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Comstock Mining Inc

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Comstock Mining Inc
Financial Snapshot

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(as of December 31, 2015)

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 as of and for the year ended December 31, 2015, as well as our future results. It should be read in conjunction with the consolidated financial statements and accompanying notes also included in this Form 10-K.

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”) and is an emerging leader in sustainable, responsible mining, including concurrent and accelerated reclamations, soil sampling, voluntary air monitoring, cultural asset protection and historical restorations. The Company began acquiring properties in the Comstock District in 2003. Since then, the Company has consolidated a significant portion of the Comstock District, rezoned its properties consistent with mining uses, built an infrastructure, and brought an exploration project into production. The Company received the 2015 Nevada Excellence in Mine Reclamation award, voted on unanimously by five participating Federal and State of Nevada agencies.

The Company continues acquiring additional properties in the district, expanding its footprint and creating opportunities for further exploration, development and mining. The near term goal of our business plan is to deliver stockholder value by validating qualified reserves (proven and probable) and developing longer-lived mine plans from our first two resource areas, Lucerne and Dayton, and significantly grow the commercial development of our operations through extended, long-lived mine plans that are economically feasible and socially responsible.

The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City. 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. Our Lucerne Resource area is located in Storey County, Nevada, approximately three miles south of Virginia City. 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 route.

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, geophysical analysis, exploration drilling, drill hole logging and extensive mine development and planning, including geological level plans and cross-sectional analysis. The volume of geologic data is immense, and thus far the reliability has been excellent, particularly in the various Lucerne Mine areas. We have amassed a large library of historic data and detailed surface mapping of Comstock District properties and continue to obtain historic information from private and public sources. We use such data in conjunction with information obtained from our current operations, to target geologically prospective exploration areas and plan exploratory programs, including expanded surface and underground drilling.

The Company achieved initial production and held its first pour of gold and silver on September 29, 2012. The Company produced approximately 22,925 and 18,455 gold equivalent ounces in 2014 and 2015, respectively. That is, the Company produced 19,601 ounces of gold and 222,416 ounces of silver in 2014, and 15,451 ounces of gold and 221,723 ounces of silver in 2015. The Company reduced its strip ratio from a 2014 average of 4.83 to less than 1.0 in 2015. Grade remained strong at 0.031 ounces of gold per ton and 0.659 ounces of silver per ton or higher, continuing the grade improvement trend started in 2014. The recovery rate estimate for gold, for the life of the Lucerne mine to date, has increased to 85%.

We continue expanding our property footprint and creating opportunities for further exploration, development and mining. The Company now owns or controls approximately 8,546 acres of mining claims and parcels in the Comstock and Silver City Districts. The acreage is comprised of approximately 2,245 acres of patented claims (private lands), surface parcels (private lands), and approximately 6,301 acres of unpatented mining claims, which the “BLM” administers.

Exploration

Exploration and Development of Lucerne Surface and Underground Targets

During 2015, the Company focused on exploration in the Lucerne Resource area, the Dayton Resource area, and the Succor/Holman Target area. Activity within the Lucerne Resource area included both surface mining and underground exploration and underground drift (tunnel) development. The Company plans to conduct additional, near term exploration within the Lucerne Resource area, including the Quartz Porphyry (PQ), Woodville and recently extended Succor targets, as well as the Dayton Resource Area. Longer-term exploration targets include the Spring Valley, Occidental, and Northern (Upper Gold Hill) Targets.

Surface production commenced from the Lucerne Mine in 2012 and was substantially completed in 2015. This included the removal of historic mine dump materials adjacent to both the Lucerne Mine and State Route 342 (SR342) and the completion of the SR 342 realignment by December 2015. The removal of approximately 300,000 tons of older waste dump material suitable for heap leaching primarily occurred between May and September 2015, with final materials removed and stacked during December 2015, and January 2016. The remaining phases of the realignment project, including the final waste dump removal, grading, and drainage reestablishment are scheduled for completion during the first quarter of 2016.

On September 5, 2015, the Company began construction of the Harris Portal and Drift on the floor of the Lucerne Mine (Pit), with approximately 1,250 feet of total drifting completed as of January 26, 2016. (Figure 1)

12916 Fig1
Figure 1 - Underground target areas highlighting the exploration drift and drill bays.

The Harris Drift represents the first substantial underground development in the Comstock District in over thirty years, and marks a turning point for the Company. The first phase of drifting has two main objectives. First, the Harris Drift provides a central platform, within Lucerne’s broader geological corridor, for conducting an underground drilling and exploration program. Second, the Harris Drift could also serve as a central haulage level depending on the overall drill results and resultant mine plans. The initial phase of drilling includes approximately 20,000 feet of diamond core and reverse circulation (RC) definition drilling. As of January 26, 2016, about 12,000 feet of HQ-3 and NQ core have been produced from a drilling configuration that is in the form of ‘fans’ that comprise a group of holes having the same azimuth but different dips (between -50 and +40 degrees from horizontal). Each drill bay has two or three fans of drill holes extending into the primary target. The core locations and orientations were specifically designed to infill and expand the areas of known, high-grade mineralization identified from previous surface drilling programs. (Figure 2)

12916 Fig2
Figure 2. 3-D representation of the Harris Drift showing drill bays, drill fans, and the 300-foot long crosscut

The Harris Drift was driven in stable footwall rocks adjacent to an 800-foot long section of the Silver City branch of the Comstock Lode that has been intruded by a mass of quartz porphyry (PQ). The Company has 46 previous surface drill holes that had outlined the potential high-grade target within and bordering the dike-like mass of PQ. Proximity of the PQ target to the pit floor, both in terms of elevation and horizontal distance, were also crucial factors in the development of the exploration plan.

