Earnings Call Transcript - CTGO Q1 2025

Operator, Operator

Hey, good morning, good afternoon, good evening, depending on where in the world you're signing in from. Thank you all for joining me today. Today, I've got with me Contango Ore's CFO, Mike Clark; and CEO, Rick Van Nieuwenhuyse to go over Contango's Q1 financials. Mike got top billing because today is about finance, so he will start today's presentation. He's going to give a brief presentation summarizing yesterday's release. Then I've got a few questions, but this is absolutely an interactive event. I'll also say that today's event is being recorded; it will probably be in your inbox mid-afternoon, Eastern time. It will also be available on events.6ix.com and on our YouTube channel. Without further ado, I'm going to go off-screen and hand it over to Mike just to summarize yesterday's press release.

Mike Clark, CFO

Thanks, Romeo, and good morning and good afternoon. I'm just going to spend a few minutes highlighting the quarter ended March 31, 2025, and just talk on the statement of operations and balance sheet. On the statement of operations, we recorded $19 million in income from operations, which includes $22.3 million in equity income from the Peak Gold JV, which is our 30% ownership in Manh Choh. We recorded a net loss of $22.5 million for the quarter, which includes an unrealized loss of $40.5 million related to the hedge contracts. This is primarily driven by gold starting the year at $2,600 and ending the quarter around $3,100. We also recorded $2.7 million in interest and finance charges related to debt. At the Manh Choh operations, we sold a little over 17,000 ounces of gold with another 3,800 ounces in recoverable inventory. Our cash costs were about $1,334 per ounce of gold sold and our ASIC was $1,374 per ounce of gold sold. Our 2025 guidance remains at 60,000 ounces of gold with an ASIC of about $1,625 as we expect the ASIC to increase in later quarters due to sustaining capital going up related to replacing tractors on the ore haul route, as well as a $5.7 million exploration drill program. On the balance sheet, we completed the quarter with $35 million in cash. We have marketable securities of about $900,000. Subsequent to the quarter end, those have increased to about US$4 million, which is our Onyx Gold Corp investment. Our trade payables were $9 million at the end of the quarter, related to a gold shipment that happened on March 31, as we had to pay the Peak Gold subsequent to the quarter end. During the quarter, we made principal repayments of $13.8 million on the facility, and then subsequent to the quarter end, we paid another $8.2 million, bringing the facility balance down to $30 million as of today. On the derivative liability, the hedge balance technically didn't change during the quarter. We had 86,000 ounces to start the quarter, and we finished with that as a balance at the end of the quarter. Because gold went up, the liability did increase. But I will highlight that we did what's called a Carry Trade, effectively locking in the April hedge price during the quarter. We ended up selling that on April 30. We have started delivering into the July hedges, and we have about 2,800 ounces delivered to those so far. Now, I'll just hand it over to Rick.

Rick Van Nieuwenhuyse, CEO

Thanks, Mike. I think it's been a good quarter, and we'll actually start the second campaign, which actually started yesterday. So, that will be our May campaign. It will run roughly 30 days. We’ll look to report on the total anticipated production from that once the campaign ends towards probably mid-June, and we’ll have an update at that time on our results. So, things are going well. I can say that things are going a little better than planned. The total gold produced was more than planned, roughly 30% for Q1. We do have that gold held in inventory, and the campaign process the gold basically in the middle month of a quarter, which means the gold sales will trail that by about 30 days. So you’ll have to keep that in mind when reading our financials; you will see there’s always probably a gold inventory that has been produced but not sold. That being said, let’s turn it back to Romeo, and we can start with Q&A.

Operator, Operator

Awesome. I do have a number of questions, some of them already reflected in the chats. I'll meld them together where possible. Mike, I'm going to start with you. I was curious if you could give me a little more color around the carry trade and hedge delivery schedule. This reflects a comment in the chat, Wesley asks, what are the remaining hedges? When are you liberated?

Mike Clark, CFO

Yes, it's a good question and I get it a lot. It's quite complicated, but we have been changing our approach. I’ll start from the beginning. The main challenge we have here is you have your hedge delivery schedule, which is kind of once a quarter, we have a maturity date, which was designed off the feasibility plan or study. What actually happens though is, you end up having shipments pretty much for the whole year, but chunkier ones in the middle campaigns. To better manage cash, we moved towards the Carry Trade, allowing us to effectively sell the gold at spot price as shipments occur, use those proceeds to pay the JV for gold, and then wait for the distribution a month later to settle that hedge in cash with our lenders. It’s a better cash management tool for us, with a relatively low cost. In the quarter, we ended up cash settling our January 31 hedge in December, so we had no hedges matured during the quarter. We started producing in February, then delivered 100% of the April hedge into these carry trades. We began the quarter with 86,000 ounces of hedges and finished it with 86,000. However, considering the carry trade, the hedge balance is just below 75,000, and today, we’re probably closer to 71,000 as we continue to deliver in July. Does that answer your question?

