# Comstock Inc.: Form 10-Q for the period ended Jun 30, 2013

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q
- Filed: 2013-08-08
- Accepted by EDGAR: Aug 8, 2013, 17:00 ET
- Period: 2013-06-30
- Accession: 0001144204-13-044019
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000114420413044019/v350469_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000114420413044019/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-04-01 to 2013-06-30 | $7.0m | us-gaap:Revenues |
| Revenue | 6 months, 2013-01-01 to 2013-06-30 | $10.8m | us-gaap:Revenues |
| Operating income | 3 months, 2013-04-01 to 2013-06-30 | −$5.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2013-01-01 to 2013-06-30 | −$11.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-04-01 to 2013-06-30 | $228.5k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2013-01-01 to 2013-06-30 | $691.9k | us-gaap:InterestExpense |
| Net income | 3 months, 2013-04-01 to 2013-06-30 | −$5.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2013-01-01 to 2013-06-30 | −$11.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-04-01 to 2013-06-30 | −$0.11 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2013-01-01 to 2013-06-30 | −$0.24 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-04-01 to 2013-06-30 | −$0.11 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2013-01-01 to 2013-06-30 | −$0.24 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-04-01 to 2013-06-30 | 57,443,706 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2013-01-01 to 2013-06-30 | 54,571,012 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2013-01-01 to 2013-06-30 | −$8.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2013-04-01 to 2013-06-30 | $1.1m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 6 months, 2013-01-01 to 2013-06-30 | $1.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-06-30 | $2.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-06-30 | $8.4m | us-gaap:AssetsCurrent |
| Total assets | at 2013-06-30 | $38.5m | us-gaap:Assets |
| Current liabilities | at 2013-06-30 | $12.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-06-30 | $21.5m | us-gaap:Liabilities |
| Long-term debt | at 2013-06-30 | $4.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2013-06-30 | $2.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2013-06-30 | $16.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,193 characters.

The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. It should be read in conjunction with the condensed consolidated financial statements and accompanying notes also included in this Form 10-Q and our Annual Report on Form 10-K as of and for the fiscal year ended December 31, 2012.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of June 30, 2013, and for the three and six month periods ended June 30, 2013, as well as our future results.

### Overview

The Company is a producing Nevada-based, gold and silver mining company with extensive, contiguous property in the historic Comstock and Silver City mining districts (collectively, the “Comstock District”). The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City. The Company began acquiring properties and developing projects in the Comstock District in 2003. Since then, the Company has consolidated a substantial portion of the historic Comstock District, secured permits, built an infrastructure and brought exploration projects into production.

Because of the Comstock District’s historical significance, the geology is well known and has been extensively studied by the Company, our advisors and many independent researchers. We have expanded our understanding of the geology of the project area through vigorous surface mapping and drill hole logging. The volume of geologic data is immense, and thus far the reliability has been excellent, particularly in the various Lucerne Mine and Resource Areas. We have amassed a large library of historical and current geological and other data and detailed surface mapping of Comstock District properties. As we continue our detailed exploration mapping, close spaced drilling and initial mine production, new details emerge that significantly influence our understanding of the local and regional geology.

Our Lucerne Resource Area is located in Storey County, Nevada, approximately three miles south of Virginia City and 30 miles southeast of Reno. Our Dayton Resource Area is located in Lyon County, Nevada, approximately six miles south of Virginia City. Access to the properties is by State Route 342, a paved highway.

The near term goal of our business plan is to deliver stockholder value by: 1) validating qualified resources (measured and indicated) and reserves (proven and probable) of at least 3,250,000 gold equivalent ounces from our first two resource areas, Lucerne and Dayton; 2) achieving initial commercial mining and processing operations in the Lucerne Mine with annual production rates of approximately 20,000 gold equivalent ounces; and 3) growing production through the commercial development and expansions of both the Lucerne and Dayton Resource Areas.

As part of this plan, the Company has developed the exploration and development-drilling programs intended to validate and expand mine design for the existing Lucerne Mine and to validate a mine design for the Dayton Resource Area. The same plan is designed to identify and validate qualified resources and reserves, in just these two resource areas, containing at least 3,250,000 gold equivalent ounces. The Company has already validated measured and indicated resources in the Lucerne and Dayton Areas containing over 2,000,000 gold equivalent ounces.

The Company has also developed a mine plan and achieved initial commercial mining and processing operations in the Lucerne Mine. Production has ramped up to the targeted 20,000 gold-equivalent-ounce annual production rate during the second quarter of 2013. This target was achieved by maximizing existing permitting capacity constraints around our existing heap leach processing facility. The Company’s existing heap leach processing facility will be expanded, once certain permit modifications are received. The Company has already filed for, and received most of, the permits required for expanding above the existing levels.

