Business context and reporting period
Contango ORE, Inc. (the registrant named in the filing; the request metadata says Contango Silver & Gold Inc.) filed this Form 10-Q for the three months ended September 30, 2012, its fiscal first quarter of 2013. The company is an Alaska-focused, exploration-stage gold, associated minerals and rare-earth-elements business. It had no mineral sales or operating revenue.
Financial and operating highlights
- Revenue and profit: No revenue. Net loss was $4.24 million, or $1.71 per basic and diluted share, versus a $1.65 million loss, or $1.05 per share, in the prior-year quarter.
- Expenses: Total expenses were $4.24 million versus $1.65 million. Exploration expense rose to $3.74 million from $1.42 million, primarily reflecting the larger 2012 field program. General and administrative expense increased to $203,000 from $73,000. Claim rentals and minimum royalties declined to $68,000 from $84,000.
- Cash flow and liquidity: Cash used in operating activities was $4.60 million, compared with $1.14 million a year earlier. Cash fell to $3.17 million at September 30 from $7.77 million at June 30. Current assets were $3.20 million and current liabilities $1.03 million.
- Debt: No borrowings were outstanding under the $1.0 million related-party revolving credit line at September 30. The line bears 10% interest and is due December 31, 2012 if drawn.
- Balance sheet: Total assets were $4.43 million and shareholders’ equity was $3.40 million. There was no depreciation, depletion or amortization recorded against the $1.01 million of mineral properties.
- Capital and shares: The company reported 2,480,269 common shares outstanding at quarter-end. A March 2012 private placement of 882,500 shares raised approximately $8.8 million gross; placement fees and expenses were approximately $0.4 million.
Material changes versus the prior comparable period
The quarterly net loss increased by approximately $2.59 million, principally as exploration spending rose by approximately $2.32 million. Operating cash use increased by approximately $3.45 million. Stock-based compensation recognized in expenses was $301,000, compared with $100,000 in the prior-year quarter. No shares were issued during the quarter.
Outlook, commentary and risks
- The company budgeted approximately $5.8 million for its 2012 exploration program: $4.7 million for the Chief Danny prospect and $1.1 million for other leads. It said approximately $0.4 million remained to be spent in the following months.
- Chief Danny drilling expanded to 36,004 feet in 50 core holes after funds were shifted from other prospects. The company expected 2012 program results in December 2012 or January 2013. Triple Z assay results were pending.
- The filing reports no proven or probable reserves and says commercial viability has not been established. Management did not expect mineral-sales revenue in the foreseeable future.
- After the 2012 program, the company expected to need additional financing. If exploration was unsuccessful and additional funds unavailable, it could cease operations, dissolve or sell properties on unfavorable terms.
- The company was considering abandoning 97,280 acres of Alaska state rare-earth claims effective December 1, 2012, to focus resources on other acreage, including its gold properties and federal rare-earth claims.
- Other key risks include exploration failure, limited cash, seasonal and remote Alaska operations, reliance on consultant Avalon, permitting and environmental requirements, property-title uncertainty, commodity-price volatility, and related-party relationships. The Tetlin lease and JEX interests carry production royalties if properties enter commercial production.
- Management reported disclosure controls were effective as of September 30, 2012, with no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
- Subsequent event: in October 2012, restricted shares and options held by Chairman Kenneth Peak were immediately vested, resulting in $141,971 of compensation expense recognized in October.
Important facts for investors to verify
- Confirm the registrant identity: the filing is for Contango ORE, Inc., notwithstanding the company name in the request metadata.
- Track cash burn and financing needs after the exploration program, including whether additional capital is available and on what terms.
- Review assay results from the 2012 Chief Danny and Triple Z programs and whether they support further exploration; no reserves or commercial discovery are established in this filing.
- Confirm whether the contemplated state rare-earth claim abandonment occurred and assess the resulting change in acreage and spending commitments.
- Review related-party arrangements, including the JEX production royalties and advisory agreement, Avalon’s exploration role, and the Contango credit facility.