Earnings Call Transcript - CTGO Q4 2024

Operator, Operator

Good afternoon, or good morning, depending on where you’re logging in from. Today, I saw some early rising Australians on the list. So thank you very much for joining us. Appreciate particularly everybody joining us on St. Patrick's Day for a corporate update and Q&A session from Contango related to this morning's press release regarding 2024 earnings. I'm joined today by the company's President and CEO, Rick Van Nieuwenhuyse; and CFO, Mike Clark. Gentlemen, thank you for joining me.

Rick Van Nieuwenhuyse, CEO

Good to see you again, Romeo.

Operator, Operator

Awesome. So here's how today is going to work for the folks in the room. I'm first going to throw it to Rick for just a quick rundown of today's news. And then I've got some questions I'll be posing to both speakers. After that, though, we are eager to take questions from the audience. This is an interactive event. So please use that chat button on the bottom right of your screen. If for whatever reason we don't get to your question today, covered in the previous events, etc., all good, I'm going to send that chat transcript to the Contango team, and I'll get back to you as soon as possible. Last piece of housekeeping, today's event is also being recorded and will be available probably late this afternoon on both 6ix.com and also our YouTube channel. That's enough out of me. I'm going to throw it to Rick to get to the protein of today's event.

Rick Van Nieuwenhuyse, CEO

Thank you, Romeo, and thank you everyone for joining us on St. Patrick's Day. We released our annual report detailing our activities for 2024, which was a strong year for us. We produced more gold than our initial expectations, and our cash costs were slightly above our guidance of $1,200 per ounce. Overall, 2024 was productive, especially with the launch of Manh Choh. We started production in July and generated just under 42,000 ounces at favorable cash costs. I believe this year's report reflects our achievements well, and we are already moving forward for 2025. We are about two-thirds through our first batch of gold for the year, with three more batches planned, aiming for a total production of around 60,000 ounces. This serves as a brief overview. Today's announcement regarding our year-end results is primarily Mike's work, so I expect there will be many questions for him. Romeo, let's open the floor for Q&A.

Operator, Operator

Awesome. Sounds great. Like I said, I got a couple of questions to run through first. I did want to ask a question, what were the factors, Rick, that led Manh Choh to exceed that production guidance by over 25% in 2024? Just how did that come to be is really my question.

Rick Van Nieuwenhuyse, CEO

Yeah. So I'll start and maybe ask Mike to join in from his perspective. But basically, we've been transporting ore from the mine site since November of 2023. So we had a whole year of transporting ore. Of course, we started mining in July of 2023, so mining and stockpiling ore at the Manh Choh site. Being a direct shipping ore model, it's not your typical mine and mill start-up as you usually see in a mining and milling operation. So we started mining. We started stockpiling ore at Manh Choh. And then in November, we started hauling the ore to the mill site at Fort Knox. Now we didn't start with all 60 trucks. We have to build up for that. So if there was a ramp-up period, that was kind of the ramp-up period. Bottom line, there was more ore delivered to the stockpile at Fort Knox than anticipated by the feasibility study. When there's higher-grade ore on the stockpile at Fort Knox, they're pretty much always going to run it through the mill because you're running a 7 or 8 gram material versus a 0.6 or 0.5 gram material from Fort Knox. Obviously, you always run better grade when you have it available, and that's what we did. We ended up producing about 10,000 ounces more than sort of the middle of our plan. We had always guided 30,000 to 35,000 ounces. And we produced, like I said, just shy of 41,300, I think it was. That was the total. We still had some gold that ended up from the 2024 batch processing, the final processing in November, that we actually sold in '25, but just kind of sticking to the basic numbers. And maybe, Mike, you want to go through the official numbers.

Mike Clark, CFO

Yeah. The only thing I'd add to that is originally, the feasibility study had five batches or five campaigns in 2025, starting in January and ending in December. They pulled kind of half of the batch in 2024 that was pulled from 2025. And then they've realigned the campaigns to be the middle month of each quarter for 2025. So that was part of the reason for the extra production in 2024.