We intend to continue to acquire additional properties in the Comstock District, expanding our footprint and creating opportunities for exploration and mining. The Company owns or controls approximately 5,900 acres of mining claims and parcels in the Comstock and Silver City Districts. The acreage is comprised of approximately 1,350 acres of patented claims (private lands) and surface parcels (private lands) and approximately 4,550 acres of unpatented mining claims, which the Bureau of Land Management (“BLM”) administers.

### Current Projects

The Company’s headquarters, mine operations and heap leach processing facility are in Storey County, Nevada, at 1200 American Flat Road, approximately three miles south of Virginia City, Nevada and 30 miles southeast of Reno, Nevada. The Company has focused to date on the Lucerne Resource Area (including the east-side target within this area), the Dayton Resource Area and the Spring Valley exploration target. We also plan on focusing future exploration on the Northern Extension, Northern Targets, and Occidental Target Areas subsequent to the exploration and development of Lucerne, Dayton and Spring Valley.

The Lucerne Resource Area has been the focus of the Company’s exploration and development efforts since 2007. It includes the previously mined Billie the Kid, Hartford and Lucerne mining claims, and extends northeasterly to the area of the historic Woodville bonanza, and north to the historic Justice and Keystone mines, plus the extension of these areas down-dip to the east. The Company has the key mining permits required and has resumed mining in the Billie the Kid, Harford and Lucerne west-side mining chains. The Lucerne Resource Area is approximately 5,000 feet long, with an average width of 600 feet, representing less than three percent of the land holdings controlled by the Company. The east-side target within this area ranks as one of the Company’s top exploration and potential mine production expansion targets.

For the Lucerne Mine expansion, the Company filed the following permit modifications during the first half of the year: 1) an expanded Water Pollution Control Permit; 2) a proposed Engineering Design Change (EDR) for the construction of storm water diversion structures around our heap leach processing facility (both with the Nevada Division of Environmental Protection); and 3) an expanded Special Use Permit with Storey County, Nevada, that, all together, allow for expanded capacity and processing rates of our heap leach processing facility. The EDR Permit and Special Use Permit were approved in June and July, 2013, respectively, and the Water Pollution Control Permit is expected to be approved by the end of September, 2013. These approvals will enable expanded and extended rates of production for the Lucerne Mine, starting in the fourth quarter of 2013.

The Dayton Resource Area lies southwest of Silver City, generally from the Dayton, Kossuth and Alhambra claims, including the old Dayton mine workings, south to where the Kossuth claim crosses State Route 341. The historic Dayton mine was the last major underground mining operation in the Comstock District, before being closed after the War Production Board promulgated Limitation Order L-208, 7 F. R. 7992 on October 8, 1942, that closed down all gold mining operations in the United States and its territories. The Dayton Resource Area ranks as one of the Company’s top exploration and potential mine production targets.

The Spring Valley exploration target lies at the southern end of the Comstock District, where the mineralized structures lie mostly concealed beneath a veneer of sediment gravels. The area includes the Kossuth claim south of State Route 341, the Dondero property, the New Daney lode mining claims and the Company’s placer mining claims in Spring Valley and Gold Canyon.

The Northern Extension, Northern Targets and Occidental areas represent exploration target areas that contain many historic mining operations, including the Overman, Con Imperial, Caledonia and Yellow Jacket mines, among others. Previous operators have explored the various mines in this area, some of which have led to mineralized-material inventories. We believe that our consolidation of the Comstock District is substantial and has provided us with opportunities to utilize the historical information available to identify drilling targets efficiently and with significant potential.

Our Comstock exploration activities include open pit gold and silver test mining. As defined by the Securities Exchange Commission (“SEC”) Industry Guide 7, we have not yet established any proven or probable reserves at our Comstock Lode Project.

The Company’s hospitality segment owns and operates the Gold Hill Hotel and related cottages. The hospitality segment is not generally seasonal in nature except for November through February when operations are generally slow. Financial information for each of our segments is disclosed in footnote 8 to the condensed consolidated financial statements.

### Exploration

The Comstock Mining district is a well-known, historic mining district, with over 150 years of production-based history. We have access to extensive reports and maps on various properties in the district, but to-date, we have only conducted detailed geologic exploration and resource modeling on approximately 10% of our approximate 5,900 acre land position. We plan on conducting ongoing exploration programs to locate and test surface mineral targets as well as deep underground bonanza targets by using historic compilation, geological mapping, geochemical and geophysical investigations and drilling. The goal of our strategic plan includes validating qualified resources (measured and indicated) and reserves (proven and probable) of 3,250,000 gold equivalent ounces, from our first two resource areas, Lucerne and Dayton, requiring execution of planned exploration and development drilling. Overall, the Company has already validated measured and indicated resources in the Lucerne and Dayton areas containing over 2,000,000 gold equivalent ounces. Mr. Larry Martin, our Vice President of Exploration and Mine Development and a Certified Professional Geologist (CPG), manages these drill programs.

