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 in our Form 10-K for the fiscal year ended June 30, 2019, 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 of 1933, 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;
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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 our Peak Gold Joint Venture 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.
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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 I, Item 2. 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, 2019, 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 our relative ownership interest in the Joint Venture Company;
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Ability to influence management of the Joint Venture Company;
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Operational constraints and delays;
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The risks associated with exploring in the mining industry;
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The 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;
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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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The 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 on mining operating and safety standards;
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Uncertainties of any estimates and projections relating to any future production, costs and expenses;
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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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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 Joint Venture Company’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 our industry;
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Risks related to title to properties; and
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Ability to consummate strategic transactions.
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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, we undertake 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 is a Houston-based company, whose primary business is the participation in a joint venture to explore in the State of Alaska for gold ore and associated minerals. On January 8, 2015, the Company and Royal Gold, Inc. (“Royal Gold”), through their wholly-owned subsidiaries, consummated the transactions (the “Transactions”) contemplated under the Master Agreement, dated as of September 29, 2014 (the “Master Agreement”), including the formation of the Joint Venture Company, to advance exploration of the Peak Gold Joint Venture Property (as defined below), which is prospective for gold and associated minerals. As of March 31, 2020, the Joint Venture Company leased or controlled over an estimated 860,000 acres for the exploration of gold ore and associated minerals.
Background
Contango Mining Company (“Contango Mining”), a wholly owned subsidiary of Contango Oil & Gas Company (“Contango”), was formed for the purpose of mineral exploration in the State of Alaska. The Company was formed on September 1, 2010 as a Delaware corporation and on November 29, 2010, Contango Mining assigned all its properties and certain other assets and liabilities to Contango. Contango contributed the properties and $3.5 million of cash to the Company, pursuant to the terms of a Contribution Agreement (the “Contribution Agreement”), in exchange for approximately 1.6 million shares of the Company’s common stock. The transactions occurred between companies under common control. Contango then distributed all of the Company’s common stock to Contango’s stockholders of record as of October 15, 2010, promptly after the effective date of the Company’s Registration Statement Form 10 on the basis of one share of common stock for each ten (10) shares of Contango’s common stock then outstanding.
Contango Mining acquired an interest in properties from Juneau Exploration, L.P., (“JEX”) in exchange for $1 million and a 3.0% overriding royalty interest in the properties granted to JEX. JEX assisted the Company in acquiring additional properties in Alaska pursuant to an Advisory Agreement dated September 6, 2012, and the Company granted to JEX a 2% overriding royalty interest in the additional properties acquired. On September 29, 2014, pursuant to a Royalty Purchase Agreement between JEX and Royal Gold, JEX sold its entire overriding royalty interest in the properties to Royal Gold. On the same date, the Company terminated the Advisory Agreement with JEX. In connection with the closing of the Transactions with Royal Gold (the “Closing”), the Company formed Peak Gold, LLC (the “Joint Venture Company”) and contributed to the Joint Venture Company the Peak Gold Joint Venture Property near Tok, Alaska, together with other personal property (the “Contributed Assets”) with a historical cost of $1.4 million and an agreed value of $45.7 million (the “Contributed Assets Value”). At the Closing, the Company and Royal Gold, through their wholly-owned subsidiaries, entered into a Limited Liability Company Agreement for the Joint Venture Company (the “JV LLCA”).
Upon Closing, Royal Gold initially contributed $5.0 million to fund exploration activity of the Joint Venture Company. The initial $5.0 million did not give Royal Gold an equity stake in the Joint Venture Company. In connection with the initial contribution, Royal Gold received an option to earn up to a 40% interest in the Joint Venture Company by investing up to $30.0 million (inclusive of the initial $5.0 million investment) prior to October 2018. As of March 31, 2020, Royal Gold has contributed $36.7 million (including its initial $5.0 million investment) to the Joint Venture Company and earned a 40.0% interest in the Joint Venture Company. Now that Royal Gold has funded $30 million to the Joint Venture Company, pursuant to the terms of the JV LLCA, the Company and Royal Gold are obligated to jointly fund the joint venture operations in proportion to their interests in the Joint Venture Company in order to maintain their respective percentage interests in the Joint Venture Company. The proceeds of the investment are used for additional exploration of the property it controls. If a member elects not to contribute to an approved program and budget or contributes less than its proportionate interest, its percentage interest will be reduced. As of March 31, 2020, the Company had approximately $3.6 million of cash, cash equivalents, and short term investments. Due to the effects of COVID-19, the Management Committee of the Joint Venture Company approved a $1.8 million budget for 2020 that would serve to care for and maintain the Peak Gold Joint Venture Property, and postpone new exploration until conditions permit. The Company's share of the budget is approximately $1.1 million. The Company currently holds a 60.0% interest in the Joint Venture Company.
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Properties
Since 2009, the Company’s primary focus has been the exploration of a mineral lease with the Native Village of Tetlin whose governmental entity is the Tetlin Tribal Council (“Tetlin Tribal Council”) for the exploration of minerals near Tok, Alaska on a currently estimated 675,000 acres (the “Tetlin Lease”) and almost all of the Company’s resources have been directed to that end. All significant work presently conducted by the Company has been directed at exploration of the Tetlin Lease and increasing understanding of the characteristics of, and economics of, any mineralization. There are no known quantifiable mineral reserves on the Tetlin Lease or any of the Company’s other properties as defined by the SEC Industry Guide 7.
The Tetlin Lease originally had a ten year term beginning July 2008, which was extended for an additional ten years to July 15, 2028. If the properties under the Tetlin Lease are placed into commercial production, the Tetlin Lease will be held throughout production and the Company would be obligated to pay a production royalty to the Tetlin Tribal Council, which varies from 2.0% to 5.0%, depending on the type of metal produced and the year of production. In June 2011, the Company paid the Tetlin Tribal Council $75,000 in exchange for reducing the production royalty payable to them by 0.25%. In July 2011, the Company paid the Tetlin Tribal Council an additional $150,000 in exchange for further reducing the production royalty by 0.50%. These payments lowered the production royalty to a range of 1.25% to 4.25%, depending on the type of metal produced and the year of production. On or before July 15, 2020, the Tetlin Tribal Council has the option to increase its production royalty by (i) 0.25% by payment to the Joint Venture Company of $150,000, (ii) 0.50% by payment to the Joint Venture Company of $300,000, or (iii) 0.75% by payment to the Joint Venture Company of $450,000.
The Joint Venture Company also holds certain State of Alaska unpatented mining claims for the exploration of gold ore and associated minerals. The Company believes that the Joint Venture Company holds good title to its properties, in accordance with standards generally accepted in the mineral industry. As is customary in the mineral industry, the Company conducted only a preliminary title examination at the time it acquired the Tetlin Lease. The Joint Venture Company conducted a title examination prior to the assignment of the Tetlin Lease to the Joint Venture Company and performed certain curative title work. Before the Joint Venture Company begins any mine development work, however, the Joint Venture Company is expected to again conduct a full title review and perform curative work on any defects that it deems significant. A significant amount of additional work is likely required in the exploration of the properties before any determination as to the economic feasibility of a mining venture can be made.
