Filing context
This is Contango ORE, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2016, filed February 1, 2017. It covers the three- and six-month periods of the fiscal year ending June 30, 2017. The request names Contango Silver & Gold Inc.; the filing identifies the registrant as Contango ORE, Inc.
The company is an exploration-stage business focused on Alaska gold and associated minerals through Peak Gold, LLC, a joint venture with Royal Gold. Neither the company nor the joint venture had begun commercial mining or generated mineral-sales revenue. The joint venture controlled or leased an estimated 808,900 acres; the company reported no known quantifiable mineral reserves.
Financial results and liquidity
- Revenue and profitability: No revenue was reported. Net loss was $592,142 for the quarter, versus $318,158 a year earlier, and $1.55 million for the six months, versus $768,650. Basic and diluted loss per share was $0.13 for the quarter and $0.36 for the six months, compared with $0.08 and $0.20, respectively.
- Expenses: General and administrative expense rose to $592,142 for the quarter from $318,158, and to $1.55 million for six months from $754,225. Stock-based compensation was $331,306 for the quarter and $959,650 for six months. Claim-rental and minimum-royalty expense was zero for the six months, versus $14,425 in the comparable prior period.
- Cash flow: Six-month operating cash use was $578,378, compared with $499,293 in the prior-year period. Financing provided $5.12 million, principally from $5.29 million of warrant-exercise proceeds, partly offset by $171,158 paid for shares withheld for employee taxes. Cash increased $4.54 million to $5.79 million.
- Balance sheet and liquidity: At December 31, cash was $5.79 million, total current assets $5.91 million, current liabilities $185,419, and shareholders’ equity $5.73 million. The filing reports no debt. The $5.29 million raised through warrant exercises represented most of the period-end cash balance. The company said proceeds were for working capital and future joint-venture obligations.
- Margins: Not meaningful because the company had no revenue.
Changes, exploration and joint venture
- Quarterly and six-month net losses increased year over year, alongside higher general and administrative costs and stock-based compensation.
- During the quarter, the joint venture completed Phase III drilling: 37 holes totaling 3,883 meters, focused on North Peak, at estimated program cost of $2.6 million. It reported multiple gold, silver, and copper intercepts. The filing cautions that intercept lengths are not true widths and mineralization does not establish economic reserves.
- For calendar 2016, the joint venture reported approximately $10.6 million of exploration costs; cumulative exploration expenditures since inception were $17.4 million. It also acquired 224 Alaska mining claims covering 34,400 acres during the quarter.
- Royal Gold had contributed approximately $17.0 million, including its initial $5 million, and held a 20.6% economic interest at December 31, 2016; Contango held 79.4%. Royal Gold may, but is not required to, contribute additional capital to earn up to 40% by October 31, 2018. Contango’s share of Peak Gold losses exceeded its $1.4 million historical investment; the investment balance was zero and $14.4 million of excess cumulative losses were suspended rather than recognized by Contango.
Outlook, risks and unusual items
- No quantitative company guidance was provided. Management said mineral-sales revenue was not expected in the foreseeable future and profitability would require significant revenue; the company’s continued funding capacity depends on capital sources and exploration results.
- Royal Gold’s future funding is discretionary. If it does not contribute further, Contango says its own funds to continue exploration would be limited. Royal Gold’s earn-in period runs through October 2018.
- Key risks include exploration failure, uncertain mineral economics and commodity prices, seasonal and weather constraints, permitting and regulatory requirements, title uncertainty on unpatented state claims, competition, and the need to raise capital. The common stock is thinly traded, which may amplify price movements.
- The company entered a related-party Management Services Agreement with Juneau Exploration, effective October 1, 2016, for an initial one-year term at $32,000 per month, including an office and equipment allocation. The CEO is also JEX’s sole manager. The filing reports no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
- Contango’s warrant repricing offer reduced the exercise price from $10 to $9 per share and resulted in 587,500 exercises and approximately $5.3 million of cash proceeds; 83,334 warrants were exercised by entities controlled by the CEO.
Investor verification priorities
- Confirm the legal registrant and reporting period: the filing is for Contango ORE, Inc., quarter ended December 31, 2016, despite the request’s different company name.
- Track Royal Gold contributions, its earned joint-venture interest, and whether it elects to fund further exploration before the October 2018 deadline.
- Review assay results alongside the stated cutoff methodology, unknown true widths, and the absence of established reserves or a demonstrated economic mine.
- Assess cash burn, working-capital needs, and potential dilution after the warrant exercises; verify the remaining warrant and option overhang.
- Review the JEX management arrangement and related-party governance, along with title, royalty, lease, and permitting obligations.