UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
CONTANGO ORE, INC.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) | (Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐ | Accelerated filer ☐ | | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The total number of shares of common stock, par value $0.01 per share, outstanding as of November 14, 2023 was
CONTANGO ORE, INC.
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PART I – FINANCIAL INFORMATION |
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Item 1. |
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Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and June 30, 2023 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 4. |
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Item 5. |
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Item 6. |
All references in this Form 10-Q to the “Company”, “CORE”, “we”, “us” or “our” are to Contango ORE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2023 | June 30, 2023 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | $ | ||||||
Restricted cash | ||||||||
Prepaid expenses and other | ||||||||
Derivative contract asset | ||||||||
Total current assets | ||||||||
LONG-TERM ASSETS: | ||||||||
Investment in Peak Gold (Note 5) | ||||||||
Property & equipment, net | ||||||||
Total long-term assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued liabilities | ||||||||
Current portion of long-term debt | ||||||||
Total current liabilities | ||||||||
NON-CURRENT LIABILITIES: | ||||||||
Advance royalty reimbursement | ||||||||
Asset retirement obligations | ||||||||
Contingent consideration liability | ||||||||
Derivative contract liability | ||||||||
Debt, net | ||||||||
Total non-current liabilities | ||||||||
TOTAL LIABILITIES | ||||||||
COMMITMENTS AND CONTINGENCIES (NOTE 12) | ||||||||
STOCKHOLDERS’ EQUITY/(DEFICIT): | ||||||||
Common Stock, $ par value, shares authorized; shares issued and outstanding at September 30, 2023; shares issued and outstanding at June 30, 2023 | ||||||||
Additional paid-in capital | ||||||||
Treasury stock at cost ( at September 30, 2023; and shares at June 30, 2023) | ( | ) | ||||||
Accumulated deficit | ( | ) | ( | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY/(DEFICIT) | ( | ) | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT) | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, |
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2023 |
2022 |
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EXPENSES: |
||||||||
Claim rental expense |
$ | ( |
) | $ | ( |
) | ||
Exploration expense |
( |
) | ( |
) | ||||
Depreciation expense |
( |
) | ( |
) | ||||
Accretion expense |
( |
) | ( |
) | ||||
General and administrative expense |
( |
) | ( |
) | ||||
Total expenses |
( |
) | ( |
) | ||||
OTHER INCOME/(EXPENSE): |
||||||||
Interest income |
||||||||
Interest expense |
( |
) | ( |
) | ||||
Loss from equity investment in Peak Gold, LLC (Note 5) |
( |
) | ||||||
Insurance recoveries |
||||||||
Unrealized loss on derivative contracts |
( |
) | ||||||
Other income |
||||||||
Total other income/(expense) |
( |
) | ( |
) | ||||
NET LOSS |
$ | ( |
) | $ | ( |
) | ||
LOSS PER SHARE |
||||||||
Basic and diluted |
$ | ( |
) | $ | ( |
) | ||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
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Basic and diluted |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended September 30, |
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2023 |
2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation |
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Depreciation expense |
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Accretion expense |
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Loss from equity investment in Peak Gold, LLC |
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Unrealized loss from derivative contracts |
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Interest expense paid in stock |
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Amortization of debt discount and debt issuance fees |
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Changes in operating assets and liabilities: |
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Decrease (increase) in prepaid expenses and other |
( |
) | ||||||
Increase in accounts payable and accrued liabilities |
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Net cash used in operating activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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Cash invested in Peak Gold, LLC |
( |
) | ||||||
Acquisition of property and equipment |
( |
) | ||||||
Net cash used by investing activities |
( |
) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Cash paid for shares withheld from employees for payroll tax withholding |
( |
) | ( |
) | ||||
Cash proceeds from debt |
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Debt issuance costs |
( |
) | ( |
) | ||||
Cash proceeds from capital raise, net |
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Net cash provided/(used) by financing activities |
( |
) | ||||||
NET DECREASE (INCREASE) IN CASH |
( |
) | ||||||
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD |
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CASH AND RESTRICTED CASH, END OF PERIOD |
$ | $ | ||||||
Supplemental disclosure of cash flow information |
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Cash paid for: |
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Interest expense |
$ | $ | ||||||
Non-cash investing and financing activities |
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Interest expense paid with stock |
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Total non-cash investing and financing activities |
$ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY/(DEFICIT)
(Unaudited)
Additional |
Total |
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Common Stock |
Paid-In |
Treasury |
Accumulated |
Stockholders’ |
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Shares |
Amount |
Capital |
Stock |
Deficit |
Equity/(Deficit) |
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Balance at June 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Restricted stock activity |
( |
) | ||||||||||||||||||||||
Issuance of common stock |
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Cost of common stock issuance |
— | ( |
) | ( |
) | |||||||||||||||||||
Stock issued for convertible note interest payment |
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Treasury shares withheld for employee taxes |
— | ( |
) | ( |
) | |||||||||||||||||||
Net loss for the period |
— | ( |
) | ( |
) | |||||||||||||||||||
Balance at September 30, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ |
Additional |
Total |
|||||||||||||||||||||||
Common Stock |
Paid-In |
Treasury |
Accumulated |
Stockholders’ |
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Shares |
Amount |
Capital |
Stock |
Deficit |
Equity |
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Balance at June 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
Stock-based compensation |
— | — | — | — | ||||||||||||||||||||
Treasury stock issued for convertible note interest payment |
— | |||||||||||||||||||||||
Treasury stock withheld for employee taxes |
— | ( |
) | ( |
) | |||||||||||||||||||
Net loss for the period |
— | ( |
) | ( |
) | |||||||||||||||||||
Balance at September 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Contango ORE, Inc. (“CORE” or the “Company”) engages in exploration for gold ore and associated minerals in Alaska. The Company conducts its business through three primary means:
● | |
● | its wholly-owned subsidiary, Alaska Gold Torrent, LLC, an Alaska limited liability company (“AGT”), which leases the mineral rights to approximately |
● | its wholly-owned subsidiary, Contango Minerals Alaska, LLC (“Contango Minerals”), which separately owns the mineral rights to approximately |
The Lucky Shot Property and the Minerals Property are collectively referred to in these Notes to Unaudited Condensed Consolidated Financial Statements as the “Contango Properties”.
The Company’s Manh Choh Project is in the development stage. All other projects are in the exploration stage.
The Company has been involved, directly and through the Peak Gold JV, in exploration on the Manh Choh Project since 2010, which has resulted in identifying two mineral deposits (Main and North Manh Choh) and several other gold, silver, and copper prospects. The other
Kinross released a combined feasibility study for the Fort Knox mill and the Peak Gold JV in July 2022. Also, in July 2022, Kinross announced that its board of directors (the “Kinross Board”) made a decision to proceed with development of the Manh Choh Project. Effective December 31, 2022, CORE Alaska, LLC, a wholly-owned subsidiary of the Company (“CORE Alaska”), KG Mining, and the Peak Gold JV executed the First Amendment to the Amended and Restated Limited Liability Company Agreement of the Peak Gold JV (as amended the “A&R JV LLCA”). The First Amendment to the A&R JV LLCA provides that, beginning in 2023, the Company may fund its quarterly scheduled cash calls on a monthly basis. To date, the Peak Gold JV management committee (the “JV Management Committee”) has approved a budget for 2023, with cash calls totaling approximately $
At the Lucky Shot Property, in August 2023, the Company began executing a program to complete surface drilling on the Coleman segment of the Lucky Shot vein. The program was shut down in September 2023 to preserve the safety of the Company's employees and contractors due to poor weather conditions.
