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Comstock Mining Accelerating Growth Plans, $9/Share Valuation Timing
Aug. 18, 2021 12:12 PM ETComstock Mining Inc. (LODE)TNGLLICY9 Comments5 Likes
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Warren Ludford
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Summary
Comstock CEO says $500MM valuation goal ($9.23/share) "will be met well ahead" of the previously stated 2022 year-end target date, with loftier, exponential ESG growth contemplated in future years.
Company balance sheet is growing, with no long-term debt.
Upcoming mineral resource estimates have massive upside potential.
ESG growth company acquisitions moving ahead quickly, with substantial revenue projections beginning next year.
Close up of old used lithium polymer batteries of mobile phones preparation for recycling. Copy space.
Andrey Deryabin/iStock via Getty Images
In his prepared remarks on the August 10th earnings call, Comstock Mining (LODE) CEO Corrado De Gasperis made some news, stating:
"So just to wrap up, we're on a path to almost $1 billion in revenue... and we're going to exceed our near-term $0.5 billion market value well ahead of schedule.
In fact, we're extremely focused on only those items within the timeframes that we published. Our money's where our mouth is, as we've directly linked these performance objectives with our goal of delivering this first $0.5 billion, which we are now obviously reassessing as each of these new growth businesses can exceed multiples of that amount, as we move to an exponential ESG based growth track."
The company makes no secret of its goal of reaching a $500 million market value - nearly 4X its current valuation - by 2023. De Gasperis now thinks that goal will be achieved, "well ahead of schedule."
Source: www.comstockmining.com
Indeed, all Comstock executive compensation is tied to the company stock, so they have every incentive to achieve that goal for shareholders, which is what De Gasperis meant by, "our money's where our mouth is."
Balance Sheet Equity has More Than Doubled in Six Months
Comstock has also seen its balance sheet increase substantially so far this year, making progress toward that $500 million valuation goal, by more than doubling the equity in the business in just six months. According to their most recently filed 10-Q, total equity increased from $31,779,206 to $70,257,845 in the last six months ending June 30, 2021. And with no long-term debt, the company has a strong balance sheet that may grow significantly near term.
Source: Comstock's recently filed 10-Q
Growth and Revenue Pipeline Expanding
Comstock Mining in many ways is a reflection of the business environment of the surrounding area. To get a sense of that value, it makes sense to view the company and its assets from a wider lens of the surrounding area, and how Comstock is engaged in the two main industries (outside of gaming) in northern Nevada.
Gold & Silver Mining
The first industry is precious metal mining, Comstock's original business. Below is a map of Northern Nevada from Nevada Gold Mines, a joint venture formed in 2019 between Barrick (GOLD) and Newmont Mining (NEM), creating the largest gold mining complex in the world, along with a slide from an analyst presentation of the joint venture.
Source: Barrick.com
Comstock's mineral rights and properties are located about 20 miles southeast of Reno, in the Comstock District.
Source: Nevada Gold Mines Analyst Presentation, 9/19/19
As pointed out in the above analyst presentation, Nevada's Great Basin was ranked #1 in the world on the investment attractiveness index for mining companies in 2018, based on mineral potential and policy considerations, and remains #1 according to the 2020 Fraser Institute Annual Survey of Mining Companies. Indeed, 74% of US gold production comes from Nevada, according to Comstock's website. Comstock's mineral rights and properties are all located here in the most attractive gold and silver mining area in the world, on the site of one of the richest gold and silver strikes in history. Experienced gold miners say the best place to find gold and silver is where it has been found previously. Indeed, some of the best-producing mines today have begun on the site or near a historically rich mine that had since been abandoned. Often mines that contained more gold and silver were abandoned as it was no longer feasible to extract the minerals, given the economics of the time. But the vastly improved economics of mining today make it feasible to mine deposits that wouldn't have been worthwhile for the old timers of the mid-late 19th century, when the Comstock Lode was originally mined.
At present, all of Comstock's mineral rights and properties represent just over $6 million in assets on their balance sheet, according to their last 10-K. This leaves huge untapped potential considering the company owns or controls over 9,350 acres of mineral properties in one of the richest historical mining areas and current most attractive region in the world to mine gold and silver.
