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Comstock Mining Inc. (NYSEMKT:LODE)

Q1 2013 Earnings Conference Call

May 9, 2013 11:00 ET

Executives

Corrado De Gasperis - President and Chief Executive Officer

Analysts

Brian Post - ROTH Capital Partners

Jim Dale - Private Investor

Jeff Singer - Private Investor

Rob Shecker - Private Investor

Jerry William - Stockholder

Operator

Good day ladies and gentlemen. Welcome to the Comstock Mining First Quarter 2013 Results and Business Update Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (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.

Corrado De Gasperis - President and Chief Executive Officer

Thank you, (indiscernible). Good morning everyone. It’s Corrado, President and CEO of Comstock Mining and welcome to our 2013 first quarter call. I’ll provide a summary of the information that was included in our recent press release and I’ll also provide a summary of some of the information that was filed in our Form 10-Q last night. If you don’t have a copy of today’s release, you’ll find one on our website at www.comstockmining.com, under News/Press Releases.

Please also let me remind you that I may make some forward-looking statements on this call. Any statement relating to matters that are not historical facts may constitute forward-looking statements. And the statements are based on current expectations and those statements are also subject to the same risks and uncertainties that could cause actual results to differ materially.

These risks and uncertainties are detailed in the reports filed by the Company with the SEC. And those risks were also identified in last night’s 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. My prepared remarks will focus on production and mine development. I will touch briefly on exploration and then wrap up with a few corporate highlights before moving to Q&A, of course Q&A is open to any and all of the above. During the first quarter of 2013 we completed the ramp-up in stabilization activity of the production system including tremendous improvement throughout the quarter to the hauling, crushing and metal extraction processes. Although we shipped over 2500 gold equivalent ounces in the quarter I’m both pleased and proud to say that we averaged over 425 gold equivalent ounces poured per week for the six months ended April, for the six weeks I’m sorry just ended in April.

In late March we had a weekly shipment of 408 ounces achieving the targeted run rate of ahead of schedule. And yesterday we shipped 472 ounces for this week. Those first quarter shipments resulted in metal sales of $4.2 million with gold revenues representing $3.7 million and silver about $1.5 million. Just as a reminder silver is accounted for as by product credit and cost applicable to mining for financial reporting purposes.

We experienced a tremendous amount of improvement during the quarter including the restoration of our haul road access. This shifting to a new Caterpillar articulated 40-ton truck fleet increased or accessed throughout the mine and increased mining and hauling. We also experienced throughout the quarter and especially in March an improving grade profile. Our crusher moved to an extended operating schedule and have literally broken records for daily production almost weekly for the last month.

We’ve also enhanced and synchronized our metal core processes so as the metal extraction has spread up significantly as shown and demonstrated by our recent pours. We actually made dramatic improvements in the synchronization of our fluid flow by upgrading our pumping capacity and increasing the actual throughout of gallons per minute over stack material on the pad especially in late March when much more materials started to coming online on that pad.

Our work on the system in Q1 was tremendous and really it’s been gratifying that it was so very productive. Our fully absorbed accounting cost in the quarter reflected the realities of the ramp-up including some redundancies associated with the temporary hauling situation with the BLM that is all now of course behind us. By the end of March we had fully ramped up our production rate. We crushed and stacked about a quarter of a million tons in the quarter consistent with our 1 million per annum permitted rate. We also filed for in mid March a modification of our water control permit as planned. That will increase our permitted rate from up to 1 million tons per annum to the category of 1 to 5 million tons per annum.

We anticipate approval of that permit by late September and we’re planning on our production increases accordingly. We are also scheduling the next project expanding the leach pad capacity from the existing five cells currently under operation to eight cells. Likely this fall once we receive that permit modification we anticipate investing about $3 million for that expansion extending the life of the heap leach pad by two additional years. In addition in April we sustained an over 30% increase in ton hauled, crushed and stacked on to the leach when we compare to the first quarter activity positioning us very well for increased metal flow for the rest of this year.