On the Shamrock Property, the Company conducted soil and surface rock chip sampling during 2021. Follow up trenching and detailed geologic mapping is planned for the summer of 2024. At the Eagle/Hona Property, the Company carried out a detailed reconnaissance of the northern and eastern portions of the large claim block that had not previously been detail sampled. Due to the steep topography, a helicopter was used to execute the program safely. Follow up geologic mapping and sampling is planned for the summer of 2024.
During the current quarter, the Company obtained office space in Vancouver, Canada and created a Canadian subsidiary, Contango Mining Canada, Inc.
The Company’s fiscal year end is June 30.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), including instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by US GAAP for complete annual consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes included in the Company’s Form 10-K for the fiscal year ended June 30, 2023. The results of operations for the three months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2024.
3. Liquidity
The Company’s cash needs going forward will primarily relate to capital calls from the Peak Gold JV, exploration of the Contango Properties, and general and administrative expenses of the Company. The JV Management Committee has proposed a significant budget to complete and start the operations of the Manh Choh mine, which will require the Company to either elect to fund its 30% portion or be subject to dilution. The JV Management Committee has approved a budget for 2023, with cash calls totaling approximately $
4. Summary of Significant Accounting Policies
Please see the Company’s Form 10-K for the fiscal year ended June 30, 2023 for a summary of the Company's significant accounting policies, as there have been no changes to the Company's significant accounting polices since the time of that filing, except for the accounting policy related to derivative instruments below.
Derivative Instruments. The Company utilizes derivative instruments in order to manage exposure to risks associated with fluctuating commodity prices. The Company recognizes all derivatives as either assets or liabilities, measured at fair value, and recognizes changes in the fair value of derivatives in current earnings. The Company has elected to not designate any of its positions under the hedge accounting rules. Accordingly, these derivative contracts are mark-to-market and any changes in the estimated values of derivative contracts held at the balance sheet date are recognized in unrealized (loss) gain on derivative contracts, net in the Condensed Consolidated Statements of Operations as unrealized gains or losses on derivative contracts. Realized gains or losses on derivative contracts will be recognized in (Loss) gain on derivative contracts, net in the Condensed Consolidated Statements of Operations.
5. Investment in the Peak Gold JV
The Company initially recorded its investment at the historical book value of the assets contributed to the Peak Gold JV, which was approximately $
The following table is a roll-forward of the Company’s investment in the Peak Gold JV as of September 30, 2023:
Investment | ||||
in Peak Gold, LLC | ||||
Investment balance at June 30, 2022 | $ | |||
Investment in Peak Gold, LLC | ||||
Loss from equity investment in Peak Gold, LLC | ( | ) | ||
Investment balance at June 30, 2023 | $ | |||
Investment in Peak Gold, LLC | ||||
Loss from equity investment in Peak Gold, LLC | ( | ) | ||
Investment balance at September 30, 2023 | $ |
The following table presents the condensed unaudited results of operations for the Peak Gold JV for the three month periods ended September 30, 2023 and 2022 in accordance with US GAAP:
Three Months Ended | Three Months Ended | |||||||
September 30, 2023 | September 30, 2022 | |||||||
EXPENSES: | ||||||||
Exploration expense | $ | $ | ||||||
General and administrative | ||||||||
Total expenses | ||||||||
NET LOSS | $ | $ |
The Company’s share of the Peak Gold JV’s results of operations for the three months ended September 30, 2023 was a loss of approximately $
6. Prepaid Expenses and other assets
The Company has prepaid expenses and other assets of $
7. Net Loss Per Share
A reconciliation of the components of basic and diluted net loss per share of common stock is presented below:
Three Months Ended September 30, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Weighted Average | Loss | Weighted Average | Loss Per | |||||||||||||||||||||
Net Loss | Shares | Per Share | Net Loss | Shares | Share | |||||||||||||||||||
Basic Net Loss per Share: | ||||||||||||||||||||||||
Net loss attributable to common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
Diluted Net Loss per Share: | ||||||||||||||||||||||||
Net loss attributable to common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) |
Options and warrants to purchase
8. Stockholders’ Equity
The Company has
Underwritten Offering
On July 24, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC and Freedom Capital Markets (collectively, the “Underwriters”), relating to an underwritten public offering and sale (the “Offering”) of
ATM Offering
On June 8, 2023, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which the Company may offer and sell from time to time up to $
May 2023 Warrant Exercise
In May 2023, the Company offered the holders of its December 2022 Warrants and January 2023 Warrants with an original exercise price of $
January 2023 Private Placement
On January 19, 2023, the Company completed the issuance and sale of an aggregate of
Pursuant to the January 2023 Warrants between the Company and each of the January 2023 Investors, the January 2023 Warrants are exercisable, in full or in part, at any time until the second anniversary of their issuance, at an exercise price of $
Petrie Partners Securities, LLC (“Petrie”) assisted the Company with the January 2023 Private Placement and received compensation equal to
December 2022 Private Placement
On December 23, 2022, the Company completed the issuance and sale of an aggregate of
Pursuant to the December 2022 Warrants between the Company and each of the December 2022 Investors, the December 2022 Warrants are exercisable, in full or in part, at any time until the second anniversary of their issuance, at an exercise price of $
Petrie assisted the Company with the December 2022 Private Placement and received compensation equal to
Rights Plan Termination and Rights Agreement
On September 23, 2020, the Company adopted a limited duration stockholder rights agreement (the “Rights Agreement”) to replace the Company’s prior stockholder rights plan, which was terminated upon adoption of the Rights Agreement.
Pursuant to the Rights Agreement, the Board declared a dividend of
The Rights Agreement had an initial term of one year, expiring on September 22, 2021. On September 21, 2021, the Board of Directors of the Company approved an amendment to the Rights Agreement, extending the term of the Rights Agreement by an additional year to September 22, 2022. On August 31, 2022, the Board of Directors approved an amendment the Rights Agreement, extending the term of the Rights Agreement by an additional year to September 22, 2023. On September 13, 2023, the Board of Directors approved an amendment to the Rights Agreement, extending the term by an additional year to September 23, 2024.
9. Property & Equipment
The table below sets forth the book value by type of fixed asset as well as the estimated useful life:
Asset Type | Estimated Useful Life | September 30, 2023 | June 30, 2023 | ||||||||
Mineral properties | N/A - Units of Production | $ | $ | ||||||||
Land | Not Depreciated | ||||||||||
Buildings and improvements (years) | |||||||||||
Machinery and equipment (years) | |||||||||||
Vehicles (years) | | ||||||||||
Computer and office equipment (years) | | ||||||||||
Furniture & fixtures (years) | | ||||||||||
Less: Accumulated depreciation and amortization | ( | ) | ( | ) | |||||||
Less: Accumulated impairment | ( | ) | ( | ) | |||||||
Property & Equipment, net | $ | $ |
10. Related Party Transactions
Mr. Brad Juneau, who served as the Company’s Chairman, President and Chief Executive Officer until January 6, 2020, and the Company’s Executive Chairman until November 11, 2021, and now serves as the Company’s Chairman is also the sole manager of Juneau Exploration, L.P. (“JEX”), a private company involved in the exploration and production of oil and natural gas. On December 11, 2020, the Company entered into a Second Amended and Restated Management Services Agreement (the “A&R MSA”) with JEX, which amends and restates the Amended and Restated Management Services Agreement between the Company and JEX dated as of November 20, 2019. Pursuant to the A&R MSA, JEX will continue, subject to direction of the board of directors of the Company (the “Board”), to provide certain facilities, equipment and services used in the conduct of the business and affairs of the Company and management of its membership interest in the Peak Gold JV. Pursuant to the A&R MSA, JEX provides the Company office space and office equipment, and certain related services. The A&R MSA was effective for one year beginning December 1, 2020 and renews automatically on a monthly basis unless terminated upon ninety days’ prior notice by either the Company or JEX. Pursuant to the A&R MSA, the Company paid JEX a monthly fee of $
11. Stock-Based Compensation
On September 15, 2010, the Board adopted the Contango ORE, Inc. Equity Compensation Plan (the “2010 Plan”). On November 10, 2022, the stockholders of the Company approved and adopted the Second Amendment to the Contango ORE, Inc. Amended and Restated 2010 Equity Compensation Plan (as amended, the “Amended Equity Plan”) which increased the number of shares of common stock that the Company may issue under the Amended Equity Plan by
As of September 30, 2023, there were
Restricted Stock.