The following table summarizes the Tetlin Lease and unpatented mining claims (the “Peak Gold Joint Venture Property”) held by the Joint Venture Company as of March 31, 2020:
Property
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Location
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Commodities
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Claims
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Estimated Acres
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Type
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Tetlin-Tok
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Eastern Interior
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Gold, Copper, Silver
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131
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10,900
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State Mining Claims
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Eagle
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Eastern Interior
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Gold, Copper, Silver
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428
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65,900
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State Mining Claims
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Bush
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Eastern Interior
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Gold, Copper, Silver
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48
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7,700
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State Mining Claims
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West Fork
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Eastern Interior
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Gold, Copper, Silver
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48
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7,700
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State Mining Claims
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Triple Z
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Eastern Interior
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Gold, Copper, Silver
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108
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15,800
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State Mining Claims
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Noah
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Eastern Interior
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Gold, Copper, Silver
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482
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75,400
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State Mining Claims
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Tetlin-Village
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Eastern Interior
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Gold, Copper, Silver
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-
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675,000
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Lease
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TOTALS:
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1,245
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858,400
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Strategy
Partnering with strategic industry participants to expand future exploration work. In connection with an evaluation of the Company’s strategic options conducted by the Board of Directors and its financial advisor in 2014, the Company determined to continue its exploration activities on the Peak Gold Joint Venture Property through a joint venture with an experienced industry participant. As a result, the Company formed the Joint Venture Company pursuant to the JV LLCA with Royal Gold. Under the JV LLCA, Royal Gold is appointed as the manager of the Joint Venture Company (the “Manager”), initially, with overall management responsibility for operations of the Joint Venture Company through October 31, 2018, and, thereafter, provided Royal Gold earns at least a forty percent (40%) percentage interest by October 31, 2018. As of March 31, 2020, Royal Gold has earned a 40% interest in the Joint Venture Company, and therefore continues to serve as its Manager. Royal Gold may resign as Manager and can be removed as Manager for a material breach of the JV LLCA, a material failure to perform its obligations as the Manager, a failure to conduct the Joint Venture Company operations in accordance with industry standards and applicable laws, and other limited circumstances. The Manager will manage and direct the operation of the Joint Venture Company, and will discharge its duties, in accordance with approved programs and budgets. The Manager will implement the decisions of the Management Committee of the Joint Venture Company (the “Management Committee”) and will carry out the day-to-day operations of the Joint Venture Company. Except as expressly delegated to the Manager, the JV LLCA provides that the Management Committee has exclusive authority to determine all management matters related to the Company. The Management Committee currently consists of one appointee designated by the Company and two appointees designated by Royal Gold. Each designate on the Management Committee is entitled to one vote. Except for the list of specific actions set forth in the JV LLCA Agreement, the affirmative vote by a majority of designates is required for action.
Effective as of January 6, 2020, Rick Van Nieuwenhuyse was appointed to serve as President and Chief Executive Officer of the Company. Brad Juneau will continue to be active in the Company as Executive Chairman. Mr. Van Nieuwenhuyse will perform the functions of the Company’s principal executive officer. Also, effective on January 6, 2020, the size of the Board was increased from four to five directors with Mr. Van Nieuwenhuyse appointed to the Board to fill the vacancy created by the increase. Mr. Van Nieuwenhuyse, 64, previously served as President and Chief Executive Officer of Trilogy Metals Inc. from January 2012. Between May 1999 and January of 2012, he served as the President and Chief Executive Officer of NOVAGOLD Resources, Inc.
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 March 31, 2020, the Company’s directors and executives beneficially own approximately 19.2% of the Company’s common stock. An additional 12.0% of the Company’s common stock is beneficially owned by the Marital Trust of Mr. Kenneth R. Peak, the Company’s former Chairman, who passed away on April 19, 2013.
Restricted Stock; Options. In November 2017, the Company granted 155,000 restricted shares of common stock to its executives and non-executive directors. All of the restricted stock from this grant vested on January 1, 2020.
In November 2018, the Company granted 155,000 restricted shares of common stock to its executives and non-executive directors. The restricted stock granted vests in January 2021. As of March 31, 2020, there were 155,000 shares of such restricted stock that remained unvested.
In December 2018, the Company cancelled 117,332 shares of unvested restricted stock held by two of its executives and the non-executive directors that were set to vest on January 1, 2019. The Company also granted 146,666 restricted shares of common stock to two of its executives and non-executive directors. The restricted shares cancellation and the subsequent new grants were accounted for as modification to the original restricted stock grants. The incremental fair value will be recognized over the vesting period. The impact of the modification to the current quarter was immaterial. All of the restricted stock granted in December 2018 vest in January 2021. As of March 31, 2020, there were 146,666 shares of such restricted stock that remained unvested.
In November 2019, the Company granted 158,000 restricted shares of common stock to its executives and non-executive directors. The restricted stock granted vests in January 2022. As of March 31, 2020, there were 158,000 shares of such restricted stock that remained unvested.
Neither Brad Juneau, the Company’s former Chairman, President and Chief Executive Officer and current Executive Chairman, nor any of the Company’s non-executive directors have ever been paid a salary or cash compensation by the Company.
There were no stock option exercises during the three and nine months ended March 31, 2020. There were also no stock option exercises during the three months ended March 31, 2019. During the nine months ended March 31, 2019 the Company's current and former executives, directors, and consultants cashless exercised 35,625 stock options resulting in the issuance of 19,513 shares of common stock to the exercising parties and no proceeds to the Company.
In connection with the appointment of Rick Van Nieuwenhuyse as the President and Chief Executive Officer of the Company, on January 6, 2020 the Company granted to Mr. Van Nieuwenhuyse options to purchase 100,000 shares of common stock of the Company, with an exercise price of $14.50 per share, which is equal to the closing price on January 6, 2020, the day on which he began employment with the Company. On January 9, 2020, the Company issued 75,000 shares of restricted stock to Mr. Van Nieuwenhuyse. The options and shares of restricted stock each will vest in two equal installments, half on the first anniversary of Mr. Van Nieuwenhuyse’s employment with the Company and half on the second anniversary of his employment with the Company, subject to acceleration upon a change of control of the Company.
Exploration and Mining Property
Exploration and mining rights in Alaska may be acquired in the following manner: public lands, private fee lands, unpatented Federal or State of Alaska mining claims, patented mining claims, and tribal lands. The primary sources for acquisition of these lands are the United States government, through the Bureau of Land Management and the United States Forest Service, the Alaskan state government, tribal governments, and individuals or entities who currently hold title to or lease government and private lands.
Tribal lands are those lands that are under control by sovereign Native American tribes, such as land constituting the Tetlin Lease or Alaska Native corporations established by the Alaska Native Claims Settlement Act of 1971. Areas that show promise for exploration and mining can be leased from or joint ventured with the tribe controlling the land, including land constituting the Tetlin Lease.
