Earnings Call Transcript - CTGO Q2 2025

Operator, Operator

Depending on where in the world you're signing in from. I saw today we got all the way from Alaska to Australia. So I'm happy to say the sun never sets on this webinar, which is always nice. I've got with me today, Rick Van Nieuwenhuyse, CEO of Contango Ore; and the company's CFO, Mike Clark. Gentlemen, how are you today?

Rick Van Nieuwenhuyse, CEO

Good morning, Romeo. How are you doing?

Operator, Operator

Good. Good. So here's how today is going to work for everybody that's in the room. First, I'm going to throw it to Rick just to recap their recent news. Then I've got some questions that I'm going to ask both the executives, but then I'm going to throw it to the live audience today for questions that you have. So this is an interactive event. That chat button in the bottom of your screen, you can use it at any point during today's event to ask Rick and Mike any questions that you might have. I'll try to get to as many as possible. If for whatever reason I don't get to your question, I'll make sure the Contango team gets to it, and they'll get back to you as soon as possible. The only other piece of housekeeping is that today's event is being recorded, and the replay will be available late this afternoon Eastern Time. It should come right in your inbox, but also be available on 6ix' YouTube channel. So I will throw it to start off to get the protein of today's event with Rick.

Rick Van Nieuwenhuyse, CEO

Thank you, everyone, for joining us to review our Q2 financials. It was a strong quarter with operating earnings of $23 million and net income around $16 million. I'm proud of our cash costs, which are well below our guidance. For the quarter, cash costs were $1,416, and for the year, they are $1,375. Our all-in sustaining costs were $1,548 for the quarter and $1,462 year-to-date. We will discuss the Johnson Tract project, where we're focused on permitting, and I'm very pleased with the progress there. Lucky Shot remains on hold, but we are planning to initiate a drill program soon, and we'll provide more details during the Q&A. As we continue on this steady path, we are concentrating on reducing debt and executing our hedges. Today marks the start of our third campaign of processing ore at the Fort Knox mill, with approximately 250,000 tonnes on the pad grading about 0.023 ounces per ton, which is around 7 grams. With that overview, I'm ready to jump into your questions.

Operator, Operator

Awesome. Well, I got a bunch, so bear with me while I grill you guys for a little bit. I do want to start with the numbers that kind of jumped right off the page for me. So, obviously, you went from a $3.1 million operating loss in Q2 of last year to $23 million operating income this quarter. It's always nice to see. Most mining companies I talk to don't see money, so it's always nice to see that. In addition, the company had a net loss in Q2 of last year of $18.5 million, now net income of $15.9 million. So beyond, obviously, increased gold production, what initiatives are contributing here? What's making that big change?

Rick Van Nieuwenhuyse, CEO

It's not typical for a junior company, especially one that is just starting production, to earn more than it spends. This definitely marks a significant shift in how we are perceived in the market. Recently, I wore a shirt from our groundbreaking ceremony on August 29, 2023, which symbolizes our two years of mining at Manh Choh and our production that started in July of last year. I feel like the project is progressing smoothly, similar to how a boat operates best when it’s up on step. Mining has been going very well, adhering to our plans in terms of schedule and budget. Ore transport has exceeded expectations, experiencing fewer shutdown days due to weather-related issues. The lawsuit has been resolved, and now the final aspect is processing the ore through the mill, where we are consistently improving our results, averaging recovery rates of 92% to 93%. We are maintaining a 2:1 ratio of oxide to sulfide ore, which helps keep our recovery rates above 90%, leading to increased gold production and profitability. It's encouraging to see our all-in sustaining costs coming in significantly below our guidance, which enhances our margins based on the realized gold prices. Mike, would you like to share your thoughts?

J. Michael Clark, CFO

Yes, that was a good explanation. Regarding the income from operations, they weren't in production in the first half of 2024, while we were in production. This is purely driven by production. The net income has increased for two reasons. Last year, we were in a constantly rising gold price environment, leading to unrealized losses on our hedges and derivative contracts, which increased our losses during that period. This stabilized during this quarter, so we didn't see that impact; we only recognized the realized portion from delivering the hedges, resulting in no unrealized portion. Additionally, we had a $6.4 million gain on our Onyx shares recognized in the quarter from the 5 million shares acquired during the HighGold acquisition, which contributed to the net income this quarter.