On December 1, 2020, the Company granted an aggregate
On August 16, 2021, the Company granted
On November 11, 2021, the Company granted
On February 2, 2022, the Company granted to four employees a total of
In December 2022, the Company cancelled
On February 7, 2023, the Company granted
On August 18, 2023, the Company granted
As of September 30, 2023, the total compensation cost related to unvested awards not yet recognized was $
Stock options. There were
A summary of the status of stock options granted under the Amended Equity Plan as of September 30, 2023 and changes during the three months then ended, is presented in the table below:
Three Months Ended | ||||||||
September 30, 2023 | ||||||||
Shares Under Options | Weighted Average Exercise Price | |||||||
Outstanding as of June 30, 2023 | $ | |||||||
Granted | ||||||||
Exercised | ||||||||
Forfeited | ||||||||
Outstanding at the end of the period | $ | |||||||
Aggregate intrinsic value | $ | |||||||
Exercisable, end of the period | ||||||||
Aggregate intrinsic value | $ | |||||||
Available for grant, end of period | ||||||||
Weighted average fair value per share of options granted during the period | $ |
12. Commitments and Contingencies
Tetlin Lease. The Tetlin Lease has a
-year term that expires on July 15, 2028, and continues for so long thereafter as the Peak Gold JV initiates and continues to conduct mining operations on the Tetlin Lease.
Pursuant to the terms of the Tetlin Lease, the Peak Gold JV is required to spend $
Gold Exploration. The Company’s Triple Z, Eagle/Hona, Shamrock, Willow, and Lucky Shot claims are all located on State of Alaska lands. The annual claim rentals on these projects vary based on the age of the claims, and are due and payable in full by November 30 of each year. Annual claims rentals for the 2023-2024 assessment year totaled $
Lucky Shot Property. With regard to the Lucky Shot Property, the Company will be obligated to pay CRH Funding II PTE. LTD, a Singapore private limited corporation (“CRH”), additional consideration if production on the Lucky Shot Property meets two separate milestone payment thresholds. If the first threshold of (1) an aggregate “mineral resource” equal to
Royal Gold Royalties. Royal Gold currently holds a
Retention Agreements. In February 2019, the Company entered into retention agreements with its then Chief Executive Officer, Brad Juneau, its Chief Financial Officer, Leah Gaines, and one other employee providing for payments in an aggregate amount of $
Employment Agreement. Effective July 11, 2023, Michael Clark was appointed to serve as Executive Vice President, Finance of the Company. Mr. Clark will perform certain of the functions of the Company’s principal financial officer. Pursuant to his employment agreement (the “Employment Agreement”), Mr. Clark will receive a base salary of $
Short Term Incentive Plan. The Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) adopted a Short-Term Incentive Plan (the “STIP”) effective as of June 10, 2020, for the benefit of Mr. Van Nieuwenhuyse. Pursuant to the terms of the STIP, the Compensation Committee establishes performance goals each year and evaluates the extent to which, if any, Mr. Van Nieuwenhuyse meets such goals. The STIP provides for a payout equal to
On August 2, 2023, CORE Alaska, a subsidiary of the Company, pursuant to an ISDA Master Agreement entered into with ING Capital Markets LLC (the “ING ISDA Master Agreement”) and an ISDA Master Agreement entered into with Macquarie Bank Limited (the “Macquarie ISDA Master Agreement”), in accordance with its obligations under that certain Credit and Guarantee Agreement, by and among the Company, its subsidiaries, ING Capital LLC and Macquarie Bank Limited, entered into a series of hedging agreements with ING Capital LLC and Macquarie Bank Limited for the sale of an aggregate of
13. Income Taxes
The Company recognized a full valuation allowance on its deferred tax asset as of September 30, 2023 and June 30, 2023 and has recognized zero income tax expense for the three months ended September 30, 2023 and September 30, 2022. The effective tax rate was
14. Debt
The table below shows the components of Debt, net as of September 30, 2023 and June 30, 2023:
September 30, 2023 | June 30, 2023 | |||||||
Secured Debt Facility | ||||||||
Principal amount | $ | $ | ||||||
Unamortized debt discount | ( | ) | ( | ) | ||||
Unamortized debt issuance costs | ( | ) | ( | ) | ||||
Debt, net | $ | $ | ||||||
Convertible Debenture | ||||||||
Principal amount | $ | $ | ||||||
Unamortized debt discount | ( | ) | ( | ) | ||||
Unamortized debt issuance costs | ( | ) | ( | ) | ||||
Debt, net | $ | $ | ||||||
Total Debt, net | $ | $ |
Secured Credit Facility
On May 17, 2023, the Company entered into a credit and guarantee agreement (the “Credit Agreement”), by and among CORE Alaska, LLC as the borrower, each of the Company, Alaska Gold Torrent, LLC, and Contango Minerals Alaska, LLC, as guarantors, each of the lenders party thereto from time to time, ING Capital LLC (“ING”), as administrative agent for the lenders, and Macquarie Bank Limited (“Macquarie”), as collateral agent for the secured parties. The Credit Agreement provides for a senior secured loan facility (the “Facility”) of up to
The Credit Agreement will mature on December 31, 2026 (the “Maturity Date”) and will be repaid via quarterly repayments over the life of the loan. The Facility has an upfront fee and a production linked arrangement fee based upon the projected total production of gold ounces in the base case financial model delivered on the closing date, payable quarterly based on attributable production, with any balance due upon the maturity or termination of the Credit Agreement. The Credit Agreement is secured by all the assets and properties of the Company and its subsidiaries, including the Company’s
Term loans, which can be made quarterly are to be used only to finance cash calls to the Peak Gold JV, fund the debt service reserve account, pay corporate costs in accordance with budget and base case financial model and fees and expenses in connection with the loan. Liquidity loans, which can be made once a month, are to be used for cost overruns. Any outstanding liquidity loans must be repaid on July 31, 2025.
