Filing and reporting period
Period mismatch: The supplied filing is Contango ORE, Inc.’s Form 10-K for the fiscal year ended June 30, 2021, filed August 30, 2021. It is not a 2020 Q4 filing, and the registrant is not identified as Contango Silver & Gold Inc.
Contango ORE is an Alaska-focused mineral exploration company. Its principal asset is a 30% interest in Peak Gold, LLC, which is developing the Manh Choh project; Kinross owns 70% and manages the joint venture. Contango also owns mineral rights to roughly 200,000 acres of Alaska claims.
Financial performance and position
| Metric | FY ended June 30, 2021 | FY ended June 30, 2020 |
|---|---|---|
| Revenue from mineral sales or operations | None | None |
| General and administrative expense | $10.36 million | $5.59 million |
| Equity-method loss from Peak Gold | $3.86 million | $3.72 million |
| Gain on sale of joint-venture interest | $39.69 million | None |
| Net income (loss) | $23.87 million | $(9.24) million |
| Net income (loss) per share, diluted | $3.82 | $(1.43) |
| Operating cash flow | $(8.38) million | $(1.39) million |
| Cash at year-end | $35.22 million | $3.01 million |
FY2021 net income primarily reflects the one-time $39.69 million gain on the Kinross transaction, not operating revenue. The company recorded $1.30 million of income-tax expense. G&A increased by approximately $4.77 million, including about $3.2 million of nonrecurring transaction and legal costs, higher payroll and benefits, and stock-based compensation.
Cash increased by $32.21 million. Investing cash flow was positive $27.35 million, including $31.25 million of proceeds reported from the sale of part of the Peak Gold investment, while financing cash flow was positive $13.23 million, including net proceeds from capital raises. The company reported no debt at June 30, 2021. Current liabilities were $0.22 million; total liabilities were $1.42 million, including a $1.20 million advance royalty reimbursement liability. The Peak Gold investment was carried at zero under the equity method after cumulative losses exceeded the company’s recorded investment.
Material changes versus the prior year
- In September 2020, Contango sold a 30% Peak Gold interest to a Kinross subsidiary for $32.4 million cash and 809,744 of Contango’s shares, which were subsequently canceled. Contango retained a 30% interest; Kinross became the 70% owner, manager, and operator.
- The transaction and private placements materially strengthened year-end cash and equity. The September 2020 placement raised approximately $3.2 million net; a June 2021 placement raised approximately $10.9 million net.
- Contango received control of approximately 167,000 acres of Alaska state claims through the transaction separation, while Peak Gold exercised an option to acquire approximately 13,000 acres for $50,000.
- Contango staked the Shamrock property in 2021, adding approximately 52,640 acres. It also began field work at its wholly owned Eagle and Hona prospects after year-end.
Outlook, risks, and unusual items
- Peak Gold’s approved 2021 calendar-year budget was increased to approximately $18.2 million. Contango’s proportionate share was about $5.5 million; it had funded about $2.5 million by June 30. The joint venture had spent approximately $9.2 million on drilling, engineering, environmental and related work through that date.
- Contango planned approximately $3.0 million of exploration on its wholly owned Eagle, Hona, and Triple Z prospects. Management said available cash was expected to cover working capital needs for the next 12 months, but also stated it might raise additional equity and that future financing was not assured.
- Failure to fund its share of approved joint-venture budgets can dilute Contango’s 30% interest. Kinross controls management and most committee votes; the filing says Kinross is not required to make future contributions.
- The company and joint venture have no mineral-sale revenue and no proven or probable reserves under the SEC standard cited in the filing. Exploration success, feasibility, permitting, development costs, weather, commodity prices, COVID-19 impacts, title, tribal arrangements, and environmental requirements are significant uncertainties.
- The Tetlin lease includes advance minimum royalties and potential production royalties; Royal Gold also holds royalties, including a 28% net smelter returns silver royalty on silver from a defined area. The $1.2 million reimbursement prepayment may be refundable under specified circumstances.
- Subsequent event: On August 24, 2021, Contango acquired Alaska Gold Torrent, LLC, which holds rights to the Lucky Shot prospect. Consideration may total up to $30 million, including $5 million cash at closing and a $6.25 million secured note due February 28, 2022. The filing describes closing cash paid as $3.8 million after withholding and adjustments. Additional cash and stock payments depend on specified resource or production thresholds; the company also committed to minimum exploration expenditures.
- The auditor issued an unqualified opinion on the financial statements and identified the Kinross transaction accounting as a critical audit matter, particularly the valuation of consideration and tax effects. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile the $32.4 million cash consideration described for the Kinross transaction with the $31.25 million sale proceeds shown in investing cash flows, including the royalty prepayment and other transaction components.
- Review the Lucky Shot acquisition’s final purchase-price adjustments, cash-versus-stock settlement of the note, funding needs, and contingent payment triggers.
- Track actual joint-venture and wholly owned exploration spending, future capital calls, and any dilution risk to Contango’s 30% Peak Gold interest.
- Assess feasibility-study results, resource and reserve disclosures, permitting progress, and the economics of transporting ore to Fort Knox for processing.
- Confirm cash runway and financing plans, particularly given continuing expenses, no operating revenue, and the Lucky Shot commitments.
- Review royalty obligations, including the Tetlin royalty range and Royal Gold’s royalties, and verify title and permitting status for the company’s properties.