Comstock ($LODE) Q2 Analysis
On the right track
LODE 0.00%↑ crashed >20% on Friday after posting what I thought was a solid report and conference call. The most important development is that the company’s first facility will be up and running in August, which is a major milestone. Management expects to run the plant at around 25% utilization for a few months, before ramping it up to 50% next year. The plant is expected to break even at 20% utilization, with corporate breakeven at 40%.
Given the company’s long history of little / no revenues and financial losses, becoming free cash flow breakeven, and eventually profitable, is a major step forward.
Some investors have quibbles about the company’s $5mm revenue guide for the back half of this year. Based on the math presented below, there should be $500 / ton in tipping fees plus another $500 / ton in metal recoveries. At 25% utilization for a 100,000 ton facility, this should equate to >$9mm for four and a half months of operation (mid-August to December).
I believe management should have provided more detail on how the the $5mm number was derived. It could very well just represent the tipping fees, as metal and glass recoveries may happen next year upon the ramp up of the metals extraction / recovery system that they are currently piloting.
However, I also think getting hung up over the $5mm number is missing the forest for the trees. Even if we just run with the $5mm number, it implies $4mm in revenue per month at 90% utilization, or roughly $50mm of revenue per year against cash cost of $13.5mm from just one facility. Slap on another $20mm in G&A costs and you get to $16.5mm in EBITDA from just one facility. At a 10X multiple that covers more than half the market cap, leaving the potential for multiple facilities, enhanced metal recoveries, plus the other assets on the balance sheet as free call options.
The value of the investment assets is also steadily rising. As hyper scalers rush to secure land for data centers, the value of SSOF based on comparable transactions has achieved a major uplift. Management now estimates SSOF + Comstock Real Estate fair value to be ~$300mm.
With 250-300MW having been secured, SSOF in now in the ‘major leagues’ when it comes to land parcels that might be of interest to tech companies. There is also an opportunity to increase that to 1.2GW. The bonding / surety for that amount of power would be significant, but management believes that interested counterparties would step in and provide the financial back stop in that scenario.
It’s also positive that LODE’s ownership in SSOF is close to 50% now, eliminating one of the major risks in the stock (conflict of interest concerns) when I first started looking at the company. LODE shareholders have the potential to realize more than the entire market cap in value from SSOF alone. Of course, the timing may get delayed, and the value may not be realized all at once, but it’s a significant catalyst that the market is currently not pricing in.
Skeptics might roll their eyes and argue that these investments have been on balance sheet for a while and have done nothing for shareholders. However I believe the recent sale of legacy mining properties is a big boost to management’s credibility with regards to delivering on asset monetization.
On June 21st, LODE signed an agreement to sell its legacy mining assets to Mackay Precious Metals Inc. for $45mm, with $20mm in cash and 2mm shares of Mackay (currently worth ~$4.2mm) to be delivered to LODE at closing in August . A second tranche of $7mm in cash payment will be released in 18 months. LODE will retain a 1.5% NSR royalty on gold and silver sales that Mackay can buy back for $3.5mm. The rest of the purchase price is a contingent payment ($10mm) payable if Mackay decides to proceed with construction of a mine, or sell for a valuation of >$500mm.
As a result of the transaction, LODE has a liquidity buffer of >$50mm ($31 mm cash + 20mm proceeds), relative to a market cap of just over $200mm at the moment. The transaction also reduces G&A spend and extinguishes reclamation liabilities associated with the mining assets.
In terms of cash outflows, the first facility capex is already paid. Another $5-10mm is likely to be deployed to finalize the metal recovery facility, and there might be some injections required for SSOF and a Bioleum bridge facility. But it’s hard to see the need for major dilution at this stage, as even the second facility development should be well funded.
In light of the above, it’s hard to explain the sell off in the stock. From my experience, trying to explain short term price moves in an illiquid micro cap is a losing proposition, so I’ll try to stay away from speculating too much. My only observation is that today’s financial markets are increasingly driven by short-termism, and ‘quantitative strategies’ that often trade on numbers without understanding the context behind them. Perhaps it was the Bioleum impairment (a non-cash, ‘rear view mirror’ charge) that triggered a sell orders, or someone expecting an SSOF LOI imminently, or someone who didn’t like the $5mm revenue guide without really thinking about the bigger picture.
We may never know the answer. Based on my overall assessment, the sell off presents a buying opportunity. That’s not to say that there are no risks at the current juncture. LODE needs to prove it can operate the facility at 25% and ramp-up to 50%+ without hiccups. The economics, including the metal recoveries, need to be proven out. And LODE needs to sign more offtakes with solar companies / utilities to ensure sufficient panel supplies to keep the facilities fully utilized. But these risks have to be measured on a probabilistic basis, and relative to the potential upside and current valuation.
It’s worth noting that insiders bought heavily earlier this year at stock prices that were significantly higher than where the stock trades today. Donald Colvin, Steven Pei and Robert Spence were added as independent directors, greatly improving corporate governance. I have joined them by increasing my position sizing over the last couple of days.
Outstanding write-up. I opened a small position after reading your analysis here.
I also see no need for dilution in the near future… which makes me uneasily confident that Corrado et al will do it soon.