Loans under the Facility can be Base Rate loans at the Base Rate plus the Applicable Margin or Secured Overnight Financing Rate (“SOFR”) loans at the three month adjusted term SOFR plus the Applicable Margin. The type of loan is requested by the borrower at the time of the borrowing and the type loan may be converted. The “Base Rate” is the highest of Prime Rate, Federal Funds Rate plus
Interest is payable commencing on the date of each loan and ending on the next payment date. The interest payment dates prior to November 1, 2025 are the last day of July, October, January and April; thereafter the payment dates are the last day of March, June, September and December. The Company also will pay commitment fee on average daily unused borrowings equal to a rate of
The Credit Agreement contains representations and warranties and affirmative and negative covenants customary for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of all or substantially all assets, transactions with affiliates and entry into hedging arrangements. The Credit Agreement also requires the Company to maintain, as of the last day of each fiscal quarter, (i) a historical debt service coverage ratio of no less than
The Company drew $
Borrowings under the term loan facility carried an original issue discount of $
Convertible Debenture
On April 26, 2022, the Company closed on a $
In connection with the closing of the Credit Agreement, the Company entered into a letter agreement with QRC (the “Letter Agreement”) which amended the terms of the Debenture. In accordance with the Letter Agreement, QRC acknowledged that the Debenture would be subordinate to the loans under the Credit Agreement, and acknowledged that the Company entering into the loans under the Credit Agreement would not constitute a breach of the negative covenants of the Debenture. QRC also waived its put right in respect of the Debenture that would require Contango to redeem the Debenture in whole or in part upon the completion of a secured financing or a change of control. In consideration for QRC entering into the Letter Agreement, the Company agreed to amend the interest rate of the Debenture from
The Debenture currently bears interest at
The Debenture carried an original issue discount of $
15. Derivatives and Hedging Activities
On August 2, 2023, CORE Alaska, a subsidiary of the Company, pursuant to an ISDA Master Agreement entered into with ING Capital Markets LLC (the “ING ISDA Master Agreement”) and an ISDA Master Agreement entered into with Macquarie Bank Limited (the “Macquarie ISDA Master Agreement”), in accordance with its obligations under that certain Credit and Guarantee Agreement, by and among the Company, its subsidiaries, ING Capital LLC and Macquarie Bank Limited, entered into a series of hedging agreements with ING Capital LLC and Macquarie Bank Limited for the sale of an aggregate of
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by gold future pricing. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to gold movements and the Company has elected not to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
As of September 30, 2023, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:
Period | Commodity | Volume | Weighted Average Price ($/oz) | ||||||
2024 | Gold | $ | |||||||
2025 | Gold | $ | |||||||
2026 | Gold | $ |
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023.
As of September 30, 2023 | As of June 30, 2023 | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments | Balance Sheet Location | Gross Recognized Assets / Liabilites | Gross Amounts Offset | Net Recognized Assets / Liabilities | Gross Recognized Assets / Liabilites | Gross Amounts Offset | Net Recognized Assets / Liabilities | ||||||||||||||||||
Commodity Contracts | Derivative contract asset - current | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Commodity Contracts | Derivative contract liability - current | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Commodity Contracts | Derivative contract asset - noncurrent | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||
Commodity Contracts | Derivative contract liability - noncurrent | $ | $ | ( | ) | $ | $ | $ | $ |
As of September 30, 2023, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $
Effect of Derivatives Not Designated as Hedging Instruments on the Income Statement
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Condensed Consolidated Statement of Operations for the three months ended September 30, 2023 and 2022.
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 | Location of Unrealized Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | |||||||
Three month period ended September 30, 2023 | Three month period ended September 30, 2022 | ||||||||
Commodity Contracts | Unrealized loss on derivative contracts | $ |
| $ | |||||
Total | $ | ( | ) | $ |
Credit-risk-related Contingent Features
Cross Default. The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
Material adverse change. Certain of the Company's agreements with its derivative counterparties contain provisions where if a specified event or condition occurs that materially changes the Company's creditworthiness in an adverse manner, the Company may be required to fully collateralize its obligations under the derivative instrument.
Incorporation of loan covenants. The Company has an agreement with a derivative counterparty that incorporates the loan covenant provisions of the Company's indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.
16. Fair Value Measurement
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
The three levels are defined as follows:
Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Other inputs that are observable directly or indirectly, such as quoted prices in markets that are not active or inputs, which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs for which there are little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the year ended June 30, 2023.
Fair Value on a Recurring Basis
The Company performs fair value measurements on a recurring basis for the following:
• Derivative Financial Instruments - Derivative financial instruments are carried at fair value and measured on a recurring basis. The Company's potential derivative financial instruments include features embedded within its convertible debenture with Queens Road Capital (see Note 14). These measurements were not material to the Consolidated Financial Statements. The Company also has hedging agreements in place to manage its exposure to changes in gold prices.
• Contingent Consideration - As discussed in Note 12, the Company will be obligated to pay CRH additional consideration if production on the Lucky Shot Property meets two separate milestone payment thresholds. The fair value of this contingent consideration is measured on a recurring basis, and is driven by the probability of reaching the milestone payment thresholds.
The following table summarizes the fair value of the Company’s financial assets and liabilities, by level within the fair-value hierarchy (in thousands):
As of September 30, 2023 |
Level 1 |
Level 2 |
Level 3 |
|||||||||
Financial Assets |
||||||||||||
Derivative contract asset - current |
$ | $ | $ | |||||||||
Financial Liabilities |
||||||||||||
Derivative Liability - noncurrent |
$ | $ | $ | |||||||||
Contingent consideration liability - noncurrent |
$ | $ | $ | |||||||||
As of June 30, 2023 |
||||||||||||
Financial Assets |
||||||||||||
Derivative contract asset - current |
$ | $ | $ | |||||||||
Financial Liabilities |
||||||||||||
Derivative Liability - noncurrent |
$ | $ | $ | |||||||||
Contingent consideration liability - noncurrent |
$ | $ | $ |
Fair Value on a Nonrecurring Basis
The Company applies the provisions of the fair value measurement standard on a non-recurring basis to its non-financial assets and liabilities, including mineral properties, business combinations, and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary.
17. Subsequent Events
On October 20, 2023, the Committee for Safe Communities (“CSC”), an Alaskan non-profit corporation inclusive of certain owners of vacation homes along the Manh Choh ore haul route and others claiming potential impact and objecting the ore haul plan and project, filed suit (the “Complaint”) in the Superior Court in Fairbanks, Alaska against the State of Alaska Department of Transportation and Public Facilities (“DOT”). The Complaint seeks injunctive relief against the DOT with respect to its oversight of the Peak Gold JV’s ore haul plan. The Complaint alleges that the DOT has approved a haul route and trucking plan that violates DOT regulations, DOT’s actions have created an unreasonable risk to public safety constituting an attractive public nuisance, and DOT has aided and abetted the offense of negligent driving. On November 2, 2023, CSC filed a motion for a preliminary injunction against the DOT and is seeking expedited consideration of its motion. If granted, the motion could impact the Peak Gold JV’s ore haul plans. The Peak Gold JV intends to intervene in the action whether by agreement of the parties or by motion and to vigorously defend its interests and the legality of its ore haul plans. The Peak Gold JV is also in consultation with DOT on addressing the allegations raised. On November 9, 2023, the motion for expedited consideration of the motion for preliminary injunction was denied by the Superior Court Judge.
On November 7, 2023, the Company drew an additional $
Available Information
General information about the Company can be found on the Company’s website at www.contangoore.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after the Company files or furnishes them to the SEC.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes and other information included elsewhere in this Form 10-Q and our Form 10-K for the fiscal year ended June 30, 2023, previously filed with the SEC.
