Contango ORE, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, the first quarter of the company’s fiscal year ending June 30, 2021. The filing identifies the registrant as Contango ORE, Inc.; the requested company name, Contango Silver & Gold Inc., does not match the filing. Financial statements are unaudited.
Business context
The company is an exploration-stage Alaska gold and associated-minerals company. It held a 30% interest in Peak Gold, LLC, which leases approximately 675,000 acres, and obtained a wholly owned subsidiary holding approximately 168,000 acres of Alaska state mining claims. Neither the company nor the joint venture had begun commercial mining or generated mineral-sales revenue.
Financial results and liquidity
| Metric | Quarter ended Sep. 30, 2020 | Quarter ended Sep. 30, 2019 |
|---|---|---|
| Mineral-sales revenue | None | None |
| General and administrative expense | $3.525 million | $0.991 million |
| Exploration expense | $20,828 | None reported |
| Equity-method loss from Peak Gold | $247,800 | $900,000 |
| Gain on sale of joint-venture interest | $39.643 million | None |
| Net income (loss) | $33.443 million | $(1.851) million |
| Basic and diluted earnings (loss) per share | $5.09 | $(0.29) |
| Operating cash flow | $(740,131) | $(90,307) |
| Cash at period end | $36.390 million | $7.610 million |
The quarter-end balance sheet reported total assets of $36.562 million, current liabilities of $4.310 million, a $1.200 million non-current advance royalty reimbursement liability, and shareholders’ equity of $31.052 million. The company reported no borrowings. Gross margin is not applicable because there were no mineral sales.
Material changes and transactions
- On September 30, 2020, the company sold a 30% Peak Gold interest to Kinross subsidiary KG Mining for $32.4 million cash and 809,744 company shares, which were canceled. The transaction generated a $39.6 million accounting gain; the gain was non-cash to the extent of the share consideration.
- After the transactions, the company retained 30% of Peak Gold; KG Mining held 70% and became manager and operator. A new joint-venture agreement took effect October 1, 2020.
- The company raised approximately $3.3 million gross, or $3.2 million net, through a September private placement of 247,172 shares at $13.25 per share. Its CEO bought 75,472 shares for approximately $1.0 million.
- The company’s G&A expense rose by approximately $2.5 million year over year, primarily due to about $2.9 million of non-recurring legal and transaction costs related to the Kinross transactions.
Outlook, risks and contingencies
- Management said available cash was sufficient for working capital needs for the next 12 months. Peak Gold expected approximately $3.6 million of fourth-quarter 2020 cash needs; the company’s estimated share was $1.1 million.
- COVID-19 led the joint venture to postpone new exploration and focus on care and maintenance. Drilling, testing, environmental work and engineering activities were anticipated as conditions allowed.
- The company expects no near-term mineral-sales revenue and said it may need additional financing. Failure to fund its share of approved joint-venture budgets could dilute its 30% interest; KG Mining controls most decisions and has no obligation to fund future exploration.
- Development and processing at the Fort Knox mill are plans, not assured outcomes. The company disclosed no known quantifiable mineral reserves and cautioned that exploration, permitting, operating, commodity-price, weather, title and transition risks could prevent commercial production.
- The $1.2 million royalty reimbursement prepayment may be refundable to KG Mining, less amounts already paid out, if the joint venture terminates or the company’s interest falls below 5% before the prepaid royalty is paid out. The filing also describes royalty obligations, lease and claim costs, and potential change-of-control retention payments.
- The company recorded $2.407 million of income tax expense related to the sale gain and maintained a full valuation allowance on deferred tax assets. It reported no material legal proceedings and no off-balance-sheet arrangements.
Investor facts to verify
- Confirm the issuer identity and period: this is Contango ORE, Inc.’s quarter ended September 30, 2020, not a filing identified as Contango Silver & Gold Inc. or calendar 2020 Q1.
- Review the transaction terms and accounting behind the $39.6 million gain, including the valuation of the share consideration and the post-transaction 30% joint-venture interest.
- Track cash use, future capital calls, financing needs and the dilution provisions if the company does not fund its proportional share.
- Assess Kinross’s operating and budget authority, the Fort Knox processing plan, COVID-related exploration delays, and the project’s lack of disclosed quantifiable mineral reserves.
- Review royalty terms, including the 28% silver royalty, potential reimbursement repayment, and the Tetlin Tribal Council’s option regarding production royalties.