The State of Alaska government owns public lands. Mineral resource exploration, development and production are administered primarily by the State Department of Natural Resources. Ownership of the subsurface mineral estate, including alluvial and lode mineral rights, can be acquired by staking a 40 -acre or 160 -acre mining claim, which right is granted under Alaska Statute Sec. 38.05.185 to 38.05.275, as amended. The State of Alaska government continues to own the surface estate, subject to certain rights of ingress and egress owned by the claimant, even though the subsurface can be controlled by a claimant with a right to extract through claim staking. A mining claim is subject to annual assessment work requirements, the payment of annual rental fees and royalties due to the State of Alaska after commencement of commercial production. Both private fee-land and unpatented mining claims and related rights, including rights to use the surface, are subject to permitting requirements of federal, state, tribal and local governments.
Gold Exploration
The Joint Venture Company controls approximately an estimated 860,000 acres consisting of the Tetlin Lease and State of Alaska mining claims for the exploration of gold and associated minerals. To date, our gold exploration has concentrated on the Tetlin Lease, with only a limited amount of work performed on the Tok, Eagle, Bush, West Fork, Triple Z, and Noah claims.
The Joint Venture Company initiated its exploration efforts with a summer 2015 exploration program on the Tetlin Lease. The work program anticipated spending $5 million with a possible expansion of the work program in early fall if drilling results warranted further work. The drilling program included exploration targets that were helicopter-supported at the Tors, Saddle, North Saddle and Saddle Skarn targets and road-supported work at the Peak Zone area. Most of the initial work program (Phase I) was completed by early August with assay results received by early September. On August 31, 2015, the Joint Venture Company approved a budget of up to approximately $4 million for additional exploration work to be completed before the drilling season ended in October 2015 and incurred aggregate cost of approximately $6.8 million for the calendar 2015 exploration program.
The Joint Venture Company initiated a calendar 2016 Phase I exploration program consisting of drilling the North Peak target area which began in February 2016 on the Tetlin Lease with an approved budget of $4.4 million. An additional budget was approved for spending up to an additional $6.8 million during the remainder of calendar 2016. The Joint Venture Company initiated a 2016 Phase II exploration drilling program in May, which was completed in September. A Phase III exploration drilling program was initiated in October and completed in November. The project incurred an aggregate cost in calendar 2016 of approximately $10.6 million.
The Joint Venture Company initiated a calendar 2017 Phase I exploration program consisting of drilling the North Peak target area and testing the True Blue Moon target area which began in February 2017 on the Tetlin Lease with an approved budget of $5.3 million. The 2017 Phase I program was completed in April. The Joint Venture Company initiated a 2017 Phase II exploration drilling and reconnaissance program in May, which was completed in July 2017. The Joint Venture Company initiated Phase III of the 2017 drilling program, which consisted of exploration drilling in the West Peak, West Peak Extension, 7 O’clock, Forks, and North Peak areas in September 2017. Phase III was completed in October 2017. The calendar 2017 Phase I, Phase II, and Phase III programs and associated technical work incurred an aggregate cost through December 31, 2017 of approximately $12.2 million.
The Joint Venture Company initiated a calendar year 2018 exploration program with an approved budget of $10.7 million, of which the Company’s share was approximately $6.1 million. The 2018 exploration program was completed in October 2018. The Company contributed $5.4 million to the Joint Venture Company during calendar year 2018. The budget included an extensive 74 line kilometers of ground geophysics program utilizing both Induced Polarization (“IP”) and Titan EM techniques. Surveys were carried out on targets within an 8-kilometer radius of Main Peak to identify targets similar to Main and North Peak and two targets in the southeastern part of the Tetlin Lease, Copper Hill and Taixtsalda. Titan EM surveys were carried out on three targets identified from airborne magnetics surveys as porphyry type signatures. The program drill tested a number of targets within an 8-kilometer radius of the Main Peak deposit. In addition to the exploration work, during the 2018 exploration program, the Joint Venture conducted engineering studies along with metallurgical testing to support the completion of a Preliminary Economic Assessment of the Company’s Main Peak and North Peak resource areas near Tok, Alaska.
The Management Committee of the Joint Venture Company approved an exploration budget for calendar 2019 of $6.9 million, of which the Company's share was approximately $4.1 million. The program was completed in October 2019 below budget. The program included ground geophysics utilizing IP and soil samples within the greater Chief Danny area. A further program of reconnaissance work, drilling and airborne Versatile Time Domain Electromagnetics (VTEM) survey was completed in the Hona and Eagle claims blocks to follow up stream sediment sampling work completed in 2017. Also included was soil sampling and ground geophysics work on the Triple Z target. The program drill tested targets adjacent to the Main Peak deposit, on the Hona claims and a target in the North Saddle area. The budget also included funding to initiate a program of surface and groundwater characterization to support future permitting efforts. The Company funded a total of $4.1 million to the Joint Venture Company during calendar year 2019, which related to both the 2019 and 2018 exploration programs.
Due to the effects of COVID-19, the Management Committee of the Joint Venture Company approved a $1.8 million budget for 2020 that would serve to care for and maintain the Peak Gold Joint Venture Property, and postpone new exploration until conditions permit. The Company's share of the budget is approximately $1.1 million. The Company's ability to contribute funds to the Joint Venture Company in proportion to its 60% interest in the Joint Venture Company will depend on its ability to raise capital. If the Company is unable to fund its contribution to the approved programs and budgets for the Joint Venture Company, its interest in the Joint Venture Company will be diluted.
From inception to March 31, 2020, the Joint Venture Company has incurred $46.5 million in exploration program expenditures. As of March 31, 2020, the Company has contributed approximately $10.0 million in cash to the Joint Venture Company and Royal Gold had funded a total of $36.7 million (including the initial investment of $5 million). The Company has a 60% interest in the Joint Venture Company, with Royal Gold holding the other 40%.
Hona Prospect Area
The Hona Prospect area is located on Alaska State mining claims approximately 25 kilometers west of the Main Peak deposit. A reconnaissance program was carried out on the Hona claim block in 2017, which consisted of 363 pan concentrate and 364 stream sediment samples. Anomalous gold and copper values were found during the 2017 program and in 2019 follow-up reconnaissance work was completed. This effort consisted of taking 615 rock chip samples and surface mapping. The two programs identified three target areas Hona 1, Hona 2 and Hona 3. Exploration drilling in 2019, consisting of two core holes, totaling 1,301 meters, tested a portion of the Hona 2 target. As part of the 2019 program, 1,006 line-km of helicopter-borne magnetic and VTEM survey was completed over a portion of the Hona Prospect.
The map below depicts the location of the two core holes drilled at the Hona 2 target along with rock chip sampling results and surface geology.