Operator, Operator

Great. No, I appreciate that extra context. That's helpful. One I've got for you, Mike, with positive operating cash flow in '24, what is the cash flow projection for 2025, but then also beyond that?

Mike Clark, CFO

There is positive cash flow from operations anticipated for 2024. After that, most of the excess cash will be directed towards paying down debt and fulfilling hedges for 2025 and 2026. The plan is for the free cash flow from operations to primarily go towards reducing debt and meeting hedge commitments, with the goal of being debt-free and hedge-free by the end of 2026. However, due to the restructure, there is now the option to extend this into the first half of 2027.

Operator, Operator

Great. I got a number of questions that came in over e-mail. So Mike, if you don't mind, I'll just kind of rapid-fire shoot them at you. First one that came through is, is the hedge coming off once you pay off your debt?

Mike Clark, CFO

The hedge delivery schedule aligns with the principal repayment schedule. Both will mature in June 2027 as part of the restructure. However, most of the principal will be paid down this year, leaving about $15 million in repayments that will extend into 2027. We aim to reduce the hedge deliveries by half by the end of this year, which means we will have 86,000 ounces of hedge gold remaining at the close of 2024. We expect to finish the year with approximately 43,000 ounces of hedges left, which will be paid down in 2026 and early 2027. Our ultimate goal is to be debt-free and hedge-free by the end of 2026, but the restructure has allowed us to extend some obligations into the first half of 2027.

Operator, Operator

Great. Someone also asked if you could provide an update on Contango's debt at the beginning of 2024, how much it ended with, and what you anticipate will be paid off this year.

Mike Clark, CFO

We started 2024 with $60 million of debt. We paid down just under $8 million during the year, reducing the debt balance to $52 million. In January, we made a principal repayment of just under $14 million, bringing the debt down to approximately $38 million as of today. We expect to end the year with about $15 million of debt remaining. Regarding hedge deliveries, we began with 124,000 ounces of gold hedges and finished the year with 86,000 ounces remaining. We delivered nearly 38,000 ounces against the hedges based on approximately 42,000 ounces of gold production, showing our commitment to delivering into that.

Operator, Operator

Great. I saw it on the PR, it's an interesting way to think about it, but I'd love if we could just reiterate it here, what percentage of the mine life is unhedged overall?

Mike Clark, CFO

Yeah. So originally, the way we looked at it, when the debt was restructured, it was always supposed to kind of be about 65% hedged during the term of the loan. But for the life of mine, it was supposed to be about 40%. How we look at it and where we're at today because of what we delivered and the extended mine life or extended ore haul plan, we are roughly 35% hedged, 65% unhedged for the life of mine. As I said, we're going to deliver into those hedges mostly between now and the end of 2026. After that, we're totally unhedged and have no debt.

Operator, Operator

Great.

Rick Van Nieuwenhuyse, CEO

I'll just throw in, '27, '28 are big banner years. Not only are we unhedged, but you're in the lien's way through the mining phase of the project, and so you've mined a lot and you have a big stockpile sitting at Manh Choh. So it's really about the ore haul plan. If you're not paying for a lot of mining that's going on, your all-in sustaining costs are going to be very low. I think they'll be in the $1,000 to $1,100 range.

Operator, Operator

I'm going to jump a couple of questions in the chat just because they're right on topic. So I'm just going to loop them in. Tate from the Maxim Group asks if you continue to expect the 2025 AISC of $1,625 per ounce.

Mike Clark, CFO

We have no updates to provide on that topic. I believe you will see us conclude this campaign in the first quarter. All associated costs should also be accounted for by that time. When we release the results in mid-May, you can expect a clear indication of our costs, which we anticipate will be between $1,200 and $1,600 in cash costs for AISC. While we refer to AISC as outlined in the feasibility study, cash costs are how we reflect these figures in our financial statements, and our cash costs are nearly finalized with minimal additional expenses to consider for AISC. We wrapped up the previous year with cash costs of $1,209, which also applies to AISC for 2024. For 2025, we expect costs to fall somewhere between that and the $1,600 figure we provided.

Operator, Operator

Great. He also asked what was the realized loss on derivative contracts in 2024 of $19.9 million.