The first step in Comstock realizing more of the value of their mineral properties is to conduct more extensive drilling, surveying, and other studies to gain a better estimate of the gold and silver deposits on their properties - something Comstock has been doing over the past few years. Those efforts will begin to yield results as soon as this quarter when the maiden mineral resource estimate for the Dayton Resource Area is scheduled to be published. This is intended to be an SK-1300 compliant report, in accordance with the new SEC rules that went into effect this year.
Given that the Dayton Resource Area is currently valued at just under $3 million on Comstock's balance sheet according to their last 10-K, and preliminary estimates from their March 2021 presentation indicate it contains roughly $164 million of gold and silver at current prices (roughly $120 million net of all estimated mining costs), suggests the value of that asset could go up significantly following this estimate.
Tonogold (OTCPK:TNGL), which bought the Lucerne Mine from Comstock for $18.8 million, where Comstock produced just over 53,500 ounces of gold and 735,000 ounces of silver between 2012 and 2016, is also planning to release a new mineral estimate for this and other areas it owns or leases from Comstock. Comstock holds some 9.5 million shares of Tonogold stock as of June 30, 2021, so any mineral resource estimates that benefit Tonogold and its stock price will benefit Comstock as well. Comstock also collects royalties on any gold and silver Tonogold produces.
As a highly interesting note regarding these upcoming mineral resource estimates, Comstock's CEO, who's doubtless seen the work on these estimates, writes on his LinkedIn page:
The near term goal of our business plan is to deliver stockholder value by 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, achieve initial commercial mining and processing operations in the Lucerne Mine with annual production rates of approximately 40,000 gold equivalent ounces and significantly grow the commercial development of our operations through coordinated, district wide plans that are economically feasible and socially responsible.
Needless to say, if the upcoming mineral resource estimates for these two areas (Lucerne and Dayton) combined come in anywhere remotely near the 3,250,000 gold ounces equivalent De Gasperis is targeting near term, with a value of $5.785 billion at $1,780 gold price per ounce, it would likely have a big impact on the stock prices of both Comstock Mining and Tonogold.
The bottom line on Comstock's mining and mineral assets is that their value potential could exceed not only the company's current market cap of $158 million as of 8/16/21, but also the $500 million market cap goal the company has established as well. And with a joint venture of the two largest gold miners in the world with large operations literally just down the road, it wouldn't be the least bit surprising if significant new mineral resource estimates drew their attention, and an offer to buy those assets.
ESG/Clean Tech Businesses
As promising as Comstock's gold and silver mining business is, with what could be significant balance sheet catalysts likely in the near term, this is only part of the developments at Comstock, which is also in the midst of transformational change as the company has acquired a string of new companies centered mostly around the recycling of lithium-ion batteries and related materials.
These businesses represent the emerging tech business that's located in Northern Nevada, near the California border between Reno and Carson City, near where Comstock Mining is located, in a string of industrial parks. The biggest is the Tahoe-Reno Industrial Center or TRIC, which bills itself as the largest industrial park in the world at 15,000 acres, where the Tesla (TSLA)/Panasonic (OTCPK:PCRFY) lithium battery Gigafactory, Giga Nevada, is located. A few other industrial parks are under development as the area is becoming a popular location for data centers. Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Switch (NYSE:SWCH), and Blockchain all have data centers here, about 200 miles east of Silicon Valley, in low-tax, business-friendly Nevada. Low humidity and speed of permitting are other key factors. Walmart (NYSE:WMT) has a distribution hub here, and there are numerous other businesses here as well. Comstock's lithium recycling business, LiNiCo, is also located in the TRIC, not far from the Gigafactory. The whole area is classified as an opportunity zone, which adds to its tax appeal for businesses.