Since 2008, the Company’s geologists have recognized the enhanced grades of precious metals when northeasterly striking mineralized structures intersected the Silver City fault zone. The Company’s geologists have now identified a specific, structurally bounded, wedge-like, zone hosting significant gold and silver. We call this structural intersection the ‘Chute Zone’. Comstock geologists believe that the structural intersection and geometric shape of the Chute Zone is similar to highly mineralized zones that were historically mined in the Comstock District as bonanzas. There were 33 mined bonanza ore zones located along the northern Comstock mineral belt.

The discovery of the Chute Zone is the result of drilling, analysis and interpretation by the Company’s geological team. The Company hopes to gain a deeper understanding of the controlling geologic attributes of the Chute Zone, allowing for even more efficient identification of such structures in future exploration programs along the Comstock. Based upon the structural controls of the higher-grade Chute Zone, the Company has recognized structural similarities in higher-grade zones at Dayton and other mineralized areas within the Company’s property position. Expectations are high that further drilling and development will allow for important extensions to these higher-grade zones. The Company is currently assessing how best to develop and ultimately mine this mineralized material, as it represents the first substantial opportunity for an underground mining development by the Company.

The next phases of our exploration, discovery and development program will continue with three significant intermediate objectives: 1) step-out, development and infill drilling in the east-side of the Lucerne Resource Area, including the Chute Zone, 2) step-out, development and infill drilling in the Dayton Resource Area, and 3) exploration drilling on high priority targets, including Spring Valley.

The infill drilling in the Dayton Resource Area will provide detailed information needed to create a mine plan for the proposed Dayton mine, to be developed in parallel with the expanded Lucerne mine.

The step-out, development and infill drilling phases in the east-side of the Lucerne Resource Area will test the continuity of mineralization to the north and south, and at greater depths to the east, including the Chute Zone. The infill-drilling phase will then provide the detailed information needed to develop an expanded mine plan for the Lucerne mine.

### Production

During the second quarter of 2013, we completed the ramp up and stabilization activities of the production system, including significant improvements to the metal extraction processes, particularly the Merrill Crowe facility. We invested approximately $0.8 million for certain debottlenecking actions associated with pump and pipe capacities, ensuring the Merrill Crowe and heap leach facilities could operate at fluid processing rates of up to 1,000 gallons per minute. The previously constrained metal extraction processes contributed to the relatively lower shipments during the first quarter. Metal sales for the six months ended June 30, 2013 totaled $11.9 million, with gold revenues of $10.5 million. We also sold $1.4 million of silver. Metal sales for the three months ended June 30, 2013 totaled $7.7 million, with gold revenues of $6.8 million. We also sold $0.9 million of silver in the second quarter. Silver is accounted for as a by-product credit in costs applicable to mining revenue for financial reporting purposes. For the three months ended June 30, 2013, the Company crushed and stacked over 368,000 dry tons of mineralized material and shipped 4,921 ounces of gold and 42,992 ounces of silver compared to 234,000 dry tons of mineralized materials crushed and stacked and shipments of 2,261 ounces of gold and 15,599 ounces of silver in the quarter ended March 31, 2013. Gold grades onto the pad averaged 0.017 ounces per ton in the second quarter, but at the lower end of our production grade range. Material placed on the heap leach pad remains under solution, although not continuously, until the target recovery rates are achieved. Higher grades are planned for the second half of the year.

The Company continues ramping up its production and exceeded its targeted production rate of 400 ounces per week, initially targeted for the end of April, and has averaged over 413 gold-equivalent ounces per week, for the three months ended June 30, 2013. The Company is continuously adjusting its operations to improve grade, maximize yields and increase tons crushed and stacked.

Bullion slumped 23 percent during the second quarter of 2013, as the Federal Reserve Chairman, Ben S. Bernanke, initially said that the U.S. central bank may start reducing its $85 billion of monthly asset purchases, implying the reductions may commence sooner than previously expected. Subsequently, minutes of a Fed policy meeting released in early July showed many Federal Reserve officials wanted to see more signs of improving employment before backing a reduction in monthly asset purchases. Federal Reserve Chairman Ben S. Bernanke then corroborated those minutes saying that the U.S. economy needs “highly accommodative monetary policy for the foreseeable future.” Gold prices responded by experiencing a weekly increase for that week in July, that was the highest weekly increase in almost two years. By the fourth week of July, Gold was sharply up, to a four week high, trading above $1,325. Silver also gained significantly, recovering from a low of approximately $18.50 in late June, 2013, to over $20 per ounce by the fourth week of July.