Mike Clark, CFO

2024, so we had a $20 million loss on the realized on the hedges. That's really what happens when you deliver into a hedge; that becomes a realized loss. Otherwise, there's a component that's kind of your mark-to-market or your fair value you do at the end of each period. So that total was $35 million at the end of 2024. Combined, it's $54 million.

Operator, Operator

Right. That makes sense. If you've got any follow-up questions, let me know in the chat. I'm happy to shoot them in. A couple I got. What is the current timeline, I think we've been over this, but I just want to reiterate if possible, timeline for eliminating the remaining credit facility balance?

Mike Clark, CFO

The credit facility balance, yes. It's currently scheduled to be paid down to $15 million by the end of this year, and then the remaining $15 million gets paid out between 2026 and mid-2027.

Operator, Operator

Great. I'm just curious for your thinking, what drove the decision to defer that $10.6 million in debt payments forward into 2027?

Mike Clark, CFO

It all began with the bridge weight restrictions and our expectations for production in 2025 after receiving the revised mine plan from Kinross. When we reviewed the delivery schedule of the hedges and the principal repayments, it became clear that we needed to adjust the repayments and the hedges' delivery schedule to better align with the extended ore haul mine plan. This required pushing out some timelines, but it wasn't a significant amount. However, it did take time and effort, especially when dealing with two sets of lenders. Ultimately, I believe we are now in a stronger position to align with the new schedule.

Operator, Operator

Great. No, I appreciate that.

Rick Van Nieuwenhuyse, CEO

Yeah. I don't really have anything to add. The mine plan, everything has been compared to the feasibility study, which is somewhat typical. And again, this is not your normal mine start-up where you're mining and putting ore through a mill right away. This is the transportation plan. We basically were in operation mining and stockpiling for a whole year before we actually started milling. Your guidance is as per the feasibility study until you get up and running. Now we've learned a bunch of things after well over a year of hauling ore and stockpiling. All those operating issues that come up, you bake into your new plan going forward. So that's effectively what has happened with the updated mine plan.

Operator, Operator

Great. While we're on that actually, just to sort of bank shot to that last comment, I'd love if you could do just a quick one-on-one lesson for folks in the room of what the economic advantages are to direct shipping ore versus the more classic mill setup.

Rick Van Nieuwenhuyse, CEO

The smaller environmental footprint is a significant advantage. It means we avoid the complexities of building a mill and a tailings facility, which require extensive permitting processes that typically take a long time, usually around five years for major projects. By not constructing these facilities, we eliminate many permitting requirements and significantly reduce the capital needed for the project. For instance, if we had built a mill at Manh Choh, it would have cost between $600 million and $700 million. Initially, we might have estimated the cost at $500 million, but as the permitting process drags on, expenses naturally increase due to inflation, which we have experienced over the past five years. By securing both state and federal permits for Manh Choh within just 1.5 years—a rare achievement in our industry—we reduce permitting risks and shorten timelines. This model is particularly beneficial for junior companies seeking capital, as it minimizes both the amount of capital required and the lag time between obtaining permits and starting construction. We believe this model is highly applicable to our other key assets in the portfolio.

Operator, Operator

Great. No, I appreciate it. I love the 101 lesson. I think it's useful. One question from the chat, Dave F. asks, this is probably my last Manh Choh question before I move on, can you yet disclose the results from the 2024 Manh Choh exploration program?

Rick Van Nieuwenhuyse, CEO

I believe we have our results, but there aren’t any significant findings to share. Most of our efforts went into assessing the large land position associated with the Tetlin lease from the Tetlin tribe. We didn't conduct much drilling, and what we did was spread across various targets. We will be meeting with the joint venture next week to discuss where to direct our exploration efforts this year, and we have some ideas that we'll share with the Kinross team.

Operator, Operator

Great. So I will move on here from Manh Choh into Johnson Tract. So I know, I believe in the relatively near future, we are intending to have a PEA for it. What metrics should investors be watching for when that PEA drops?