Operator, Operator

Great. While I'm on with you, Mike, actually, I know earnings per share jumped from a loss of $1.90 to a profit of $1.24 per diluted share. And it looks like $3,274 per ounce realized spot price versus that blended carry trade of $2,441. So I'm curious if you can just like looking for some color on your pricing strategy and how that contributed to the bottom line this quarter.

J. Michael Clark, CFO

Yes. The hedging strategy mainly involves delivering to the hedges. Approximately 70% of our gold goes into the hedges while 30% is sold at spot price throughout the year. If we consider the average gold price during the quarter to be $3,300 and our hedge price at $2,000, we arrive at a blended price of about $2,450. This year we implemented a carry trade to help us manage our cash flows. When we receive gold deliveries from the Peak Gold JV, we sell it at the full spot price and pay Peak Gold for it, which comes at a slight discount, resulting in about a $1 million gain on metal sales each quarter. By selling gold at the spot price, the banks cover the difference between $3,300 and $2,000. Then, when the hedge delivery date arrives in the next quarter, we settle the hedge. This approach conserves cash. In Q1, when gold prices were rising, we saved a couple of million dollars through this carry trade. This quarter, it cost us a couple of hundred thousand dollars, but it effectively minimizes our risk related to gold price fluctuations. It prevents situations where we might sell gold at $3,000 and then have to settle the hedge at $3,500, which could create a difficult position for us. Overall, this strategy helps us manage risk and provides an additional gain of about $1 million each quarter.

Operator, Operator

Okay. Makes sense. I want to get into operational details real quick. So Rick, I'll throw it to you. I know this third campaign is processing 250,000 tons at 0.23 ounces per ton, which for the metric folks in the audience, 7 grams per ton grade. So I'm curious, how does this compare to your Q2 performance of 255,000 tons at 0.22? And what's driving that grade consistency at Manh Choh? Where does that come from?

Rick Van Nieuwenhuyse, CEO

Yes, earlier I mentioned that the mill operates best with a ratio of two-thirds oxide to one-third sulfide. Oxide ores are simpler to process and require fewer consumables. As we go deeper into the ore body, we'll encounter more sulfide. However, we have a substantial low-grade stockpile of oxide that we can continue to utilize, which is influencing the grade. Kinross, as the management of the mill, is currently working on adding an oxygen sparging circuit to the cyanide leach tanks. The oxygen will serve as a catalyst to enhance the reaction speeds. The sulfide ore performs well in terms of extracting gold from the cyanide solution and is not refractory at all. However, sulfides do require more consumables, and the oxygen system will aid in this process. They plan to have the oxygen sparging system operational by the end of the year. As we go deeper and deal with more sulfide, we will eventually fall below that 2:1 ratio as the oxide depletes. This is part of our operational strategy. Additionally, our trucks, which have collectively driven over 1 million miles, will need to be replaced soon. It's common after a few years of operations to start replacing vehicles, and these costs will be reflected in the all-in sustaining costs as they are capital expenditures for the business. I don't know if Mike has anything else to add.

J. Michael Clark, CFO

No, that's how I would explain it.

Operator, Operator

Perfect. I want to get into cash flow and capital allocation for a second. So I know generating $36.9 million in operating cash flow for the first half versus $6.9 million last year. But with $30 million in Q2 distributions from Peak Gold, $54 million year-to-date, how are you guys balancing debt reduction? I know you paid down $29 million so far. But what's the plan on debt reduction versus reinvestment in growth projects? Just looking to get your head on that.

Rick Van Nieuwenhuyse, CEO

I'll let Mike go first, and I might throw in after.

J. Michael Clark, CFO

My priority is to consistently meet our delivery dates to ensure debt is serviced each quarter and manage our hedged deliveries. Right now, we have enough capital to make all necessary payments up until maturity, and for 2025, we are benefiting from some extra cash this year. We are focusing on permits at JT, and I expect we will perform slightly better than anticipated. We plan to reduce our current debt of around $23 million to approximately $15 million by the year's end, specifically with ING and Macquarie. Currently, our hedge position is just under 63,000 ounces, and we aim to reduce that by another 20,000 ounces to about 43,000 by year-end. This is the primary use of our proceeds, although we are setting some funds aside for other projects. I'll hand it over to Rick.