Operator, Operator

Yes, that's great. I think that's useful extra color, so I appreciate it. One question I got just for folks who don't know, and it’s popped up in the chat a bit too: Where do the Onyx shares come from that are now worth $5 million?

Mike Clark, CFO

Yes. When we acquired HighGold, they owned 5 million shares of Onyx, which was spun out of HighGold about 1.5 years ago. We had those on the books; when we acquired them they were probably valued around $500,000 or $600,000, finished the quarter at $900,000. As of today, the shares are valued at about CAD 5 million, so we thought we would include it in the press release to highlight that there's another source of capital for us.

Rick Van Nieuwenhuyse, CEO

I'll just add in, Romeo. I think Darwin and the team over at Onyx have an interesting project, so we'll keep an eye on that. They just raised some more money to do additional drilling, so I think it's definitely an asset on the books for us.

Operator, Operator

Some in the chat had asked just for clarity: Is that stake now in available-for-sale security for Contango?

Mike Clark, CFO

There are some hooks on it with lockups. Anything is possible if we really wanted to, but we're on a...

Rick Van Nieuwenhuyse, CEO

Actually, I consider it in friendly hands.

Operator, Operator

One question I got is, can you discuss that dismissed lawsuit and what it means for both Manh Choh, but generally for Contango?

Rick Van Nieuwenhuyse, CEO

Yes, I’ll add my input. We previously reported on a local anti-development group, Citizens for Safe Communities, that filed a lawsuit to try to halt the truck call program. This lawsuit has been ongoing for nearly two years. The court dismissed three out of the four claims, leaving one still pending, but there has been no action from Citizens for Safe Communities. We found out that they were thinking about withdrawing the lawsuit. However, there is a process to settle a lawsuit rather than simply dropping it. It took them just over a month to settle the case without any further claims. This is clearly a positive development for our project and the Manh Choh project. It is also beneficial for the mining industry overall, as a lack of support from anti-mining groups for ore trucking would hinder the transportation of concentrates. Therefore, the resolution of this issue is advantageous, not only for our project but also for mining in Alaska.

Operator, Operator

Great. I appreciate that extra flavor. One question I had is what will the balance be on the facility by the end of the year?

Mike Clark, CFO

The facility will finish the year around $15 million just under.

Operator, Operator

I want to say congratulations on beating quarterly guidance; that’s really impressive. You mentioned the PR incremental improvements in transportation and processing at Fort Knox. What helps get that significantly lower ASIC of $1,374 versus the target of $1,625?

Mike Clark, CFO

You want me to start on this and then Rick you can... Yes, go ahead, Mike, and I'll weigh in. I'll let you talk about the incremental improvements. I’ll just comment on our guidance remaining at $1,625 for ASIC. The main driver there is more sustaining capital during the quarter. There wasn't a lot in Q1, and there's also going to be an exploration drill program, so the ASIC will go up as a result. We did produce more gold in Q1. I expect a strong Q1, Q2 and Q3, and in Q4, I think there’s slightly less production in that period. When you combine those, you're going to end up with around $1,600. We still hope to beat that, but it's a reasonable estimate.

Rick Van Nieuwenhuyse, CEO

Great. Yes. On the incremental improvements, restrictions are still in place for bridge rates. The improvements are really about water management, whether it's frozen water in the wintertime. Q1 reflects wintertime operations; they were just knocking the snow and ice off the trucks. When they come down the hill from the Manh Choh mine, there's a 20-mile road that connects it to the Alaska Highway. The snow and ice were knocked off there. Once you're on the highway, there’s little ice and snow pickup unless it’s snowing; it’s Interior Alaska. This year was our start-up year, and I think people sometimes forget that it wasn't your normal mine sequencing of feeding stuff right into the mill immediately. It goes into a stockpile first. Last year was a long start-up from turning on the mill. You learn as you operate where things go right or wrong and make changes to improve. That’s exactly what has happened, which reflects producing more gold at a lower cost than guidance. It's all been positive.

Operator, Operator

Great. I have one more on general strategy before I jump into a quick Johnson Tract question. I'm curious, with the gold price significantly increasing during Q1, how does Contango balance the benefits of spot prices against hedge obligations? Are there any potential adjustments to the hedging strategy?

Mike Clark, CFO

That's definitely my question ultimately. We look at this a lot. We're currently selling 30% of the gold effectively at spot price for the year, and 70% into the hedges. You can swap out hedges for gold prepays; at the end of the day, you get to the same result but approach it differently. My focus right now is to keep delivering into these hedges, get ahead of them as much as we can, maintain that 70-30 ratio, and ensure we are ahead of schedule by year-end. By the year-end, we will have about 43,000 ounces in the hedges and our debt down to $15 million. I think this will be less of a concern by year-end when we demonstrate a solid production year that is no longer significant on our balance sheet. Rick, anything you'd like to add?