Rick Van Nieuwenhuyse, CEO

Yeah. So expect it toward, I keep saying hoping towards the end of the month, Mike tells me I probably should expand that into April. We're working with our contractor there to get that done. It's definitely taking a little longer than we would have hoped. Basically, it's a pretty typical preliminary economic assessment, but it looks at the project, again, as a DSO project. We're not building a mill and tailings facility. We've identified a couple of different options as to where to send this material that we think are realistic that will be covered in the PEA. Standard metrics, NPV of the project, rate of return. By not building a mill and tailings facility, you're saving yourself a lot on capital cost and the permitting timeline, as mentioned. We think our five-year plan that we've outlined previously makes sense and is what we want to aim towards. What that means this year is it's mostly about permitting the access road up to the mine site from the coast and permitting a barge landing site. So those are the activities that we'll be focused on this year.

Operator, Operator

I'm on mute. What a jerk. That's all me. Jumping into my last question here before.

Rick Van Nieuwenhuyse, CEO

I was trying to lip-read, but I was not really good at it.

Operator, Operator

I'm mumble even actually when with lip reading, so there you go. I do want to ask the question, now that we've got many, many months in the rearview after acquiring HighGold, curious how the team feels in retrospect about the transaction and how integrating the assets gone generally into Contango's business.

Rick Van Nieuwenhuyse, CEO

Yeah. Good question. We're really pleased with the transaction. Essentially, it was a corporate transaction, but it really was about buying the Johnson Tract asset. From an accounting perspective, that's how Mike is going to treat it. But in terms of, are we happy with what we bought or do we have buyer's remorse? We sure don't have buyer's remorse. We're very happy with the asset. We think it fits our model really well. We've developed a really good working relationship with Cook Inlet Region, Inc., CIRI. Those are folks that I've known for a long time, just having worked up here in Alaska a long time. As I mentioned before, I have looked at Johnson Tract several times in the past as a potential opportunity. I just could never imagine permitting a mill and a tailings facility there. But with our DSO model, we get away from all of that. Simply, it's a run-of-mine operation. We get underground. We develop a good mine plan. Very excited about what we see from the resource modeling work that we've done; we've done some additional drilling last year to augment that, particularly in the upper third of the deposit. We pretty much have that drilled out at the drill density we think is appropriate to develop a mine plan around. We have to get in underground to develop the rest of it to a feasibility level, get the infill drilling done. That mountain that you see in the foreground, the photo on our website, it just goes up too steep to drill where we need to be drilling at depth. Putting the tunnel in is the next logical step, spending the time to get the infill drilling and all the other information we need to put a proper mine plan together. The PEA will outline that, and I think it will start to look at what the scale of the operation will be. It's an underground mine, not an open pit; it's underground. Selectively mining high-grade material underground. When you look at the block model we have on the website, you can see a nice high-grade zone right in the middle of where the tunnel goes in. It's just a perfect spot to start mining this thing. Obviously, that's open at depth because it hasn't been drilled at depth at all. Very exciting to see all that play out. This year's activities will be mostly around permitting. Not a lot of ground disturbance type work going on, no drilling. We're not planning on doing any drilling or any road construction at this point.

Operator, Operator

Great. A couple of quick numbers questions for you, Mike, that came in a couple of minutes ago. So I'm going to throw it to you for a calculator. But one person asked, what's the average hedge price per ounce at this time?

Mike Clark, CFO

Well, the hedge price is all kind of flat. It's $2,025 for '25 and '26. We did roll out about 15,000 ounces into '27. Those hedge prices came down a little bit for '27 to mid-$1,900, and that just has to do with the hedges being underwater. Overall, it's not a big impact on the hedge book.

Operator, Operator

Great. Thanks. Another numbers question, Bevonzi asks, based on $3,000 an ounce for gold, what is management's best estimate for 2025 and 2026 EBITDA?

Mike Clark, CFO

Sorry, I couldn't hear the last part.

Operator, Operator

Best estimate for 2025 and '26 EBITDA is what they're looking for.