Rick Van Nieuwenhuyse, CEO

Yes. I'll make a few comments from an operational perspective. We are looking to advance our other projects. We've consistently stated that the next step for JT is obtaining the permit for underground operations. There's not much to do at this point. We want to invest exploration funds in relatively early-stage projects to increase our reserves. We have a high-quality deposit that is very lucrative and has a significant net present value at current gold prices. It's not wise to begin or resume exploration in the Ellis Zone or in any other targets at the moment. We are aware that we have a very promising area at JT. Therefore, the next priority is securing the permits, and that process is going smoothly. We have established a strong relationship with the state of Alaska. We need two main permits from the Department of Environmental Conservation for underground mining: a water discharge permit and a mine operating permit. While technically it's a mine, we are not yet producing anything; we're still creating a large underground excavation. So, our focus is on JT. As for Lucky Shot, we are eager to initiate a program, return underground, and start drilling again, but we want to avoid starting and stopping repeatedly. That's why we emphasize that our priority is on executing the hedges and reducing debt. We are looking for a clear opportunity to commence work at Lucky Shot without interruptions. So, please be patient; the project is not going anywhere. With the increasing gold prices, once we get underground, we can progress quickly. I'm not overly concerned about the overall timeline.

Operator, Operator

Great. I have two quick questions regarding Johnson Tract and Lucky Shot. For Johnson Tract, I appreciate the overview of the upcoming milestones. What tonnage potential are you aiming for at Johnson Tract?

Rick Van Nieuwenhuyse, CEO

The initial assessment we conducted, using the term S-K 1300 similar to the Canadian 43-101, aimed for a 1,500 ton per day operation. JT is a high-grade deposit with favorable geometry for mining. However, drilling presents challenges due to the steep mountain and the vertical ore deposit, resulting in long drill holes that need to be done parallel to the mountain surface, which is not ideal. From an exploration perspective, this geometry is challenging, but from an underground mining perspective, it works well since it features a significant ore body that is nearly vertical. This allows for the development of effective long-hole stopes. Additionally, all our infrastructure is situated in unmineralized material known as dacite porphyry, which contains very few sulfides, making it an excellent rock for underground development as it keeps water clean. The major fault that divides the mineralized from the unmineralized zones acts as an aquitard or aquiclude. This ensures that contaminated mineralized water remains on one side, allowing us to maintain separation. If necessary, we can install a curtain to further isolate the areas, facilitating clean and environmentally responsible development of the ore body without significant concerns about water contamination. Nature is currently helping us find these deposits through metal anomalies, indicating metal presence in the creeks. However, we prefer not to disturb them since doing so would involve our water management.

Operator, Operator

Fair enough. Fair enough. I got one question about Lucky Shot as well. I noticed you mentioned a royalty acquisition of an existing 0.5% NSR for $250,000. Just what does this mean for me and the folks in the room?

Rick Van Nieuwenhuyse, CEO

As we transition Lucky Shot from an exploration project to a mine, we are focused on completing the drilling. This process will progress when the timing is right, which includes addressing the hedges and other factors. If we can purchase a royalty at a reasonable price, it means we won't have to pay that royalty to another party once we enter production. Owning it outright is advantageous, allowing us to eliminate that payment. It's important to clarify that our goal isn't to turn into a royalty company; rather, if we can buy out the current royalty owners at a fair price, it benefits them by providing immediate cash without the ongoing operational risks. This approach makes sense for us.

Operator, Operator

Great. While we're on Mike's paperwork, actually, I do have a question for you. I'll talk about carry trade mechanics. So I know you reduced your hedge book from 74,800 to 62,900 ounces or somewhere around there. Curious, what's your philosophy on the optimal hedge ratio as production progresses?

J. Michael Clark, CFO

The optimal hedge ratio remains consistent and reflects what was outlined in the original feasibility study, which is how the lender structured it. Unfortunately, it was set up to operate quarterly, whereas we deliver gold on a weekly basis. Some weeks we have larger deliveries during active campaigns, while others may be smaller, but we make deliveries every week. My goal is to limit risk and ensure we have enough gold ready by the time deliveries are due. At the start of a campaign, there are a couple of weeks where we await the first substantial shipment. Once that shipment arrives, we deliver all of that gold into the carry trade, and we typically complete that next hedge delivery within the first three shipments. For the final two shipments, I'll sell them at 100% of the spot price without a carry trade. This strategy keeps us ahead of the hedge delivery. In a rising market, this approach is advantageous. However, if gold prices decline, there is a slight downside. Nevertheless, this strategy ensures that we are never short on our gold deliveries, avoiding the need to purchase it on the open market later when prices may fluctuate again. This has been my strategy, and it has proven effective so far.