We now expect to deliver the upper range of our prior guidance for 20,000 gold equivalent ounces for the calendar 2013 year positioning us for a very, very robust remaining 2013 production performance. Throughout this quarter or the first quarter we realized an average of $1626 per ounce of gold sold and $3144 average per ounce of silver sold. Our second quarter pricing will obviously be lower but we are benefiting right now from having sold forward and an equivalent of $1600 per ounce for the (Ormet) of secured revolving facility that we have.

Considering this when gold prices fell below $1600 in the quarter we prioritized the shipment of ounces towards the repayment of this secured loan and combined with our higher production levels we believe now that is very likely we will repay this loan early than it’s original amortization schedule. That schedule took us late into the summer and was extendable till the end of the year and we’re now looking to pay that off early. We look forward to that announcement what that loan is fully paid off.

Lucerne’s operating expenses for the quarter were approximately $3.8 million net of the silver credit, cost applicable to mining revenue include mining and processing labor, maintenance, blasting an ethane cost associated with a rate that is actually capable of running higher than the 1 million tons per annual production rate. We did experience higher cost absorbed in the inventory associated with operating at that higher rate, staffing at that higher rate in advance are actually producing at that higher rate. But with that we affirm our expectation that prospective mining and processing cost will be $15.9 million per annum, which at the current rate and at a greater rate of production.

As I mentioned earlier we’re already now producing at rates beyond the 400 gold equivalent ounces per week and we will do so throughout the rest of the year. We continue identifying opportunities for streamlining our system reducing cost and increasing throughput. For example our initial logistics efforts which were a little complex in shifting from small street legal vehicles that we’re operating on the state route back on to our own haul road but in that exercise shifting out from our five Caterpillar haul trucks to 10 slightly smaller 40-ton articulated trucks that was a transition that had some redundancy embedded in it, once it got stabilized, once we started operating we exceeded our expectations in terms of cycle time, the operation started our remarkably smooth and only got better from there.

Those efforts have already reduced our truck fleet from 10 trucks to eight. We rented those trucks with no long-term commitment or obligation, we’re able to downsize by two trucks and that will save us prospectively already $300,000 per annum. So it’s those types of productivity and efficiency gains now that we’re able to look at with a stably operating system and I strongly believe it will greatly impact our throughput and our cost performance for the rest of the year, so we’re feeling good about all of that.

Just briefly turning to exploration. As many of you already know in February we announced the highlights of our fourth 43-101 technical report. The report which was an update of our 2012’s drilling program declared a mineral resource of over 3.2 million gold equivalent ounces, 2.15 million of which were measured and indicated representing a 25% increase in Lucerne measured and indicated resource alone. The Lucerne resource area now includes modeled mineralization that covers over one mile of strike length.

Although we only drove the limited number of Lucerne holds on the East side that drilling again as some of you already know resulted in the discovery and interpretation of this Chute zone by our geological team. This intersection host of zone of incredibly enhanced mineralization. The zone currently mapped dimensions of 100 to 150 feet by a 100 to 450 feet. And based on the structural control of that zone that newly discovered higher grade Chute Zone our team has recognized structural similarities in higher grade zones at the date and in other mineralized areas with throughout the property position. So our expectations remain extremely high that further drilling will allow for an important extension to these existing already known higher grade zones.

Lastly in just turning to corporate at the end of the quarter the company’s balance sheet had strengthened meaningfully. We had total current assets of about $18 million. Cash and cash equivalents on hand were about $10 million. We increased inventory by $1 million. We increased the cash collateral on the reclamation bond by 350,000 all of these were according to plan. Today cash plus cash equivalents plus available gold and silver in this system meaning finished metal totals about $8 million. And as I mentioned earlier based on hires in plan production levels and advantageous gold prices relative to our debt pricing we are accelerating the pay off of these secured debt.

Total debt and other long-term liabilities were about $11 million at the end of the quarter a decrease of $3.5 million during the quarter from about $14.5 million at year end. We plan on paying down an additional $6 million of debt obligation this year including that full repayment of that secured (Ormet) facility. Once repaid the enhanced liquidity coupled with our positive cash flow delivers us strong 2013 balance sheet. So in summary the first quarter of 2013 brought our mining and processing systems into stability a remarkable achievement by our entire team and I have to thank them all personally for the hard work every day for the last four months putting us squarely on track for achieving our first full year of production goal of 20,000 gold equivalent ounces and enabling us to invest in future production growth and future resource growth and beginning the acceleration of this debt repayment.