Throughout the first six months of 2013, the Company realized an average price of $1,454.27 price per ounce of gold and a $23.87 average sales price per ounce of silver. In comparison, commodity market prices in the first half of 2013 averaged $1,522.06 per ounce of gold and $26.59 per ounce of silver.

### Operating Costs

During the first half of 2013, actual Lucerne Mine costs applicable to mining revenue were approximately $13.5 million, $12.1 million net of silver credits. Cost applicable to mining revenue include mining and processing labor, maintenance, drilling and blasting and assaying costs associated with higher production rates and higher absorbed inventory costing associated with costs incurred in advance of achieving the targeted production rate.

Costs applicable to mining revenue for the first half of 2013 include $1 million of higher hauling costs, including the previously incurred redundancy associated with our inability to use an existing haul road, for most of the first quarter that crosses Lot 51 and the transition costs associated with renting new haul vehicles while transitioning out of the existing, temporary vehicles. Costs applicable to mining revenue also include $1.5 million of depreciation and a $1 million write down of inventory to market value for the six months ended June 30, 2013. At the end of the first quarter, the Company converted to a larger fleet of haul-trucks and added a shift to its mining and crushing activities, and significantly enhanced maintenance activities in these two areas. These changes added approximately $5 million in annual operating expenses with the objective of debottlenecking, testing, stabilizing and ultimately operating the system at higher rates of production. Management believes the system is now capable of operating at twice the production rates of the first six months and plans on operating at those higher levels once final permits, expected in late September 2013, are approved.

During the second quarter, once production was debottlenecked, tested and stabilized, the Company focused on stream-lining the organization and reducing general, administrative, consulting and other related costs. The Company is also focused on reducing costs applicable to mining and leveraging the existing fixed operating expenses for the production of significantly higher ounces in the second half of 2013. Costs applicable to mining per ounces added to inventory during the quarter and, on average, in ending inventory, are lower than the previous quarter by over 17% and 21%, respectively.

Our expenses associated with mining operations do not include corporate administration or other general and administrative costs, nor do they include exploration and mine development costs.

### 2013 & 2014 Production Outlook

The Company’s current financial analysis for the Lucerne Mine anticipates 2013 annual cash costs applicable to mining revenue, including all mining, processing, mine administration and support costs of approximately $26-28 million per annum with an anticipated production schedule ramping up to 2 million tons per annum run rate, during the fourth quarter of 2013. The Company currently anticipates production rates beyond the 400 gold-equivalent ounces per week in the second half of the year, targeting 600 ounces per week by the end of the September, or a run rate of 30,000 gold equivalent ounces per annum for September and the full fourth quarter and 770 ounces per week, or a run rate of 40,000 gold equivalent ounces per annum, for the full first quarter of 2014, once production has been permitted to expand in the fourth quarter. This would result in an all in cash costs applicable to mining, processing, mine administration and support of approximately $725 - $795 per ounce run rate, by early 2014.

### Recent Developments

From June 30, 2013 through August 2, 2013, preferred shareholders converted 4,070.58 shares of convertible preferred stock into 4,197,421 common shares. Through August 2, 2013 the Company issued a total of 1,296,368 shares of common stock for dividends and other employee and non-employee compensation.

In January 2013, the Company initially determined that an accelerated capital contribution may have been required pursuant to the operating agreement of Northern Comstock Mining, LLC. Pursuant to the operating agreement, $5,000,000 in accelerated payments are triggered when the Company determines through geological estimates derived from a validated, third party technical report that an additional 200,000 gold equivalent ounces of measured and indicated resources, have been validated. However, upon further analysis, the Company concluded that such threshold was not surpassed and therefore no accelerated capital contribution is required at this time.

### Land and Mineral Right Acquisitions

We did not have any material land or mineral right acquisitions during the six months ended June 30, 2013, and through the date of this report. We will continue to increase our footprint in the Comstock District through strategic acquisitions.

### Comparative Financial Information

Since the Company just recently commenced production, and correspondingly, did not recognize revenues from gold and silver production and sales until late fiscal 2012, certain results associated with the three and six month periods ended June 30, 2013 may not be comparable with the three and six months ended June 30, 2012. For these line items we have provided additional analysis as noted below.