Significant Drill Intercepts from the 2019 Program. Sample intervals are calculated using 0.5 grams per tonne (gpt) lower cut off for gold with no internal waste less than cutoff grade that is greater than 3 meters in thickness. Intercepts shown are drill intercept lengths. True width of mineralization is unknown. The grade cutoff for gold (Au) is 0.5 gpt; for silver (Ag) is 10 gpt; and for copper (Cu) is 0.1%. The following table summarizes the significant drilling results obtained for the complete 2019 Program:
DrillHole
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Zone
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From (meters)
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To (meters)
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Interval (meters)
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Au_gpt
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Au_opt
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Ag_gpt
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Cu %
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HN19001
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Hona 2
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32.00
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35.05
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3.05
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1.01
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0.029
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1.4
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0.027
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HN19001
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Hona 2
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436.17
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440.89
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4.72
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0.80
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0.023
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-
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0.025
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HN19001
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Hona 2
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452.78
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460.71
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7.93
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0.88
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0.026
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0.4
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0.034
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HN19002
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Hona 2
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224.33
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227.38
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3.05
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0.59
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0.017
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-
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0.012
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HN19002
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Hona 2
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339.09
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342.29
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3.20
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1.23
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0.036
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1.3
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0.046
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HN19002
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Hona 2
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369.27
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373.56
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4.29
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0.55
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0.016
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-
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0.028
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HN19002
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Hona 2
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396.85
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399.04
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2.19
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0.93
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0.027
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1.7
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0.024
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HN19002
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Hona 2
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445.24
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446.53
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1.29
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3.05
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0.089
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0.8
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0.029
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HN19002
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Hona 2
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612.65
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629.67
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17.02
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0.41
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0.012
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5.4
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0.333
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The exploration effort on the Tetlin Lease has resulted in identifying two mineral deposits (Peak and North Peak) and several other gold and copper prospects following drilling programs starting in 2011. Surface, bedrock, and stream sediment data on the Tetlin Lease as well as on the Eagle, Noah and Tok state of Alaska claims adjacent to the Tetlin Lease have been gathered during the summer exploration programs. There was no exploration program in 2014. None of the exploration targets are known to host quantifiable commercial mineral reserves and none are near or adjacent to other known significant gold or copper deposits. There has been no recorded past placer or lode mining on Peak Gold Joint Venture Property, and the Company and the Joint Venture Company are the only entities known to have conducted drilling operations on the Joint Venture Property.
Chief Danny Prospect Area
The Chief Danny Prospect Area currently is the most advanced exploration target on the Tetlin Lease and is comprised of several distinct mineralized areas: Main Peak Zone, Discovery Zone, West Peak Zone, North Peak Zone, Saddle Zone and the 7 O’clock area. The Chief Danny prospect was discovered during rock, stream sediment and pan concentrate sampling in 2009 and since then has been explored using top of bedrock soil auger sampling, trenching, ground IP geophysics, airborne magnetic and resistivity surveys and core drilling. Results from this work indicate the presence of a zoned metal-bearing system consisting of a gold-copper-iron enriched core covering six square miles at Chief Danny South (includes Main Peak, Discovery, West Peak, and North Peak) and a fault-offset arsenic-gold enriched zone to the north covering three square miles at the Saddle Zone. The Joint Venture Company has conducted extensive drilling on the Main Peak, North Peak, and West Peak Zones. The Joint Venture Company has also conducted some environmental base line studies on the areas surrounding the Chief Danny prospect, as well as airborne magnetic and resistivity programs. From 2009 through March 31, 2020, the Joint Venture Company conducted field-related exploration work at the Chief Danny Prospect, including collecting the following samples:
Year
|
|
Program
|
|
Core
Samples
|
|
Rock
Samples
|
|
Soil
Samples
|
|
Pan Con
Samples
|
|
Stream Silt
Samples
|
|
Core (feet)
|
|
IP/Geophysics
(kilometers)
|
|
Trenching
(feet)
|
2009
|
|
Chief Danny
|
|
—
|
|
|
958
|
|
|
33
|
|
|
94
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
2,330
|
|
2010
|
|
Chief Danny
|
|
—
|
|
|
613
|
|
|
760
|
|
|
668
|
|
|
795
|
|
|
—
|
|
|
14
|
|
|
—
|
|
2011
|
|
Chief Danny
|
|
1,267
|
|
|
20
|
|
|
688
|
|
|
—
|
|
|
—
|
|
|
8,057
|
|
|
3,957
|
|
|
—
|
|
2012
|
|
Chief Danny
|
|
5,223
|
|
|
82
|
|
|
1,029
|
|
|
—
|
|
|
—
|
|
|
36,006
|
|
|
—
|
|
|
—
|
|
2013
|
|
Chief Danny
|
|
8,970
|
|
|
14
|
|
|
1,406
|
|
|
85
|
|
|
278
|
|
|
47,081
|
|
|
2,414
|
|
|
—
|
|
2014
|
|
Chief Danny
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2015
|
|
Chief Danny
|
|
8,352
|
|
|
133
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,128
|
|
|
—
|
|
|
—
|
|
2016
|
|
Chief Danny
|
|
10,450
|
|
|
21
|
|
|
694
|
|
|
—
|
|
|
—
|
|
|
67,336
|
|
|
24
|
|
|
—
|
|
2017
|
|
Chief Danny
|
|
11,864
|
|
|
112
|
|
|
975
|
|
|
408
|
|
|
408
|
|
|
59,347
|
|
|
48
|
|
|
—
|
|
2018
|
|
Chief Danny
|
|
2,973
|
|
|
402
|
|
|
63
|
|
|
45
|
|
|
9
|
|
|
20,307
|
|
|
80
|
|
|
—
|
|
2019
|
|
Chief Danny
|
|
1,575
|
|
|
839
|
|
|
1,563
|
|
|
18
|
|
|
—
|
|
|
10,079
|
|
|
1,049
|
|
|
|
|
|
|
Total
|
|
50,674
|
|
|
3,194
|
|
|
7,211
|
|
|
1,318
|
|
|
1,501
|
|
|
294,341
|
|
|
7,586
|
|
|
2,330
|
|
The map below depicts the grade times thickness in the Main Peak, North Peak, and West Peak zones:
During the quarter ended March 31, 2020, the Joint Venture Company spent an estimated $0.6 million on program activities and related expenses.
2019 Exploration Program. During the quarter ended December 31, 2019, the Joint Venture Company spent an estimated $1.6 million on program activities, including metallurgical testing, geochemical data analyses, geophysical surveys landholding fees and other related expenses.
During the quarter ended September 30, 2019 the Joint Venture Company spent an estimated $2.8 million on program activities, including 7.6 line kilometers of IP geophysical surveys and 125 soil auger sampling and 146 rock chip samples within the Chief Danny area. Exploration drilling consisted of 1,771 meters in four holes, which included three holes for 1,117 meters in the East Peak area and one hole of 654 meters at the North Saddle.
The map below depicts the location of the core holes drilled in the East Peak and North Saddle zones.