Our balance sheet and liquidity is strong, our cash flow is ramping up and there is tremendous amount of positive activity throughout the network as we continue identifying these opportunities for efficiencies. We are now fully commenced in the pre-planning activities for the accelerated expansions for both Lucerne and the Dayton projects including the feasibility work specifically for Lucerne in 2013. So those are the end of my prepared remarks.

With that (indiscernible) why don’t we go over to questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Brian Post from ROTH Capital Partners.

Corrado De Gasperis

Hi, Brian, how are

Brian Post - ROTH Capital Partners

Good, good especially after seeing these results.

Corrado De Gasperis

Thank you.

Brian Post - ROTH Capital Partners

Congratulations on a successful first full quarter. Looking a little bit as far as the positive profile in grades you mentioned that grades are improving. Any idea what that trend will be through the year…

Corrado De Gasperis

Yeah, yeah we do have a profile I mean in context our average grade in the resource is 0.03 ounces per ton which is about a gram. When we looked at the 2013 plan we started our in the Lucerne mine in an area that we call the Hartford, it has significant amount of ore but it was probably lower end of our grade range averaging actually slightly less than like a 0.02. We worked – we were in the Hartford now and the grades are starting to actually realize better than that lower range average and so that’s a nice development. But the next phase of the plan moves more to a 0.025 sort of range. And I think that it moves up slightly from there in the second half of the year I think all in if you went to gold equivalent because our silver grades are closer to a third of an ounce 0.33 you’re probably looking at a 0.032, 0.033 sort of average. So slightly higher than the gold resource average obviously that’s enhanced by the silver but I think what’s good for us is that the plan in and itself shows a improving grade profile. There is obviously variability from block-to-block and area-to-area but in average or in general it’s improving.

Brian Post - ROTH Capital Partners

Not to get too much geological (indiscernible) but is the ore – is the model proving out as you get into the ore zones and are you better the same ore sort of expecting?

Corrado De Gasperis

It is the – I’ll give you some nice color I mean initially we’re just on the surface benches we were getting some I would say meaningful variation initially you’re looking at an ore potential just directionally 14,000, 15,000 tons, you discover 11 you have some anxiety then you go into the next bench you are looking at 17,000 you have 20 anxiety comes your way. And so but to be frank as we got deeper into this structure it’s stabilized much more closely with the model and it is reconciling very nicely to the model number one. Number two we did actually bring in some drill rigs for a couple of weeks just to fortify some of our understanding and that proved out positively for us. And then lastly the metallurgical yields for gold seem to be right on what the column testing had indicated and the yields for silver seem to be exceeding I think in the last met reconciliation our gold was about 98% of metallurgical plan realized at that juncture in this cycle and silver was like 102% of the metallurgical plan which is I think is that surprising to us that it was so close.

So, so far the metallurgy has been sort of the most consistent with what we’re expecting the ore quantities in the mine have seen some variation up and down which I would call that more normal to expectation I think you would expect a 10%, 12% of variation from the model both ways and we’re seeing that aggregation sort of steady itself out. The grades initially were a bit lower than we thought and that was also this Hartford area and currently they are a bit higher than we though so grade variation seems to be aggregating too. So all-in-all it’s working very well from a grade perspective.

Brian Post - ROTH Capital Partners

Sounds good. Shifting gear to the gold loan, you mentioned in the prepared remarks or the press release that you had actually gone out and bought some in the open market. It looks like you have about half year ounces let’s deliver how many did you go out and buy in the open market and what average price?

Corrado De Gasperis

We bought about 900 ounces, we bought them over a period of time and we were just right around the 1500 sort of range. So we think of that as a real hedge, we didn’t want to sort of jump ahead or overextend ourselves with that. We preferred much more so in lot of the 3700 ounces, we much more preferred to just deliver them as quickly as we can. I think that I calculated net-net with all of the ounces being delivered even if we assumed sort of today’s average price for the remainder of the delivery we would realize about a $300,000 sort of net benefit which from our perspective would represent a 30% reduction of the cost of that capital, obviously with hindsight that could have been timed a little better with the big drop that occurred in gold prices but we’re really not we’re not traders in that context, we’re just we borrowed some money that we needed, had an embedded hedge built into it and with hindsight that hedge is really turning beneficial for us.