The core holes from the first four drill bays were designed to evaluate the southern lobes of the quartz porphyry, and the extent of the fractured and veined environment lying beyond and to the south. The initial drill bays also included a group of holes that targeted and penetrated the Silver City/Succor structural intersection. In general, these more southerly oriented drill holes intersected more narrow (2 to 10 feet thick) zones of high-grade mineralization. One of the most significant aspects of the intercepts is that they tend to lie along the margins of a second, previously un-described intrusive mass of intermediate composition. The Company then began encountering longer mineralized intercepts (10 to 40 feet thick) as it moved northerly toward the Silver City/Succor structuralized interaction and within or bordering the PQ mass further north.

Drill results from Bays 1 through 4 are summarized in Table1 below.

Drill Bay

Hole #

From (ft.)

To (ft.)

Length

Au opt (1)

Ag opt (2)

Au Grams

Ag Grams

Au Equivalent Ounces (3)

1

LUGC15-001

283.0

293.0

10.0

0.175

1.427

6.00

48.90

0.193

1

Including

288.0

293.0

5.0

0.268

1.753

9.19

60.10

0.290

1

LUGC15-001 (4)

358.0

363.0

5.0

1.269

0.352

43.50

12.07

1.273

                   

1

LUGC15-002

157.0

161.0

4.0

0.137

2.564

4.70

87.90

0.170

1

LUGC15-002

219.0

221.0

2.0

0.762

2.704

26.12

92.70

0.797

                   

1

LUGC15-003

44.0

49.0

5.0

0.319

0.373

10.94

12.79

0.324

                   

1

LUGC15-005

81.5

86.5

5.0

0.096

3.100

3.29

106.27

0.136

1

LUGC15-005

114.0

122.0

8.0

0.115

0.415

3.94

14.22

0.120

1

Including

114.0

116.0

2.0

0.290

0.790

9.94

27.08

0.300

1

LUGC15-005

268.0

270.0

2.0

0.354

1.875

12.14

64.28

0.378

1

LUGC15-005

302.0

307.0

5.0

0.171

0.212

5.86

7.27

0.174

1

LUGC15-005

312.0

317.0

5.0

0.107

0.426

3.67

14.60

0.112

1

LUGC15-005

322.0

327.0

5.0

0.096

0.181

3.29

6.21

0.098

1

LUGC15-005

370.0

374.0

4.0

0.093

0.904

3.19

30.99

0.105

1

LUGC15-005

382.0

387.0

5.0

0.083

0.312

2.85

10.70

0.087

1

LUGC15-005

441.0

447.0

6.0

0.094

1.143

3.22

39.18

0.109

                   

1

LUGC15-007

119.0

123.5

4.5

0.391

0.484

13.40

16.59

0.397

1

LUGC15-007

209.0

214.0

5.0

0.083

2.088

2.85

71.58

0.110

                   

1

LUGC15-008

187.9

193.0

5.1

0.147

0.099

5.04

3.39

0.148

                   

2

LUGC15-006

331.0

339.0

8.0

0.141

1.452

4.82

49.77

0.159

2

Including

331.0

333.5

2.5

0.318

1.771

10.90

60.71

0.341

2

LUGC15-006

358.5

365.5

7.0

0.121

0.549

4.16

18.80

0.128

                   

2

LUGC15-010

159.0

164.0

5.0

0.100

0.598

3.43

20.50

0.108

2

LUGC15-010

168.0

173.0

5.0

0.090

0.446

3.09

15.29

0.096

2

LUGC15-010

176.5

181.0

4.5

0.126

0.785

4.30

26.89

0.136

                   

2

LUGC15-012

158.0

163.0

5.0

0.083

0.192

2.85

6.58

0.085

                   

2

LUGC15-013

118.0

122.0

4.0

0.104

4.000

3.57

137.13

0.155

                   

2

LUGC15-015

42.0

45.0

3.0

0.104

1.161

3.57

39.80

0.119

2

LUGC15-015

117.5

121.0

3.5

0.198

0.076

6.79

2.61

0.199

2

LUGC15-015 (5)

169.5

171.0

1.5

1.416

0.848

48.56

29.08

1.427

2

Including

169.5

170.6

1.1

1.602

0.933

54.92

31.98

1.614

2

LUGC15-015

260.0

280.0

20.0

0.345

1.140

11.83

39.09

0.360

2

Including

260.0

263.0

3.0

0.424

1.466

14.54

50.26

0.443

2

Including

264.5

270.5

6.0

0.446

1.169

15.30

40.08

0.461

2

Including

273.0

280.0

7.0

0.386

0.882

13.24

30.25

0.397

2

LUGC15-015

287.0

288.5

1.5

0.132

1.782

4.53

61.09

0.155

2

LUGC15-015

298.0

308.0

10.0

0.087

0.904

2.99

31.00

0.099

2

LUGC15-015

317.0

318.0

1.0

0.599

1.897

20.53

65.03

0.623

2

LUGC15-015

325.0

333.0

8.0

0.093

0.732

3.17

25.11

0.102

                   

