Contango ORE, Inc. — Form 10-K Summary
Period mismatch: The supplied filing is Contango ORE, Inc.’s annual report for the fiscal year ended June 30, 2022, filed August 31, 2022. It is not a 2021 Q4 filing, and the issuer name in the request (“Contango Silver & Gold Inc.”) does not match the filing.
Business context and reporting period
Contango is an Alaska mineral exploration and development company with no commercial production or recurring revenue. Its principal asset is a 30% interest in Peak Gold, LLC, operated and 70%-owned by Kinross. The joint venture’s Manh Choh project plans to mine gold ore in Alaska and process it at Kinross’s Fort Knox facility. Contango also owns the Lucky Shot property through Alaska Gold Torrent and other Alaska exploration claims, including Eagle/Hona, Triple Z, Shamrock and Willow.
Financial and operating metrics
| Metric | FY2022 / June 30, 2022 | FY2021 / June 30, 2021 |
|---|---|---|
| Revenue | None | None |
| Net income (loss) | $(23.5) million | $23.9 million |
| Basic and diluted EPS | $(3.49) | $3.82 |
| Operating cash flow | $(13.9) million | $(8.4) million |
| Cash and restricted cash at year-end | $23.3 million, including $0.2 million restricted | $35.2 million |
| Total assets | $37.3 million | $36.0 million |
| Total liabilities | $24.0 million | $1.4 million |
| Shareholders’ equity | $13.3 million | $34.5 million |
FY2022 expenses totaled $19.6 million, including $8.5 million of exploration expense, $10.3 million of general and administrative expense, and $0.6 million of claim rentals. The filing does not report operating revenue or operating margins. Contango’s Peak Gold investment had a zero carrying value after cumulative losses exceeded its recorded investment; $22.6 million of excess losses were suspended.
FY2022 investing cash outflow was $15.4 million, including $11.6 million paid for the Lucky Shot acquisition and $3.7 million contributed to Peak Gold. Financing provided $17.4 million, principally from the convertible debenture. Cash and restricted cash decreased by $11.9 million during the year.
At year-end, debt was a $20 million unsecured convertible debenture, carried at $19.2 million net of discount and issuance costs. It bears 8% interest, with 6% payable in cash and 2% in shares, matures four years after issuance, and is convertible at $30.50 per share, subject to adjustment. Current liabilities were $1.5 million.
Material changes versus the prior comparable period
- Net results swung from $23.9 million of income in FY2021 to a $23.5 million loss in FY2022. FY2021 included a $39.7 million gain on the sale of a Peak Gold interest in the Kinross transaction; FY2022 had no comparable gain.
- Exploration expense rose to $8.5 million from $0.1 million, reflecting work on Contango’s wholly owned claims and Lucky Shot, acquired in August 2021. Claim rental expense also increased, to $0.6 million from $0.2 million, as the claim portfolio expanded.
- Contango acquired Lucky Shot in August 2021. The acquisition included a $5 million cash payment and a $6.25 million promissory note, which was repaid in cash in February 2022. The company also issued $20 million of convertible debt in April 2022.
- Cash and restricted cash declined from $35.2 million to $23.3 million, while total liabilities increased from $1.4 million to $24.0 million, primarily reflecting the new debenture.
Outlook, commentary, risks and unusual items
- Manh Choh: The filing reports that Kinross released a feasibility study in July 2022 and announced its decision to proceed with development. Early works, including camp refurbishment, earthworks and road construction, had begun. Kinross expected production in the second half of 2024 from two open pits mined concurrently over approximately 4.5 years. Kinross’s disclosed estimates included average production of 225,000 gold ounces annually (approximately 67,500 ounces attributable to Contango), AISC of about $900 per gold-equivalent ounce, and project capital expenditures of approximately $182 million, including the ore transport fleet. These are operator estimates, not realized results.
- The Management Committee increased the Peak Gold JV’s 2022 budget to $39.6 million on August 4, 2022, after earlier revisions; Contango’s stated share was approximately $11.9 million. The company said it had funded $1.5 million of its share to date. Failure to fund approved budgets can dilute Contango’s 30% JV interest.
- Contango reported approximately $23.1 million of unrestricted cash at June 30, 2022 and believed it had sufficient liquidity for working capital needs for the next twelve months. However, it has no recurring revenue and says its continued viability depends on raising capital. Management also said it was likely to raise additional capital, potentially through equity, creating dilution risk.
- For Lucky Shot, Contango had spent $8.6 million toward a contractual $10 million exploration expenditure commitment over 36 months. Four underground pilot holes intersected the area believed to contain the vein, but assays were pending. The acquisition also provides for milestone payments of cash and shares if specified resource or production thresholds are met.
- An avalanche at Lucky Shot in February 2022 destroyed vehicles and equipment; the company recorded a $92,777 impairment net of insurance recoveries and other write-offs.
- Key risks include exploration and permitting uncertainty, commodity-price and inflation/supply-chain volatility, severe Alaska weather and remote access, environmental and safety liabilities, property-title risk, and dependence on Kinross’s management and funding decisions. The filing notes that permits may be delayed or denied and that the Tetlin Lease involves a sovereign tribal counterparty.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an ICFR attestation.
Most important facts for investors to verify
- Whether the Manh Choh permits, construction schedule, capital budget, production profile and cost estimates remain on track, and whether the forecast second-half 2024 start is achievable.
- Contango’s ability to fund its share of Peak Gold budgets and its other commitments without unacceptable dilution or a reduction in its 30% JV interest.
- Lucky Shot drill assays and whether exploration can support a compliant resource estimate; verify remaining expenditure obligations and potential milestone consideration.
- Debenture interest and repayment terms, conversion and redemption provisions, and the impact of any conversion or future financing on outstanding shares.
- The difference between unrestricted cash of $23.1 million and cash plus restricted cash of $23.3 million, and the company’s actual liquidity runway given continuing exploration and corporate costs.
- That the reported Manh Choh resource/reserve and production figures are Kinross estimates disclosed in the filing, while the filing also cautions that commercial recovery and project outcomes are uncertain.