The comparative financial information is reflected in the following table:

#### Three Months Ended:

|  | June 30, 2013 | June 30, 2012 | Change |
| --- | ---: | ---: | ---: |
| Revenue - Mining | $6,811,516 | $- | $6,811,516 |
| Revenue - Hospitality | 174,393 | 182,523 | (8,130) |
| Cost applicable to mining revenue | 8,233,818 | - | 8,233,818 |
| Hospitality operating costs | 253,583 | 225,390 | 28,193 |
| Reclamation and exploration | 2,336,948 | 5,504,368 | (3,167,420) |
| General and administrative | 1,486,947 | 2,723,697 | (1,236,750) |
| Consulting and professional fees | 339,566 | 782,290 | (442,724) |
| Loss from operations | (5,664,953) | (9,053,222) | (3,388,269) |
| OTHER INCOME (EXPENSE) |  |  |  |
| Change in fair value of derivatives | 81,787 | 117,900 | (36,113) |
| Interest expense | (228,511) | (52,738) | 175,773 |
| Interest income | 818 | 7,714 | (6,896) |
| Gain on settlement of debt obligations | 286,535 | - | 286,535 |
| Net loss | $(5,524,324) | $(8,980,346) | $(3,456,022) |

21

Mining revenue from the sale of gold in the second quarter of 2013 was $6.8 million. We also produced and sold $0.9 million worth of silver in the second quarter of 2013. Silver is accounted for as a by-product credit in costs applicable to mining revenue for financial reporting purposes. We recorded our first mining revenue from gold sales in October 2012, and accordingly, we did not generate mining revenue during the three months ended June 30, 2012.

During the second quarter of 2013, we completed the ramp up and stabilization activities of the production system, including improvements to the hauling, crushing and metal extraction processes.

For the three months ended June 30, 2013, the Company crushed and stacked over 368,000 dry tons of mineralized material and shipped 4,921 ounces of gold and 42,992 ounces of silver compared to 234,000 dry tons of mineralized materials crushed and stacked and shipments of 2,261 ounces of gold and 15,599 ounces of silver in the quarter ended March 31, 2013. Material placed on the heap leach pad remains under solution, although not continuously, until the target recovery rates are achieved.

Throughout the three months ended June 30, 2013, the Company realized an average price of $1,384.17 price per ounce of gold and a $21.65 average sales price per ounce of silver. In comparison, commodity market prices in the second quarter of 2013 averaged $1,413.64 per ounce of gold and $23.11 per ounce of silver.

The Company continues ramping up its production and exceeded its targeted production rate of 400 ounces per week, initially targeted for the end of April, 2013 and has averaged over 413 gold-equivalent ounces for the three months ended June 30, 2013. The Company is continuously adjusting its operations to improve grade, maximize yields and increase tons crushed and stacked.

Hospitality revenue from the cottages, hotel rooms, restaurant and bar was stable for the three months ended June 30, 2013, compared to the same quarter in 2012. Consistent with current economic conditions and seasonal variations experienced during these periods, we do not expect material changes in our hospitality operational results. We further expect our hospitality results to become less material to our overall operations as we continue to execute our mine development plans.

Costs applicable to mining revenue were $8.2 million. The Company was not producing during the comparable prior period quarter. The increases from the prior quarter resulted from increased costs of $1.2 million for higher labor, fuel, equipment rental, maintenance, blasting and assaying costs associated with ramping up to higher production rates, an increase of approximately $1 million for the write down of inventory cost higher than realizable market value, somewhat offset by lower hauling costs associated with the redundancy of transitioning from hauling on the state route back onto our primary haul route, and higher absorbed inventory costing associated with costs incurred in advance of achieving the targeted production rate.

Hospitality operating costs increased approximately 13% to $253,583 for the quarter ended June 30, 2013 compared with the three months ended June 30, 2012. The hotel operating costs represents costs incurred for providing room, banquet, restaurant and bar services at the hotel. The increase was attributable to higher labor, maintenance and food costs in the quarter.

Reclamation and exploration expenses decreased by $3.1 million or approximately 58% compared to the three-month period ended June 30, 2012. The decrease is primarily the result of the completion of our 2012 drilling program that commenced in January 2012 and completed in December 2012. Exploration activities in the second quarter primarily represented geological support, grade and metallurgical analysis and assessment.

General and administrative expenses, inclusive of professional and consulting fees, decreased by $1.7 million or approximately 48% compared to the period ended June 30, 2012. The decrease is primarily the result of lower stock-based compensation expense and legal and administrative services.

During the three months ended June 30, 2013, we recognized a gain on the settlement of our Auramet Facility obligations of approximately $287 thousand that is not expected to be recurring. Further, the estimated fair value of our derivative liabilities continued to decline resulting in the recognition of approximately $82 thousand of other income.

