significant results of cleaning up our capital structure. It’s important to reiterate that we didn’t just eliminate the preferred stock and dividends, but permanently dispensed with tens of millions of dollars of future obligations and royalties. We have already spoken with dozens of funds that are more interested in investing, calling us for meetings. I’m dedicated to responding and proudly explaining the new Comstock Mining in coming months.
In speaking with contacts and analysts, some believe that Comstock’s growth profile is limited, perhaps due to city boundaries?
The perception that we are limited is a dated one. Our contiguous land position is massive and last October we received unanimous approval from local regulators to expand our permit boundaries by almost tenfold. Our progress is only constrained by the rate at which we can develop these higher-grade targets. I should add we have drilled on less than 1 mile of our 6-mile strike, and if one considers depth, we’ve probably drilled on less than 2-3%.
Presumably, you believe that being in production is a world apart from, “in production soon…” Please comment on possible lessons learned?
Production is MORE than a world apart from a stage of, “advanced development” or “in production soon.” Lead times for obtaining permits, funding and building infrastructure are measured in years not months. There’s also a huge difference between commencing production and working out the slew of unexpected issues resulting in a ramp up period much longer than management and investors expect. We have three years of continuously improving production. We continue to improve but with the majority of our growing pains behind us. We are pouring gold and silver every week, while maintaining a low-cost profile, despite operating at a small percentage of our capacity.
More importantly, our Lucerne resource area is fully permitted. This achievement is invaluable as we transition to drilling multiple, higher-grade targets with the objective over time of developing long-lived mines. Our flexibility and experience should allow for faster exploration and permitting, possibly culminating in a faster development cycle. This knowledge will be incredibly useful as we start planning activities in the Dayton and Spring Valley drill targets.
Lessons learned? It is critically important to focus on one development at a time, prudently dedicating resources through completion of each objective. For example, ensuring the lowest possible operating costs at Lucerne and maintaining a strong balance sheet. As we see other Nevada mines failing, it appears that they have taken shortcuts, under-appreciated ongoing risks and contingencies, while working with inflexible project schedules. No surprise, but attacking low-grade opportunities with higher costs, bloated overhead, excessive debt or multi-tasking projects doesn’t work well with gold at $1,100/oz!
Is Comstock a Takeout Candidate?
We believe we have built a platform for Nevada-based growth. We have the management, district and network to lead that growth, both organically and through Nevada-based acquisitions. We are attractive to investors and I’m sure once they understand what has been built, land owned, obstacles cleared, absence of royalties and most importantly, the extent of the known geology. As suitors better understand our known and blue-sky potential, we expect they will certainly take notice. Some already have.
Why invest in Comstock now instead of waiting for a higher price of gold & silver?
There are a small number of junior, mid-tier and major producers demonstrating low cash costs (critical in a downturn). Low capital and all-in sustaining costs (critical longer term) and clean balance sheets. These will be the winners, representing companies that investors should consider investing in. Waiting means possibly paying more as many risks have been mitigated. For those of us emerging safely through this downturn, there will be far fewer names to choose from. Comstock Mining will certainly be one of them.
I believe our position among surviving Nevada-based companies will continue to improve as we execute on our underground portal in the Lucerne mine and develop Dayton, our 2nd target. We will be drilling and hopefully developing even higher-grade targets. The winners are those of us that have continued advancing, slashed costs and increased operating flexibility.
Some believe that Comstock has too much corporate overhead, perhaps too many senior people. Please comment.
Yes, we’ve been asked about that. Our system was designed to handle complexities beyond the norm. With hindsight, our challenges have become one of our strongest assets. We streamlined core competencies in areas where we’ve achieved reliability. Our corporate costs have come down in line with peer Nevada-based miners, better enabling us to while achieve our growth goals.
What are 3 key takeaways that you believe make an investment in the new Comstock Mining a good bet?
Nevada-based, massive consolidated land holdings, permitted for gold and silver and continuous exploration and development.
Existing infrastructure delivering a low and flexible operating cost, enabling success even in low gold and silver price scenarios and positioned to thrive at higher prices.
Vast exploration potential on six miles of contiguous, mineralized strike in one of the historically highest grade, world-class mining districts.
Thank you Corrado for you valuable time. I believe you articulate the New & Improved Comstock Mining well.