Cautionary Statement about Forward-Looking Statements
Some of the statements made in this report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words and phrases “should be”, “will be”, “believe”, “expect”, “anticipate”, “estimate”, “forecast”, “goal” and similar expressions identify forward-looking statements and express our expectations about future events. Any statement that is not historical fact is a forward -looking statement. These include such matters as:
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The Company’s financial position; |
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Business strategy, including outsourcing; |
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Meeting Company forecasts and budgets; |
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Anticipated capital expenditures and availability of future financings; |
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• | Risk in the pricing or timing of hedges the Company has entered into for the production of gold and associated minerals; | |
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Prices of gold and associated minerals; |
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Timing and amount of future discoveries (if any) and production of natural resources on the Contango Properties and the Peak Gold JV Property; |
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Operating costs and other expenses; |
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Cash flow and anticipated liquidity; |
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The Company’s ability to fund its business with current cash reserves based on currently planned activities; |
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Prospect development; |
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Operating and legal risks; and |
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New governmental laws and regulations. |
Although the Company believes the expectations reflected in such forward-looking statements are reasonable, such expectations may not occur. These forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are outside of our control, that may cause our actual results, performance or achievements to be materially different from future results expressed or implied by the forward-looking statements. In addition to the risk factors described in Part II, Item 1A. Risk Factors, of this report and Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2023, these factors include among others:
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Ability to raise capital to fund capital expenditures; |
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Ability to retain or maintain capital contributions to, and our relative ownership interest in the Peak Gold JV; |
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Ability to influence management of the Peak Gold JV; |
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• | Potential delays or changes in plans with respect to exploration or development projects or capital expenditures; | |
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Operational constraints and delays; |
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Risks associated with exploring in the mining industry; |
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Timing and successful discovery of natural resources; |
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Availability of capital and the ability to repay indebtedness when due; |
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Declines and variations in the price of gold and associated minerals, as well as price volatility for natural resources; |
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Availability of operating equipment; |
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Operating hazards attendant to the mining industry; |
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Weather; |
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Ability to find and retain skilled personnel; |
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Restrictions on mining activities; |
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Legislation that may regulate mining activities; |
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Impact of new and potential legislative and regulatory changes (including commitments to international agreements) on mining operating and safety standards; |
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Uncertainties of any estimates and projections relating to any future production, costs and expenses (including changes in the cost of fuel, power, materials, and supplies); |
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Timely and full receipt of sale proceeds from the sale of any of our mined products (if any); |
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Stock price and interest rate volatility; |
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Federal and state regulatory developments and approvals; |
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Availability and cost of material and equipment; |
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Actions or inactions of third-parties; |
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Potential mechanical failure or under-performance of facilities and equipment; |
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Environmental and regulatory, health and safety risks; |
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Strength and financial resources of competitors; |
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Worldwide economic conditions; |
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Impact of pandemics, such as the worldwide COVID-19 outbreak, which could impact the Company's or the Peak Gold JV’s exploration schedule; |
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Expanded rigorous monitoring and testing requirements; |
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Ability to obtain insurance coverage on commercially reasonable terms; |
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Competition generally and the increasing competitive nature of the mining industry; |
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Risks related to title to properties; and |
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Ability to consummate strategic transactions. |
You should not unduly rely on these forward-looking statements in this report, as they speak only as of the date of this report. Except as required by law, the Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
Overview
The Company engages in exploration for gold ore and associated minerals in Alaska. The Company conducts its business through three primary means:
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30.0% membership interest in Peak Gold, LLC (the “Peak Gold JV”), which leases approximately 675,000 acres from the Tetlin Tribal Council and holds approximately 13,000 additional acres of State of Alaska mining claims (such combined acreage, the “Peak Gold JV Property”) for exploration and development, including in connection with the Peak Gold JV’s plan to mine ore from the Main and North Manh Choh deposits within the Peak Gold JV Property (“Manh Choh” or the “Manh Choh Project”); |
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its wholly-owned subsidiary, Alaska Gold Torrent, LLC, an Alaska limited liability company (“AGT”), which leases the mineral rights to approximately 8,600 acres of State of Alaska and patented mining claims for exploration from Alaska Hard Rock, Inc., located in three former producing gold mines located on the patented claims in the Willow Mining District about 75 miles north of Anchorage, Alaska (“Lucky Shot”, “Lucky Shot Property”, or the “Lucky Shot Property”); and |
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its wholly-owned subsidiary, Contango Minerals Alaska, LLC (“Contango Minerals”), which separately owns the mineral rights to approximately 145,280 acres of State of Alaska mining claims for exploration, including (i) approximately 69,780 acres located immediately northwest of the Peak Gold JV Property (the “Eagle/Hona Property”), (ii) approximately 14,800 acres located northeast of the Peak Gold JV Property (the “Triple Z Property”), (iii) approximately 52,700 acres of new property in the Richardson district of Alaska (the “Shamrock Property”) and (iv) approximately 8,000 acres located to the north and east of the Lucky Shot Property (the “Willow Property” and, together with the Eagle/Hona Property, the Triple Z Property, and the Shamrock Property, collectively the “Minerals Property”). The Company relinquished approximately 69,000 acres located on the Eagle/Hona Property in November 2022. The Company retained essentially all of the acreage where drilling work was performed in 2019 and 2021, and used sampling data to determine which acreage should be released. |
The Lucky Shot Property and the Minerals Property are collectively referred to in this Quarterly Report on Form 10-Q as the “Contango Properties”.
The Company’s Manh Choh Project is in the development stage. All other projects are in the exploration stage.
The Company has been involved, directly and through the Peak Gold JV, in exploration on the Manh Choh Project since 2010, which has resulted in identifying two mineral deposits (Main and North Manh Choh) and several other gold, silver, and copper prospects. The other 70.0% membership interest in the Peak Gold JV is owned by KG Mining (Alaska), Inc. (“KG Mining”), an indirect wholly-owned subsidiary of Kinross Gold Corporation (“Kinross”). Kinross is a large gold producer with a diverse global portfolio and extensive operating experience in Alaska. The Peak Gold JV plans to mine ore from the Main and North Manh Choh deposits and then process the ore at the existing Fort Knox mining and milling complex located approximately 240 miles (400 km) away. Ore from the mine is to be trucked to Fort Knox for processing on public roadways in newly purchased state-of-the-art trucks carrying legal loads. The use of the Fort Knox facilities is expected to accelerate the development of the Peak Gold JV Property and result in reduced upfront capital development costs, smaller environmental footprint, a shorter permitting and development timeline and less overall execution risk for the Peak Gold JV to advance the Main and North Manh Choh deposits to production. The Peak Gold JV has entered into an Ore Haul Agreement with Black Gold Transport, located in North Pole, Alaska to transport the run-of-mine ore from the Manh Choh Project to the Fort Knox facilities. Peak Gold JV has also entered into a contract with Kiewit Mining Group to provide contract mining and site preparation work at the Manh Choh Project. The Peak Gold JV will be charged a toll for using the Fort Knox facilities pursuant to a toll milling agreement by and between the Peak Gold JV and Fairbanks Gold Mining, Inc., which was entered into and became effective on April 14, 2023.
