Business context and reporting period
Paramount Gold Nevada Corp. filed this Form 10-Q for its fiscal first quarter ended September 30, 2016. The company acquires, explores and develops precious-metal properties in Nevada and Oregon; it has no mining operations or established economically recoverable reserves and generates no operating cash flow.
On July 7, 2016, Paramount acquired Calico Resources Corp. and its Grassy Mountain Gold Project in Oregon, issuing 7,171,163 Paramount shares valued at approximately $15.2 million. Grassy Mountain became a wholly owned subsidiary.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2016 | Comparable period / prior date |
|---|---|---|
| Revenue | $5,306, from leasing water rights; no mining revenue | $5,202 |
| Operating expenses | $1,270,320 | $808,481 |
| Net income (loss) | $1,953,496 income | $801,993 loss |
| Operating cash flow | $(1,159,935) | $(997,714) |
| Investing cash flow | $(997,260), principally Calico-related | $(6,477) |
| Cash and cash equivalents | $3,717,063 at Sep. 30 | $5,874,258 at Jun. 30 |
| Working capital | $3,355,139 at Sep. 30 | Not stated for comparison |
| Total assets | $53,105,942 at Sep. 30 | $35,484,027 at Jun. 30 |
| Total liabilities | $1,975,468 at Sep. 30 | $1,577,840 at Jun. 30 |
The reported profit resulted from a $3,215,418 deferred tax recovery associated with the Calico acquisition and recognition of previously unrecognized tax-loss benefits; it was not generated by operations. Excluding that recovery, the quarter had a $1,261,922 loss before income taxes. Margins are not meaningful given the absence of mining revenue. The filing reports no debt; recorded liabilities principally include reclamation and environmental obligations.
Material changes versus prior comparable period
- Exploration expense rose to $537,371 from $274,875, mainly due to $440,741 of Grassy Mountain work associated with the pre-feasibility study.
- Land holding costs increased to $154,611 from $84,522, reflecting Grassy Mountain claims and leases. General and administrative expense increased to $142,055 from $58,216, including costs assumed with Calico and higher compliance, travel and marketing expenses.
- Mineral property carrying value increased to $46,460,386 from $25,674,658, including $20,785,728 for Grassy Mountain. Shares outstanding increased from 8,518,791 to 15,689,954 following the acquisition.
- Cash declined by $2,157,195 during the quarter. The company used $1,159,935 in operations and $997,260 in investing activities.
Outlook, risks and unusual items
- For fiscal 2017, management budgeted approximately $690,000 for Sleeper reclamation and claim management, $570,000 for Grassy Mountain non-discretionary costs, and $1,750,000 for corporate administration. It also budgeted $4.5 million for discretionary Grassy Mountain pre-feasibility, drilling and permitting-related work.
- Management stated that cash on hand was expected to fund non-discretionary spending, but additional capital would be needed for the discretionary budget. Failure to obtain financing could significantly curtail exploration and development.
- The Grassy Mountain pre-feasibility study began in late August. Management planned a 15,000–20,000-foot drill program, submission of a mine Plan of Operation to the BLM in late 2016, and initiation of an Environmental Impact Statement and permitting in 2017. These are plans, not assured outcomes.
- Management expects losses to continue. The company’s principal disclosed uncertainties include obtaining additional funding, exploration and development outcomes, mineral-property valuation, and reclamation estimates. It has not established proven or probable reserves.
- The Sleeper asset retirement obligation was $1,436,361, including a current portion of $384,099. Estimated undiscounted reclamation costs for existing disturbances were $3,835,050; an insurance policy provides coverage up to $25 million if the bond is insufficient. Approximately $3.4 million of cash was above federally insured limits.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to risk factors from the June 30, 2016 Form 10-K.
Important facts for investors to verify
- Whether Paramount can raise the additional capital needed for its planned $4.5 million discretionary Grassy Mountain program, and the potential dilution or other financing terms.
- Whether the deferred tax recovery and assumed tax-loss benefits are realizable; the quarter’s reported profit depends on this non-operating accounting item.
- Progress, costs and results of the Grassy Mountain pre-feasibility study, drilling and permitting, and whether the project can demonstrate economic reserves.
- Cash burn and liquidity relative to the fiscal 2017 budgets, including any changes to planned exploration and reclamation spending.
- Calico acquisition assumptions, acquired liabilities and the subsequent carrying value of mineral properties; also monitor the expanded share count.
- Reclamation obligations, bond and insurance coverage, and cash exposure above federally insured limits.