Significant Drill Intercepts from the 2019 Program. Sample intervals are calculated using 0.5 grams per tonne (gpt) lower cut off for gold with no internal waste less than cutoff grade that is greater than 3 meters in thickness. Intercepts shown are drill intercept lengths. True width of mineralization is unknown. The grade cutoff for gold (Au) is 0.5 gpt; for silver (Ag) is 10 gpt; and for copper (Cu) is 0.1%. The following table summarizes the significant drilling results obtained for the complete 2019 Program:
DrillHole
|
Zone
|
From (meters)
|
To (meters)
|
Interval (meters)
|
Au_gpt
|
Au_opt
|
Ag_gpt
|
Cu %
|
TET19446
|
East Peak
|
213.52
|
215.00
|
1.48
|
1.11
|
0.032
|
64.8
|
0.046
|
TET19447
|
East Peak
|
148.44
|
151.49
|
3.05
|
0.99
|
0.029
|
31.0
|
0.022
|
TET19447
|
East Peak
|
303.70
|
306.29
|
2.59
|
1.70
|
0.050
|
61.8
|
0.116
|
TET19447
|
East Peak
|
326.04
|
327.17
|
1.13
|
1.70
|
0.050
|
5.1
|
0.076
|
TET19447
|
East Peak
|
339.85
|
342.14
|
2.29
|
1.79
|
0.052
|
3.1
|
0.108
|
TET19447
|
East Peak
|
407.21
|
408.52
|
1.31
|
9.18
|
0.268
|
1.9
|
0.049
|
TET19448
|
East Peak
|
326.77
|
329.34
|
2.57
|
2.37
|
0.069
|
1.3
|
0.015
|
2019 Exploration Program – continued. During the quarter ended June 30, 2019, the Joint Venture Company spent an estimated $1.7 million on program activities, including 23.3 line kilometers of IP geophysical surveys and 1,363 soil auger sampling within the Chief Danny area. Drill targets were assessed and initial drilling to test East Peak and North Saddle started in mid-August. In addition, seven monitor wells were installed in and around the deposit area to initiate groundwater characterized to support baseline date collection.
During the quarter ended March 31, 2019, the Joint Venture Company spent an estimated $0.3 million on program activities, including metallurgical testing, geochemical data analyses, landholding fees and other related expenses.
2018 Exploration Program - Phase I. During the quarter ending December 31, 2018, 3.5 line-kilometers of IP surveys, 35.0 line-kilometers of Titan DCIP/MT surveys and 4,427 meters of core drilling were completed. The Joint Venture Company spent an estimated $4.6 million, during the quarter, on program activities, including drilling, geochemical analyses, landholding fees and other related expenses. Exploration drilling consisted of 2,177 meters in six holes in the North Saddle Area, 1,403 meters in six holes in Copper Hill, 207 meters in two holes in 2 O’clock, 261 meters in one hole in 8 O’clock, 180 meters in one hole in Main Peak and 200 meters in one northeast of North Peak. In the 2018 field season, 6,189 meters of drilling in 28 holes were completed.
Metallurgical testing of 19 composite samples from the Main Peak deposit were completed and showed good metallurgical response to direct cyanidation. The Main Peak testing along with previously completed metallurgical testing on North Peak were used as the basis for the Preliminary Economic Assessment completed in September 2018.
The map below depicts the location of the core holes drilled in the 8 O'clock, 2 O'clock, Main Peak and North Saddle zones:
Significant Drill Intercepts from the 2018 Phase I Program. Sample intervals are calculated using 0.5 grams per tonne (gpt) lower cut off for gold with no internal waste less than cutoff grade that is greater than 3 meters in thickness. Intercepts shown are drill intercept lengths. True width of mineralization is unknown. The grade cutoff for gold (Au) is 0.5 gpt; for silver (Ag) is 10 gpt; and for copper (Cu) is 0.1%. The following table summarizes the significant drilling results obtained for the complete Phase I of the 2018 Program:
Drillhole
|
Zone
|
From (meters)
|
To (meters)
|
Interval (meters)
|
Au g/t
|
Au_opt
|
Ag g/t
|
Cu %
|
TET18421
|
Two O'clock
|
41.14
|
42.86
|
1.72
|
1.18
|
.034
|
39.7
|
0.025
|
TET18430
|
Eight O'clock
|
124.05
|
124.66
|
0.61
|
3.11
|
.091
|
38.3
|
0.213
|
TET18433
|
Copper Hill
|
112.00
|
113.77
|
1.77
|
8.08
|
.236
|
5.4
|
0.036
|
TET18440
|
North Saddle
|
179.88
|
181.52
|
1.64
|
1.48
|
.043
|
0.6
|
0.003
|
TET18440
|
North Saddle
|
231.46
|
233.58
|
2.12
|
0.95
|
.028
|
2.6
|
0.014
|
TET18440
|
North Saddle
|
307.40
|
310.47
|
3.07
|
0.69
|
.020
|
15.8
|
0.013
|
TET18443
|
North Saddle
|
84.92
|
88.26
|
3.34
|
0.87
|
.025
|
15.8
|
0.021
|
TET18443
|
North Saddle
|
96.92
|
98.43
|
1.51
|
1.11
|
.032
|
18.7
|
0.023
|
TET18443
|
North Saddle
|
196.04
|
199.4
|
3.36
|
1.13
|
.033
|
142.3
|
0.139
|
TET18443
|
North Saddle
|
285.86
|
288.75
|
2.89
|
0.83
|
.024
|
22.5
|
0.060
|
TET18443
|
North Saddle
|
353.11
|
355.18
|
2.07
|
0.95
|
.028
|
15.8
|
0.062
|
TET18443
|
North Saddle
|
422.58
|
425.23
|
2.65
|
0.73
|
.021
|
3.9
|
0.017
|
TET18445
|
Main Peak
|
83.60
|
162.73
|
79.13
|
0.59
|
.017
|
45.8
|
0.938
|
Including
|
Main Peak
|
103.07
|
115.46
|
12.39
|
3.14
|
.092
|
16.4
|
0.475
|
2018 Exploration Program - Phase I (continued). During the quarter ending June 30, 2018, 30.6 line-kilometers of IP surveys, 10.6 line-kilometers of Titan DCIP/MT surveys and 1,762 meters of core drilling were completed. The Joint Venture Company spent an estimated $4.0 million, during the quarter, on program activities, including drilling, geochemical analyses, landholding fees and other related expenses. Exploration drilling consisted of 1,518 meters in ten holes in the 2 O’clock area and 244 meters in two holes in the 8 O’clock area. To date, the Joint Venture Company has also completed 1,370 meters of core drilling at Copper Hill, and has drilled the North Saddle Zone for porphyry prospects.
Nineteen composite samples from the Main Peak orebody and 19 composite samples from the North Peak orebody were the subject of ongoing metallurgical testing in support of the Preliminary Economic Evaluation completed in September. Test results support the economic processing of Main and North Peak materials in a conventional gold processing plant using traditional mining methods.
The map below depicts the location of the core holes drilled in the 8 O'clock, 2 O'clock, and North Saddle zones during the 2018 Phase I Program:
The map below depicts the location of the core holes drilled in the Copper Hill zone during the 2018 Phase I Program:
Significant Drill Intercepts from the 2018 Phase I Program. Sample intervals are calculated using 0.5 grams per tonne (gpt) lower cut off for gold with no internal waste less than cutoff grade that is greater than 3 meters in thickness. Intercepts shown are drill intercept lengths. True width of mineralization is unknown. The grade cutoff for gold (Au) is 0.5 gpt; for silver (Ag) is 10 gpt; and for copper (Cu) is 0.1%. For the 2018 exploration program, no significant intervals were encountered in the drilling.