Rick Van Nieuwenhuyse, CEO

And the objective is to deliver the hedges and have full exposure to the upside or downside. I mean, obviously, what we don't want to do as a junior company is try to play or game the market on guessing where gold is going. That's just not the role of a junior mining company. And equity owners of Contango shouldn't want us to make bets, I mean go to Vegas...

J. Michael Clark, CFO

Yes. When we have a stronger balance sheet, Romeo, we would take a more sophisticated approach to this. But while we're at these levels and managing the lenders, it's all about just removing the risk and trying not to take any big swings for the fences at the cost of being wrong.

Operator, Operator

Yes, I appreciate your perspective on that. Rick, I'm aware there are many questions in the chat, and I will address them shortly. First, I want to take a step back. With $58.2 million in Q2 gold revenue, you've positioned yourself as a mid-tier gold producer. I'm interested in your thoughts on how Contango compares to other mid-tier gold producers, particularly with potential rate cuts that could lead to higher gold prices. How do you see Contango fitting into that group?

Rick Van Nieuwenhuyse, CEO

Well, we consider ourselves a junior company, and I wouldn't say we're mid-tier just yet. I see us as a junior producer. However, we are earning more than we are spending, which is quite rare for junior producers. This situation will improve even further once we move past our hedges, and we're aiming to achieve that responsibly. As Mike mentioned, we are not looking to take huge risks or make substantial bets at this moment. We do have confidence in the gold price; if you don't believe in it, you shouldn't be in this business. Our hedging was a requirement from the banks and wasn't integrated into our initial strategy, but it's typical for junior companies like ours. In the gold sector, I can't think of another junior producer making a profit from selling gold with only 12 million shares outstanding, making us somewhat distinctive. Our model is unique, and while there are other companies trying to replicate our approach, we've proven that it works. The focus really needs to be on the assets, which must meet three criteria: they need to have good grade, be close to infrastructure to minimize capital expenditures, and be relatively straightforward projects to permit for quick development. When I reflect on Manh Choh, previous studies indicated it would cost around $500 million to build our own mill and develop that project. Unfortunately, the market doesn’t support such investments for a relatively small deposit, even if it's high quality. It's high quality, but just too small for investors to want to risk $500 million, whether through debt or equity, enabling a junior startup to bring it to production. There is more confidence in larger deposits, like those of 5 million to 10 million ounces, which likely would attract interest from intermediates or majors who might step in if a junior project falters.

Operator, Operator

That is usually how they operate.

Rick Van Nieuwenhuyse, CEO

And I mean the market is littered with junior wannabe start-ups that said we're going to develop our 10 million ounce gold deposit, and they don't. Maybe Newmont or Barrick does eventually or somebody else. But yes, we don't want to be one of those. So we're going to stay prudent. And we like our low share count. We've been told several times we should just roll it forward 10:1 or something like that and be happy with a $2 stock. And no, my objective is I'd like to have a 3-digit stock price someday.

Operator, Operator

Someone in the chat agrees with you, stating they see the stock at $100 and believe the model is impressive. Before I address the chat questions, when will you provide guidance on the 2026 production at Manh Choh? Also, what are the upcoming catalysts for Contango?

Rick Van Nieuwenhuyse, CEO

Yes, the guidance for 2026 will typically be approved around November, so we won't have anything definitive outside of the general life of mine guidance we usually provide. However, we plan to stick to our strategy. Kinross is known for being steady and not taking excessive risks. The mining operations, hauling, and milling processes are all running smoothly. Fort Knox has never looked better from Kinross's financial reports. If they're satisfied, we are too.

Operator, Operator

Here we go. Perfect. Let me get into some of the questions in the chat. So Tate Sullivan right at the beginning of the hour asked how long will Campaign 3 last and potential timing of the check from the JV?

Rick Van Nieuwenhuyse, CEO

So the campaign is roughly 3 weeks. And Mike, you probably ought to comment on when...