2

LUGC15-017

116.0

121.0

5.0

0.159

0.501

5.45

17.18

0.165

2

LUGC15-017

248.0

252.0

4.0

0.092

0.094

3.15

3.22

0.093

2

LUGC15-017

256.0

261.0

5.0

0.199

0.499

6.82

17.11

0.205

2

LUGC15-017

478.0

483.0

5.0

0.528

7.100

18.10

243.40

0.619

                   

2

LUGC15-020

15.0

20.0

5.0

0.113

0.086

3.87

2.95

0.114

                   

3

LUGC15-018

90.0

95.0

5.0

0.092

0.609

3.15

20.88

0.100

3

LUGC15-018

166.5

174.5

8.0

0.096

2.451

3.30

84.02

0.128

3

LUGC15-018

181.5

185.0

3.5

0.479

1.100

16.42

37.71

0.493

3

LUGC15-018

194.0

198.0

4.0

0.092

1.205

3.15

41.31

0.107

3

LUGC15-018

225.0

228.0

3.0

0.094

2.360

3.22

80.91

0.124

3

LUGC15-018

232.5

242.5

10.0

0.094

4.220

3.23

144.67

0.148

3

LUGC15-018

270.0

275.0

5.0

0.131

2.882

4.49

98.80

0.168

                   

3

LUGC15-021

173.0

182.5

9.5

0.159

1.188

5.43

40.74

0.174

3

LUGC15-021

203.0

204.0

1.0

0.344

1.080

11.79

37.02

0.358

3

LUGC15-021

217.0

218.0

1.0

0.347

1.755

11.90

60.16

0.370

3

LUGC15-021

238.0

243.0

5.0

0.160

0.508

5.47

17.42

0.166

3

LUGC15-021

258.0

263.0

5.0

0.346

0.315

11.86

10.80

0.350

3

LUGC15-021

306.5

311.0

4.5

0.112

0.223

3.84

7.64

0.115

                   

3

LUGC15-025

77.0

87.0

10.0

0.143

1.564

4.90

53.60

0.163

3

LUGC15-025

102.0

107.0

5.0

0.110

0.356

3.77

12.20

0.115

                   

3

LUGC15-028

120.0

128.0

8.0

0.109

2.790

3.72

95.63

0.144

                   

3

LUGC15-034

85.5

98.5

13.0

0.743

2.140

25.47

73.35

0.770

3

Including

85.5

93.0

7.5

0.977

2.428

33.48

83.24

1.008

3

LUGC15-034

104.0

113.0

9.0

0.148

1.663

5.06

57.00

0.169

3

LUGC15-034

138.0

152.0

14.0

0.441

1.908

15.13

65.40

0.466

3

Including

138.0

144.0

6.0

0.287

1.212

9.84

41.55

0.303

3

Including

149.0

152.0

3.0

1.209

3.542

41.45

121.43

1.254

                   

4

LUGC15-011

53.0

58.0

5.0

0.386

0.320

13.23

10.97

0.390

4

LUGC15-011

217.0

220.0

3.0

0.158

2.615

5.42

89.65

0.192

4

LUGC15-011

249.0

251.5

2.5

0.137

1.939

4.70

66.47

0.162

                   

4

LUGC15-014

99.0

102.5

3.5

0.155

0.443

5.31

15.19

0.161

4

LUGC15-014

287.0

292.5

5.5

0.162

0.384

5.55

13.16

0.167

                   

4

LUGC15-016

134.0

139.0

5.0

0.162

7.600

5.55

260.54

0.259

4

LUGC15-016

213.0

219.0

6.0

0.146

0.805

5.01

27.60

0.156

4

LUGC15-016

339.0

343.0

4.0

0.124

0.076

4.25

2.61

0.125

                   

4

LUGC15-019

115.0

117.0

2.0

0.142

4.700

4.87

161.12

0.202

                   

4

LUGC15-022

138.0

178.0

40.0

0.391

1.635

13.39

56.06

0.412

4

Including

138.0

150.0

12.0

0.475

1.501

16.27

51.47

0.494

4

Including

165.0

178.0

13.0

0.636

2.467

21.82

84.58

0.668

                   

4

LUGC15-024

112.0

117.5

5.5

0.438

2.897

15.01

99.32

0.475

4

Including

112.0

114.7

2.7

0.749

2.522

25.68

86.46

0.781

4

LUGC15-024

217.5

220.0

2.5

0.194

1.199

6.63

41.10

0.209

4

LUGC15-024

250.0

255.0

5.0

0.093

0.085

3.19

2.91

0.094

Reported values are from American Assay Labs (AAL) and Inspectorate American Corporation (Inspectorate) in Reno, NV
AAL and Inspectorate lab methods include standard fire assay with ICP finish and gravimetric finish per each labs internal protocols