Rick Van Nieuwenhuyse, CEO

Yes, I'll just add: We're a junior producer; we don't want to get cute by betting on gold. That wouldn't be good for our shareholders. They want us to keep the hedges in place; that's how we raised money two or three years ago when equity markets were dead. So it's part of the company’s DNA. As Mike says, we’ll focus on paying down the debt and keep delivering to the hedges. Let’s just continue our normal operations, where we’ll be in a good position soon.

Operator, Operator

Liberated, as they say in the comments.

Rick Van Nieuwenhuyse, CEO

Liberated.

Operator, Operator

I want to pivot to Johnson Tract for a quick second because I know we talked about it recently, but I really do want to emphasize the impressive NPV of over $400 million at current gold prices. So I'm curious, as your folks in the room, what are the next key milestones in developing Johnson Tract? More specifically, what’s the timeline for permitting that underground access tunnel?

Rick Van Nieuwenhuyse, CEO

Yes, permitting is not the sexy part of the story for sure; it's the next stage for Johnson Tract. We wanted to put out the initial assessment to let people know that this is a pretty valuable asset. The next stage is permitting the tunnel, which is a sustainable Alaska mine operating permit. We're expecting it to take about a year. There’s no specific federal permitting involved. We already have the access road between camp and the proposed tunnel site permitted, so we could build that at any time. But it doesn’t make sense to spend money on building a road that will sit there. We'll get the permits in about a year. At the same time, we’re permitting the easement and barge landing site that have been granted to CIRI by the federal government. With the easement, you usually have already been permitted, so we’re going through normal parameters. One is wetlands; we want to properly manage impacts. We’re also paying attention to fish habitats, ensuring that fish can pass under the roads. So we’ll do work on that this summer. This year's focus is in terms of road access down to the barge landing site. It's about a 20-mile road length, very similar to Manh Choh. We'll gather information this year, then start formal permitting next year.

Operator, Operator

Awesome. I appreciate the Johnson Tract update. I have one last question: With a strengthened cash position and reduced debt, what are the priorities for the remainder of this year?

Rick Van Nieuwenhuyse, CEO

I think, Mike covered it: keep paying the debt down, keep delivering to the hedges. We’ll review our budget shortly. Next week, Mike and I will sit together and take a look at whether we have enough cash to look at a drill program at Lucky Shot this year. I'd like to do that, but I also want to be prudent and ensure we have cash to deal with our main business, which is getting Johnson Tract permitted, delivering into the hedges, and paying down debt. There are other things we can explore, but those are the main priorities for now.

Operator, Operator

Awesome. Jumping into the chat; we’ve covered some of it, but there are a lot of questions so bear with me. Jan asks where is the next likely drilling for Contango going to be?

Rick Van Nieuwenhuyse, CEO

I'd say, probably definitely Lucky Shot. If we don’t get a drill program this year, I’m confident we'll be drilling next year. The underground is permitted there; it’s technically a mine which we have on care and maintenance. That’s my best guess. Separately from Manh Choh, we have a $5.7 million joint venture program at Manh Choh. The focus is to evaluate targets in and around the current pit. They'll also be doing work further afield, but most exploration will occur within the pit area. The feasibility-level pit was done at a gold price of $1,450, and gold is now almost at $2,000. It wouldn’t surprise me to see that pit get larger. We won’t have results until later this year, and while we can’t upgrade a resource with that budget, if we find interesting things, we’ll likely focus our effort there moving forward.

Operator, Operator

Great. On that exact topic from the chat, Tate from the Max Group asks, of that $5.7 million, is it taken out of your share of sales in the JV? Or do you write a separate check?

Rick Van Nieuwenhuyse, CEO

I'll let Mike answer too, but it’s all part of the annual budget that’s approved. The cash sweeps occur before we get a dividend.

Mike Clark, CFO

Currently, we're guided to getting about $80 million in cash distributions from the JV this year for our 30%, which includes that $5.7 million program.

Rick Van Nieuwenhuyse, CEO

The shorts, we love the shorts. I don't want to see them hang, but there’s another topic. Short answer is I think it's speculation on my part. We got hammered last November with the reduced production and increased costs against feasibility. This drives continued shorting the stock. However, our share price has gone up because we’ve performed better than guidance and are delivering more gold than planned at lower costs. So, I think the shorts are in trouble, and today is a good demonstration of that.

Operator, Operator

A short squeeze would be lovely, as multiple participants in the chat have pointed out. Congratulations on a fantastic quarter. Looking for clarity on something from the last call. I suggested that you'd finance Johnson Tract with bank debt and free cash flow as long as gold prices remain robust. Just making sure that's accurate.

