Rebirth of the Comstock Lode

Bob Moriarty
Archives
Oct 29, 2010

Where over 400 different mining companies once fought to extract high-grade silver and gold ore from the Comstock Lode in Virginia City, Nevada, one company exists today. The company owns six miles of the seven-mile strike length where claims were priced per running foot of strike.

The Comstock didn't produce the most silver in US history. That would actually be the Silver Valley in Idaho. The Comstock only produced 192 million ounces of silver. Nevada's motto is The Silver State and most of the silver produced in Nevada came from the Comstock. But the Comstock has to be the most famous silver strike in history. Few of us remember the Comstock also produced 8.2 million ounces of gold. It paid for the Union victory of the Civil War, built San Francisco and bought most of Southern California.

They called the Comstock a silver district because the gold/silver ratio favored silver at 17 ounces to an ounce of gold. Today the Comstock is going to be considered a gold district simply because the gold/silver ratio favors gold at 56 ounces of silver to one ounce of gold.

At today's prices, the Comstock produced $4.5 billion in silver and $10.8 billion in gold. You have to ask yourself, how much did they take out in terms of the total gold and silver in the ground and better yet, how much did they leave? Is there two times or three times or four times that much still left in the ground? Probably.

Comstock Mining (LODE-OTCBB) Catchy name and no one is going to forget it any time soon. This company is going to be the Diamond Fields of Voisey Bay fame. That was the giant find in 1993 that lit the market on fire. The project was sold in 1996 for $4.3 billion. This is the big Kahuna. This is the company that is going to ignite the junior market in this cycle. It will be sold for a lot more than $4.3 billion when it hits the auction block.

Then as now, people lost millions and for the same reasons. They waited too late to buy and then sold too early. It's been said that history doesn't repeat but it does rhyme. In this case, it repeats.

Since the initial discovery of silver in Virginia City in 1859, litigation was the name of the game and lawyers made their fortunes right up until recent times. There were too many claims, too many companies. No one knew if there was one giant gold/silver vein or many veins. We know today there are many veins.

Some of the greatest names in US history got their start in Virginia City associated with the Comstock Lode. Samuel Clemens otherwise better known as Mark Twain began his writing career for the Territorial Enterprise newspaper after a failed career as a miner. George Hearst, father of the famous William Randolph Hearst, made the family fortune from his Comstock Lode investments. William Ralston, founder of the Bank of California got his start here.

Seven years ago, a self-made Southern California investor named John Winfield began buying up land in the area to allow the wild mustangs a safe haven. Local ranchers, who felt free to shoot them when found on their land, threatened the mustangs. That relatively minor contribution on the part of John Winfield evolved into something much greater.

The sheer number of mining companies always limited rational development of the Comstock Lode. The legal conflicts surrounding a swarm of veins acted as a millstone around the neck of miners for 150 years. Basically, if you discover a vein and develop it, you own it even if it goes onto another claim according to the 1872 Mining Act. So the simple issue of how many veins there are has always crippled mining in the Comstock and made a lot of lawyers rich.

It's been the dream of many mining companies to rationalize the Comstock but there were simply too many mining claims and conflicts. And if a big mining company came in and started buying up claims, the price would skyrocket overnight.

The key to the success of the giant De Beers Company was the rationalization of the hundreds of tiny diamond claims at the Kimberley diamond pipe in South Africa. It made the fortunes of Cecil Rhodes and Ernest Oppenheimer. Kimberley didn't work and couldn't as a series of small mining claims. When put together by Cecil Rhodes, it financed the growth and prosperity of entire countries.

Literally no one already in the mining business could tie up the valley. But a rich investor from Southern California who understood the importance of gold in today's financial environment could.

John Winfield spent 7 years buying up claims quietly. Often he would buy both sides to a lawsuit and fire the bloodsucking lawyers. He had the resources privately to accomplish something that no mining company of any size or individual associated with the mining industry could accomplish.

He financed privately a small heap leach operation on a property once owned by Howard Hughes. Hughes tried and failed to tie up the mining claims in the valley during the 1960s and 1970s up until his death. Where Howard Hughes failed with all his billions in resources, John Winfield succeeded. Winfield wanted to actually produce gold because he wanted to prove his theory was valid. He built a small plant on Hughes' ground and produced 10,000 ounces of gold and 50,000 ounces of silver just to prove he could.

The original building built by Howard Hughes still serves as their mining office. A picture is shown below.

Comstock Mining is going to change the mining business in the United States and North America. Maybe the world. John Winfield is self-made. He's rich already and he's not married to doing things the way they have always been done. I went out to Virginia City to meet him and his team. He had never heard of either Diamond Fields or Voisey's Bay. That's a good thing. He can think for himself.