Consulting Services provided by Avalon Development Corporation
Until January 8, 2015, the Company was a party to a Professional Services Agreement (“PSA”) with Avalon to provide certain geological consulting services and exploration activities with respect to the Peak Gold Joint Venture Property. Pursuant to the PSA, Avalon provided geological consulting services and exploration activities, including all field work at the Tetlin Lease. In connection with the Transactions, the Company terminated the PSA with Avalon. Avalon continued to provide services to the Joint Venture Company until February 28, 2020, when its owner, Curtis J. Freeman, retired. The Joint Venture Company has retained key administrative, geology, and database management personnel from Avalon, on a contract basis. The Company's CEO, Rick Van Nieuwenhuyse, who has extensive experience in the mining industry, and the personnel retained from Avalon are assisting the Joint Venture Company in place of Avalon.
Services Provided by Tetlin Village Members
Since the start of the term of our Tetlin Lease, the Company has worked closely with the Tetlin Tribal Council to train and employ Tetlin residents during Peak Gold Joint Venture project exploration programs. During the Company’s exploration programs, there were 10 to 15 Tetlin residents working on the Peak Gold Joint Venture project employed on a seasonal basis through Avalon. Their duties included reconnaissance soil, stream sediment and pan concentrate sampling, diamond drill core processing, drill pad construction and related tasks, expediting services, food services, database management, vehicle transportation and maintenance services, reclamation activities, and project management tasks.
Community Affairs
In April 2015, the Joint Venture Company entered into a Community Support Agreement (as amended, the “Support Agreement”) with the Tetlin Village for a one year period, which has been extended for an additional two year period under the same terms. Under the extended Support Agreement the Joint Venture Company provided payments to the Tetlin Village four times during the year for an aggregate amount of $110,000 through January 1, 2017 and an additional $100,000 through January 1, 2018. The Support Agreement was extended a second time for an additional two-year period under the same terms. Under the second extension, the Joint Venture Company provided payments to the village four times during the year for an aggregate amount of $100,000 through January 1, 2019 and an additional $100,000 through January 1, 2020. The Support Agreement was extended a third time for an additional one-year period under the same terms. Under the third extension, the Joint Venture Company provides payments to the Tetlin Village four times during the year for an aggregate amount of $100,000 through January 1, 2021. The Support Agreement defines agreed uses for the funds and auditing rights regarding use of funds. In addition, the Joint Venture Company supports the Tetlin Village in maintenance of the village access road, which is used by the Joint Venture Company.
Adverse Climate Conditions
Weather conditions affect the Joint Venture Company’s ability to conduct exploration activities and mine any ore from the Peak Gold Joint Venture Property in Alaska. While the Company believes exploration, development work and any subsequent mining may be conducted year-round, the arctic climate limits many exploration and mining activities during certain seasons.
Competition
The Company currently faces strong competition for the acquisition of any new exploration-stage properties as well as extraction of any minerals in Alaska. Numerous larger mining companies actively seek out and bid for mining prospects as well as for the services of third party providers and supplies, such as mining equipment and transportation equipment. The Company’s competitors in the exploration, development, acquisition and mining business will include major integrated mining companies as well as numerous smaller mining companies, almost all of which have significantly greater financial resources and in-house technical expertise. In addition, the Company will compete with others in efforts to obtain financing to explore our mineral properties.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
The Tetlin Lease had an initial ten year term beginning July 2008 which was extended for an additional ten years to July 15, 2028, or so long as the Joint Venture Company initiates and continues to conduct mining operations on the Tetlin Lease. The Joint Venture Company was required to spend $350,000 per year annually until July 15, 2018 in exploration costs pursuant to the Tetlin Lease. Exploration expenditures to date under the Tetlin Lease have satisfied this work commitment requirement for the full lease term, through 2028, because exploration funds spent in any year in excess of $350,000 are credited toward future years’ exploration cost requirements. The Tetlin Lease also provides that the Joint Venture Company will pay the Tetlin Tribal Council a production royalty ranging from 2.0% to 5.0% should the Joint Venture Company deliver to a purchaser on a commercial basis precious or non-precious metals derived from the properties under the Tetlin Lease. As of March 31, 2020, the Company had paid the Tetlin Tribal Council $225,000 in exchange for reducing the production royalty payable to them by 0.75%. These payments lowered the production royalty to a range of 1.25% to 4.25%. On or before July 15, 2020, the Tetlin Tribal Council has the option to increase its production royalty by (i) 0.25% by payment to the Joint Venture Company of $150,000, (ii) 0.50% by payment to the Joint Venture Company of $300,000, or (iii) 0.75% by payment to the Joint Venture Company of $450,000.
On January 8, 2015, the Company assigned the Tetlin Lease to the Joint Venture Company in connection with the Transactions.
Until such time as production royalties begin, the Joint Venture Company will pay the Tetlin Tribal Council an advance minimum royalty of approximately $75,000 per year, plus an inflation adjustment. Additionally, the Joint Venture Company will pay Royal Gold an overriding royalty of 3.0% should it deliver to a purchaser on a commercial basis gold or associated minerals derived from the Tetlin Lease, Additional Properties and certain other properties, and an overriding royalty of 2.0% should it deliver to a purchaser on a commercial basis precious metals, non-precious metals or hydrocarbons derived from any other properties. The Joint Venture Company pays claim rentals on state of Alaska mining claims which vary based on the ages of the claims. For the 2019–2020 assessment year, claims rentals totaled $323,248. Also, if the minimum work requirement is not performed on the property, additional minimum labor payments are due on certain state of Alaska acreage.
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 $1,500,000 upon the occurrence of certain conditions. The Retention Agreements, as amended, are triggered upon a change of control (as defined in the applicable Retention Agreement), that takes place prior to August 6, 2025, provided that the recipient is employed by the Company when the change of control occurs. Mr. Juneau and Ms. Gaines will receive a payment of $1,000,000 and $250,000, respectively, upon a change of control.
Application of Critical Accounting Policies and Management’s 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. We have identified below the policies that are of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. The Company analyzes its estimates, including those related to its mineral reserve estimates, on a periodic basis and bases its estimates on historical experience, independent third party engineers and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements:
Stock-Based Compensation. The Company applies the fair value method of accounting for stock-based compensation. Under this method, the Company measures and recognizes compensation expense for all stock-based payments at fair value at the date of grant and amortize the amount over the employee’s service period. Management is required to make assumptions including stock price volatility and employee turnover that are utilized to measure compensation expense.
Investment in the Joint Venture Company. The Company’s consolidated financial statements include the investment in the Joint Venture Company, which is accounted for under the equity method. The Company has designated one of the three members of the Management Committee and on March 31, 2020 held a 60.0% ownership interest in the Joint Venture Company. Royal Gold serves as the Manager of the Joint Venture Company and manages, directs, and controls operations of the Joint Venture Company. The Company recorded its investment at the historical cost of the assets contributed. The cumulative losses of the Joint Venture Company exceed the historical cost of the assets contributed to the Joint Venture Company; therefore, the Company’s investment in the Joint Venture Company as of March 31, 2020 is zero. The portion of the cumulative loss that exceeds the Company’s investment will be suspended and recognized against earnings, if any, from the investment in the Joint Venture Company in future periods.