Comstock is also a part (9% estimated) owner of the Sierra Springs Opportunity Fund SSOP, and Corrado De Gasperis is also the SSOP president. The fund owns property just a few miles from these industrial park developments, in nearby Silver Springs. Among the holdings in the fund are the Silver Springs Regional Airport, 200 acre-feet of senior water rights, a 180,000+ sq. ft., fully leased manufacturing facility (Sierra Clean Processing LLC), 98 acres of industrial land, 160 acres of commercial property centrally located in Silver Springs, high-quality water rights from a Tahoe-sourced water spring, development rights for an additional 2,000 acres and an additional 1,500 acre-feet of water rights. Comstock's ownership interest in the SSOP is currently valued at its $335,000 investment amount on its balance sheet.
In the Comstock earnings call last week, Comstock CEO Corrado De Gasperis mentioned that Comstock's stake in the SSOP is currently valued at around $12 million, based on the current $1.80 share price of the privately-held entity, with comparable fair value estimates of $3 - $6/share valuing Comstock's stake at somewhere between $20 - $40 million - both valuations significantly higher than the $335,000 currently on Comstock's balance sheet. He also mentioned that there is significant investment interest in the fund, and he's taking calls weekly from interested investors.
Source: Company
This may seem like small potatoes, but for a company with a $158 million market cap as of 8/16/21, the value here is significant, particularly as it's not represented on the company's balance sheet beyond the $335,000 investment amount.
LiNiCo and Li-ion battery recycling
News of Comstock's acquisition of LiNiCo, a lithium battery recycling start-up, along with an investment in Green Li-ion, securing exclusive US rights to its patented li-ion battery recycling technology, caused the stock to spike to nearly $10/share earlier this year, before settling back down to $3.20 as of 8/13/21- still an over 200% increase YTD.
Since that acquisition was announced, Comstock has several other acquisitions of related businesses, although they may not seem related at first glance, which are meant to be transformative in nature, as described in their April 13, 2021 shareholder letter, and is reflected in the changes to the company website, description, business objectives and, based on a comment from De Gasperis in the earnings call, soon their corporate name.
To recap, here are the company acquisitions since the LiNiCo acquisition was announced in February:
Renewable Process Solutions (RPS), announced 6/22/21, an advanced process engineering and renewable technology development company which provides engineering, procurement, and construction ("EPC") services for the renewable metals, mining, petrochemical, and fuels industries. RPS also provides advanced equipment manufacturing services through its affiliated manufacturing facilities in the United States and India, at consistently superior qualities and rates.
Quantum Generative Materials LLC, or GenMat, announced 6/24/21 a newly formed Quantum computing company, currently in stealth mode, with the primary goal of commercializing new quantum computing technologies to accelerate material science discovery and development. Comstock, which apparently owned 45% of the company prior to this announcement of a 5% additional stake for $50 million, $15 million over six months, and $35 million contingent on reaching certain development milestones, also gains exclusive rights to use GenMat's quantum technologies to complement and enhance its existing operations and planned technological and new business developments.
50% Joint Venture with Lakeview Energy LLC, in which Comstock acquires 50% of their subsidiary LP Biosciences LLC, or LPB, including the financing needed to retrofit LPB's pre-existing industrial scale solvent extraction and valorization facility in Merrill, Iowa ("LPB Facility"), for the production of an array of wholesale products from up to 200,000 pounds per day of industrial hemp, announced 7/29/21. Comstock also acquired 100% of MANA Corporation, an industrial hemp technology development, marketing, and management company. Lakeview is an experienced agriproducts management company that owns and operates three renewable fuels facilities. LPB's facility is ideally co-located with Lakeview's ethanol facility in Iowa, where the two facilities can exploit operational and other synergies to maximize throughput, profitability, and cash flow. Comstock's and MANA's agreements with Lakeview call for Lakeview to provide construction, operating, administrative, logistics, commodities, risk management, and other services to LPB as the parties work together to build, operate, and grow the LPB Facility. MANA additionally agreed to provide a suite of complementary technology, marketing, and other management services, with a focus on acquiring and using pre-existing and new feedstock and offtake arrangements to fill the LPB Facility.
So, what does an advanced process engineering company, quantum computing, and industrial hemp have in common, and what does any of it have to do with recycling lithium-ion batteries, you ask? The answer is in three parts.