Kinross released a combined feasibility study for the Fort Knox mill and the Peak Gold JV in July 2022. Also, in July 2022, Kinross announced that its board of directors (the “Kinross Board”) made a decision to proceed with development of the Manh Choh Project. Effective December 31, 2022, CORE Alaska, LLC, a wholly-owned subsidiary of the Company (“CORE Alaska”), KG Mining, and the Peak Gold JV executed the First Amendment to the Amended and Restated Limited Liability Company Agreement of the Peak Gold JV (as amended, the “A&R JV LLCA”). The First Amendment to the A&R JV LLCA provides that, beginning in 2023, the Company may fund its quarterly scheduled cash calls on a monthly basis. To date, the Peak Gold JV management committee (the “JV Management Committee”) has approved a budget for 2023, with cash calls totaling approximately $165.1 million, of which the Company’s share is approximately $49.5 million. As of September 30, 2023, the Company has funded $39.8 million of the 2023 budget. On May 15, 2023, the Peak Gold JV received approval of its Waste Management Plan, Plan of Operations, and Reclamation and Closure Plan from the State of Alaska Departments of Environmental Conservation and Natural Resources. As of August 29, 2023, construction at the Manh Choh Project is complete and all mining equipment is on site and mining has commenced. Current mining activity consists of mostly pre-stripping the waste material and stockpiling any ore in preparation for transportation to the Fort Knox mill for processing. Kinross, on behalf of the Peak Gold JV, is also continuing its comprehensive community programs and prioritizing local economic benefits as it develops the project. All permitting activities are completed with all major permits received from both Federal and State permitting agencies. The Peak Gold JV believes that production is expected to commence at Manh Choh in the second half of 2024, with a mine plan that consists of two small, open pits that will be mined concurrently over 4.5 years.
At the Lucky Shot Property, in August 2023, the Company began executing a program to complete surface drilling on the Coleman segment of the Lucky Shot vein. The program was shut down in September 2023 to preserve the safety of the Company's employees and contractors due to bad weather conditions.
On the Shamrock Property, the Company conducted soil and surface rock chip sampling during 2021. Follow up trenching and detailed geologic mapping is planned for the summer of 2024. At the Eagle/Hona Property, the Company carried out a detailed reconnaissance of the northern and eastern portions of the large claim block that had not previously been detail sampled. Due to the steep topography, a helicopter was used to execute the program safely. Follow up geologic mapping and sampling is planned for the summer of 2024.
Recent Developments and Other Information
On October 20, 2023, the Committee for Safe Communities (“CSC”), an Alaskan non-profit corporation inclusive of certain owners of vacation homes along the Manh Choh ore haul route and others claiming potential impact and objecting the ore haul plan and project, filed suit (the “Complaint”) in the Superior Court in Fairbanks, Alaska against the State of Alaska Department of Transportation and Public Facilities (“DOT”). The Complaint seeks injunctive relief against the DOT with respect to its oversight of the Peak Gold JV’s ore haul plan. The Complaint alleges that the DOT has approved a haul route and trucking plan that violates DOT regulations, DOT’s actions have created an unreasonable risk to public safety constituting an attractive public nuisance, and DOT has aided and abetted the offense of negligent driving. On November 2, 2023, CSC filed a motion for a preliminary injunction against the DOT and is seeking expedited consideration of its motion. If granted, the motion could impact the Peak Gold JV’s ore haul plans. The Peak Gold JV intends to intervene in the action whether by agreement of the parties or by motion and to vigorously defend its interests and the legality of its ore haul plans. The Peak Gold JV is also in consultation with DOT on addressing the allegations raised. On November 9, 2023, the motion for expedited consideration of the motion for preliminary injunction was denied by the Superior Court Judge.
On August 2, 2023, CORE Alaska, pursuant to an ISDA Master Agreement entered into with ING Capital Markets LLC (the “ING ISDA Master Agreement”) and an ISDA Master Agreement entered into with Macquarie Bank Limited (the “Macquarie ISDA Master Agreement”), in accordance with its obligations under that certain Credit and Guarantee Agreement, by and among the Company, its subsidiaries, ING Capital LLC (“ING”) and Macquarie Bank Limited (“Macquarie”), entered into a series of hedging agreements with ING and Macquarie for the sale of an aggregate of 124,600 ounces of gold at a weighted average price of $2,025 per ounce. The hedge agreements have delivery obligations beginning in July 2024 and ending in December 2026, and represent approximately 45% of the Company’s interest in the projected production from the Manh Choh mine over the current anticipated life of the mine.
On July 24, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC and Freedom Capital Markets (collectively, the “Underwriters”), relating to an underwritten public offering (the “Underwritten Offering”) of 1,600,000 shares (the “Underwritten Shares”) of the Company’s common stock. All of the Underwritten Shares are being sold by the Company. The offering price of the Underwritten Shares was $19.00 per share, and the Underwriters agreed to purchase the Underwritten Shares from the Company pursuant to the Underwriting Agreement at a price of $17.77 per share (the “Purchase Price”), which includes a 6.5% Underwriters discount. The net proceeds from the Underwritten Offering were $28.2 million after deducting underwriting discounts and commissions and offering expenses.
Strategy
Partnering with strategic industry participants to expand future exploration work. As of October 1, 2020, in conjunction with the Kinross transactions that established the current ownership interests in the Peak Gold JV and the signing of the A&R JV LLCA, KG Mining became the manager of the Peak Gold JV (the “Manager”). KG Mining may resign as Manager and can be removed as Manager for a material breach of the A&R JV LLCA, a material failure to perform its obligations as the Manager, a failure to conduct the Peak Gold JV operations in accordance with industry standards and applicable laws, and other limited circumstances. Except as expressly delegated to the Manager, the A&R JV LLCA provides that the JV Management Committee has exclusive authority to determine all management matters related to the Company. The JV Management Committee currently consists of one appointee designated by the Company and two appointees designated by KG Mining. The Representatives designated by each member of the Peak Gold JV vote as a group, and in accordance with their respective membership interests in the Peak Gold JV. Except in the case of certain actions that require approval by unanimous vote of the Representatives, the affirmative vote of a majority of the membership interests in the Peak Gold JV constitutes the action of the JV Management Committee.
Structuring Incentives to Drive Behavior. The Company believes that equity ownership aligns the interests of the Company’s executives and directors with those of its stockholders. As of September 30, 2023, the Company’s directors and executives beneficially own approximately 17.8% of the Company’s common stock.
Acquiring exploration properties. The Company anticipates from time to time acquiring additional properties in Alaska for exploration, subject to the availability of funds. The acquisitions may include leases or similar rights from Alaska Native corporations or may include filing Federal or State of Alaska mining claims by staking claims for exploration. Acquiring additional properties will likely result in additional expense to the Company for minimum royalties, minimum rents and annual exploratory work requirements. The Company is open to strategic partnerships or alliances with other companies as a means to enhance its ability to fund new and existing exploration and development opportunities.
Off-Balance Sheet Arrangements
None.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company has identified below the critical accounting estimate that is of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. Actual results may differ from these estimates under different assumptions or conditions.
Business Combinations. In determining whether an acquisition should be accounted for as a business combination or asset acquisition, the Company first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business, and is instead deemed to be an asset. If this is not the case, the Company then further evaluates whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the single identifiable asset or group of similar identifiable assets and activities is a business. The Company accounts for business combinations using the acquisition method of accounting. Application of this method of accounting requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually. The Company measures and recognizes asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets, which includes transaction costs. Goodwill is not recognized in asset acquisitions. Contingent consideration in asset acquisitions payable in the form of cash is recognized when payment becomes probable and reasonably estimable, unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the asset acquisition cost when acquired. Contingent consideration payable in the form of a fixed number of the Company’s own shares is measured at fair value as of the acquisition date and recognized when the issuance of the shares becomes probable. Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets. The Company carries a liability for contingent consideration related to the acquisition of AGT. In estimating the fair value of the contingent consideration at each reporting period, the Company makes estimates regarding the probability and timing of reaching the milestones associated with payment of the consideration, as well as the weighted average cost of capital used to discount the liability to its present value as of the balance sheet date. The estimate of the fair value of the contingent consideration is sensitive to changes in any one of these estimates.