Interest expense increased by $176 thousand, or approximately 333% for the three months ended June 30, 2013 from the three months ended June 30, 2012, primarily due to the 2012 equipment financing (Caterpillar Equipment Facility) and revolving debt facility entered into on 2012 (Auramet Facility) supporting our gold and silver production. During the three months ended June 30, 2013, we reduced our outstanding debt balance by $4.2 million or approximately 40%. This decrease is primarily attributable to the payoff of the Auramet Facility during the second quarter.

We anticipate continued reductions in our debt balances through year end, effectively reducing our prospective borrowing costs.

#### Six Months Ended:

|  | June 30, 2013 | June 30, 2012 | Change |
| --- | ---: | ---: | ---: |
| Revenue - Mining | $10,479,438 | $- | $10,479,438 |
| Revenue - Hospitality | 296,237 | 294,245 | 1,992 |
| Cost applicable to mining revenue | 12,069,915 | - | 12,069,915 |
| Hospitality operating costs | 459,923 | 406,083 | 53,840 |
| Reclamation and exploration | 4,425,812 | 10,245,232 | (5,819,420) |
| General and administrative | 4,238,293 | 4,918,218 | (679,925) |
| Consulting and professional fees | 984,845 | 1,438,750 | (453,905) |
| Loss from operations | (11,403,113) | (16,714,038) | (5,310,925) |
| OTHER INCOME (EXPENSE) |  |  |  |
| Change in fair value of derivatives | 519,601 | 484,700 | 34,901 |
| Interest expense | (691,947) | (97,948) | 593,999 |
| Interest income | 1,568 | 14,342 | (12,774) |
| Gain on settlement of debt obligations | 286,535 | - | 286,535 |
| Net loss | $(11,287,356) | $(16,312,944) | $(5,025,588) |

Mining revenue from the sale of gold in the first six months of 2013 was $10.5 million. We also produced and sold $1.4 million worth of silver in the first half of 2013. Silver is accounted for as a by-product credit in costs applicable to mining revenue for financial reporting purposes. We recorded our first mining revenue from gold sales in October 2012, and accordingly, we did not generate mining revenue during the six months ended June 30, 2012.

During the first six months of 2013, we completed the ramp up and stabilization activities of the production system, including improvements to the hauling, crushing and metal extraction processes.

During the six months ended 2013, the Company crushed and stacked over 600,000 dry tons of mineralized material and shipped 7,206 ounces of gold and 59,542 ounces of silver.

Throughout the six months ended June 30, 2013, the Company realized an average price of $1,454.27 price per ounce of gold and a $23.87 average sales price per ounce of silver. In comparison, commodity market prices in the first six months of 2013 averaged $1,522.06 per ounce of gold and $26.59 per ounce of silver.

Hospitality revenue from the cottages, hotel rooms, restaurant and bar was stable for the six months ended June 30, 2013 compared to the same quarter in 2012. Consistent with current economic conditions and seasonal variations experienced during these periods, we do not expect material changes in our hospitality operational results.

Costs applicable to mining revenue for the first half of 2013 were approximately 115% of the recognized revenue during the period (the Company was not producing during the comparable prior six month period). Costs applicable to mining revenue include approximately $1.5 million for depreciation, amortization, and depletion and approximately $1 million from the write down in the value of our inventory caused by declining gold prices. Since the end of 2013 second quarter, gold prices have begun rising from the second quarter lows; however, overall, gold prices have had increasing levels of volatility.

Hospitality operating costs increased approximately 13% to $460 thousand for the six months ended June 30, 2013 compared with the six months ended June 30, 2012. The hotel operating costs represents costs incurred for providing room, banquet, restaurant and bar services at the hotel. The increase was attributable to higher labor, maintenance and food costs in the period.

Reclamation and exploration expenses decreased by $5.8 million or approximately 57% compared to the six-month period ended June 30, 2012. The decrease is primarily the result of the completion of our 2012 drilling program that commenced in January 2012 and completed in December 2012, and the transition of the Company from an exploration-based company to a production based company.

During the six months ended June 30, 2013, we sold mining equipment and vehicles with a gross book value of $3,165,746 at a loss of $1,015,496. The loss is included in general and administrative expenses in the condensed consolidated statements of operations.

General and administrative expenses, inclusive of professional and consulting fees, decreased by $1.1 million or approximately 18% compared to the period ended June 30, 2012. The decrease is primarily the result of lower stock based compensation, legal and administrative services.

During the six months ended June 30, 2013, we recognized a gain on the settlement of our Auramet Facility obligations of approximately $287 thousand that is not expected to be recurring. Further, the estimated fair value of our derivative liabilities continued to decline resulting in the recognition of approximately $520 thousand of other income.

