Contango ORE, Inc. — Form 10-Q Summary
Period and issuer: The filing covers the three months ended September 30, 2022, Contango ORE’s first fiscal quarter of fiscal 2023 (fiscal year ends June 30). Although the request identifies Contango Silver & Gold Inc. and “2022 Q1,” the filing names Contango ORE, Inc. and reports September 2022 results.
Business context
The company explores for gold and associated minerals in Alaska. Its principal interests are a 30% stake in the Peak Gold JV, which is developing the Manh Choh project; the wholly owned Lucky Shot property; and other Alaska exploration claims. Neither the company nor the JV has begun commercial mining or generated mineral-sales revenue. The company states it has no known mineral reserves.
Financial and operating results
- Revenue and margins: No mineral-sales revenue; margins are not applicable. The filing says no recurring source of revenue exists.
- Net loss: $7.09 million, or $1.05 per share, versus $4.57 million, or $0.68 per share, in the prior-year quarter.
- Expenses: Exploration expense was $4.40 million versus $0.95 million, primarily reflecting Lucky Shot work. General and administrative expense was $2.42 million versus $1.97 million. Interest expense was $449,000 versus $57,000.
- Cash flow: Cash used in operating activities was $5.26 million versus $1.55 million. There was no investing cash flow in the quarter. Cash and restricted cash fell $5.29 million to $18.04 million.
- Liquidity: September 30 cash was $17.81 million, plus $231,000 of restricted cash. Current assets were $18.48 million and current liabilities $2.31 million, implying working capital of approximately $16.17 million.
- Debt and equity: Debt, net of discount and issuance costs, was $19.29 million. The company’s $20 million unsecured convertible debenture bears 8% interest, is due in April 2026, and is convertible at $30.50 per share, subject to adjustments. Shareholders’ equity declined to $7.08 million from $13.27 million at June 30, 2022.
Changes versus the prior-year quarter
- Net loss increased approximately 55%, driven mainly by higher exploration spending, higher interest expense, and the absence of the prior-year $1.45 million equity-investment loss in the Peak Gold JV. The JV-related loss recognized by Contango was zero in the current quarter because its recorded investment balance was already zero.
- Operating cash use increased approximately $3.70 million. The company reported no investing outflows in the current quarter, compared with $6.64 million in the prior-year quarter, which included the AGT acquisition and Peak Gold JV funding.
- The current quarter included $338,000 of insurance recoveries related to a February 2022 avalanche at Lucky Shot. The destroyed assets had been written off in earlier quarters.
Outlook, developments, and risks
- Kinross released a combined feasibility study for the Fort Knox mill and Peak Gold JV in July 2022 and announced its decision to proceed with Manh Choh development. Early site work was approximately 80% complete at September 30; construction on the camp and access road was expected to continue through year-end. The project plans to process ore at Fort Knox, subject to the expected toll-milling arrangement.
- The JV approved a 2022 budget of $39.6 million, of which Contango’s share is $11.9 million. The filing says $9.8 million had been funded by the report date, including $8.3 million funded in October after quarter-end. If Contango does not fund its proportionate share of approved JV budgets, its 30% interest may be diluted.
- At Lucky Shot, ten underground holes had intersected what the company believes is the vein structure; assays were still pending. The company had exceeded its $10 million, 36-month expenditure commitment for the property. Further payments to the seller could be triggered by specified resource or production milestones.
- Management said existing liquidity was sufficient for working capital needs over the next 12 months, but also said additional equity or debt financing was more likely than not to be sought within six months. The company has no operating revenue, and financing availability, exploration results, metal prices, permitting, construction, weather, and JV funding needs remain significant uncertainties.
- The filing provides no production or earnings guidance. Management forecast a book and taxable net loss for fiscal 2023. Disclosure controls were deemed effective; the company reported no material change in risk factors from its latest 10-K and no material legal proceedings.
Important facts for investors to verify
- Confirm the issuer and reporting period: the filing is for Contango ORE, Inc., quarter ended September 30, 2022, not a calendar-year 2022 first quarter.
- Review the Manh Choh feasibility study, project schedule, toll-milling terms, and remaining construction and permitting requirements.
- Track Lucky Shot assay results and whether drilling supports the interpreted vein structure or triggers contingent consideration.
- Assess cash burn, future capital calls, expected financing needs, and potential dilution from JV non-funding or new securities.
- Review the convertible debenture’s conversion, redemption, change-of-control, and secured-financing provisions, alongside the company’s absence of revenue and known reserves.