Brian Post - ROTH Capital Partners

Sounds good. And one more if I may you mentioned that you are looking to do a leach pad expansion possibly later in the year with the water permit being the kind of the gating factor. Do you have enough capacity to run these assuming you do get the water permit, how many more years of leach pad capacity do you have without the expansion?

Corrado De Gasperis

Right. So yeah so there is two parts to that question, right. First and most importantly the pollution the Water Pollution Control Permit expansion is much, much more tied for us to the rate which we are allowed to operate so that we will take almost immediate benefit of that modification in the context that I believe our current system meaning our current labor, our current shift could and I don’t want to say easily but I’m starting to feel easily now could do a 1.4 million or a 1.5 million tons per annum. And I’m talking about not even adding the shift just running the system as fully as we can. And so as soon as it will do a lot we would do that. With the current, the current heap leach configuration including the expansion was deigned to be up to five years right of capacity. This expansion component had about two years of capacity. So that would suggest all the things being equal that we’re not a year into three years or two and a half to three years worth of capacity and we would extend it by a couple of years.

Now having said that that’s all in the context of operating just over about a million tons a year right. So that the notion of the second phase of the water permit is to put us into the newer category right of 1 million to 5 million, 1 million to 5 million tons per annum. The step up to a much higher production level which we’ve talked more in the context of 4 million ton per year operation required, would require sort of a second meaningful expansion of the heap leach. But the good news is that the footprint is there to do it and so we view, we view those activities as reasonably incremental but what we’re doing now we were studying fully I guess we call it the pre-planning phase of the whole district wide plan for federal permitting, right.

And once we sort of put all our (indiscernible) the planning would ultimately result in assessing every aspect of how we would step up to a 4 million ton per rate activity. And that would include either a more meaningful expansion of the heap leach which is fully feasible, a different heap leach which maybe better we have to study that or even potentially with some of these high grade discoveries the concept of a mill, we don’t have any notion of a mill expansion in any plan but we will do the assessment as part of this broader overview. And I suspect that come to fall we will have some very interesting discussions because in our view these will only result in upside modifications to our plan.

Brian Post - ROTH Capital Partners

Great. Well I will leave the floor. Thank you.

Corrado De Gasperis

Alright. Thank you, Brian.

Operator

And the next question comes from Jim Dale, Private Investor. Please go ahead.

Corrado De Gasperis

Hi Jim.

Jim Dale - Private Investor

Hey thanks for the great report, Corrado.

Corrado De Gasperis

Thank you, sir.

Jim Dale - Private Investor

Looking out a few years or I would say or many years as the case might be, when you start developing your Dayton and Spring Valley areas hopefully you build (indiscernible) according to plan, but are you willing to have to duplicate your existing infrastructure out there or you’d be able to use permittable haul roads to make use of your crushing operations where you’re currently at?

Corrado De Gasperis

Great question and it’s a great segue from Brian’s last question. So the answer is that it is quite possible and we have secured the area if you will the space if you will in the Southern district for the possibility of replicating our processing capacity. So in other words right now with American Flat for Lucerne our crushing, heap leaching and (mineral) core processing activity. It’s an outstanding facility. We could replicate that in the Southern part of the district and that could most immediately service the Dayton mine plan and it could potentially but I think most certainly it would be designed to service the possibility of this Spring Valley mine.

So that you could call that sort of conceptually Plan A. Plan B which is part of what we’re studying now is, what would the synergies be for using American Flat to source both Lucerne and the Dayton. So heat capacity, alternative milling those are the kinds of things we just want to be very thorough. But the good news in where we’re sitting right now is that we are fully operating, we have metallurgical validation, we understand fully the economic feasibilities of the existing mine. And so, when people generally talk about economic feasibility for a junior you’re thinking about this expensive Greenfield engineering where everything is an assumption.