(1) Au opt - Gold ounces per ton
(2) Ag opt - Silver ounces per ton
(3) Gold Equivalent ratio based on gold to silver price ratio of 78:1 Ag:Au
(4) Value reported is average of original and check assay
(5) Pending additional total digestion assay on a portion of the interval

The Company considers the initial 800 feet of advance within the Harris Drift as a first phase of development towards a longer-term exploration and development objective targeting a three quarter mile long mineralized corridor that includes the Lucerne (including the PQ target), Woodville, Succor/Holman and high-grade Chute zone systems. Most of these systems remain open to the north and east and particularly at depth. A second phase of development has already commenced by advancing a crosscut out of Drill Bay 2, toward the structural intersection of the Silver City and Succor zone. The design of the crosscut is geared toward a favorable underground drilling geometry that should enable access to one or more of the historic Succor mine levels. The Succor represents an important target in conjunction with the PQ zone based on its location (perpendicular and adjacent to the PQ), past production history and the results from the Company’s 2011, and 2012, reverse circulation drill programs. In addition, a near surface (less than 80 feet deep) drill program was completed in 2015, within the Succor/Holman claim areas that suggests that vein environments between the crosscut elevation (5110) and the surface have potential to host significant lengths of potentially high-grade mineralized resources.

Drill results from the 2015 program are summarized in Table 2 below.

 

Succor

Holman

No. of holes drilled

80

39

No. of 10' intervals with intercepts >.015 Au opt

166

55

No. of 10' intervals with intercepts >.100 Au opt

22

3

Average gold grades for drill intercepts >.015 Au opt

0.056

0.047

Average silver grades for drill intercepts >.015 Au opt

0.259

0.333

Table 2: Summary of drill intercepts from the 2015 Succor and Holman shallow drill hole programs.

The general spatial relationships between the Woodville, Lucerne, and Succor target areas are depicted in Figure 3. The Succor Vein Target has a strike length of greater than 1000 feet, an average true width of 15 feet and an average dip of 55 degrees. The structure has reported historic mining grades of approximately 0.620 ounces per ton of recovered gold equivalent grade and is open to the east and at depth, along the entire structure. The proposed drilling holes shown in Figure 3 are designed to extend the depth of known mineralization.

12916 Fig3
Figure 3. 3-D representation showing relationships between the Woodville, PQ, and Succor target areas.

Exploration and Development of Dayton Surface and Underground Targets

Additional surface drilling on the Company’s Dayton property, located in the southern part of the Comstock district, commenced in the first quarter of 2015. The program consisted of 408 holes totaling

30,818 feet of drilling that was completed in late September 2015. Of the 408 holes drilled, 245 contained intercepts of 10 feet or more in length with gold grades exceeding or equal to 0.015 ounces per ton (opt.), and with an overall weighted average grade of 0.035 opt Au and 0.323 opt Ag. Out of those same 245 holes, a total of 32 contained intercepts of 10 feet or more in length with an average Au grade exceeding or equal to 0.100 opt Au, and with an overall average weighted grade of 0.148 opt Au and 0.694 opt Ag.

The geologic and engineering staff also completed underground mapping, sampling, and surveying in a number of historic mine tunnels. Figure 4 below depicts the location of the drill holes and significant geographic features.

12916 Fig4
Figure 4 - The location of the drill holes and significant geographic features.

The main objective of the program was to pinpoint the major surface structures (faults) and then explore these structures for mineralization. This then enabled efficient infill drilling that further refined and resolved areas of structural complexity in the geologic models. The underground mapping and sampling effort, together with the drilling, resulted in several important discoveries. The most significant was defining mineralization along a previously un-drilled, 600-foot segment of the Grizzly Hill Fault and additional mineralization at an intersection of the Grizzly Hill and Alhambra Faults with the Silver City fault. The Company also discovered additional dike-like masses of quartz porphyry, similar to the Lucerne area, that generally host significant mineralization. Finally, the drilling also helped to define extended mineralization along a 550-foot segment of the Mill Fault.

The Company commenced metallurgical test-work on representative samples of mineralized rock types that are currently ongoing. All samples, both from drilling and underground, were analyzed for gold and silver at the existing, on-site, industry standard, production assay lab. Table 4 summarizes the results of the drill program with an emphasis on drill holes with intercepts greater than 0.015 opt Au, and those with intercepts greater than 0.100 opt Au.

Table 4 - Summary of drill intercepts for Dayton Property surface drilling program

No. of holes drilled

408

No. of 10' intervals with intercepts >.015 Au opt

245

Average gold grades for drill intercepts >.015 Au opt

0.035

Average silver grades for drill intercepts >.015 Au opt

0.323

No. of 10' intervals with intercepts >.100 Au opt

32

Average gold grades for drill intercepts >.100 Au opt

0.148

Average silver grades for drill intercepts >.100 Au opt

0.694

The Company has recently updated its internal geologic model based on the results of this drilling program and permitting activities have also been initiated for the Dayton Property for both mining and transportation. These tasks will be ongoing through 2016 and 2017.