After spending millions of his own money, Winfield determined that it was time to finance the company on a public exchange. It's a US OTCBB stock for now but the company has a timeframe for moving to both the New York and the Toronto Stock Exchange.

He financed the company through an unusual move. After watching the Vancouver and Toronto sharks hammer company after company by unloading their shares received as commissions 4 months after a deal was done, John didn't want any part of it. His deal called for exchanging the debt owed to him for preferred shares and the issuance of new preferred shares to raise $35.75 million in new cash.

The preferred shares pay 7.5% interest and after 20 days of trading above a price of $4.50, the preferred shares are force converted into common shares. There is no new money brought in during the conversion. The investment houses in Vancouver and Toronto wanted no part of the financing and they are going to be sorry.

No one has had any metric for valuing the company up until now because, frankly, the structure was confusing. Once the financing was finished things became clearer.

The company has about 20.5 million shares outstanding. With the conversion of the preferred shares, however, the number of shares outstanding goes up to about 87 million depending on when the preferred gets converted. There is a provision for a forced conversion when the common trades over $4.50 for more than 20 days. There is no exchange of cash upon conversion so it's not as if the company gets any more money at conversion time.

What it means is that preferred shareholders get a 7.5% payment yearly and can convert at any time. It's very important for any pending investor to understand that the number of shares outstanding should be thought of as 87 million but the float for now is only 20.5 million.

This is critical because the 20.5 million shares are in the most friendly of hands. For all purposes, there is virtually no float and there won't be until the conversion is done. The market cap has jumped $41 million dollars higher on only $800,000 worth of buying a few days ago. The stock can move 10% in a day even though the effective market cap is about $270 million right now. That's pretty unusual. And where with most stocks, when you get a big move upward shareholders rush to sell. With LODE the shares are in such friendly hands that the higher the price, the less likely people are to sell.

I visited the project a couple of days ago and met John Winfield and his complete staff. Right off the bat I told John the share price was too high and the stock would back off. He said he hoped it would but then started explaining what he was doing and why. And I realized that instead of being overpriced and due for a drop, the stock is way underpriced and about to rocket higher.

As with real estate, there are a variety of metrics you can use to judge value. With real estate, you can look at what it would cost you to build a house today. And with mining companies, you can look at resources. According to a Behre Dolbear report from August of 2010, LODE has a 43-101 resource of 1.63 million ounces of gold equivalent (gold and silver)

If someone were to come in and buy the entire company in a takeover right now, a 1.63 million ounce resource should be worth about $300 an ounce or $489 million. A production company is valued at maybe $200 an ounce or $322 million and an M&I resource might be worth $100 an ounce or $163 million. So the range of value based on ounces alone varies from $163 million to $489 million. But does that really represent the true range of potential value?

If you were looking to value real estate, you might also want to look at the price of a house right across the street identical to yours that just sold. Certainly with a mining company, you would want to consider the potential. What do you think the potential would be for an entire district that produced $15.3 billion dollars in metals 150 years ago?

Now you start getting into numbers that are simply nutso. This is a district that has never been explored by modern methods. Remember that the glory days of the Comstock were from about 1860 to the late 1890s. The 400 different mining companies were operating in one of the most expensive and hostile environments at the time. The rock was weak; hundreds of miners lost their lives in the Comstock. At one point, there was a death every week for years. The rock face conditions were hot with water temperatures reaching 140 degrees and often the miners could only work the face for 15 minutes at a time.

Silver crashed in 1873 during the Panic of 1873 and took years to recover. Mining is always a capital-intensive business and the San Francisco Earthquake of 1906 almost destroyed the Comstock with many companies shutting down, never to reopen. It's critical to remember that even if a company shut down, someone held on to the claims for another 100 years. Everyone has always understood the potential of the Comstock; it took John Winfield to turn potential into actual value.

The final kiss of death to the Comstock was the War Act of 1942, L-208 that shut down all nonessential mining in the United States. Gold and silver mining were considered unessential. How times have changed.

So what is the potential of the Comstock given that we now have $24 silver and $1350 gold? If the entire mining district has flown into headwinds for its entire 150-year history, what is the potential that it has been rationalized?

The Comstock used some of the most expensive and dangerous mining techniques available at the time. They had to high-grade the deposit because their costs were so high. The district consists of a number of epithermal swarming veins with two different orientations. According to geological theory, where you have intersecting veins, the pressure is the lowest so you have the most mineralization. That's where the early Comstock miners mined.

Today is an entirely new story. You can go anywhere in the 6 miles of strike length running north-south and when you see a quartz vein, knock off a piece and find 1 gram gold. You don't need the intersections; you can mine any of the veins on either orientation. That's giant. The early miners mined the sweet spots.

