Comstock Mining: A LODE Of Gold Waiting To Be Grabbed
Summary
- Comstock is a mining company that is expanding into new potentially lucrative businesses.
- Comstock has been undergoing a multiyear reorganization so it has very little revenue.
- None of the exciting growth has materialized yet.
Investment Thesis
Comstock Mining (NYSE:LODE) is a mining company that is expanding into more profitable non-mining businesses via joint ventures and acquisitions. The Mercury recapture business and the LiNiCo battery rejuvenation process hold the promise of increasing Comstock's revenues by orders of magnitude from where they currently stand. Management's compensation is aligned with shareholders making this company both a buy and a potential 10 bagger or greater.
Current Status of the company
Comstock is a gold mining company that currently does not perform any mining operations. Comstock is officially classified as a penny stock, but is listed on the NYSE. The company halted mining operations in 2016 and has been undergoing a painful reorganization process. In 2020 they reached a turning point in the reorganization and are now poised for growth in 2021 and beyond having entered into exciting new businesses outside of mining for gold. The stock is up over 200% YTD and is generating a lot of interest. If you look at their stock chart over the last 10 years, it becomes clear this is a company that has had some tough times.
As a result of the reorganization, the company has no debt, and over $12 million in cash with several million more expected to come in later this year as a result of selling superfluous assets. This information came from the earnings call and was not found in the most recent financial statements. It will most likely be found in the quarterly results which should be released around May 14th.
Given the unique opportunity Comstock presents, and the pain long-term shareholders have experienced, I go back to how things looked in 2012, the last time the stock experienced a meaningful increase in its price as well as the future potential for their up and coming businesses.
LiNiCo Investment/Operations
LiNiCo is best described as an investment alliance. The operations of LiNiCo are to take used up lithium batteries, or batteries that were not up to spec and turn them into pure cathodes which are what is used to make the batteries for phones, cars, etc.
Comstock owns 45% of LiNiCo, with the potential to own up to 64%. LiNiCo has licensed the patented technology of a Singaporean company called Green Li-ion which LiNiCo also owns 20% of. There are a few pieces missing to get LiNiCo up and running. The first item which is the current focus for the next 90 days is to complete and submit all the necessary permits for their operations. Once that is completed LiNiCo will work to gain partnerships with companies that will supply them with batteries that need to be turned into cathodes.
The question we all are most interested in is, what kind of revenue will this business generate and what the long-term goals are. The CEO said that at 30% of capacity LiNiCo should be generating $100 million in revenue and at 100% capacity it should be able to generate annual revenues of $400 million. Since LODE is a micro-cap stock with a market cap of ~ $150 million, LiNiCo would prove to be transformative to Comstock's financials and by extension stock price.
The way the LiNiCo business and its operations are expected to work are as follows: They receive batteries. The batteries go into a crushing system that also separates non-essential material. The non-essential materials are things like the framing, the metal that contains the battery, etc. The lithium, cobalt, nickel, graphite and other mineralized materials are altogether referred to as black mass. The black mass is put through a process called co-precipitation that turns the black mass into cathode material. This material is estimated to sell somewhere between $20,000 per ton and up to $80,000 per ton.
MCU & MCU-P The Cash Cow
Comstock owns 50% of the joint venture for MCU Philippines (known as the MCU-P) which is currently operating to clean mercury from a mine complex and will produce various by-products that can be sold as well as gold. These operations are expected to be generating cash flow of around $1 million per month based on the rate of finding 1 gram of gold per ton of material. In the Comstock district where they have tested their operations, they were finding 5-7 grams per ton of material making the $1 million per month cash a conservative estimate. The costs of setting up the operations are also relatively inexpensive at a cost of $2 million and they have an estimated operation life of 6-10 years making the MCU-P a cash cow.
The total addressable market for MCU's operations is massive. Thanks to the U.N., 140 nations including the U.S. have signed a document referred to as the Minamata convention which is focused on removing mercury from mines. The U.S. has embraced the convention and is helping other nations adopt it as well. The CEO said during the earnings call they have hundreds of sites they can get into. The strategic importance of the MCU-P site is related to it being renown for being an extremely contaminated ecosystem. If the operations are as successful as expected, nations the world over and hundreds of sites in the U.S. will be knocking on MCU's door.
The Mining Business - Dead or Alive?
Currently, Comstock is going to reenter the exploration phase of their mining operations. The last time they were in a similar position was in 2012. I have reviewed their 10-Ks & Qs from this period to see what might have been reported that caused their stock to rise into the 80s.