Production

The Company both completed and initiated a number of important projects during the fiscal year 2015. Surface production commenced from the Lucerne Mine in 2012 and was substantially completed in 2015. This included the removal of historic mine dump materials adjacent to both the Lucerne Mine and State Route 342 (SR342) and the completion of the SR 342 realignment by December 2015. The removal of approximately 300,000 tons of older waste dump material suitable for heap leaching primarily occurred between May and September 2015, with final materials removed and stacked during December 2015, and January 2016. The remaining phases of the realignment project, including the final waste dump removal, grading, and drainage reestablishment are scheduled for completion during the first quarter of 2016. The Harris Portal and Lucerne underground tunnel were established concurrently, during the third and fourth quarters on the north wall of the Lucerne floor at an elevation of 5120 feet, while the historic mine dumps were extracted and processed. The Company completed comprehensive, shallow surface drilling program on the Succor and Holman patents lying about one-quarter mile east of the Lucerne open cut, and a similar, but even more extensive drill program on the Dayton property situated in the southern end of the Comstock District. Additionally, the Company is scheduled to complete the first phase of the Lucerne underground drill program in February 2016.

The Company completed the planned mining for the Billie the Kid, Hartford and Justice patents during 2014, while continuing to mine the Lucerne patent through 2014 and 2015. During the second and third quarters of 2015, the Company further expanded its activities to include a more significant amount of extraction from the historic mine dumps adjacent to and underneath the existing portion of SR-342, into the daily production schedule. Substantially all of the operations for the second half of 2015 were focused on surface activity, including the extraction of the mineralized material contained in those remaining mine dumps while also completing the realignment of SR-342, establishing a drift into the higher-grade PQ, Woodville and Succor targets, and developing those targets, through diamond core drilling, towards the establishment of reserves for potential future mining.

The Company operates a heap leach based, gold and silver production system, including a zinc-precipitate based Merrill-Crowe processing plant. The Company, under the existing water pollution control permit with the State of Nevada, has the crushing and processing capacity to operate at a rate of up to 4.0 million tons of material crushed and stacked, per annum. The Merrill-Crowe system facilitates that capacity with an operating fluid processing rate of over 1,000 gallons per minute. In March 2015, the Company completed construction of a ninth heap leach pad cell. The Company’s nine cells continue under solution until the target gold and silver recovery rates have been achieved.

The following table presents mining operations and production by quarter for 2015 and 2014:

 

4Q 2015

3Q 2015

2Q 2015

1Q 2015

Total 2015

4Q 2014

3Q 2014

2Q 2014

1Q 2014

Total 2014

 

Mining Operations

Tons Mined

17,851

140,415

254,856

316,199

729,321

1,061,233

1,131,985

944,166

947,852

4,085,236

 

Processing

 

Tons Crushed

17,851

104,286

211,942

157,612

491,691

182,029

191,013

122,026

205,686

700,754

 

Weighted Average Grade Per Ton Au

0.023

0.021

0.030

0.039

0.031

0.039

0.026

0.034

0.024

0.030

Weighted Average Grade Per Ton Ag

0.564

0.573

0.654

0.734

0.659

0.680

0.564

0.546

0.345

0.527

 

Estimated Au Ounces Stacked

404

2,240

6,438

6,083

15,165

7,110

4,926

4,191

5,016

21,243

Estimated Ag Ounces Stacked

10,072

59,717

138,639

115,689

324,117

123,692

107,822

66,607

70,989

369,110

Estimated Au Equivalent* Ounces Stacked

540

3,034

8,344

7,669

19,587

8,806

6,584

5,205

6,140

26,735

 

Au Ounces Poured and Sold

2,334

3,847

4,575

4,695

15,451

5,329

5,002

4,763

4,507

19,601

Ag Ounces Poured and Sold

42,649

62,480

60,112

56,482

221,723

63,336

61,096

48,626

49,358

222,416

Au Equivalent* Ounces Poured

2,907

4,678

5,400

5,470

18,455

6,200

5,936

5,499

5,290

22,925

 

* Au Equivalent ounces = Au ounces (actual) + (Ag ounces (actual) ÷ the ratio of average gold to silver prices)

74.04

75.27

72.73

72.91

73.77

72.93

65.03

65.69

63.14

66.7

The following table presents weighted average grades of gold and silver by quarter:

 

Weighted Average per ton Gold

Weighted Average per ton Silver

 

Q1, 2014

0.024

0.345

Q2, 2014

0.034

0.546

Q3, 2014

0.026

0.564

Q4, 2014

0.039

0.680

2014

0.030

0.527

 

Q1, 2015

0.039

0.734

Q2, 2015

0.030

0.654

Q3, 2015

0.021

0.573

Q4, 2015

0.023

0.564

2015

0.031

0.659

The Company produced 22,925 and 18,455 gold equivalent ounces in 2014 and 2015, respectively. Overall during 2015, the Company crushed and stacked 491,691 dry tons of mineralized material, delivering 15,165 estimated ounces of recoverable gold and 324,117 estimated ounces of recoverable silver to the leach pads. Material placed on the heap leach pads remains under solution until the target recovery rates are achieved. Throughout this period, the recovery of gold and silver continues, but the most effective economic recovery of gold and silver takes between 45 to 60 days to complete. The Company estimates it will recover 85% of the recoverable gold and 57% of the recoverable silver from the portion of the heap, which stays under leach the longest. Preliminary laboratory metallurgical test results suggest that ultimate heap leach recovery will meet or exceed the estimated ounces of recoverable gold and silver.