In our case, we’re really just looking at a couple of alternative variables that are very soft assumptions in other words, we know most of the operating data that underlies then if I think we’ll be very quick to be able to look at all of those alternatives with high credibility and then decide what the best approach is going forward. Not only have we secured the rights to the areas in the southern part of the district for that possibility. We have both federal and private lands at American Flats that also have expansion capability. So we, I think we provided ourselves with some tremendous flexibility that will allow us to pick frankly what, whatever the best option is. And it will take though not to underestimate the effort, it will take environmental assessments which are currently doing, it will take some levels of engineering and it will also take some notions of the engineering of the mine and expanding it and all that is growth work, all that is productive work that we’re just starting now.

Jim Dale - Private Investor

Well that is basically my thought was okay the rather than having to duplicate and I was not only as far as we have construction effort to construct the pad and additional crushing capacity here are at different location and then with a different location now you say have increased labor costs associated with operating with those facilities, it’s also the time and expense associated with whole new set of permits it’s actually?

Corrado De Gasperis

Right, right there is yes, so that’s exactly right, I’ll tell you, I’ll give you a more insight or view of that.

Jim Dale - Private Investor

Right.

Corrado De Gasperis

If our crusher had the ability to do 4 million tons which was something that we’re targeting in its design I would say Lucerne is going to be dedicated to American Flat and we want a second facility for Dayton. But I got to tell you our crusher is like flying at levels away above that. The notion of the crusher being able to handle the Lucerne and Dayton it’s feasible, it’s mainly feasible it’s like entirely feasible. So that motivates us to enjoy those synergies that you referred to and that will be I'm sure a central part of the analysis.

On the timing thing there is a little bit of a caveat right and that replicating the existing permitting footprints to station local for Lyon County and Dayton would require a process if it could be 15 months it could be 12 to 18 months somewhere in that range which you would actually fail if you leverage the existing footprint. But the expansion in Lucerne unlike Dayton potentially foresees a federal land. So we’re in that preplanning phase for that right now. And the federal permits unfortunately it’s only one tends to take two years or more. So depending on how you sequence Dayton in federal or non-federal we may or may not be quicker, but it seemingly tremendously more efficient. So we’re looking at it right now.

Jim Dale - Private Investor

Okay, thank you very much and good luck to you.

Corrado De Gasperis

Thank you, thank you sir.

Unidentified Analyst

And one last question any evidence of the blue mud in the Chute Zone?

Jim Dale - Private Investor

No, but I’ll tell you this is a reminder, that the both in the Dayton and on the East side of Lucerne where the Chute was discovered, pad depth we’re hitting these silver-only deposits and we’re hitting high silver content deposits in the gold and silver ore. So not only are we hitting high grade silvers in excess of 5 ounces per ton and 6 ounces per ton with gold as we go deeper in the 900 to let’s say a 1000 feet sort of rounds we’re hitting silver-only deposits and that’s fascinating to our geologists because one of the things that Larry Martin and the team have said over and over is that our structural controls our knowledge of the district are so strong that the predictability has been very, very high that’s why we’re hitting on every hole, but those silver-only hits at depths were not in our model. So we’re hitting on some things that we didn’t even expect and it’s positive. So no we haven’t start any blue mud yet but we’re finding some silver that could be very interesting once we develop the better understanding of it.

Jim Dale - Private Investor

Well obviously you did in those considerable gold out here at Comstock as everybody knows this been out here traditional silver area?

Corrado De Gasperis

We just love the silver will someone just send email around of like 8 bars that we shipped yesterday in a system it looks silver because its storage is fantastic.

Jim Dale - Private Investor

Great, alright, thank you very much. Have a good day.

Corrado De Gasperis

Thank you sir.

Operator

And the next question comes from (indiscernible).

Unidentified Analyst

Good morning.

Corrado De Gasperis

Robert, how are you?

Unidentified Analyst

A simply stated question the answer is probably not quite as simple. If you knew for a fact that gold and silver prices were going to stay right here for the next several years would you want to or need to change your operational plans at all?