In 2020, they completed an aerial geophysical survey of most of the land. The CEO was very excited about this because the survey produced very detailed maps covering depths as low as 1,200 feet and showing the geological structures that exist underneath. The CEO believes this data is highly valuable and as a result the drilling exploration plans are being amended based on the results from the geophysical survey.
In 2012, when they were performing explorations, they spent $18.3 million (pg. 39 of 2012 10-K) and thanks in part to this survey they expect to spend less than $2 million this year validating and discovering what gold is where.
By the end of 2012, the company had an estimated 2 million ounces of gold in their Lucerene & Dayton mines (2012 10-K page 23). At this time, an ounce of gold was worth around $1,650 and they had increased mining to a rate of 20,000 ounces per year. This would have created an estimated $33 million in revenue. With those expectations the stock price nearly doubled from $45 a share in May 2012 to $84 a share in September 2012. Given that gold prices now are at about $1800, the company would need to mine 18,300 oz of gold a year to earn the same amount of revenue, and depending on how much gold they have, the stock could move up in a big way.
During the earnings call and in the 10-K, we were not provided an estimate for how much gold they expect to mine on a yearly basis. During the earnings call on March 11, 2021 the CEO said that exploration drilling would begin within 90 days which means they should start by June 9th at the latest.
So to be clear there is no confirmation that any gold will be mined in the future, but management seems positive that will be the case. The CEO also stated during the earnings call they will release a technical report on the gold resources in Q3.
New businesses = High Risk and High Reward
At present LODE has not yet begun producing any revenues from the confirmed information that we have. This makes investing in LODE risky because none of the operations may play out as management expects. An investment in LODE at this time is an investment at the ground level before any revenues are produced, without a doubt that is a very high risk proposition.
Management Looks Reliable
With the risks taken into account, management makes me feel comfortable with the risks for a few reasons. I will start with the CEO's background; he is a former employee from KPMG, one of the 4 largest accounting firms in the country where he gained experience with miners and other industrial companies. During his 10 years there, he climbed to the ranks of partner. After his time at KPMG, he went into the mineral business in 1998.
He worked at GrafTech international as the CFO which deals with cathodes and is most likely why he has such a deep understanding of the business LiNiCo is involved in. He also worked at Barzel Industries that was an iron mining company. I think it's also fair to disclose that I work in public accounting so I have an understanding of the sort of people that work in this profession and that is part of why I trust the CEO. His industry experience also gives me confidence that his expectations are grounded in reality.
During the earnings call, management did a few things that I consider success indicators. The first item is in regards to a short-seller report. The CEO was asked about his thoughts regarding the short-seller report and given the current climate with the rise of Wall Street Bets, and stonk talk you might expect the CEO to make some comment dismissing short sellers for being short sellers. The CEO responded differently, he said:
"We think it's an unfortunate assessment. I certainly don't think that they have the depth of appreciation for what we've really established here as a platform"… "So to suggest that we're a failed mining endeavor, I think there's just not a lot of understating of what we're doing." "We'd love to talk to them about what we're doing. I think they'd be shocked."
In our present culture where differences of opinion are treated and accepted as an act of war, I believe the CEO's response shows grace, and empathy toward people that could be viewed as adversaries or enemies. This shows that management and by extension the organizational culture are class acts. This gives me some confidence that the estimates provided are not merely numbers pulled out of thin air but represent a fair assessment for what results could be in the future.
During the earnings call while the CEO showed excitement about the future of the company he also set realistic expectations stating very clearly LiNiCo is a tiny player in the industry, and that's okay.
"We don't have delusions of grandeur we are excited about having one facility to 10,000 tons a year making incredible amounts of money."
Between management's experience, manners, and honesty I believe management will be successful and reward shareholders over the long term.
Conclusion
LODE is a buy, in my opinion, the risk here is asymmetrical as the stock has the potential to increase 3x and more. Investors should have sufficient time to perform their due diligence and gradually work their way to a full position in their portfolio. At its fastest pace the stock could pop after the Q1 2021 earnings call. I think it is more likely for the stock to gain momentum in Q3 when the gold report comes out, or in early 2022 as the projects are built out and results begin to materialize.
Lastly, management has the goal of making the stock worth $12 a share minimum by 2023 which presents a 3x gain from current prices. Their incentives are aligned with shareholders and that has driven tremendous results at other companies.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LODE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (36)
2. Pure unadulterated gambling stocks are not based on reality. Doge coin for example, unlike other altcoins that have some snazzy tech that's suppose to do something someday Doge coin does nothing and was created with the intent of doing nothing.
3. Comstock is in fact doing real tangible things that we can see and touch. They have an operation in the Philippines to decontaminate a site and the decontamination process should produce by products that generate income.Whether or not the strategy is successful is a risk, but its the same risk every legitimate business takes.