For the quarter ended December 31, 2015, the Company realized an average sales price of $1,106.71 per ounce of gold and $14.97 per ounce of silver. In comparison, commodity market prices averaged $1,104.40 per ounce of gold and $14.76 per ounce of silver.

For the year ended December 31, 2015, the Company realized an average sales price of $1,195.10 per ounce of gold and $15.78 per ounce of silver. In comparison, commodity market prices in 2015 averaged $1,160.11 per ounce of gold and $15.70 per ounce of silver.

During the fourth quarter of 2014, and further again in January 2015, the Company received unanimous approval to significantly modify and expand permitted and allowable uses, under its existing Storey County Special Use Permit No. 2000-222-A-3 (“Storey SUP”), throughout the entire Lucerne Resource Area, containing the Company’s largest, classified gold and silver resources and the American Flat processing area. The amendments applied to local county, state and federal permits. The most significant expansion of permitted uses applies to both surface and underground mining; processing and milling; mine definition; exploration; development and other ancillary uses. Some of the more salient features are highlighted below.

The Storey SUP expanded the overall permitted boundary to over 1,280 acres (from 185 acres), allowing for substantial expansion of mining and processing operations. Additionally it expanded the permitted private property boundary to approximately 400 acres (from 78 acres) for processing to the south and west of the existing processing facility in American Flat, consistent with strategic acquisitions of adjacent private lands. The permit allows for ongoing mine definition and exploration for the assessment of mineral deposits, including their location, extent, depth, and grade, for the subsequent phasing of the active mine, both surface and underground opportunities and it allowed for the re-alignment of State Route 342, enabling access to significant resources both under and just east of the current alignment. The permit established new and best practices for environmentally responsible mining, including concurrent land reclamation, restoration and preservation of one of the most historically significant and progressive mining districts in Nevada. This permit supports the ongoing development of the county’s significant mineral resources without impeding the growth of the tourism-based economy of the Comstock Lode.

12916 Fig5

The Company also received a five-year renewal of its Water Pollution Control Permit (“WPCP”), NEV2000109, from the NDEP BMRR. The permit, effective October 22, 2014, authorizes construction, operation, and closure of the approved heap leaching facilities in Storey County. Additionally, the permit allows for the construction of an additional cell to the existing heap leach facility. The Company currently has nine active cells and anticipates construction of an additional cell in the future. The Water Pollution Control permit also allows processing rates of up to 4 million tons of mineralized material to be placed on the leach pad per annum.

On November 6, 2014, the Company received a revised NDEP Bureau of Air Pollution Control permit, allowing for longer operating hours and increased throughput. The Company submitted an application to revise its existing OPTC, AP1041-2761. The revisions allow the Company to increase the maximum allowable throughput of gold bearing material to 7,300,000 tons per 12-month rolling period and increase the hours of operation from 12 to 20 hour per day .

The Company has submitted an application to amend Right-of-Way (“ROW”) grant NVN 091237, submitted to the BLM’s Sierra Front Field Office along with a draft Plan of Development. The existing ROW expires on December 31, 2017. The ROW amendment would provide an expanded roadway that can accommodate oversized haul trucks, and allow the Company to deliver material from the mine to the processing facility, both located on private land. To evaluate this proposal, the BLM has prepared the American Flat Road/Lucerne Access Right-of-Way Draft Environmental Assessment (“EA”). This analysis has been prepared to comply with the National Environmental Policy Act and National Historic Preservation Act. The draft EA analyzes the following activities:

  1. Modifications to the American Flat Road to facilitate safe use of the roadway;
  2. Realignment of a portion of the American Flat Road to segregate public traffic from haul traffic; and
  3. Use of several “wedges” of public land in the Lucerne Pit for haul-through purposes.

The Lucerne Haul Road would be used exclusively for haul-through purposes by the Company.

Concurrently, the BLM and consulting parties are preparing a Memorandum of Agreement (“MOA”) under the National Historic Preservation Act to resolve potential adverse effects to nine historic properties in the project area. The BLM will hold a separate workshop on the MOA.

SR-342 Realignment and Extraction of Existing Mine Dumps

In early February, the Nevada Department of Transportation, (“NDOT”, closed an approximate two-mile section of State Route 342 (“SR-342”), south of Gold Hill, as a safety precaution following roadway cracking and area specific sinking during a weekend of heavy rains. The area of sinking is above a historic mine-shaft dating back to the early 1900’s, and that portion of the road sits on old mine dumps and looser fill that has a history of instability and, in some cases, failure. The Company owns the land, with NDOT granted prescriptive rights to operate the state roadbed over that private land. Storey County, NDOT, the Company, and other applicable regulatory agencies evaluated several remedies for the realignment of SR-342.

On December 4, 2015, the Company announced that the realignment of SR-342 was completed in collaboration with the NDOT, U.S. Army Corp. of Engineers (“USACE”), the Nevada Division of Environmental Protection (“NDEP”) and the U.S. Environmental Protection Agency (“EPA”). SR-342 passed all relevant NDOT inspections and has been reopened for public use.