First, RPS is helping to streamline LiNiCo's recycling process and facility, including use of its patented technologies. As a result, Comstock announced that LiNiCo's throughput capacity of processing li-ion batteries or LIBs has been increased from 20,000 tons annually, as originally planned when LiNiCo was acquired, to 100,000 tons - a fivefold increase. That has also increased Comstock's revenue projections for black mass production and sales for the LiNiCo facility, as follows:
Source: Comstock July 21, 2021 Press Release
CEO Corrado De Gasperis added during the earnings call that any downstream mineral and cathode production would add to the black mass (raw battery material) revenues.
This is the most concrete and immediate impact of Comstock's recent acquisitions in terms of growing its LIB recycling business, headed by LiNiCo. The other acquisitions could lead to future growth in that business down the road, which I'll discuss later.
In the more immediate term, Comstock also plans to exercise their $2.5 million warrant for an additional investment in LiNiCo in Q3, giving Comstock a majority stake in the company, and consolidating LiNiCo's financial results into Comstock's consolidated financial statements following that.
Valuing LiNiCo
This brings up the question of LiNiCo's valuation. What's a start-up lithium-ion battery LIB recycling company in this nascent industry, critical to the growth of the EV, energy storage, and mobile electronics industries generally, worth these days? Lithium demand is forecast to outstrip supply in the coming years, making LIB recycling a critical component to the success of these industries.
During last week's earnings call, De Gasperis said that LiNiCo is currently valued at $70 million, but that two LIB recycling competitors have valuations over $1 billion.
The first competitor De Gasperis mentioned, "a private company valued at $3.7 billion, similarly not having announced the capacity that we've announced and the facility that we have." Undoubtedly this is a reference to Redwood Materials, a privately held LIB recycling company started in 2017 by former Tesla CTO JB Straubel, and located close to Comstock and LiNiCo in nearby Carson City. The relatively high profile of the company founder and 4-year head start have given Redwood Materials an early advantage in terms of securing feedstock and funding, but their recycling process methods may not be superior. Redwood reportedly processed some 10,000 tons of LIBs in 2020, and is targeting 20,000 in 2021- the most of any US LIB recycler. Straubel hinted that the company isn't profitable, noting that the company is consuming capital as it grows, but is profitable on a per unit basis, in a CNBC interview and profile of the nascent industry earlier this year. Redwood Materials just announced a $700 million investment led by a group of mutual fund companies at the end of July. They plan to triple the size of their Carson City facilities and build another facility on 100 acres in the Tahoe-Reno Industrial Center - where LiNiCo is located.
All that would seem to rain on LiNiCo's parade, except LiNiCo at this point has announced both higher throughput capacity and purity of their recycled products through patented and proprietary processes. And at this point, Redwood processing 20,000 tons of LIBs annually is only 4% of the estimated 500,000 tons of LIBs that end up in landfills every year, with an additional tens of thousands of tons more reaching end-of-life every year. There is plenty of room for competitors like LiNiCo to gain market share, particularly if their process proves to be superior.
Redwood Materials' $3.7 billion valuation does provide a comparable for LiNiCo, which could achieve similar throughput as Redwood as early as next year according to company projections. And at over 50x LiNiCo's current valuation, Redwood Materials provides a massive upside comparable for LiNiCo and Comstock if LiNiCo is able to execute its current plans even remotely close to their current projections.
The key to success in the LIB recycling market will almost certainly be determined by the quality and efficiency of the recycling process, with purity and quality of the end products being of primary importance to buyers, and overall efficiency being a key driver of competitiveness and profitability for producers. LiNiCo announced that it has a process that results in 99.99% pure recycled lithium, something competitors have not announced. Battery-grade purity is 99.5%, so anything less than that produced by LIB recyclers will be of little value to customers, with higher demand and value for higher purity levels. Impurities in battery components like lithium can result in failures, including explosions.
Another LIB recycling competitor, which recently went public last week via SPAC, is Li-Cycle (LICY), a Canadian firm operating in the Northeast US as well. It has a $1.8 billion market cap as of 8/16/21, despite not having any revenue at this point. It uses a spoke/hub method of recycling, although the hub hasn't been completed yet, where spoke facilities pre-process recycled LIBs for transport to the hub, which produces the finished recycled metal salts. It's estimating $12 million in revenue in 2021, $75 million next year, and $264 million in 2023, investing $459 million in their business over this 3-year period. They hope to be cash flow positive by 2025, according to their April 2021 presentation.
