Business context and reporting period
The filing is Contango ORE, Inc.’s unaudited Form 10-Q for the three and six months ended December 31, 2011 (the company’s fiscal second quarter), signed February 6, 2012. This differs from the company name in the request metadata. Contango ORE is an exploration-stage Alaska gold, associated-minerals and rare-earth-elements company. It had no mineral revenue and no proven or probable reserves.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 | Prior comparable period |
|---|---|---|---|
| Revenue | None | None | None |
| Total expenses and net loss | $492,480 | $2,142,650 | $296,237 and $1,158,365, respectively |
| Loss per share | $0.31 | $1.36 | $0.19 and $0.74, respectively |
| Exploration expense | $284,077 | $1,699,137 | $198,591 and $928,495, respectively |
Six-month operating cash use was $2,516,455; investing cash use was $150,000; financing provided $400,000. Cash fell from $2,395,100 at June 30 to $128,645 at December 31. At period-end, current assets were $234,324 and current liabilities were $548,222, including a $400,000 note payable; shareholders’ equity was $919,988. The filing reports no operating margins because the company had no revenue.
The company had borrowed $400,000 under a $1.0 million revolving note from Contango Oil & Gas Company by December 31. The note bears 10% interest and is due December 31, 2012. By January 31, 2012, borrowings were $500,000, with accrued unpaid interest of $6,861. The lender and company share executive officers.
Material changes versus prior comparable periods
Six-month net loss increased about 85% year over year, while exploration expense rose from $928,495 to $1,699,137, primarily reflecting the 2011 summer exploration program. Delay rentals and minimum royalties increased to $171,440 from $72,662; general and administrative expense increased to $145,394 from $65,756. Cash declined substantially from the prior June year-end, and the company began relying on the related-party credit facility.
Outlook, commentary, risks and contingencies
- Management planned to raise approximately $10 million over the following four months to fund 2012 exploration and other needs. The company warned that financing might not be available on acceptable terms, or at all; without funding it could halt exploration, be unable to repay the note, and potentially cease operations and dissolve.
- Conditional on obtaining funding, the 2012 exploration budget was approximately $6.75 million: $3.6 million for Chief Danny, $2.75 million for other gold prospects, and $400,000 for rare-earth exploration. Management also budgeted $500,000 to repay the note and $800,000 for financing costs.
- The company planned additional Chief Danny drilling and environmental baseline sampling. Reported exploration intercepts and early rare-earth sampling results are not resource or reserve estimates; management stated that further work, including at least two more years of exploration, was likely needed to assess economic feasibility.
- Key risks include exploration failure, financing dependence, Alaska’s seasonal weather and remote access, commodity-price volatility, permitting and environmental requirements, title uncertainty on unpatented claims, dependence on Avalon and tribal consulting support, and competition from better-capitalized miners. Tetlin Lease royalties after reductions range from 1.25% to 4.25%; a 3% JEX production royalty also applies if properties enter commercial production. The company also faces annual rentals, labor payments and advance minimum royalties.
- Management said disclosure controls were effective as of December 31, 2011, with no material change in internal control over financial reporting during the quarter. The filing reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the planned approximately $10 million financing was completed, on what terms, and how much dilution or debt it involved.
- Subsequent cash burn, borrowing, interest accruals, repayment plans and compliance with the related-party note’s covenants and maturity.
- Whether exploration produced independently supported resources or reserves, and the technical and economic basis for any future development claims.
- The status of 2012 drilling, permitting and environmental work, and whether spending and acreage obligations were met.
- Applicable royalty rates, claim and lease title, and the company’s ability to fund ongoing minimum payments and exploration commitments.