The completion of the SR-342 realignment, including the capping of the historic Silver Hills Mine shaft, provides a better route from Carson City to Virginia City and also allows for a safer and more efficient passage for ongoing mining operations. The Company also achieved significant environmental and reclamation objectives and completed the project under the original $3 million budget.

In addition, during the latter part of 2014, the geological and environmental teams undertook a systematic evaluation of historic mine dumps throughout most of the central part of the Comstock District. Quantifying and understanding the nature of possible legacy contaminants and identifying the extent of mineralization with the potential to increase mineable resources were the two primary objectives. Overall, we identified approximately 604,000 tons of mineralized dump materials. Of that total, approximately 450,000 tons are located underneath and to the east of SR-342, with an average grade between 0.025-0.035 opt Au. As part of the SR-342 re-alignment, 304,000 tons of the material located underneath SR-342 was extracted and stacked onto the leach pad for processing providing a significant environmental remediation and a meaningful contribution to operations and production schedule. The remaining tons not yet extracted and processed have been targeted for later in 2016, in conjunction with the final transition into underground mining production.

Operating Costs

During fiscal year 2015, actual Lucerne Mine cost applicable to mining revenue was $14.2 million, $10.7 million net of silver by-product credits as compared to $23.3 million, $19.1 million net of silver by-product credits in 2014, a 39% reduction of cost applicable to mining when comparing 2015 to 2014. Cost applicable to mining revenue include mining and processing labor, maintenance, drilling, blasting and assaying, hauling, crushing and related maintenance cost, among others. Cost applicable to mining revenue also includes $5.4 million and $5.4 million of depreciation for 2015 and 2014.

During the year ended December 31, 2015, the Company realized $8.5 million of savings from reduced labor, drilling, and blasting and fuel in 2015, as compared to 2014. The Company also realized $2.0 million savings from other non-mining activities including environmental, mine claims and real estate segment. In total, the Company reduced costs by $10.5 million from 2015 as compared to 2014, exceeding the total annual target of $10 million. In addition, the Company also reduced future mine claim costs by approximately $1.5 million per annum, eliminated all future preferred stock dividends, resulting in additional future savings of approximately $3.5 million per annum and eliminated royalties directly associated with future production from the Lucerne resource areas, saving millions more depending on production rates and ensuring a lower cost operation by eliminating those royalties. The Company incurred approximately $0.7 million in severance costs during the year ended December 31, 2015, in mining and general and administrative expenses, associated with organizational cost reductions.

Outlook

The Company commenced the underground drift tunnel and drilling, associated with the first underground exploration phase of a PQ geological target in September 2015, and expects to complete drift-sampling, drilling and ongoing metallurgical test work of the PQ target by February 2016. The Succor vein system is being considered as an easterly extension of the first phase of development beyond the high-grade PQ target. This will positively expand the scope of Phase 1, through the first half of 2016. The drift tunnels are designed to conduct an underground exploration program directed at a series of geological targets in the Silver City Branch of the Comstock Lode, including the PQ target, the Succor vein systems and the historic Woodville Bonanza system. These initial targets represent the core of a broader geological corridor where the Company is currently drilling. Previous surface drilling in the area, including the Succor-Holman drilling from 2015 had suggested that a greater than 1,000 feet of mineralized strike in the Succor zone lying generally adjacent to and below the Lucerne Cut has the potential to yield high-grade gold and silver. The current program has been geared toward defining that potential.

Drill results from the PQ drilling have begun yielding wider and longer high-grade intercepts. These results will be released as they are received and analyzed through February of 2016. During the first quarter of 2016, the Company will complete, analyze and assess the results of the PQ drilling toward its potential contribution toward mineral reserves and a mine plan. The Company will also complete the drifting to the Succor vein system in early February, and commence geological sampling and limited scope drilling in March 2016, on the Succor target to assess its potential for adding to a potential Lucerne mine plan.

The Company will also complete similar scope drilling on the Woodville target during the second quarter, to further assess its potential for Lucerne mine planning. Ultimately, these efforts are designed to develop mine plans of sufficient grade and quantities for longer-lived production plans for the Lucerne mine.

During the second quarter of 2016, the Company will commence limited core drilling in Dayton, sufficient to finalize the parameters of a mine plan and commence the permitting for the Dayton Mine. This drilling should be completed in the second quarter and allow for permitting during the second half of 2016. The Company has developed grade shells with higher average grades and believes the Dayton to have economically feasible potential and plans on developing those mine plans in the later half of 2016. Infill drilling is expected to expand the reserve potential for the Dayton mine plans.

Production during 2016 is currently limited to processing of existing leach pad materials and limited stacking of new mineralized material during January and February of 2016. Considering the improved estimates of gold and silver recoveries, that is, 85% for gold and 57% for silver, the current leach cycle will continue well into the second quarter, likely through May 2016, or later. All operating costs associated with hauling, crushing and other ancillary activities have been reduced or eliminated as we transition the full organizational focus to toward the discovery, development and establishment of reserves from Lucerne and Dayton, for future mining. During our exploration and development activities in 2016, we expect to operate with less than 25 employees. General and administrative costs are also expected to decline significantly during the first quarter of 2016, resulting in savings in all non-mining costs of over $3 million during 2016, as compared to 2015.