Both Redwood Materials and Li-Cycle use a hydrometallurgy process to recycle LIBs into individual metal components, a process ReCell, a national collaboration of industry, academia, and national laboratories, considers less than ideal:
The lithium-ion battery recycling methods being used today are hydrometallurgical and pyrometallurgical processes. These processes, though effective, only enable the recovery of specific metals, and in material forms that are of low value to battery manufacturers. To make lithium-ion recycling profitable, without charging disposal fees to consumers, and to encourage industry growth, new recycling methods need to be developed.
From an article in Waste360, Redwood Materials first collects batteries from a variety of partners. Rather than relying on fossil fuels for smelting (a pyrometallurgical process), Redwood uses residual energy in the batteries to produce an alloy. Afterwards, Redwood employs hydrometallurgical methods to reach recovery rates of 95-98% for nickel and cobalt (80% for lithium). This allows them to reach the quality necessary to sell their output raw materials to battery manufacturers.
The article goes on to say that, given the large amounts of wastewater and other contaminants that require costly processes to treat and dispose, and even if large amounts of the solvents can be recovered and reused, "these [hydrometallurgical] processes still require large economies of scale to have compelling unit economics (on the order of 20,000-60,000 tons)." This last point would explain the difficulties Redwood Materials and Li-Cycle are facing at this stage.
LiNiCo says on its website that, "The current battery recycling methods are not suitable for LIB recycling due to its slow process, low purity of the products (low profits) and the use of non-environmentally friendly leaching reagents," echoing some of the points made by ReCell.
They go on to say that LiNiCo uses a co-precipitation method which avoids separation of the cathode metal elements, saving cost and reducing processing steps. By contrast, traditional separation of cobalt and nickel metals by solvent extraction from NMC (a type of LIB) batteries involves complicated steps and is a slow method. Moreover, the separated cobalt and nickel salts need to be mixed again for the synthesis of new cathode material. LiNiCo's process allows various types of LIB to be processed (Lithium cobalt oxide, LCO; Lithium manganese oxide, LMO; Lithium nickel manganese cobalt oxide, NMC; Lithium nickel cobalt aluminium oxide, NCA) and valuable cathode precursors can be synthesized.
The process is, therefore:
Greener - Zero toxic discharge, zero landfill, lower reliance on mining. Purer - The end product is 99.9% pure and is therefore of better value to a battery-producing company. Faster - This method is faster than traditional battery recycling technology because it processes ALL of the batteries.
It also is able to recover both graphite (used in anodes) and cathode materials at 99%+ purity levels.
The output is immediately reusable battery cathodes, rather than individual cathode metal salts which need to be remixed by the battery manufacturer to produce cathodes.
The bottom line here is that LiNiCo appears to have a process that could allow them to leapfrog the competition with a more efficient process that produces a more valuable end-product for customers. And given that LiNiCo is currently valued at $70 million, compared to the $1.8 - $3.7 billion valuations for a couple of its competitors, there could be massive upside to LiNiCo's valuation should it execute reasonably well on its plan and projections.
Mercury Remediation MCU
Comstock's mercury remediation business suffered the only reported setback in last week's earnings call, a 5-week stoppage in the Philippines project due to a permitting issue regarding sales of the remediated sand and gravel. The issue is expected to be resolved soon, and operations re-start again in a week or two.
As an overview of this business, Comstock has acquired patent-pending technology to remediate or remove mercury from contaminated areas. These areas are often contaminated by small scale or artisanal gold mining. Over 100 countries have signed on the Minamata Convention to remove toxic mercury from contaminated sites, as it has many harmful effects in humans and animals, and does not dissipate on its own.
Comstock, through its MCU subsidiary, has purchased and built a mobile unit to remove mercury from a river in the Philippines, in the first commercial project for this business, outside a test unit on Comstock's own property.