Results of Operations
Neither the Company nor the Joint Venture Company has commenced mining or producing commercially marketable minerals. To date, neither the Company nor the Joint Venture Company has generated any revenue from mineral sales or operations. Neither the Company nor the Joint Venture Company has any recurring source of revenue and other than Royal Gold’s contributions in connection with the Transactions, the Company’s ability to continue as a going concern is dependent on our ability to raise capital to fund our future exploration and working capital requirements. In the future, the Joint Venture Company may generate revenue from a combination of mineral sales and other payments resulting from any commercially recoverable minerals from the Peak Gold Joint Venture Property. We do not expect the Joint Venture Company to generate revenue from mineral sales in the foreseeable future. If the Peak Gold Joint Venture Property fails to contain any proven reserves, our ability to generate future revenue, and our 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 our stock, joint ventures, or alternative methods such as mergers or sale of our assets. No assurances can be given, however, that we will be able to obtain any of these potential sources of cash. We will need to generate significant revenues to achieve profitability and we may never do so.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
General and Administrative Expense. General and administrative expense for the three months ended March 31, 2020 and 2019 were $1,322,124 and $1,070,916, respectively. Current year general and administrative expenses primarily relate to audit fees, legal fees, management fees, and stock-based compensation expense. We recognized $862,125 of stock-based compensation expense for the three months ended March 31, 2020, related to restricted stock granted to our officers and directors in January 2020, November 2019, December 2018, November 2018, August 2016, September 2015 and November 2014, all pursuant to the Contango ORE, Inc. Amended and Restated 2010 Equity Compensation Plan (as amended, the “Equity Plan”). We recognized $724,970 of stock-based compensation expense for the three months ended March 31, 2019, related to restricted stock granted to our officers and directors in November 2018, November 2017, November 2016, August 2016, September 2015, and November 2014, all pursuant to the Equity Plan.
Loss from Equity Investment in the Joint Venture Company. The loss from the Company’s equity investment in the Joint Venture Company for the three months ended March 31, 2020 and 2019 was $600,000 and $420,000, respectively. Pursuant to the terms of the JV LLCA, the Company and Royal Gold are required to jointly fund the joint venture operations in proportion to their interests in the Joint Venture Company to avoid dilution. The Company invested $600,000 in the Joint Venture Company during the three months ended March 31, 2020, and $420,000 during the three months ended March 31, 2019. The portion of the cumulative loss that exceeds the Company’s cumulative investment will be suspended and recognized against earnings, if any, from the Company’s investment in the Joint Venture Company in future periods. The suspended losses for the period from inception to March 31, 2020 are $23.0 million.
Nine Months Ended March 31, 2020 Compared to Nine Months Ended March 31, 2019
General and Administrative Expense. General and administrative expense for the nine months ended March 31, 2020 and 2018 were $3,464,060 and $3,168,099, respectively. Current year general and administrative expenses primarily relate to audit fees, legal fees, management fees, and stock-based compensation expense. We recognized $2,485,448 of stock-based compensation expense for the nine months ended March 31, 2020, related to restricted stock granted to our officers and directors in January 2020, November 2019, December 2018, November 2018, November 2016, August 2016, September 2015 and November 2014, all pursuant to the Company’s 2010 Equity Compensation Plan. We recognized $2,255,937 of stock-based compensation expense for the nine months ended March 31, 2019, related to restricted stock granted to our officers and directors in December 2018, November 2018, November 2017, November 2016, August 2016, September 2015 and November 2014, all pursuant to the Company’s 2010 Equity Compensation Plan.
Loss from Equity Investment in the Joint Venture Company. The loss from the Company’s equity investment in the Joint Venture Company for the nine months ended March 31, 2020 and 2019 was $3,300,000 and $3,210,000, respectively. Pursuant to the terms of the JV LLCA, the Company and Royal Gold are required to jointly fund the joint venture operations in proportion to their interests in the Joint Venture Company to avoid dilution. The Company invested $3,300,000 million in the Joint Venture Company during the nine months ended March 31, 2020, and $3,210,000 during the nine months ended March 31, 2019. The portion of the cumulative loss that exceeds the Company's cumulative investment will be suspended and recognized against earnings, if any, from the Company's investment in the Joint Venture Company in future periods. The suspended losses for the period from inception to March 31, 2020 are $23.0 million.
Liquidity and Capital Resources
Prior to the Closing, the Company’s primary cash requirements were for exploration-related expenses. Since the Closing, the Company’s primary cash requirements have been for general and administrative expenses and capital calls from the Joint Venture Company. The Company’s sources of cash have been from common stock offerings. The Peak Gold Joint Venture Property is still in the initial stages of exploration, and the longer term liquidity of the Company will be impaired to the extent the Joint Venture Company’s exploration efforts are not successful in generating commercially viable mineral deposits on the Peak Gold Joint Venture Property.
As of March 31, 2020, the Company had approximately $3.6 million of cash, cash equivalents, and short-term investments. Due to the effects of COVID-19, the Management Committee of the Joint Venture Company approved a $1.8 million budget for 2020 that would serve to care for and maintain the Peak Gold Joint Venture Property, and postpone new exploration until conditions permit. The Company's share of the budget is approximately $1.1 million. Under this approved budget, the Company has sufficient liquidity to meet its working capital requirements for the next twelve months. The Company believes that if a larger budget beyond the current care and maintenance budget is undertaken by Joint Venture Company this calendar year and the Company funds its portion, or if we don't complete a strategic transaction, the Company will need to raise capital to fund future exploration. If a larger 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.
In September 2016, the Company distributed a Private Placement Memorandum to its warrant holders to give them the opportunity to exercise their warrants at a reduced exercise price and receive shares of common stock, par value $0.01 per share of the Company by paying the reduced exercise price in cash and surrendering the original warrants. The offering applied to warrant holders with an exercise price of $10.00 per share originally issued in March 2013. The offering gave the warrant holders the opportunity to exercise the warrants for $9.00 per share. The offer expired on November 15, 2016. In conjunction with the offering a total of 587,500 warrants were exercised resulting in total cash to the Company of $5.3 million. On October 13, 2017, the Company distributed a Private Placement Memorandum to its warrant holders to give them the opportunity to exercise their warrants at a reduced exercise price and receive shares of common stock, par value $0.01 per share of Contango ORE, Inc. by paying the reduced exercise price in cash and surrendering the original warrants. The offering applied to warrant holders with an exercise price of $10.00 per share originally issued in March 2013. The offering gave the warrant holders the opportunity to exercise the warrants for $9.50 per share. The offer expired on November 10, 2017. In conjunction with the offering a total of 124,999 warrants were exercised resulting in total cash to the Company of $1.2 million. Proceeds from the exercise of the warrants will be used for working capital purposes and for funding future obligations to the Joint Venture Company.