Corrado De Gasperis

Yeah, so now the answer is no. but there is a perspective part of that. Our plan was to get in the production and stabilize at 20,000 ounces and we’ve done that. And it’s not a huge scale of start but we’ve always had the notion of leveraging the system up so that the Lucerne mine would do at least four times that level. So we talk about 80,000 to 100,000 ounces we’re talking about ForEx production and if we get to that line and I believe if we can get to a rate of 30,000 ounces our cost profile will be $600 an ounce or less in terms of mining a process and process for the Lucerne mine. But our plan is always intended to leverage that more. And so our expectation is that we did is very, very important in all environments if the gold prices approaching 1200 or if it’s approaching 2000 it’s our advice that we have to have the most efficient lowest cost operation. And so we don’t believe in inefficient processing of gold and we do believe in investing in the development of the district, because we control all of that.

So, it’s a little when you saw the gold price get there a month or so ago all the headlines were that these companies were going to start reducing costs and I don’t understand that so well because I would think that they would want to have their operating costs where they need to be all the time and then the discretionary money would go into growth and development. I know that sounds ridiculously obvious, but common sense doesn’t always seem to be so common. So that answer your question more precisely the, if the gold price stays exactly where it was for three years I don’t see our plans changing at all, those plans would be aggressive development on the territory.

Right getting to 4.5 million ounces, 5 million ounces just in Lucerne and Dayton alone is right in front of us, but we would continue to be on that because the economics of our situation are favorable and we would make a lot of money at these prices. We can develop the territory at a rate constraint only by our physical and financial resources. So to the extent prices will drop and we have a lien operation than I think the implication was we would have to slow the pace of investment if prices increase it might afford us the opportunity to as accelerate the rate of investment but we can’t put the enterprise at risk it has to be safe in all scenarios.

Unidentified Analyst

Okay, that’s all I had. Thank you.

Corrado De Gasperis

Thank you sir.

Operator

And the next question comes from Jeff Singer from Private Investor. Please go ahead.

Jeff Singer - Private Investor

Hi Corrado.

Corrado De Gasperis

Jeff, how are you?

Jeff Singer - Private Investor

I'm doing well, thank you. First of all we’ve talked a lot about executions I just want to congratulate you guys you did a great job on the execution side.

Corrado De Gasperis

Pretty much, I wish you were here when you were here last the thing was just starting up and it looks very different even from when that you were here last time.

Jeff Singer - Private Investor

I’ll make it up there in next couple of months I appreciate. My question is just if you could talk a little bit about where you hit cash flow positive going forward and what kind of cash requirements you’re going to have over the next year what’s your current plan?

Corrado De Gasperis

Yeah, thank you for that. So, I think for all intense and purposes and I’ll define cash flow as the day that our bank accounts starts growing rather than shrinking we tie at literally to this month because we’ve already got in the pipeline sufficiency of ounces to payoff the (Ormet) facility so that, that’s the question of that working itself through the system and then and obviously we’re shipping and collecting cash now on a weekly basis that other than that. So we’re there, we’re there the effort if you could imagine it we had people building the system, we had people operating the processes and we had people debugging. So we’re in and in some of those people if you will, are advisors and consultants and contractors and engineers and we’re in a very much of stabilizing and streamlining mode no w is very positive, but we’re going to see our cost go down this quarter over next and we’re going to see our cost go down meaningfully next quarter after the one after. So sequential improvement quarter-after-quarter and so I expect that cash flow will stabilize and then even start to grow that’s coincidence with increasing the production rates as we look forward to that water pollution control permit. So, in September and with high insight from that point we’ll see that we’ll had been making money for the six months prior and that’s very, very, very important. So I very much appreciate that question. What was the second part I'm sorry.

Jeff Singer - Private Investor

And that was the main part, the only other thing I just wanted to mention the BLM issue that you guys had worked out I think it’s really important for everyone for you guys to do a good job explaining because until you actually have gone and seen what were, what the difference was between the hauling how, there is a huge difference when you see as visually opposed trying to explain that it’s mind-boggling that they put you guys in that position and the costs associated with it you just don’t understand and try to see it?

Corrado De Gasperis

Yeah so let me yeah thank you for that. Let me may be clarify that or explain that to your point from a cost perspective. So in the fourth quarter and in the first quarter through the third week of February, we were operating with, we had picture our Caterpillar vehicles fitting in that sort of working mainly on moving a war and moving leased then we had to have a whole another third-party fleet of 18-wheeled street-legal vehicle double handling that material and taking a much, much longer route all the way to the site, long story short, we were incurring probably for honest with ourselves because we’ve been saying $3 million annually and that is really the cost of the third-party probably it was $4 million annually when you consider the inefficiencies of our internal activity.