Derivative Instruments. The Company utilizes derivative instruments in order to manage exposure to risks associated with fluctuating commodity prices. The Company recognizes all derivatives as either assets or liabilities, measured at fair value, and recognizes changes in the fair value of derivatives in current earnings. The Company has elected to not designate any of its positions under the hedge accounting rules. Accordingly, these derivative contracts are mark-to-market and any changes in the estimated values of derivative contracts held at the balance sheet date are recognized in unrealized (loss) gain on derivative contracts, net in the Condensed Consolidated Statements of Operations as unrealized gains or losses on derivative contracts. Realized gains or losses on derivative contracts will be recognized in (Loss) gain on derivative contracts, net in the Condensed Consolidated Statements of Operations.
Results of Operations
Neither the Company nor the Peak Gold JV has commenced producing commercially marketable minerals. To date, neither the Company nor the Peak Gold JV has generated any revenue from mineral sales or operations. Neither the Company nor the Peak Gold JV has any recurring source of revenue. The Company’s ability to continue as a going concern is dependent on the Company’s ability to raise capital to fund future exploration and working capital requirements. In the future, the Company and the Peak Gold JV may generate revenue from a combination of mineral sales and other payments resulting from any commercially recoverable minerals from the Manh Choh Project. The Company does not expect the Peak Gold JV to generate revenue from mineral sales prior to mid-2024. If the Company’s properties or the Manh Choh Project fail to contain any proven reserves, the Company’s ability to generate future revenue, and the Company’s results of operations and financial position, would be materially adversely affected. Other potential sources of cash, or relief of demand for cash, include external debt, the sale of shares of the Company’s stock, joint ventures, or alternative methods such as mergers or sale of our assets. No assurances can be given, however, that the Company will be able to obtain any of these potential sources of cash. The Company will need to generate significant revenues to achieve profitability and the Company may never do so.
Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022
Claim Rentals Expense. Claim rental expense primarily consists of State of Alaska rental payments and annual labor payments. We recognized claim rental expense of $0.1 million compared to $0.1 million for the three months ended September 30, 2022.
Exploration Expense. Exploration expense for the three months ended September 30, 2023 was $1.1 million compared to $4.4 million for the three months ended September 30, 2022. Current and prior period exploration expense relates to exploration work performed on our Lucky Shot Property. The current period exploration program at Lucky Shot was shut down in September 2023 due to poor weather conditions. The prior period program was carried out through November 2022.
General and Administrative Expense. General and administrative expense for the three months ended September 30, 2023 and 2022 was $2.8 million and $2.4 million, respectively. The Company’s general and administrative expense primarily relates to legal fees, management fees, payroll and stock-based compensation expense. General and administrative expenses were higher for the three months ended September 30, 2023, as a result of a $0.2 million bonus paid to Rick Van Nieuwenhuyse during that quarter, additional payroll related fees for the addition of two employees during the quarter, as well as increased audit fees.
Loss from Equity Investment in the Peak Gold JV. The loss from the Company’s equity investment in the Peak Gold JV for the three months ended September 30, 2023 and 2022 was $5.6 million and zero, respectively. The current period expense includes the recognition of $4.3 million in suspended losses from previous periods and $1.3 million in current period losses from our 30.0% investment in the Peak Gold JV. The Company did not make a capital contribution to the Peak Gold JV during the three months ended September 30, 2022, and at that time the cumulative loss exceeded the Company’s cumulative investment thus the prior period losses from the Peak Gold JV were suspended losses. There were no suspended losses as of September 30, 2023.
Interest Expense. In connection with the closing of the Credit Agreement, the Company entered into an amendment to its $20,000,000 unsecured convertible debenture (the “Debenture”) with Queen’s Road Capital Investment, Ltd. (“QRC”) that raised the stated interest rate from 8% to 9%. The Debenture currently bears interest at 9% per annum, payable quarterly, with 7% paid in cash and 2% paid in shares of common stock of the Company (See Note 14 - Debt for discussion of both debt arrangements). The current quarter interest expense of $0.8 million includes a full quarter of interest expense related to the Debenture, and a full quarter of interest expense related to the Company’s cumulative $20 million draw-down on the Facility. Prior year interest expense of $0.4 million only included the current quarter interest expense related to the Debenture.
Loss on Derivative Contracts. The Company incurred a loss of $2.7 million during the current quarter related to derivative contracts compared to $0 during the quarter ended September 30, 2022. The Company did not enter into any derivative contracts until July 2023 (see Note 15 - Derivative and Hedging Activities).
Liquidity and Capital Resources
As of September 30, 2023, the Company had approximately $18.7 million of cash.
The Company’s primary cash requirements have been for general and administrative expenses, capital calls from the Peak Gold JV for the Manh Choh Property, and exploration expenditures on the Lucky Shot Property. The Company’s sources of cash have been from common stock offerings, the issuance of the Debenture, and the proceeds from the Facility (see Note 8 - Stockholder's Equity and Note 14 - Debt, for a discussion of the recent activity).
The JV Management Committee of the Peak Gold JV has proposed a significant budget to complete and start the operations of the Manh Choh mine. Specifically, the JV Management Committee has approved a budget for 2023, with cash calls totaling approximately $165.1 million, of which the Company’s share is approximately $49.5 million. As of the date of this filing, the Company has funded $45.4 million of the approved 2023 budget. This budget primarily relates to completion of the Manh Choh camp, mine access road construction, earthworks, general construction and installation, pre-production stripping, etc. The Company will be required to make capital contributions of 30% of the budgeted amounts when cash calls are received from the Peak Gold JV or face the possible dilution of its interest in the Peak Gold JV.
The Company’s cash needs going forward will primarily relate to capital calls from the Peak Gold JV, exploration of the Contango Properties, and general and administrative expenses of the Company. If a large budget is undertaken, and no additional financing is obtained, the Company can elect not to fund its portion of the approved budget, in which case the Company would maintain sufficient liquidity to meet its working capital requirements for the next twelve months; however, its membership interest in the Peak Gold JV would be diluted. If the Company’s interest in the Peak Gold JV is diluted, the Company may not be able to fully realize its investment in the Peak Gold JV. Also, if no additional financing is obtained, the Company may not be able to fully realize its investment in the Contango Properties. The Company has limited financial resources and the ability of the Company to arrange additional financing in the future will depend, in part, on the prevailing capital market conditions, the exploration results achieved at the Peak Gold JV Property, as well as the market price of metals. The Company cannot be certain that financing will be available to the Company on acceptable terms, if at all.
Further financing by the Company may include issuances of equity, instruments convertible into equity (such as warrants) or various forms of debt. The Company has issued common stock and other instruments convertible into equity in the past and cannot predict the size or price of any future issuances of common stock or other instruments convertible into equity, and the effect, if any, that such future issuances and sales will have on the market price of the Company’s securities. Any additional issuances of common stock or securities convertible into, or exercisable or exchangeable for, common stock may ultimately result in dilution to the holders of common stock, dilution in any future earnings per share of the Company and may have a material adverse effect upon the market price of the common stock of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” the Company is not required to provide this information.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15(b) of the Exchange Act, the Company has evaluated, under the supervision and with the participation of its management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023 at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
From time to time, the Company is party to litigation or other legal and administrative proceedings that it considers to be a part of the ordinary course of business. For a discussion of the complaint filed on October 20, 2023 by CSC seeking injunctive relief against the Alaska DOT with respect to its oversight of the Peak Gold JV’s ore haul plan, see Note 17 – Subsequent Events and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments and Other Information. As of the date of this Form 10-Q, the Company is not a party to any material legal proceedings and the Company is not aware of any material proceedings contemplated against us, that could individually or in the aggregate, reasonably be expected to have a material adverse effect on the Company's financial condition, cash flows or results of operations.