Mike Clark, CFO

Correct. We’re a couple of years away from that decision. This year, we’re permitting the tunnel; hopefully next year, we start thinking about building it. It’s a year to build the tunnel, and then we need underground drilling and a mine plan around that, so that's at least three years away. Three years from now, we will no longer be hedged and will have zero debt, which means we could take on more debt with expected production around 60,000 ounces a year out of Manh Choh. We’ll be in a good position to debt finance building the road and barge landing facility. We prefer the direct shipping option model to Asia and may also consider other mills to extend mine life.

Operator, Operator

One question from the chat: What gives you personally confidence that Manh Choh's life of mine can be extended beyond 2029?

Mike Clark, CFO

Reiterating what I said before, the feasibility study pit was based on $1,450 gold. Our life of mine cost should remain about that number. This year is higher due to the purchase of tractors, and we have higher stripping this year and next, so we expect strong cash flows from Manh Choh over the next four years. If gold prices hold where they are, we’ll make substantial free cash flow given only 12 million shares outstanding.

Rick Van Nieuwenhuyse, CEO

If you’re asking about restrictions, there is a chance that the weight restriction will be resolved soon. The current plan is that the Department of Transportation budget has been approved, and updates are now scheduled to occur a year later than originally planned, possibly in 2026.

Operator, Operator

Great. One question is: When the bank debt's paid off, is Contango able to authorize a small, let’s say $10 million share repurchase?

Mike Clark, CFO

In regard to the buyback program, it’s something we’d discuss further down the road.

Rick Van Nieuwenhuyse, CEO

Next week, we’re headed to Las Vegas for a Canaccord Genuity conference with over 20 meetings set up with institutional investors. It’s a busy schedule until late July when things quiet down. Come August, we’ll hit the road again, starting with the Beaver Creek conference, then the Denver Gold Show. We’ll have marketing in Europe and end the year with the New Orleans conference.

Mike Clark, CFO

Yes, we’ll be traveling quite a bit from Beaver Creek through the end of the year.

Operator, Operator

We have a question from the chat: Any plans to initiate a dividend?

Rick Van Nieuwenhuyse, CEO

No, again the main order of business is paying off the debt and delivering the hedges. That will stick to our plan; share buybacks are an option.

Operator, Operator

I got two tough questions to answer. One is a common, what do you think the stock is worth?

Rick Van Nieuwenhuyse, CEO

I don't think we're supposed to say that. Can we, Mike? More than $15, how about that?

Operator, Operator

Are there any active takeover bids for Contango right now?

Rick Van Nieuwenhuyse, CEO

Short answer is not that I'm aware of.

Operator, Operator

What is CIRI's stake in Johnson Tract?

Rick Van Nieuwenhuyse, CEO

CIRI, as the landowner, owns the mineral and surface rights on the tract where the current resource is. They have special rights with the federal government regarding access. They already have the easement for the road access and barge facilities. They have a right to participate as an equity owner, which will be a discussion point in about a year.

Mike Clark, CFO

They also have royalties.

Operator, Operator

What happens if you come across archeological sites while exploring the Johnson Tract project?

Rick Van Nieuwenhuyse, CEO

That’s part of the permitting process—there’s a protocol for evaluating archaeological or cultural sites, managed closely in collaboration with CIRI. They will drive the evaluation for where the road will go. Although we don’t expect to find sites at the mine site, we’ll work closely with CIRI, who understands the land and cultural heritage.

Operator, Operator

I appreciate that. That’s useful information. I know we’ve gone over time but are close to our hard stop. Two more questions: Will the derivative liability decline by approximately $20 million a quarter for the rest of the year?

Mike Clark, CFO

That's a little higher. The April 30 hedge represents about $13 million, so if gold stays where it is, our hedge liability should be cut in half by year-end. That’s about $50 million for the year. It will gradually go down from there.

Operator, Operator

Great. One last one from Roger. You notice no public options are available for Contango. Do you expect to have options available in the near term?

Rick Van Nieuwenhuyse, CEO

The options market is independent; we don’t control it. We don’t issue options to employees, which is why there aren’t any public options available for Contango. We have some warrants, but I don’t know if they trade.

Mike Clark, CFO

There are about 700,000 of them, but they’re all pretty far out of the money and have about two years left.

Operator, Operator

There are a couple of comments chat participants pointed out, 'What a balance sheet transformation, keep up the good work.' Thank you, Rick and Mike, for joining us and answering the audience's questions. I appreciate your time, and I hope to talk to you soon with more updates. Thank you.

Rick Van Nieuwenhuyse, CEO

Thanks, Romeo. Good afternoon to you. Take care.

Operator, Operator

Have a good afternoon, guys.