The new Comstock can mine almost anything and it's ore grade. If you look at LODE's drill results you will see that they drilled what appears to be economic grade of more than 20 feet on 42 of 51 holes. They hit mineralization on 49 of 51 holes. The rock is an oxidized gold and silver in quartz so it's easy to leach. Heap leaching didn't exist until much later and even the use of cyanide processing didn't take place until 1887, after the glory days of the Comstock.

During the glory days, the Comstock mining district went down to about 3500 feet. LODE has ore near surface. LODE can use cheap and easy to permit open pit methods in comparison to dangerous and expensive mining of 150 years ago. If there were 18 million ounces taken out by the 400 different mining companies and 130 different public companies, it's safe to say that one company controlling the entire district can find a lot more than that. There are mines in Nevada processing gold in the .6-g/t range and the dumps in the Comstock are going to run higher than that.

I'm waiting to get a number from the experts at LODE on how much it costs them to define an ounce of gold but I'm going to guess it will be in the $4-$8 an ounce range. They are aiming at definition of 3.25 million gold equivalent ounces in the next two years and have an exploration budget of $15 million. You can do the math.

A third way to value real estate is by what it produces. If a house rents for $20,000 a year, it should be worth maybe 10 times that in revenue. Gold exploration companies don't get the same valuation as gold producers. Comstock was producing gold years ago just so John Winfield could prove he could. They are fully permitted, there is $8 million budgeted for pad expansion and equipment purchase and they will be back into production in middle 2011. My experience with everything they told me is that they are conservative almost to a fault. They estimate 24,000 gold equivalent ounces in 2012; I'd bet they beat that by 50%. In terms of gold mines, that's small but what it really means is they should be fully self-supporting within a year. They are using a back of the envelope calculation of $450 production costs; I'd bet $350 would be closer to the mark. Inside of a year, Comstock is going to be a cash calf. Give it a couple of years and Comstock will be a full cash cow.

There may be someone smarter than John Winfield in the mining business. I just haven't met that person yet. John accomplished what he did simply because he was outside the industry but the industry needs to study his model and make it theirs. He may not do everything right but he's done everything right so far.

1. He's in one of the safest mining districts in the world.
2. There is no overhang of broker warrants waiting to smack the stock price in four months.
3. He has a tiny float.
4. Majors are salivating to do a deal with him right now.
5. Many US brokers will be able to recommend the stock now that the price is above $3. All of them will be able to recommend the stock when it goes over $5. That's a giant plus most penny dreadfuls ignore.
6. His potential market is "all investors"; the penny stocks are all fighting for the pennies of the gold and silver bugs. You may love gold and silver bugs and count them as your friends but the great unwashed have a lot more money.
7. LODE owns 6+ miles of the whole flipping district.
8. This is going to be a mid-tier mining company right out of the chute. All institutions are going to throw money at it. This is going to be THE GOLD STOCK to buy. They were fighting and literally yelling at John to be allowed to buy more of the financing and he wouldn't. Treat 'em mean; keep 'em keen.
9. Infrastructure. Repeat, infrastructure.
10. Exploration potential.
11. Grade.
12. Tonnage.
13. Cash in the bank and cash flow starting in mid-2011.
14. Tons of data from past producers.
15. Scalability.
16. A great team and I repeat, it's a team. John Winfield is the brains; don't let me kid you for a minute. He's not the CEO and he's not the President and I really don't think he's a control freak. He's on the board and will provide direction for the company. He has built a complete team from the ground up and created a program that if they succeed they will all get very rich. Along with the rest of us. The best people in mining are going to be standing on the doorstep of that silly purple building wanting jobs.
17. Great name.
18. Great symbol.

I love the company. This is going to totally change investing in gold and silver stocks. It's a real mining company run by real mining people and it's going to make a lot of people rich. After I heard the story and saw what they have, I bought some. I am as biased as I can be. They are not clients of 321gold yet but I'd guess they probably will be. They are easy to contact and I urge people to contact them. I also highly urge their webmaster to get the website up to date in the next few days or find someone who will. There is no reason the issues of fact and data are not on the website now.

I wrote a piece about Novagold in August of 2001, some nine years ago. I called it exactly right and I could have written the same piece about them a week ago.

I suspect that another nine years from now, this piece will have been my very best call ever. I got it in a couple of hours. When everyone else gets it, they are going to be buying shares.

Comstock Mining Inc
LODE OTCBB $3.04 (Oct 29, 2010)
18.9 million shares outstanding (90 million upon conversion)
Comstock website

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Bob Moriarty
President: 321gold
Archives

321gold Ltd