Mike Clark, CFO

The EBITDA for 2025 was originally modeled at a gold price of $2,500, which included approximately $50 million in distributions from the joint venture. After accounting for hedge losses that consumed about half of that amount, along with overhead and interest costs, the scenario suggests a potential earnings of around $5 million for the year before principal repayments. If we assume a 20% increase based on today's gold price, those figures should rise accordingly. Is that how you see it, Rick?

Rick Van Nieuwenhuyse, CEO

Yeah. I mean, obviously, as the gold price goes up on the 30% of the ounces that aren't hedged for 2025, you're making that delta of almost $1,000 for those ounces; that's how I sort of quick math think about it.

Operator, Operator

Great. Somebody right at the end asked if you could please provide an update on any activities related to extending the Manh Choh mine life.

Rick Van Nieuwenhuyse, CEO

Yeah. That really speaks to the exploration effort. For the last couple of years, Kinross has been looking at the rest of the property; it's a very big property. I compared it before to Rhode Island, which is the smallest in the United States, but still a big chunk of land. There's been a lot of stream sentiment type work and follow-up and identifying potential drill sites around the whole area. We like to see more focused exploration around the mine site. That's what we'll be advocating for when we meet next. I understand that you've got a big property, well, let's go see what's on it and see if there's any sort of low-hanging fruit. That has been a good part of the effort for the last couple of years. We still think there's some good targets to drill right in and closer to the mine site. We'll certainly be advocating for that, as I mentioned earlier.

Operator, Operator

Great. Now one question that came in, this is the one I'll wrap with, came in right as the event started and asked, does anybody out there know how much this company is actually undervalued? So I won't ask you that exact question. But I will ask what your perspective is generally on the kind of market value gap that's on right now? And when do you think it's going to close that up?

Rick Van Nieuwenhuyse, CEO

I think that's a CFO question.

Mike Clark, CFO

No, absolutely not. I'm not touching that one. It's with the CEO.

Rick Van Nieuwenhuyse, CEO

I believe we were definitely undervalued. The shorts had a great opportunity with our relatively small equity issuance of 12 million shares. However, as reflected in Mike's excellent press release about our year-end results, we are profitable and not facing bankruptcy. Despite various rumors that banks would not cooperate with us, today's release clearly shows that is not true. There was speculation about needing to raise equity, leading to shorting the stock, but we are not pursuing that path. If it means waiting a year without drilling at Lucky Shot, we will do so. Our focus will be on delivering the hedges and paying down debt, which will lead to significant profits once the hedges are settled. The hedges were implemented because, at the time of raising funds to build the mine, equity markets were not favorable. Despite $1,800 to $1,900 gold prices, interest in investing in development-stage gold junior producers was low. While market conditions have improved, there is still hesitation towards junior stocks, which have substantial upside potential. Larger companies like Agnico, Newmont, and Barrick are starting to gain recognition for their cash flow from gold operations, but juniors have not yet experienced this boost. I am confident that our stock will perform well as gold prices rise, and our priority this year will be on profitability, settling hedges, and debt reduction.

Operator, Operator

Awesome. Now some questions that sneak in just as I was saying goodbye. So won't actually be the last one, but they're short. Somebody asked, are there any plans for exploring the other assets beyond Johnson Tract acquired from HighGold?

Rick Van Nieuwenhuyse, CEO

Our two core assets are Johnson Tract and Lucky Shot. Currently, we have no plans to drill at Lucky Shot. We are engaged in various strategic discussions, which are cost-effective, and we believe that a logical next step for both projects is to determine where we will process the material. These discussions are ongoing, and I categorize them as strategic in nature. We anticipate that they will lead to positive developments once we solidify our plans. However, until we finalize these details, we are under confidentiality agreements and cannot share much more, but we are definitely prioritizing this for the year.

Operator, Operator

Okay. Makes sense. And I think that actually also tackles the last question. So there you go. Mike, Rick, thank you so much. I think this was very helpful. Thanks, everybody, in the room. I know there are a lot of you today. I really appreciate your questions and joining us. Grateful for you being here on St. Patrick's Day. But now you are free to go. Please hit the bars. Have fun. Everybody, have a great afternoon. Cheers.

Rick Van Nieuwenhuyse, CEO

Cheers. Thanks.