Interest expense increased by $0.6 million, or approximately 606% for the six months ended June 30, 2013 from the six months ended June 30, 2012, primarily due to the 2012 equipment financing (Caterpillar Equipment Facility) and revolving debt facility entered into 202 (Auramet Facility) supporting our gold and silver production. As noted above, the Auramet Facility was settled during the second quarter.

### Liquidity and Capital Resources

Total current assets were $8.4 million at June 30, 2013. Cash and cash equivalents on hand at June 30, 2013 totaled $2.4 million. Inventories, stockpiles, and mineralized material on leach pad totaled $4.3 million including $0.6 million of in-process and finished goods. In March 2013, the Company raised $10 million in gross proceeds (approximately $9.7 million, net of issuance costs) through an underwritten public offering of 5,000,000 shares of our common stock at a price of $2.00 per share. During the first six months of 2013, the company reduced its long-term debt obligations by $7.3 million, from $13.7 million down to $6.4 million, including the full pay down of our $5 million revolving credit facility. The Company plans on paying off an additional $1 million of debt obligations during the second half of 2013.

Net cash used in operating activities for the six months ended June 30, 2013 was approximately $8.4 million as compared to a use of $10.1 million for the six months ended June 30, 2012. Our use of cash in the first six months of 2013 was primarily from operating losses associated with ramping up production, including an increase of $390 thousand for inventory and an increase of $2.3 million in accounts receivable, net of $2.7 million of gold produced and directly transferred as payment on our Auramet Facility which we completely paid off.

Net cash used in investing activities for the six months ended June 30, 2013 was $1.1 million, primarily as the result of $572 thousand of proceeds from the transfer of equipment that was previously used in our mining development and production activities, net of capital asset purchases of $1.0 million and bond deposit increases of $650 thousand. Cash used in investing for the six months ended June 30, 2012 was approximately $7.5 million, primarily $8.3 million for purchases of equipment used in our mining development and production activities, $0.7 million for increases in reclamation bond deposits offset by $1.5 million in proceeds from sale of available-for-sale securities.

Net cash provided by financing activities for the six months ended June 30, 2013 was $5.9 million, comprised of net proceeds of approximately $9.7 million from the sale of securities through a public offering of 5,000,000 shares of our common stock at a price of $2.00 per share, partially off-set by the pay-down of our long-term debt obligations of approximately $3.8 million. Net cash provided by financing activities for the six months ended June 30, 2012, was $15.2 million, substantially all comprising of net proceeds from the sale of public securities through an underwritten public offering of 9,078,948 shares of common stock at a price of $1.90 per share.

When pouring commenced in late 2012, the Company averaged approximately 200 gold-equivalent ounces poured per week. The Company is successfully and continuously adjusting its operations to improve grade, maximize yields and increase tons crushed and stacked. The Company continues ramping up its production and exceeded its targeted production rate of 400 ounces per week for the three months ended June 30, 2013. averaging over 413 ounces per week during the third quarter ended 2013. The Company currently anticipates production rates beyond the 400 gold-equivalent ounces per week in the second half of the year, targeting up to 770 ounce per week, or 40,000 gold equivalent ounces per annum, once production has been permitted to expand in the fourth quarter.

#### Liquidity and Management Plans

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred net operating losses and negative cash flows from operations every year since inception. At June 30, 2013, the Company has cash and cash equivalents of $2.4 million. The Company incurred an operating loss of $11.3 million and used cash flows in operations of $8.4 million, including $2.3 million used for debt repayments, for the six months ended June 30, 2013. The Company continues its efforts to increase production, reduce costs and working capital needs, improve efficiencies, and maximize funds available for working capital. The Company’s current capital resources include cash and cash equivalents and other working capital resources, cash generated through operations, and existing financing arrangements. The Company’s certificate of incorporation permits it to incur indebtedness for money borrowed of up to $5 million at the discretion of the Board of Directors. The Company believes that it could access, on more favorable terms than in the past, existing facilities that have not terminated or one or more other credit facilities. The Company currently has no indebtedness for borrowed money.

The Company’s current mine plan will require that the Company utilize existing financing arrangements or raise additional funds. The Company has financed its activities principally from the sale of equity securities and from debt financing. While the Company has been successful in the past in obtaining the necessary capital to support its operations, and has similar future plans to access various capital resources, including registered debt or equity financings from its existing shelf registration, borrowings, or other means, there is no assurance that the Company will be able to obtain additional equity capital or other financing.

