Contango Silver & Gold Inc. annual report, FY2017

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Contango ORE, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended June 30, 2017. The request metadata says “2016 Q4,” but this filing is an annual report for FY2017, not a quarterly filing. The registrant named in the filing is Contango ORE, Inc.

Business context

Contango ORE is an exploration-stage company focused on gold and associated minerals in Alaska through Peak Gold, LLC, its joint venture with Royal Gold. The joint venture controls an estimated 849,900 acres, principally the Tetlin Lease and Alaska mining claims. Contango held a 70.5% interest at June 30, 2017; Royal Gold managed the venture and held 29.5%. The company and joint venture had not begun commercial mining and had no mineral-sales revenue. No proven or probable reserves were reported.

Financial results and liquidity

  • Revenue: No revenue from mineral sales or operations in FY2017 or FY2016.
  • Net loss: $2.84 million in FY2017 versus $1.22 million in FY2016. Basic and diluted loss per share was $0.62 versus $0.31.
  • Expenses: General and administrative expense was $2.84 million, up from $1.21 million. Stock-based compensation rose to $1.79 million from $0.51 million. Claim-rental and minimum-royalty expense was zero, compared with $14,425.
  • Cash flow: Operating cash use was $1.14 million, versus $0.69 million in FY2016. Financing provided $5.08 million, primarily from $5.29 million of warrant exercises, partly offset by $0.21 million for shares withheld for employee taxes. Cash increased $3.94 million to $5.19 million.
  • Balance sheet: Total assets were $5.37 million, current liabilities $137,419, and shareholders’ equity $5.23 million. The filing reports no debt. The investment in Peak Gold was carried at zero because the company’s share of cumulative venture losses exceeded its contributed asset value.
  • Joint venture activity: Peak Gold reported FY2017 exploration expense of $11.33 million and general and administrative expense of $2.03 million, for a $13.36 million net loss. Contango’s share of the venture’s FY2017 loss was reported as $10.3 million, but losses beyond the carrying value of its investment were suspended rather than recognized in Contango’s consolidated results.

Changes versus prior year

  • Contango’s net loss more than doubled, while general and administrative expense increased approximately 135%, reflecting higher stock compensation and a new management-services fee to JEX.
  • Cash rose from $1.25 million to $5.19 million, primarily due to warrant exercises; operating cash use also increased.
  • Peak Gold exploration expense increased from $7.71 million to $11.33 million. The joint venture reported identifying and drilling multiple gold, copper and silver prospects, but no commercial reserves were established.
  • Royal Gold’s cumulative contributions reached $23.0 million and its interest reached 29.5% by year-end, compared with an 11.0% interest at June 30, 2016.

Outlook, risks and unusual items

  • Management stated that Contango’s cash was expected to cover working-capital needs for the next 12 months from the report date. The company nevertheless depends on financing and Royal Gold’s contributions to support exploration; it has no recurring operating revenue.
  • After the earlier of Royal Gold’s reaching $30 million of contributions or October 31, 2018, members are generally required to fund approved programs in proportion to their interests. A member that underfunds may be diluted. Royal Gold could earn up to 40%; once it does, it may require Contango to sell an additional 20% of its interest in connection with a qualifying third-party sale of Royal Gold’s entire interest.
  • After June 30, 2017, Royal Gold contributed a further $4.2 million, bringing cumulative contributions to $27.2 million and its interest to 35.8%. The September 2017 budget approval added $1.1 million for the 2017 Phase III drilling program; management estimated calendar-2017 capital expenditures of approximately $11.9 million. These are post-year-end developments and estimates, not FY2017 results.
  • FY2017 drilling included notable reported intercepts. The filing cautions that intercept lengths are not true widths; results do not establish reserves or economic viability.
  • Principal risks include exploration failure, uncertain financing and possible dilution, commodity-price volatility, remote Alaska access and weather, permitting and environmental requirements, title and tribal-sovereignty issues, and reliance on Royal Gold and outside technical consultants. Development of a mine could require capital exceeding $1 billion.
  • The Tetlin Lease runs to July 2028, subject to its terms. It carries advance minimum royalties of approximately $75,000 annually before production royalties, and potential production royalties; Royal Gold also has royalty rights. The filing reports no pending legal proceedings.
  • Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2017. The auditor did not provide an attestation on internal control.

Most important facts for investors to verify

  • Review the audited statements and Peak Gold, LLC exhibit to reconcile the venture’s reported losses, Contango’s equity-method accounting, and suspended losses.
  • Confirm post-year-end Royal Gold contributions, its current ownership percentage, and the timing and terms of the next funding obligations and dilution provisions.
  • Assess cash runway against corporate overhead, planned exploration spending, and Contango’s ability to fund its share of future joint-venture budgets.
  • Review complete drilling disclosures and independent technical information; reported intercepts are not reserve estimates and true widths are unknown.
  • Track permitting, environmental baseline work, lease and claim standing, royalties, and any future evidence of economic feasibility or commercially recoverable reserves.