So $1 million in the quarter, both in the fourth and not as much but close to that number because we went two-thirds of a way through in the first quarter. So what you saw in first quarter performance was the fourth quarter cost rolling out of inventory while you see in the second quarter is a lesser amount certainly an improvement, but those costs rolling out of the inventory. In coincident with that and to your point now we have only our Caterpillar fleet working fully optable and almost invisible from the road I mean literally

it's so – it's fair to say the system is operating at a high level productivity now but in the simple way that you sort of describe where it's not being stressed so the notion of frankly increasing production by 30% which we did in April may be even 40% or 50% is a safe stable operation and so we’re all anxious to get there faster. We will we've been in very close contact with NDEP the group that actually approves our permit. The permit limit is in annual limit and so we have the opportunity to increase production sort of up towards September.

As long as we don’t increase – why we don’t process million tons by the end of September or fully compliant but we could actually operate at that higher rate and then when we get the permit sort of continue that forward. So, I appreciate your point we had inefficiency it was painful to the head and the heart when you looked at it directly. The silver lining is that the BLM after those initial discretion, indiscretions either way however you want to think of it has come out here on half a dozen occasions has been exceptionally complementary realizes that where we are now is the best situation for all and has been incredibly supportive in terms of our go forward activities. I mean it's almost like nine days so being the optimist I look for the sliver lining in bad situation turned very good now.

Jeff Singer - Private Investor

Thanks for that Corrado.

Corrado De Gasperis

Thanks Jeff.

Operator

And the next question comes from Rob Shecker, Private Investor. Please go ahead.

Rob Shecker - Private Investor

Hi, I had a question regarding your production growth rate for the next few years. Can you kind of give us an idea of what do expect in production for 2014 and 2015 and then kind of talk about the cost you kind of foresee with that kind of growth?

Corrado De Gasperis

Yes, sir. So let’s talk about 2013 and 2014 first. So, we’re operating at a rate we've achieved the rate of 20,000 ounces with the cost of just under $16 million of for all the mining and processing activity to deliver those materials. We've achieved the 20 but I think as I stated we’re capable now of increasing that. We do have this permit that we have to synchronies to so we’re not going to leap to a 1.5 million tons and 30,000 rate but we’re going to graduate to it may be is the better way to say it. I do think that we could be operating between the 25 and 30,000 ounce sort of rate in the second half of the year. I do believe once that permit is soundly established we would look at operating at that rate for the entirety of 2014. So to say achieving 20 in 2013 which means we’re going to run higher than that rate for the rest of this year and achieving 30 for 2014 I think that's our guidance.

The next part of your question is a little bit more complex and that the ultimate goal is to leverage fully existing infrastructure for Lucerne and today that would we believe easily represent running at a rate of four times to million ton rate so lets say 4 million tons. And depending on grade frankly that could be anywhere from 70 to almost 100,000 ounces per annum.

We cannot run at that rate sustainably because we can't access enough ore from our existing permitted footprint and we would require and as I said we’re in the preplanning phase for this right now because we know we have more than enough ore and we’re certain with over 2.5 million ounces are evaluated. We have to permit the expansion of that Lucerne and we believe now although there is multiple scenarios where we could expand the private footprint for sustained continued production. What we’re preplanning is what the most optimal expansion and with the federal permit be the best step. And if that's the case there is a two year plus process for achieving that permit. So, my answer to you is that if we filed those, if we concluded that was, if we foresaw and concluded that that was the right thing to do which we’re working on right now we were able to file those permits this year it would be 2015 and likely later 2015 before that big step could be moved and that's the part of our plan.

However could we increase from a 1.5 million rate on private property with an expanded heap leach pad in between those two time period absolutely we could we just don’t have a specific plan for it yet. So, there is 30,000 rate which we have a plan for and it's very stable there is 80 plus thousand rate which we have a plan or a preplanning for and we believe is ultimately going to feasible. And there is timely something in the middle there that would be progressive growth of operations in cash flow that would be delightful that will fall out of this broader planning process we just don’t know specifically what that would be yet.