On October 23, 2017, the Company completed the issuance and sale of an aggregate of 553,672 shares of common stock, par value $0.01 per share, of the Company at a purchase price of $19.00 per share of common stock, in a private placement to certain purchasers pursuant to a Stock Purchase Agreement dated as of October 23, 2017, by and among the Company and each purchaser named therein. Brad Juneau, who was serving as the Company’s President and Chief Executive Officer at the time of the offering, purchased 13,200 shares of common stock, at an aggregate purchase price of $250,800, in the Private Placement on the same terms and conditions as all other purchasers. The Private Placement resulted in approximately $10.5 million of gross proceeds and approximately $10.0 million of net proceeds. The Company will use the net proceeds from the Private Placement to fund its exploration and development program and for general corporate purposes. Petrie acted as sole placement agent in connection with the Private Placement and received a placement agent fee equal to 6.50%, which was reduced to 3.25% for existing stockholders and other purchasers referred by those existing stockholders, or a total of $0.5 million in placement agent fees.
On January 8, 2015, Royal Gold invested $5 million to fund exploration activity, and had the option to earn up to a 40% interest in the Joint Venture Company by investing up to $30 million (inclusive of the initial $5 million investment) prior to October 31, 2018. As of March 31, 2020, Royal Gold had funded approximately $35.1 million (including the initial investment of $5 million) and earned a 40.0% interest in the Joint Venture Company. The proceeds of Royal Gold’s investment were used for additional exploration of the Peak Gold Joint Venture Property. For additional information regarding the Joint Venture Company’s capital budget and expenditures, see the “Gold Exploration” section above.
Pursuant to the terms of the JV LLCA, the Company and Royal Gold are required to jointly fund the joint venture operations in proportion to their interests in the Joint Venture Company. If a member elects not to contribute to an approved program and budget or contributes less than its proportionate interest, its percentage interest will be reduced. The capital costs of developing a large gold mining facility could exceed $1 billion. The Company’s ability to contribute funds sufficient to retain its membership interests in the Joint Venture Company may be limited. To date, neither the Company nor the Joint Venture Company has generated any revenue from mineral sales or operations. In the future, the Joint Venture Company may generate revenue from a combination of mineral sales and other payments resulting from any commercially recoverable minerals from the Peak Gold Joint Venture Property. The Company does not expect the Joint Venture Company to generate revenue from mineral sales in the foreseeable future. Further, neither the Company nor the Joint Venture Company has any recurring source of revenue other than Royal Gold’s contributions in connection with the Transactions. As a result, the Company’s ability to contribute funds to the Joint Venture Company and retain its interest will depend on its ability to raise capital. 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 Joint Venture 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. If the Company were unable to fund its contributions to the approved programs and budgets for the Joint Venture Company, its interest in the Joint Venture Company would be diluted. Now that Royal Gold has earned a 40% interest in the Joint Venture Company, it has the additional right to require the Company to sell up to 20% of the interest in the Joint Venture Company in a sale of Royal Gold’s entire 40% interest in the Joint Venture Company. If Royal Gold exercises this right, the Company will be obligated to sell 20% of the membership interest to a bona fide third party purchaser on the same terms and conditions as the interest being sold by Royal Gold.
Further financing by the Company may include issuances of equity, instruments convertible into equity (such as warrants) or various forms of debt. The Company believes that it is likely that it will raise capital through the issuance of additional equity securities in the next six months for purposes of funding its proportionate share of future Joint Venture Company exploration and for the Company’s operating costs. 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.
Risk Factors
In addition to the risk factor set forth below and the other information set forth elsewhere 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, 2019, under the headings “Item 1. Business — Adverse Climate Conditions,” “—Competition,” “— Government Regulation” and “— Environmental Regulation,” “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, 2019 or our subsequent reports on Form 10-Q, other than updating the risk factors below. The risks described in our Annual Report on Form 10-K for the year ended June 30, 2019 or are subsequent reports on Form 10-Q are not the only risks we face. 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:
We face risks related to health epidemics and other outbreaks, including the recent spread of COVID-19 or novel coronavirus, or fear of such an event.
Our business could be adversely affected by a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by COVID-19. Through March 31, 2020, the spread of this virus and government responses has caused business disruption and is adversely affecting many industries. The spread of COVID-19 has also caused significant volatility in U.S. and international debt and equity markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. economy and consumer confidence. As discussed in Note 1, the Company and the Joint Venture Company are monitoring the situation and taking reasonable steps to keep our business premises, properties, vendors and employees in a safe environment and are constantly monitoring the impact of COVID-19. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact. While we have not seen a significant impact to our results from COVID-19 to date, if the virus continues to cause significant negative impacts to economic conditions or impacts the Joint Venture Company’s ability to continue exploration work, our results of operations, financial condition and liquidity could be adversely impacted.
The Company’s common stock is thinly traded.
As of March 31, 2020, there were approximately 6.6 million shares of the Company’s common stock outstanding, with directors and officers beneficially owning approximately 19.2% of the common stock and the Marital Trust of Mr. Kenneth R. Peak, the Company’s former Chairman, beneficially owning approximately 12.0% of our common stock. As of August 2, 2019, Royal Gold reported beneficial ownership of approximately 12.7% of our common stock. Our common stock is quoted on the OTCQB tier of the OTC Markets Group Inc. under the symbol “CTGO”. Although our common stock is quoted on the OTCQB, trading has been irregular and with low volumes and therefore the market price of our common stock may be difficult to ascertain. Since the Company's common stock is thinly traded (average trading volume of 598 shares of common stock per day for fiscal year 2019), the purchase or sale of relatively small common stock positions may result in disproportionately large increases or decreases in the price of the Company's common stock.
The Company's interest in the Joint Venture Company may be reduced.
Pursuant to the JV LLCA, now that Royal Gold has earned a 40.0% interest in the Joint Venture Company, the members will contribute funds to approved programs and budgets in proportion to their respective percentage interests in the Joint Venture Company. If a member elects not to contribute to an approved program and budget or contributes less than its proportionate interest, its percentage interest will be recalculated by dividing (i) the sum of (a) the value of its initial contribution plus (b) the total of all of its capital contributions plus (c) the amount of the capital contribution it elects to fund, by (ii) the sum of (a), (b) and (c) above for both members multiplied by 100. Going forward, the Company’s ability to contribute funds sufficient to maintain the current level of its membership interests in the Joint Venture Company will depend on its ability to raise capital and may be limited. 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 Joint Venture Property, as well as the market price of metals. Further financing by the Company may include issuances of equity instruments convertible into equity (such as warrants) or various forms of debt. The Joint Venture Company has not approved a final exploration budget for calendar year 2020. If the Company ever elects not to, or is unable to contribute its proportionate share of future approved exploration budgets, its interest in the Joint Venture Company will be reduced.
In addition, now that Royal Gold has earned a percentage interest of 40.0% in the Joint Venture Company, the Company’s interest in the Joint Venture Company may also be reduced if Royal Gold exercises its right to require the Company to sell up to 20.0% of the interest in the Joint Venture Company in a sale by Royal Gold of its entire percentage interest in the Joint Venture Company.