Insufficient near-term financing or future production rates and gold prices below management’s expectations would adversely affect the Company’s results of operations, financial condition and cash flows, and could raise substantial doubt about the Company’s ability to continue as a going concern. If the Company was unable to obtain any necessary additional funds, this could have an immediate material adverse effect on liquidity. In such case, it could be required to limit or discontinue, certain business plans, activities or operations, reduce or delay certain capital expenditures or sell certain assets or businesses. There can be no assurance that the Company would be able to take any of such actions on favorable terms, in a timely manner or at all.

The Company’s recurring losses and negative cash flow from operations require an ongoing assessment of our ability to continue as a going concern. The unaudited consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.

With our March 2013 public offering of 5,000,000 shares of our common stock, resulting in net proceeds of approximately $9.7 million, we intend to increase our current production capacity (primarily through additional permitting), acquire additional mining claims and rights, and continued pay-down our on-going corporate obligations.

For the remainder of 2013, we plan on spending up to $3 million in capital expenditures, primarily to expand our heap leaching and related production capacity. We will also pay down an additional $1 million in debt obligations.

### Contractual Obligations

Our contractual obligations at June 30, 2013 are summarized as follows:

| Contractual Obligations | Payments Due by Period Total | Less than 1 Year | 1 - 3 Years | 4 - 5 Years | More Than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Debt(1) | $7,761,721 | $2,838,350 | $3,582,274 | $1,293,751 | $47,346 |
| Operating Leases(2) | 32,393,275 | 701,475 | 2,811,300 | 1,884,000 | 26,996,500 |
| Reclamation and remediation obligations(3) | 4,743,569 | — | — | — | 4,743,569 |
| Other(4) | 1,400,000 | 1,200,000 | 200,000 | — | — |
|  | $46,298,565 | $4,739,825 | $6,593,574 | $3,177,751 | $31,787,415 |

(1) Amounts represent principal of $6,351,907 and estimated interest payments of $1,409,814, assuming no early extinguishment.

(2) The Company leases certain properties under operating leases expiring at various dates through 2049. Amounts include minimum rental and minimum advance royalty payments.

(3) We are required to mitigate long-term environment impacts by stabilizing, contouring, re-sloping, and re-vegetating various portions of a site after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with plans reviewed and approved by the appropriate regulatory agencies. The estimated undiscounted cash outflows of these reclamation and remediation obligations are reflected here.

(4) In July 2012, the Company placed a $4.67 million reclamation surety bond, through the Lexon Surety Group (“Lexon”) with the State of Nevada’s Bureau of Mining Regulation Reclamation (“BMRR”). The initial cash collateral percentage due to Lexon is approximately 50% of the total state bond amount of $4.67 million. At June 30, 2013, accrued expenses include $1.2 million and other liabilities include $0.2 million remaining due to Lexon for the initial cash collateral.

### Critical Accounting Policies And Estimates

There have not been any material changes to the critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

## Market risk

As filed, 1,360 characters.

**Metal Price –** Changes in the market price of gold may significantly affect our profitability and cash flow. Gold prices fluctuate widely due to factors such as; demand, global mine production levels, investor sentiment, central bank reserves, and the value of the U.S. dollar.

Gold Bullion slumped 23 percent during the second quarter of 2013, as the Federal Reserve Chairman, Ben S. Bernanke, initially said that the U.S. central bank may start reducing its $85 billion of monthly asset purchases, implying the reductions may commence sooner than previously expected. Subsequently, minutes of a Fed policy meeting released in early July showed many Federal Reserve officials wanted to see more signs of improving employment before backing a reduction in monthly asset purchases. Federal Reserve Chairman Ben S. Bernanke then corroborated those minutes saying that the U.S. economy needs “highly accommodative monetary policy for the foreseeable future.” Gold prices responded by experiencing a weekly increase for that week in July, that was the highest weekly increase in almost two years. Silver also gained significantly, from a low of $18.61 to over $20 per ounce.

With exception of the above, there have been no material changes in the market risks discussed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

## Controls and procedures

As filed, 1,720 characters.

### A. Disclosure

### Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Principal Executive Officer (who also serves as our Principal Accounting Officer), an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Exchange Act and SEC’s rules, and that such information is accumulated and communicated to our management, including our Principal Executive, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Our Principal Executive Officer concluded that, as of June 30, 2013, our disclosure controls and procedures were effective.

### B. Internal Control over Financial Reporting

No change in our internal control over financial reporting, as such term is defined in Exchange Act Rule 13(a)-15 occurred during the fiscal quarter ended June 30, 2013, that materially affected or is reasonably likely to materially affect our internal control over financial reporting.

## Risk factors

As filed, 153 characters.

There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

Filed Aug 8, 2013.
Source: SEC EDGAR, the filing index for accession 0001144204-13-044019. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.