Contango Silver & Gold Inc. annual report, FY2018

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Business Context and Reporting Period

Contango ORE, Inc. filed this Form 10-K for the fiscal year ended June 30, 2018, comparing results with fiscal 2017. Although the request identifies 2017 Q4, this filing covers FY2018 and does not provide a clear standalone fourth-quarter financial summary.

The company is an exploration-stage gold and associated-minerals company operating through Peak Gold, LLC, a joint venture with Royal Gold. At June 30, 2018, Contango held a 60% joint-venture interest and Royal Gold held 40%; Royal Gold manages the venture. The project controls approximately 850,000 acres in Alaska. No proven or probable reserves, as defined by SEC Industry Guide 7, were reported.

Financial and Operating Metrics

  • Revenue: No revenue from mineral sales or operations in FY2018 or FY2017.
  • Net loss: $6.19 million in FY2018, or $1.09 per diluted share, versus $2.84 million, or $0.62 per share, in FY2017.
  • Expenses: General and administrative expense was $3.77 million, up from $2.84 million. FY2018 included $2.47 million of stock-based compensation. The company also recorded a $2.58 million loss from its equity investment in Peak Gold.
  • Cash flow: Operating cash use was $1.00 million versus $1.14 million in FY2017. Investing cash use was $2.58 million, reflecting contributions to Peak Gold. Financing provided $12.20 million, principally from equity and warrant transactions.
  • Cash and liquidity: Cash was $13.81 million at June 30, 2018, compared with $5.19 million a year earlier. Current assets were $13.97 million and current liabilities were $0.26 million. Management said cash was expected to cover working-capital needs for the next 12 months.
  • Debt: No debt balance is reported in the supplied balance sheet information.
  • Equity: Total shareholders’ equity was $13.71 million, versus $5.23 million. Shares outstanding increased to 6.15 million from 4.93 million.
  • Joint venture: Peak Gold’s FY2018 net loss was $9.39 million, compared with $13.36 million in FY2017. Contango’s recorded investment was zero at year-end after its cumulative losses exceeded its recorded investment; $22.9 million of losses were suspended for potential recognition against future investment earnings.

Material Changes Versus Prior Period

  • Net loss more than doubled, mainly reflecting the newly recorded $2.58 million equity-investment loss and higher G&A, including increased stock-based compensation.
  • Cash increased by $8.62 million, supported by approximately $10.0 million of net proceeds from an October 2017 private placement and cash from warrant exercises.
  • Royal Gold completed the funding associated with earning its 40% joint-venture interest. Contango’s interest declined from 70.5% at June 30, 2017 to 60.0% at June 30, 2018.
  • Contango contributed $2.58 million to Peak Gold in FY2018; it made no contribution in FY2017.

Outlook, Commentary, and Risks

  • The approved 2018 calendar-year exploration budget was $9.1 million, with Contango’s expected share approximately $5.1 million. Peak Gold had spent approximately $4.6 million by June 30, 2018. Planned work included geophysical surveys, 6,900 meters of drilling, metallurgical testing, engineering work, and preparation of a Preliminary Economic Assessment.
  • For the 2018 Phase I program, the filing reported no significant assay intervals among results received to date; assays for Copper Hill and Saddle Zone holes were still pending. The filing also reports encouraging results from earlier drilling, but drill intercept lengths are not true widths and do not establish economic reserves.
  • After Royal Gold earned 40%, both members are expected to fund approved joint-venture programs in proportion to ownership. A member that underfunds may be diluted. The company’s ability to preserve its 60% interest therefore depends on financing future commitments.
  • Management states that mineral-sale revenue is not expected in the foreseeable future. Mine development could require capital exceeding $1 billion, and no assurance is provided that financing, discoveries, permits, or commercial production will be achieved.
  • Key risks include exploration failure, volatile metal prices, remote and seasonal Alaska operations, permitting and environmental requirements, property-title uncertainty, reliance on Royal Gold and outside consultants, and possible equity dilution. The company reported no legal proceedings and no off-balance-sheet arrangements.
  • Management concluded that disclosure controls and internal control over financial reporting were effective at June 30, 2018. The independent auditor did not provide an internal-control attestation.

Important Facts for Investors to Verify

  1. Confirm the reporting period: this is an FY2018 10-K, not a standalone 2017 Q4 report.
  2. Review the audited financial statements and cash-flow detail, including the sources and uses of the FY2018 financing proceeds.
  3. Track cash needs and Contango’s ability to fund its approximately $5.1 million share of the 2018 exploration budget and future approved programs without dilution.
  4. Verify subsequent assay results, resource estimates, and the status and assumptions of the planned Preliminary Economic Assessment; the filing reports no SEC-defined reserves.
  5. Review the joint-venture agreement for funding, dilution, management, and Royal Gold’s right to require a sale of up to 20% of Contango’s joint-venture interest in specified circumstances.
  6. Assess the timing and cost of permitting, environmental studies, and any potential mine development, as well as the company’s related royalty obligations.