The Company will report the results of the Lucerne and Dayton exploration and development programs, when available, during both the first and second quarters of 2016.

The industry is experiencing a difficult downturn with many participants shutting down or deferring project activities. Exploration is down significantly, industry wide, and new discoveries are even scarcer.  Cost reductions are pervasive and the Company has led in both reducing and transitioning to lower, more flexible systems and expanding exploration. The Company believes exploration and development for new resources and reserves for future production, with higher yields (and during potentially higher metal prices), will deliver higher returns for us and to our investors. The Company also believes the evaluation of potential acquisitions of resources and reserves, especially in Nevada and the western United States, during this period of lower mining equity values, represents a good opportunity to grow and deliver additional returns to our investors. This is the focus of our 2016 business plans.

Recent Developments

In January 2016, NDEP-BMRR completed public comment on a proposed major modification to the Company’s Water Pollution Control Plan for various expansions of the heap leach facility. This modification, through a final Notice of Decision would authorize construction of “Cell 10,” located adjacent and north of the existing Cell 1 through 4 pads, and also identifies multiple future heap leach pad expansions, on privately held land, south and southwest of the existing heap leach pad and existing facilities. The modification would also authorizes the processing of underground material. Once approved, the Cell 10 expansion, the Company’s largest design to date, would provide an estimated 2.9 million tons of additional capacity. Unique to this modification is the identification and inclusion of future expansions for Cell 11 and Cell 12, located adjacent to and southwest of the existing facilities. Those potential expansions would be on approximately 90 acres located entirely within the Company’s private property. The Company expects a final authorization and the issuance of the final Notice of Decision late February, 2016.

Equity Raises

In October 2015, the Company raised $6.0 million (approximately $5.9 million net of issuance cost) through an underwritten public offering of 10,169,492 shares of common stock at a price per share of $0.59.

Land and Mineral Right Acquisitions

The Company continues to increase its footprint in the Comstock District through strategic acquisitions. The Company considers the historic Comstock District central to its growth strategy. During the year ended December 31, 2015, the Company completed various purchases of land and buildings totaling over 897 acres of land in Gold Hill, Nevada, including properties adjacent to the mining and processing operation, with purchase prices totaling approximately $5.6 million, including the issuance of 1,553,462 restricted shares of common stock as part of the purchase of two properties.

Liquidity and Capital Resources

Total current assets were $5.6 million at December 31, 2015. Cash and cash equivalents on hand at December 31, 2015 totaled $1.7 million. Inventories, stockpiles, and mineralized material on leach pad totaled $1.8 million.

Net cash used in operating activities for the twelve months ended December 31, 2015 was approximately $3.0 million as compared to $2.4 million for the year ended 2014. The Company’s use of cash in 2015 included $2.9 million for the SR-342 road realignment project, $3.3 million costs related to underground drift and exploration and $2.0 million for a reduction of accrued liabilities, offset by positive cash flow from revenues in excess of costs associated with mining revenue due to lower operating costs associated with lower labor, blasting, fuel and lower equipment costs. Our use of cash in 2014, was primarily from uses for working capital, including an increase of inventories of $1.0 million, the reduction of accounts payables and other accrued expenses of $2.1 million and increase in accounts receivable of $0.3 million.

Net cash used in investing activities for the year ended December 31, 2015, was $5.1 million, primarily from $2.5 million for strategic land purchases and $2.3 million for the design and construction of the heap leach expansion, $1.0 million deposits towards the purchase of lands and bond deposit increases of $0.1 million, net of $0.8 million of proceeds received from the sale of equipment that was previously used in mining development and production activities. Cash used in investing for the year ended 2014, was approximately $3.3 million, primarily as the result of capital assets purchases of $2.6 million and bond deposit increases of $0.8 million, net of $0.2 million of proceeds received from the sale of equipment that was previously used in mining development and production activities.

Net cash provided by financing activities for fiscal year 2015 was $4.5 million, comprised of proceeds of approximately $6.0 million from the sale of securities and proceeds of $4.4 million from the Revolving Credit Facility with Auramet and $5.0 million from the Varilease equipment lease agreement, partially off-set by the pay-down of our long-term debt obligations of approximately $10.9 million. Net cash provided by financing activities for the year ended 2014, was $8.6 million, comprised of proceeds of approximately $11 million from the sale of securities and proceeds of $4.6 million from the Revolving Credit Facility with Auramet, partially off-set by the pay-down of our long-term debt obligations of approximately $7.0 million.

The Company’s current capital resources include cash and cash equivalents and other working capital resources, cash generated through operations, and existing financing arrangements, including a lease financing agreement and a revolving credit facility (the “Revolving Credit Facility”) with Auramet International, LLC (“Auramet”). Under the Revolving Credit Facility, the Company may have borrowings up to $10 million outstanding at any given time, subject to satisfying certain conditions and obtaining certain consents. The Revolving Credit Facility has a maturity of April 28, 2018 and allows for re-advances on the facility up to the $10 million availability.