Will Comstock crash – or soar?

The Flying Frisby

By 2050 in the US there will be 330 million solar panels ready for landfill

When the potential upside of an investment eclipses the downside, you have what is known as an asymmetric bet – “the holy grail of investing”, according to some. You might risk $1,000. Instead of a “safe” 10% annual return, you might make ten or a hundred times your money – or you might lose it all.

Enter Comstock (NYSE: LODE), which trades on the Amex in New York, an exchange for small and medium-sized companies. The stock is very volatile. In the last year it has swung from $1.50 to $7 and back. Four years ago it was flirting with $100. Now worth $2.50, in 2021 it was flirting with $100. But if it achieves its lofty goals, it might be able to reclaim the $100 mark.

Comstock is not an easy company to understand, but we’ll start with its assets. This is a Nevada-based, former junior mining company, which took its name from its main property, Comstock Lode, where there was a silver rush occurred back in the 1850s and 1860s. Mark Twain lost his shirt in the scramble and, as a result, famously declared that a gold mine is “a hole in the ground with a liar at the top”.

Estimates are that the district, historically, produced between seven and eight million ounces of gold and 225 million ounces of silver. The company still owns the district, which spans 12 square miles, and it has 600,000 proven ounces of gold and six million ounces of silver. What’s that worth? $50m, perhaps ($50 an ounce for the gold, $3/oz for the silver). The plan is to sell or lease the asset.

Then it has 260 acres of land in Nevada (“data-centre country”) worth $50m, which it is also selling. It also owns a 17% stake of 2,500 acres of similar land nearby, worth another $50m.

So that’s $150m in assets, which de-risks the thing somewhat.

Now, on to the blue sky. It has two fledgling recycling businesses, one for solar panels (Comstock Metals), the other for biofuels (Comstock Fuels).

The US is about to be hit with 33 million photovoltaic (PV) solar panels by 2030 – one million tonnes – and ten times that by 2050, as they come to the end of their life. Southwestern states, for obvious sunny reasons, have more than their fair share. Around 90% of panels are now dumped in landfill, but California has banned them from landfills, so they have to be trucked and buried out of state.

The numbers add up

Comstock Metals lies just across the border. It already has a functioning demonstration facility that processes 135,000 panels a year. Next it plans to build three recycling facilities in Nevada at a cost of $12m each. The first will be operational next year. Between them, by 2030, they will be able to process ten million panels per year. These still need financing, which will either come from debt or equity (there are multiple solutions). For the $36m outlay, they will generate $180m in profit per year. Here’s how.

Comstock is paid a “dumping fee” of $500 per tonne to take the metal. (It costs the same to send to landfill.) It then recycles the panels, which costs $100/ tonne, to produce ground aluminium, ground glass, silver and copper, which it then sells for $200/tonne. So for every tonne it processes it makes $600, an 85% margin. If the plan for three plants to be operational by 2030 (processing 300,000 tonnes) is successful, that’s $180m in earnings, including between nine and ten million ounces of silver production. It all equates to a $1.8bn valuation by 2030.

“The group is well placed to benefit from Donald Trump’s America First policies”

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The fuels side of the business is harder to understand, but it seems to have the most potential. Comstock Fuels has a technology that converts waste wood – forestry residue, sawmill waste – and crops into fuels, specifically sustainable aviation fuel, renewable diesel, ethanol and gasoline. The yields are industry-leading.

Comstock will build and operate a network of “Bioleum Refineries” in the US, starting with a demonstration facility in Oklahoma, aiming to produce 200 million barrels of renewable fuel annually by 2035. To build this facility it needs $150m. Refineries are not cheap.

But it will also license its technology globally. It already has five international licence deals secured, for which Comstock receives 6% engineering fees (on top of the cost of building the product), 6% royalties, and 20% equity, while the cost of construction is shouldered by the licensee. There is scope for hundreds of millions of fees and royalties. Note that these overseas deals have not been actively sought out; rather the partners have sought out Comstock.

It all depends on the success of the technology: that it can’t be copied, that nobody else comes up with something superior and, above all, on execution. Much can
go wrong. But the potential is there. And from a macroeconomic point of view the group is well placed to benefit from Trump’s America-first policies.

It’s all going to cost a lot of money. Who pays? The firm has announced partnerships with special-purpose firm SBC Commerce, and titans RWE Energy for solar panels and Marathon Petroleum for fuels, but details of these deals are still thin on the ground. There is a funding round coming later this year, so we should learn more then. Sales of the real-estate and mining assets would reduce the dilution risk. If the fuels business can be spun out, the required capital/dilution can happen afterwards. Note too that when Comstock licenses to third parties, there is no capital required.

All this for a market value of $60m. Too good to be true? Probably.

One potential problem is that the scale of the ambition is too great for a company of this size. I’ve seen many natural-resource companies with lofty recycling goals go bust. So much hinges on flawless execution.

There are some questions about management too.

But it’s still an asymmetric bet.

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This article first appeared in this week’s Moneyweek Magazine

Disclaimer:

I am not regulated by the Financial Conduct Authority (FCA) or any other regulatory body as a financial advisor. Therefore, any information provided in this newsletter does not constitute regulated financial advice. It is solely an expression of opinion. Smallcap stocks are inherently risky. Please conduct your own due diligence and consult with a financial advisor if you have any doubts. Remember, markets can both rise and fall, especially in the case of small and midcap resource stocks. I am not aware of your individual financial circumstances, so only invest money that you can afford to lose.