Contango ORE, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended December 31, 2018, the company’s fiscal second quarter and first half of fiscal 2019. The filing is for Contango ORE, Inc., an exploration-stage company; it reports no commercial mineral production or revenue.
Business context
The company’s principal asset is its 60% interest in Peak Gold, LLC, a joint venture with Royal Gold that explores for gold and associated minerals in Alaska. Royal Gold holds 40%, manages the joint venture, and controls its operations. The project includes two identified deposits, Peak and North Peak, but the company states that there are no known quantifiable mineral reserves.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| General and administrative expense | $1.10 million | $0.81 million | $2.10 million | $1.48 million |
| Interest income | $58,020 | None reported | $116,053 | None reported |
| Loss from equity investment in Peak Gold | $0.84 million | None | $2.79 million | None |
| Net loss | $1.89 million | $0.81 million | $4.77 million | $1.48 million |
| Loss per share, basic and diluted | $0.30 | $0.14 | $0.77 | $0.28 |
- Cash was $10.43 million at December 31, 2018, down from $13.81 million at June 30, 2018. Six-month operating cash use was $0.59 million; investing cash use was $2.79 million, all reported as investment in Peak Gold. No financing cash was raised during the period.
- Current assets were $10.53 million and current liabilities were $64,987, indicating substantial short-term liquidity at period end. The company reported no borrowings.
- Stock-based compensation was $1.53 million for the six months and was a significant noncash component of general and administrative expense.
- The Peak Gold investment is carried at zero because cumulative losses exceed its historical carrying value. The company reports approximately $23.4 million of suspended losses; these may be recognized against future investment earnings. It also states that the company must contribute proportionately to approved joint-venture budgets to avoid dilution.
Changes versus the prior comparable period
- First-half net loss increased to $4.77 million from $1.48 million, reflecting higher general and administrative costs and a $2.79 million equity-investment loss in Peak Gold; interest income partly offset expenses.
- First-half general and administrative expense rose about 42% year over year, while stock-based compensation increased to $1.53 million from $1.00 million.
- Cash declined by $3.38 million during the first half, versus a $10.63 million increase in the prior-year period, when the company received financing proceeds.
Outlook, commentary and risks
- Management said current cash should cover working-capital requirements for the next 12 months. This does not remove the longer-term funding risk: the company has no recurring operating revenue, expects no mineral-sale revenue in the foreseeable future, and may need additional capital to fund exploration and preserve its 60% joint-venture interest.
- The joint venture’s 2018 exploration budget was $10.7 million; actual calendar-year spending was $10.1 million, and the company contributed $5.4 million. The 2018 field program was completed in October, with drilling, geophysical surveys, metallurgical testing and work supporting a Preliminary Economic Assessment. Reported Main Peak testing showed a good response to direct cyanidation; exploration results and assessment work do not establish commercial viability or reserves.
- The company and Royal Gold were pursuing a joint strategic review and sale process for the Peak Gold project, with financial advisers retained. There is no assurance that a sale or other strategic transaction will be completed. A January 2019 joint-venture amendment established additional sale, tag and drag provisions; in specified circumstances Royal Gold may require the company to sell up to 20% of an interest alongside its sale.
- February 2019 retention agreements provide for aggregate payments of $1.5 million upon a qualifying change of control, subject to continued employment. The CEO and CFO are to receive $1.0 million and $250,000, respectively.
- Key risks include exploration failure, metal-price volatility, weather and operating constraints in Alaska, difficulty obtaining financing, potential dilution of the joint-venture interest, thin trading in the company’s shares, and failure or delay in a strategic transaction. Tetlin lease and Royal Gold production royalties would also apply if production begins.
- The company reported no material legal proceedings and no material changes in internal control over financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the strategic sale process progressed or resulted in a transaction, and the terms and potential effect of the January 2019 joint-venture amendment.
- Cash needs, future exploration budgets and the company’s ability to fund its share without dilution or additional equity issuance.
- Underlying Peak Gold technical and economic results, including the Preliminary Economic Assessment, resource information, and the distinction between exploration findings and proven reserves.
- The accounting treatment and remaining balance of suspended joint-venture losses, and the reconciliation of reported equity-method losses with contributions and joint-venture results.
- The change-of-control retention obligations and any other transaction-related costs or contingencies.