J. Michael Clark, CFO

Yes. I would expect that distribution should come in late September is my best guess. It's usually kind of right near the end of the campaign when they're 89% done.

Operator, Operator

Great. CW Donahue from the chat asks, for Johnson Tract, is there still a Beluga whale lawsuit issue? Where is the status of that?

Rick Van Nieuwenhuyse, CEO

Yes, the Center for Biodiversity and Cook Inletkeepers filed a lawsuit against the U.S. Army Corps of Engineers for granting our 404 permit last year. It is currently in federal court. We have one federal judge in Alaska, although we should have three. Congress has yet to appoint any of Trump's federal judges. Our lone federal judge has a significant workload with 550 cases to handle. So, yes, the lawsuit is active, and we have joined in it, which is the current status. Unfortunately, I can't provide much more information than that.

Operator, Operator

One question from the chat asked for clarification on what contributed to the ASIC being lower than expected for the second quarter. Additionally, how are we progressing towards the sub-$1,625 target?

J. Michael Clark, CFO

Do you want me to start this one, Rick?

Rick Van Nieuwenhuyse, CEO

Yes. Go ahead, Mike.

J. Michael Clark, CFO

Yes. As you know, the weather in Alaska improves significantly during the summer. At the start of the year, there wasn't much exploration happening, and we didn't plan to purchase many trucks then. Therefore, Q1 was very low. Q2 was lower than our internal expectations, despite making some truck purchases during the quarter along with exploration. There was an increase from Q1 to Q2. We expect Q3 to be similar to Q2, though it might be slightly less due to the time we will allocate to our third campaign during the quarter. If we aren't conducting our campaign, Fort Knox will be conducting theirs. The less time we spend on our campaign in a quarter affects our processing and administrative costs. I anticipate costs to remain stable, but I believe we will come in under the $1,625 target based on our current tracking. The fourth quarter should be slightly higher due to the planned campaign size, so you may see a slight increase in Q4. However, we definitely hope to finish below $1,625. Rick, would you like to add anything?

Rick Van Nieuwenhuyse, CEO

Yes, in general, we do experience more weather-related disruptions, especially in truck transportation during winter. The winter brings challenges like blowing snow and extreme cold, which can slow down operations. When it's very cold and there's ice in the stockpile, it can also affect the mill's performance. These issues are primarily winter-specific. Summer is generally smoother, although we tend to make capital expenditures during this time, such as exploration and ordering trucks and related equipment.

J. Michael Clark, CFO

The other item I'll add is this is always a function of your ounces sold during the year. And so far, we are tracking kind of slightly ahead of our guided production of 60,000 ounces for the year. So for every ounce more than what we guided, that's going to bring down your cost because it's a fixed cost-driven operation. So all those factors, when you put them together, that's why we kind of expect we'll come in under, but we'll see how we get at the end of Q3.

Rick Van Nieuwenhuyse, CEO

Kinross again, they're going to have guidance that they're going to meet or beat.

Operator, Operator

Great. That steady, reliable good news. I don't get a lot of this in the mining industry. SK from the chat had 3 questions, so I'll throw them to you one at a time. Are there plans to monetize the Onyx shares?

Rick Van Nieuwenhuyse, CEO

The short answer is yes. It's more about timing. We appreciate what they are doing and will be patient. We have a strong working relationship with Onyx, so we won't disrupt that at all.

J. Michael Clark, CFO

Some of those shares are still under escrow from when they were originally issued to HighGold, and we also have restrictions on what we can do with them. So it’s not straightforward to just say we will sell them, but we will certainly consider our options and keep a close watch.

Operator, Operator

Great. He also asks as we go into conference season, what's the message for 2026? What will you be telling folks at the conferences in September, October?

