Contango ORE, Inc. — Form 10-Q Summary
Filing-period clarification: The supplied filing is for Contango ORE, Inc., not Contango Silver & Gold Inc. It reports the quarter and nine months ended March 31, 2019, not 2018 Q3. The company’s fiscal year ends June 30.
Business context
Contango ORE is an exploration-stage company whose principal asset is its 60% interest in Peak Gold, LLC, a joint venture exploring for gold and associated minerals in Alaska. Royal Gold owns 40% and manages the venture. Neither the company nor the joint venture has begun commercial production or generated mineral-sales revenue.
Financial results and liquidity
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Revenue | None | None |
| General and administrative expense | $1.071 million | $3.168 million |
| Loss from equity investment in Peak Gold | $420,000 | $3.210 million |
| Net loss | $1.436 million | $6.207 million |
| Loss per share, basic and diluted | $0.23 | $0.99 |
- At March 31, 2019, cash was $9.777 million, total current assets were $9.975 million, and current liabilities were $216,000. The company reported no borrowings.
- For the nine months, operating cash use was $823,000 and investing cash use was $3.210 million, principally the company’s investment in Peak Gold. Cash decreased by $4.033 million from June 30, 2018.
- The Peak Gold investment’s reported carrying value was zero because cumulative losses exceeded its recorded historical cost. Approximately $23.2 million of losses were suspended for potential recognition against future investment earnings.
- Stock-based compensation was $2.256 million for the nine months, included in G&A; it is noncash compensation expense.
Changes versus prior comparable periods
- Nine-month G&A rose from $2.383 million to $3.168 million; management attributed the increase in part to stock-based compensation, which rose from $1.730 million to $2.256 million.
- Nine-month net loss increased from $2.383 million to $6.207 million, primarily reflecting the $3.210 million equity-investment loss recorded in 2019; no such loss was recorded in the 2018 comparative period.
- Quarterly net loss increased from $906,000 to $1.436 million. Quarterly G&A increased from $906,000 to $1.071 million.
- Cash declined from $13.811 million at June 30, 2018 to $9.777 million at March 31, 2019. No financing cash was raised in the nine months ended March 31, 2019.
Outlook, risks and unusual items
- The 2019 joint-venture exploration budget is $6.9 million; Contango’s 60% share is approximately $4.1 million. Work includes geophysics, sampling, permitting-related studies and planned drilling. A 5,000-meter drilling program was planned for later in the 2019 season, with further drilling contingent on earlier survey results.
- Management said existing cash was expected to cover working-capital requirements for the next 12 months. However, failure to fund its proportional share of approved joint-venture budgets could dilute Contango’s 60% interest. The company noted that development of a large mine could require capital exceeding $1 billion.
- Contango and Royal Gold were conducting a joint sale process for the Alaska properties, with financial advisers retained. The process was ongoing; the filing gives no assurance that a transaction will be completed. Royal Gold’s contractual rights could require Contango to sell up to 20% of its interest in specified circumstances.
- February 2019 retention agreements provide for an aggregate $1.5 million in payments upon a qualifying change of control, subject to employment conditions; the CEO and CFO would receive $1.0 million and $250,000, respectively.
- The filing states there are no known quantifiable commercial mineral reserves and no near-term expectation of mineral-sale revenue. Exploration, permitting, commodity prices, weather, financing and the strategic sale process are material uncertainties. The company also identified its OTCQB shares as thinly traded.
- Management reported effective disclosure controls as of March 31, 2019, no material change in internal control over financial reporting, and no material legal proceedings.
Important facts for investors to verify
- Confirm the filing and issuer identity: this is Contango ORE, Inc.’s March 31, 2019 10-Q, notwithstanding the request metadata.
- Review subsequent updates on the joint sale process, transaction terms, and any effect on Contango’s ownership or contractual obligations.
- Track actual exploration spending and results against the $6.9 million 2019 budget and Contango’s approximately $4.1 million funding share.
- Assess cash runway, future capital needs and the potential dilution consequences if Contango cannot fund its share of joint-venture programs.
- Review technical and economic disclosures carefully: exploration intercepts are not reserves, and the filing reports no established commercial reserves or production.