Jared Sturdivant, portfolio manager and managing partner of O-Cap Management, LP, likes to find special-situation investment opportunities. Below is an excerpt of an interview with Jared in which he discusses Comstock Mining (OTCBB: LODE).
The Gold Report: For the rest of our conversation, I’d like to talk about public companies because those could be of value to our readers. Do you have examples of companies that meet your criteria that you’ve taken a chance on?
Jared Sturdivant: Sure. We look for two underlying components in an investment: Value and a catalyst. Typically, the catalyst is a restructuring of some sort. One company on the gold-/silver-mining side is Comstock Mining Inc. (LODE). What was interesting about Comstock (formerly known as GoldSpring) is that it had assembled a large area of land around the historic Comstock Lode Mining District in Nevada. Since the 1800s, that district has produced 8 million ounces (Moz.) of gold and 190 Moz. silver. Comstock put this big property together through debt financing. However, it was a penny stock and it was headed for bankruptcy.
Then, an investor by the name of John Winfield bought up a lot of the debt, consolidated and converted it into a preferred structure. He could’ve filed bankruptcy for Comstock but restructured the company and kept it public instead. He effectively transitioned that debt to a preferred stock, which prevented a Chapter 11 process. Shortly thereafter, the company did a major refinancing. It financed US$35M of new convertible preferred stock to outside investors. This, along with hiring new CEO Corrado De Gasperis, was a major game-changer. It saved the company from bankruptcy.
Corrado laid out three aggressive targets, which we thought were very attractive. The first was to increase the gold-equivalent ounces (Au Eq.) from 1 Moz. to +3 Moz. The second was to enter production in the second half of 2011. And, the third was to get 2012 production up to 24 Moz. Au Eq.
What we really like about the situation is that you’re buying an exploration company that is converting to a producing company that’s growing resources substantially. We think it will have cash costs of $450–$500/oz., so Comstock could do US$20M in cash flow next year very easily. And, the company’s got two projects. The Dayton Phase 1 drilling program is now hitting bonanza-type grades, so there’s a lot of resource upside as the property continues to get drilled.
We looked at this and said, “Wow this is interesting.” Not only do you have a company going from an explorer to a producer, but also you have a new management team with great plans for a resource upgrade. Comstock also has an AMEX listing coming in May, which is another tangible catalyst.
When you look at the valuation, if Comstock gets valued like a producer, you’ve got multiple upsides from here. If the company continues to grow the resource base, once it starts producing 3, 4 or 5 Moz., Comstock really starts showing up on the radar of acquirers. We think that’s attractive.