In addition to the risk factor set forth below and the other information set forth in this Form 10-Q, you should carefully consider the risks discussed in our Annual Report on Form 10-K for the year ended June 30, 2023, under the headings “Item 1. Business — Adverse Climate Conditions,” “—Competition,” “— Government Regulation” and “Item 2. Properties— Environmental Regulation and Permitting,” “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” which risks could materially affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our Annual Report on Form 10-K for the year ended June 30, 2023. The risks described in our Annual Report on Form 10-K for the year ended June 30, 2023 are not the only risks the Company faces. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. An investment in the Company is subject to risks inherent in our business and involves a high degree of risk. The trading price of the shares of the Company is affected by the performance of our business relative to, among other things, competition, market conditions and general economic and industry conditions. The value of an investment in the Company may decrease, resulting in a loss. The updated risk factors are as follows:
Opposition to our operations and those of the Peak Gold JV from local stakeholders or non-governmental organizations could have a material adverse effect on us.
There is an increasing level of public concern relating to the effect of mining production on its surroundings, communities, and environment. Local communities and non-governmental organizations (“NGOs”), some of which oppose resource development, are often vocal critics of the mining industry. For instance, certain NGOs have recently filed suit against the State of Alaska and the Alaska Department of Transportation to stop trucking of mining ore on public highways, citing safety and environmental concerns. While we and the Peak Gold JV seek to operate in a socially responsible manner, opposition to extractive industries, or our operations specifically, adverse publicity generated by local communities or NGOs related to extractive industries, or our operations specifically, or the modification or increase in enforcement of laws regarding truck weight limits or public road access could prevent us from obtaining permits necessary for our operations or to continue operations as planned or at all. Further, such events could have a material adverse effect on our reputation, our relationships with the communities in which we operate and our financial condition and prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 4. Mine Safety Disclosures
None.
None.
(a) |
Exhibits: |
The following is a list of exhibits filed as part of this Form 10-Q. Where so indicated, exhibits, which were previously filed, are incorporated herein by reference (File No. 001-35770, unless otherwise indicated).
Exhibit Number |
Description |
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3.1 |
Certificate of Incorporation of Contango ORE, Inc. (Filed as Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form 10, as filed with the Securities and Exchange Commission on November 26, 2010). |
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3.2 |
Certificate of Amendment to Certificate of Incorporation of Contango ORE, Inc. (Filed as Exhibit 3.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on December 17, 2020). |
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3.3 |
Bylaws of Contango ORE, Inc. (Filed as Exhibit 3.2 to Amendment No. 2 to the Company’s Registration Statement on Form 10, as filed with the Securities and Exchange Commission on November 26, 2010). |
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3.4 |
Amendment No. 1 to the Bylaws of Contango ORE, Inc. (Filed as Exhibit 3.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on October 21, 2021). |
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4.1 |
Form of Certificate of Contango ORE, Inc. common stock. (Filed as Exhibit 4.1 to the Company’s quarterly report on Form 10-Q for the three months ended December 31, 2013, as filed with the Securities and Exchange Commission on November 14, 2013). |
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4.2 |
Certificate of Designation of Series A Junior Preferred Stock of Contango ORE, Inc. (Filed as Exhibit 3.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on December 21, 2012). |
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4.3 |
Certificate of Elimination of Series A Junior Preferred Stock of Contango ORE, Inc. (Filed as Exhibit 3.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on September 24, 2020). |
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4.4 |
Certificate of Designations of Series A-1 Junior Participating Preferred Stock of Contango ORE, Inc. (Filed as Exhibit 3.2 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on September 24, 2020). |
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4.5 |
Registration Rights Agreement dated as of June 17, 2021, by and between Contango ORE, Inc. and the Purchaser named therein (Filed as Exhibit 4.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on June 21, 2021). |
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4.6 |
Registration Rights Agreement dated as of August 24, 2021, by and between the Company and CRH Funding II Pte. Ltd. (Filed as Exhibit 4.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on August 25, 2021). |
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4.7 |
Rights Agreement, dated as of September 23, 2020, between Contango ORE, Inc. and Computershare Trust Company, N.A., as Rights Agent. (Filed as Exhibit 4.2 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on September 24, 2020). |
4.8 |
Amendment No. 1 to Rights Agreement, dated as of September 22, 2021, between Contango ORE, Inc. and Computershare Trust Company. N.A. as Rights Agent. (Filed as Exhibit 4.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on September 22, 2021). |
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4.9 |
Amendment No. 2 to Rights Agreement, dated as of August 31, 2022, between Contango ORE, Inc. and Computershare Trust Company. N.A. as Rights Agent. (Filed as Exhibit 4.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on September 2, 2022). |
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4.10 |
Form of Registration Rights Agreement dated as of December 23, 2022. (Filed as Exhibit 4.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on December 23, 2022). |
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4.11 |
Form of Registration Rights Agreement dated as of January 19, 2023. (Filed as Exhibit 4.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on January 19, 2023). |
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10.1 |
Employment Agreement, dated July 11, 2023 between Michael Clark and the Company † (Filed as Exhibit 10.1 to the Company current report on Form 8-K, as filed with the Securities and Exchange Commission on July 17, 2023). |
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10.2 |
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10.3 |
Retention Agreement, dated August 4, 2023 between Leah Gains and the Company † (Filed as Exhibit 10.1 to the Company current report on Form 8-K, as filed with the Securities and Exchange Commission on August 4, 2023). |
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10.4 |
ISDA Master Agreement, dated May 17, 2023, between ING and Core Alaska (Filed as Exhibit 10.1 to the Company current report on Form 8-K, as filed with the Securities and Exchange Commission on August 8, 2023). |
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10.5 | ISDA Master Agreement, dated May 17, 2023, between Macquarie and Core Alaska (Filed as Exhibit 10.2 to the Company current report on Form 8-K, as filed with the Securities and Exchange Commission on August 8, 2023). | |
10.6 | Amendment No. 2 to the Credit and Guarantee Agreement, dated August 15, 2023, by and among the Borrower, the Guarantors, each of the lenders party hereto from time to time, the administrative agent and the collateral agent. * | |
31.1 |
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31.2 |
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32.1 |
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32.2 |
101 |
Financial statements from the Company’s quarterly report on Form 10-Q for the three months ended September 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Cash Flows; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity; and (v) Notes to Unaudited Condensed Consolidated Financial Statements. |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* |
Filed herewith |
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† | Management contract or compensatory plan or agreement |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
CONTANGO ORE, INC. |
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Date: November 14, 2023 |
By: |
/s/ RICK VAN NIEUWENHUYSE |
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Rick Van Nieuwenhuyse |
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President and Chief Executive Officer (Principal Executive Officer) |
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Date: November 14, 2023 |
By: |
/s/ LEAH GAINES |
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Leah Gaines |
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Vice President, Chief Financial Officer, Chief Accounting Officer and Controller (Principal Financial and Accounting Officer) |