So I think the answer to the question is there will be methodical growth annually from 2013 to 2014 to 2015 and beyond just in Lucerne. The Dayton which is the second mine depending on how we wanted to commission it could come online coincident with the Lucerne expansion or could come online before. And generally we've been talking about it coming online before like sort of the mid to end of the 2014 period. So, I don’t mean to be vague about it – I'm as specific as I can be it's all happening it's just what will be the exact mine plan and the exact footprint define it will be good it's just we don’t have the specifics yet.

Rob Shecker - Private Investor

Okay. That's great. Thank you.

Corrado De Gasperis

Thank you sir.

Operator

And the next question comes from Jerry William, Stockholder. Please go ahead.

Jerry William - Stockholder

Hi and I apologies I missed the first part of the presentation. I just wonder if you could speak to the, your expectations of stock price and I do some simple calculations it seems like based on the inventory or the reserves that you’ve already identified stock price should be substantially higher than it currently is?

Corrado De Gasperis

Just on the stock price I can highlight some very, very meaningful specifics. So, first let me say that we’re growing the resource, we believe that just Lucerne and Dayton have the potential of having 3.25 million ounces of the highest category resources measured and indicated we believe that would likely translate to 4.5 maybe even 5 million and that’s nascent because that's what we can see in the existing structures but the more we drill the more we find like the Chute Zone discovery that was just reported last quarter and is very new to us. So, from a resource growth I would expect that you should see tremendous valuation growth relatively speaking.

Secondly we’re in a production we’re cash positive and we’re growing right so solid and you have oxide ore, near surface, good breeds, high economic feasibility, cash flow, cash flow growth I think that is where you want to be you’re in the Nevada jurisdiction one of the most supportive places to be junior mining on the planet I don’t, I wouldn’t want to be anywhere else.

You then look towards the market and see what’s happening and what we see is a strong recalibration from the investment community two producers, two producers with a feasible, probably non-speculative economic growth that can support their own growth without external needs capital. So I would expect that expectation actually is a wrong word we’re already seeing an inflow of new investor into our story that represents some of the best U.S. based investors there are.

We’re proud of them and they understand I think well what we’re doing. I think many of them in their analysis from the macro perspective believe that we’re at all time lows in junior mining valuations and so we are seeing a coincident of our internally generated on the ground produced value growing rapidly at a point in time where the market is at historical and in spite some multiples and some measurements were at 50 years lows in terms of just market comps in terms of valuation. See both macro and micro or internal organic if you will, growth and value.

And if I could add one more piece, our shareholder base is incredibly robust at these levels in lower meaning we have good satisfaction and great stability in our base and so I don’t want to say the growth is going to be explosive, it is in the terms of what’s happening on the ground but it could also be in terms of the appreciation that we see from new investment. So I think both location which I mentioned earlier Nevada and timing could turn out to be incredibly well when we’re looking back 12 months or nine months from now.

Jerry William - Stockholder

Okay. I just think that things are so broadly progressing on all fronts and is high as this (indiscernible) reflecting the sack race.

Corrado De Gasperis

Although we’re seeing a constant increase in interest we’re seeing a constant approach of the types of investors that we really would love to see keep coming into the story. So that you know it feels inevitable to me.

Jerry William - Stockholder

Okay, thank you.

Operator

(Operator Instructions) There are no further questions at this time. Please continue.

Corrado De Gasperis

Thank you. I world just like to conclude in re-summarizing that we’re really on track here for achieving our full year production goal and that’s one meaningful than just a number because it means substantial sequential growth both in terms of revenue and cash flow. That’s what we measure ourselves by with our revenue what’s our cash flow we think it is a fundamental only way to value our company it’s growing and it’s growing strongly and for us it’s the watershed event.

Today is not minor that we hit the target of operating rate that we hit it early and that were sustaining and growing from it. So, I very much look forward to these next couple of months of production and I very much look forward to hitting out in the road and better communicating it and I very much look forward to on our next quarter reporting the second results. So thank you all and have a great day.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line. And have a great day.

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