Rick Van Nieuwenhuyse, CEO

A significant focus will be on underground drilling at Lucky Shot and starting underground work at JT. We are currently preparing the road and doing preliminary work to ensure we can fully commence operations next year. We will continue to deliver on our hedges, reduce debt, and improve cash flow to support our two ongoing projects. For Lucky Shot, we anticipate a resource of around 400,000 to 500,000 ounces, and once drilling is done, we'll have a mine plan that aims for a startup producing 30,000 to 40,000 ounces with strong profit margins due to high grades above 10 grams. We have access to the railroad, and I spoke with the Head of Alaska Railroad this week, who is keen on helping us transport our ore in boxes. Utilizing the railroad could significantly lower our transportation costs compared to trucking, so we are considering various options for transporting Lucky Shot ore. In the meantime, we need to progress the underground development at JT, which will take about a year to complete the 1.5 kilometers needed for drilling. Johnson Tract has an estimated gold equivalent resource of about 1 million ounces at 9.5 grams, a promising deposit that is open at depth, but we can't drill deeper yet due to the site's geometry. Once we are underground, we'll be able to drill deeper and determine if the resource could be 1.5 million ounces or 2 million ounces; we know it's more than 1 million ounces, so I am eager to advance our underground exploration work.

Operator, Operator

Great. That's a good story for Beaver Creek and Denver. They also asked, is there any thought been given to getting into ETFs like the GDXJ?

Rick Van Nieuwenhuyse, CEO

Mike, do you want to address that? I’m not really surprised we’re not included. That would be my take. We’re part of the Russell 2000, which is a larger and more comprehensive index, not specifically focused on gold. It’s likely something we need to evaluate, as I’m somewhat surprised we’re not included.

Operator, Operator

Sure. Yes, they said the same thing in the comments, it makes no sense that producing junior miner isn't in the largest passive ETF, so something interesting. Somebody with a very colorful username asks, could we expect the same earnings for the next few quarters if gold stays in this range all year?

J. Michael Clark, CFO

I believe I can begin. I expect that Q3 will be similar to Q2. While Q4 might see a slight decline, it will serve to summarize the entire year and we aim to keep it aligned with our annual guidance. However, I am confident that Q3 will at least match or possibly exceed expectations.

Operator, Operator

Great. And I will ask you guys one last question, which should give everybody in the chat a chance to ask their last questions before we wrap. Just curious, what are you most excited for, for the rest of the year? Rick, I'll start with you.

Rick Van Nieuwenhuyse, CEO

I hate to say it’s just steady as she goes, but that’s how it feels. What I really want to achieve is getting underground at Lucky Shot and starting the drilling because that’s an exciting process. It’s a great deposit and really straightforward, and we appreciate simplicity. The sooner we can get underground and begin drilling, the better. Once we’re down there, we can continue without interruption. However, I want to avoid starting and then halting operations due to issues like falling gold prices or financial difficulties. We need to ensure there's a clear path forward, and as I mentioned, this project is not going anywhere. It still aligns with our five-year plan.

Operator, Operator

Great. Mike, what keeps you excited for the rest of the year?

J. Michael Clark, CFO

It's a straightforward answer, but my response is to continue operating steadily, delivering these ounces, managing our hedges, and reducing our debt. What truly excites me is seeing our balance sheet improve and our liabilities decrease. By the end of this year, I believe we will have a very strong balance sheet with substantial earnings.

Operator, Operator

Awesome. One last question from the chat, and I know you might be bored of this question because I've asked you, I think, on 6 webinars in the last year. But are there plans in the future to reward shareholders with the dividend?

Rick Van Nieuwenhuyse, CEO

Yes, I appreciate that idea. It's unlikely to happen this year and probably not next year either. However, enhancing shareholder value is definitely one of our priorities, and maintaining a low share count is part of that strategy. Whether it results in a dividend or a share buyback, those are avenues we want to explore for long-term growth. We have confidence in the gold price and are examining other opportunities. As I mentioned previously, we're looking for a suitable option for the Lucky Shot and JT ores, and we have several possibilities in mind. So, stay tuned for updates on that. We are currently under confidentiality agreements with several groups, but this is more of a long-term plan. If we can achieve our five-year target of getting JT and Lucky Shot into production and reaching a production profile of 200,000 ounces a year while keeping our share count low, that would be a significant accomplishment. That's the vision we aim to create.

Operator, Operator

Awesome. Well, on that note, I'll wrap up for today. Rick, Mike, thanks so much for running through questions and talking about the last quarter. Everybody in the chat, thank you so much for participating, everybody who is in the room. If you have any additional questions, you can always reach out to info@contangoore or feel free to respond right to the email that got you to this room. I'll make sure that question gets to the Contango team. But thank you so much. Hope everybody has a great afternoon.

Rick Van Nieuwenhuyse, CEO

Thank you.