Business context and reporting period
This is Contango ORE, Inc.’s Form 10-Q for the three months ended September 30, 2015 (the first quarter of fiscal 2016), not a filing under the name Contango Silver & Gold Inc. The Houston-based company explores for gold and associated minerals in Alaska through Peak Gold, LLC, a joint venture managed by Royal Gold. The company and joint venture had no commercial production or mineral-sale revenue; the properties had no proven or probable reserves.
Financial results and condition
| Metric | Quarter ended Sept. 30, 2015 | Comparable 2014 quarter |
|---|---|---|
| Revenue | None | None |
| Total expenses / net loss | $450,492 | $1,037,170 |
| Basic and diluted loss per share | $0.12 | $0.27 |
| Operating cash used | $163,571 | $780,179 |
| Cash at period end | $1,783,475 | $2,668,322 |
- Quarter-end assets were $1.82 million, current liabilities $138,191 and shareholders’ equity $1.68 million. No debt is reported.
- Gross or operating margins are not meaningful because there was no revenue. Claim rentals and minimum royalties were $14,425; exploration expense recorded directly by the company was zero; general and administrative expense was $436,067.
- Stock-based compensation was $220,623, a noncash expense. The company’s investment in Peak Gold was carried at zero after recognizing losses up to its $1.43 million historical cost; excess losses were suspended.
- Royal Gold’s separately reported Peak Gold balance sheet showed $2.39 million cash and $3.01 million liabilities at September 30. These are joint-venture figures, not company consolidated cash or debt.
Changes versus the prior comparable period
Net loss declined by about 57%, and operating cash use fell by about 79%. The filing attributes the lower expenses principally to the absence of the prior year’s substantial professional and legal costs related to the Royal Gold transaction. Direct exploration expense also fell to zero because, following the January 2015 joint-venture closing, exploration costs were incurred by Peak Gold rather than directly by the company. General and administrative expense decreased to $436,067 from $897,562.
Outlook, commentary, risks and unusual items
- Royal Gold initially contributed $5 million to Peak Gold and, on August 31, 2015, committed approximately $4 million more for fall exploration. Its total investment was expected to be about $9 million; the additional contribution was not described as an unconditional obligation beyond the stated commitment. Royal Gold may earn up to a 40% interest by investing up to $30 million by October 31, 2018.
- The 2015 exploration program drilled 14,059 meters in 61 holes, with estimated program spending of $6.3 million. The filing reports encouraging intercepts in some areas but stresses that intercept lengths are not true widths and that no commercial reserves are established.
- The company expects no mineral-sale revenue in the foreseeable future. Its viability depends on exploration outcomes and access to future funding; it warns it may never become profitable and may need additional financing. If Royal Gold does not continue funding, or the company cannot fund its share of later approved budgets, exploration may be curtailed and its joint-venture interest could be diluted.
- Key risks include exploration failure, volatile gold prices, remote Alaskan access and weather, permitting and environmental requirements, title and tribal-sovereignty issues, and dependence on Royal Gold’s management and technical expertise. The company reported no material litigation or off-balance-sheet arrangements.
- Management said disclosure controls were effective and that controls addressing a previously reported material weakness in joint-venture accounting had been enhanced and were considered remediated during the quarter.
Important facts for investors to verify
- Reconcile the joint-venture loss disclosures: the note reports Peak Gold’s $3.314 million loss from inception through September 30 and also describes a $3.3 million company share for the three-month period, while the company’s income statement records no equity-investment loss for the quarter and the note says excess losses were suspended.
- Confirm the status and receipt of Royal Gold’s approximately $4 million committed contribution and the resulting ownership interest; the filing gives an approximate potential earn-in interest of 8% for the aggregate $9 million investment.
- Verify the 2015 drilling results, outstanding assays, and the distinction between exploration intercepts and any future reserve or economic assessment.
- Check the share-count inconsistency: the balance sheet reports 3,904,540 shares outstanding at September 30, while an “Other Information” passage reports 3,904,950. The cover reports 3,904,540 as of November 11.
- Assess company-level cash runway separately from Peak Gold’s cash, since joint-venture funds are held and spent by the venture and the company has no recurring operating revenue.