The business essentially offers to remediate the mercury contamination from a given site, in exchange for the right to sell the cleaned sand and gravel, along with any residual gold found while remediating the mercury. De Gasperis has projected that each mercury remediation unit could produce up to $10 million/year in revenue, depending on the amount of sand/gravel and gold sales from a particular site. The cost of building and deploying the units appears to be in the $2-3 million range. It also appears, based on De Gasperis' earnings call comments, that the Philippines site sales of sand/gravel are paying for the cost of the project, which began at the end of the river where there is little mercury contamination, and therefore, little or no gold. But sand/gravel sales have been stronger than expected, as they've been able to sell all it produces. As they work their way upriver, where more mercury and gold are expected, more revenue could be produced. There doesn't appear to be any competition for this business.
The growth plan for the business is to build more units, presumably from the profits produced from the existing units, and either deploy them at existing or new sites, each with incremental revenue potential of $10 million/year. There are literally hundreds of possible sites for future deployment, and as the mercury remediation comes with no out-of-pocket costs for the host country/site with no competition, it would seem this business could grow incrementally for many years, as new units are built and put into production. The Philippines project may take several years before it's completed, and adding additional remediation units is planned as is deploying to additional sites.
Bottom line here is that the mercury remediation business has a pretty clear self-contained growth path with little risk and no competition. It may only add $5 million or so incrementally to revenue - using half the $10 million/year per unit potential - but the potential to build and deploy many more units at sites worldwide could generate substantial revenue and free cash flow for Comstock in the coming years.
Source: Comstock Mining website
LP Biosciences & MANA
The LP Biosciences and MANA acquisitions aren't likely to have much of an impact in the near term, but the LPB/MANA acquisition is scheduled to bring added revenue and free cash flow beginning the last half of next year, after the LPB facility is retrofitted, according to company projections.
The revenues projected come just from the sales of the oils extracted from industrial hemp, known as cannabidiol or CBD, which are sold as health supplements. There are a myriad of other uses for hemp fibers, from clothing to construction materials, even as a low-cost alternative to graphene for use in superconductors. Superconductors are used in EVs, energy storage, wind turbines, and other electronics where quick bursts of energy are needed. At some point, if LPB/MANA is able to find customers and/or produce other hemp products for sale, this could add to revenue too.
GenMat
Lastly, there is the acquisition of a 50% stake in GenMat. This doesn't look like it will contribute anything to Comstock for at least a couple years, and given there is next to nothing known about the company, other than its a quantum computing start-up focused on innovation in the materials industry. I suspect, given it's in stealth mode, it could be into next year before any more details are known about the company and its quantum computing platform. There is some potential for appreciation of the asset if the platform proves credible, but this is both far from certain and not near-term. Also uncertain is whether quantum computing can provide any innovation or value-added to Comstock's businesses, as it is still unproven in any application at this point. Looking at an IBM quantum computing case study regarding lithium batteries with Mitsubishi Chemical (OTCPK:MTLHY), there appears to be some promise in researching new battery designs as quantum computing is able to model chemical reactions in detail, providing a new platform for innovation. It may be that GenMat can add value in this regard, but any innovation appears to be some years away.
Bottom Line
Comstock appears to have several potential catalysts to its growth, some near term (gold/silver mining, LiNiCo, MCU) and some a bit further out (LP Biosciences/MANA, GenMat), each with the potential to add multiples to Comstock's current market cap. It should be noted that the acquisition of these new businesses has been paid for largely with restricted stock, which presumably wouldn't be acceptable for sellers if they weren't optimistic about becoming a stakeholder in Comstock and its future prospects.
And looking at Comstock's various businesses, it's difficult not to be optimistic that one or more of these businesses will turn into significant profit and revenue drivers for the company, with continued increases in its balance sheet. Comstock's CEO earnings call comments, shortening the timeline he plans to reach a $500 million market cap - nearly 4x its current valuation - along with improving prospects for continued growth beyond that, should be compelling for investors comfortable with the risk/reward of a small, speculative company with no long-term debt and several potential growth drivers at various stages of development.
Mark Reichman with Noble Financial, the only analyst covering the stock currently has a $9.50 price target on the stock, up from $9.25 prior to last week's earnings report.
