Contango ORE, Inc. — Form 10-Q Summary
Period and entity: The filing covers the quarter and six months ended December 31, 2020 (fiscal Q2 and first half of FY2021). The filing identifies the registrant as Contango ORE, Inc.; this differs from the company name in the request metadata.
Business context
The company is an Alaska mineral exploration-stage business with a 30% interest in Peak Gold, LLC and wholly owned Alaska state mining claims. It has not begun commercial mining and reports no mineral-sales revenue. Kinross became the joint venture’s 70% owner, manager, and operator in September 2020.
Financial highlights
| Metric | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2020 |
|---|---|---|
| Revenue from mineral sales | $0 | $0 |
| Total expenses | $2.66 million | $6.21 million |
| Net income/(loss) | $(3.21) million | $30.23 million |
| Basic and diluted EPS | $(0.53) | $4.79 |
| Net cash used in operating activities | $(4.07) million for the six-month period |
- The six-month profit chiefly reflects a $39.64 million gain on the sale of part of the Peak Gold investment; it is not recurring operating income. The company recorded $1.83 million of income tax expense for the six months.
- Cash was $31.94 million at December 31, 2020, versus $3.01 million at June 30, 2020. Six-month cash flows included $29.83 million provided by investing activities and $3.17 million provided by financing activities.
- Total liabilities were $3.50 million, including $2.30 million current liabilities and a $1.20 million non-current royalty-reimbursement liability. Management states the company has no debt.
- Shareholders’ equity was $28.85 million. The company had approximately 6.20 million common shares issued and outstanding at December 31.
- Revenue margins are not meaningful because the company has no mineral-sales revenue. G&A expense rose to $2.60 million for the quarter from $1.15 million a year earlier and to $6.13 million for six months from $2.14 million. The six-month increase included approximately $2.9 million in transaction-related legal and other costs, as well as higher payroll and executive bonuses.
Material changes and outlook
- In the Kinross transactions, Contango sold a 30% Peak Gold interest and retained a 30% interest. It received $32.4 million cash and 809,744 of its shares, which were subsequently canceled. The filing recognized a $39.64 million gain. Of the cash, $1.2 million is a prepayment tied to silver royalties and may be refundable in specified circumstances.
- The joint venture approved an $18.0 million 2021 budget for infill drilling, feasibility-level engineering and environmental studies, exploration, community relations, and permitting preparation. Contango’s expected share is approximately $5.4 million. The company also planned roughly $3.0 million of 2021 exploration on its wholly owned prospects.
- Management said cash should cover working-capital needs for the next 12 months, but also said it is likely to raise capital through additional equity within six months. If Contango does not fund its share of approved joint-venture budgets, its ownership interest may be diluted.
- The joint venture’s plan is to mine the Peak and North Peak deposits and process ore at Kinross’s Fort Knox complex. The filing describes expected potential benefits, but reports no proven reserves and no production decision.
Risks, contingencies, and unusual items
- Exploration, feasibility, permitting, operating, commodity-price, weather, COVID-19, environmental, title, and financing risks could delay development or prevent economic production. Weather and COVID-19 delays affected 2020 work.
- Kinross controls joint-venture management and holds two of three Management Committee seats; Contango has one seat. Failure to fund its proportional share could dilute Contango’s 30% interest.
- Royal Gold holds royalties, including a 28% net smelter returns silver royalty on silver produced from a defined Tetlin Lease area, as well as other royalties described in the filing. The Tetlin Tribal Council exercised an option to increase its production royalty by 0.75%, credited against future royalties.
- The company maintains a full valuation allowance against deferred tax assets. It says forecast income is driven by the one-time transaction gain, not a recurring income source.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company reported no material legal proceedings.
Most important facts for investors to verify
- That the transaction proceeds, $39.64 million gain, share cancellation, and $1.2 million conditional liability are understood on the same basis as reported.
- Whether Contango can fund its expected joint-venture and exploration commitments without further equity issuance or dilution.
- Progress and costs against the 2021 feasibility, permitting, and exploration plans, including any schedule effects from weather or COVID-19.
- The economic impact and terms of the Royal Gold and Tetlin Tribal Council royalties, and the status of mineral resources, reserves, and permitting.
- The thin trading and liquidity of the company’s OTCQB-listed common stock; the filing reports average fiscal-2021-to-date trading volume of 523 shares per day.