Contango Silver & Gold Inc. (CTGO) Earnings Call Transcript & Summary

Great. Actually, now a good number have filtered in, so I'll say good afternoon, good evening, depending on where you're logging in from today. Really appreciate everybody joining us for a corporate update and Q&A session from Contango related to this morning's press release. So I'm joined today by the company's President and CEO, Rick Van Nieuwenhuyse; and their CFO, Mike Clark. Gentlemen, thanks so much for joining us today.

Romeo, good to see you again, and thanks for 6ix for hosting this. And to everybody out there, Happy Thanksgiving weekend. Obviously, we wanted to put some news out today that was important from a timing perspective. We recently had a joint venture meeting with our partner, Kinross, which gave us a new updated plan for 2025 and the life of mine plan. And so we wanted to get that news out as quickly as we could. We are still formulating information. Kinross is still processing information, but the bottom line is the mine plan really resolves -- revolves around a reduction in bridge weights that was imposed by the recently imposed by the state of Alaska Department of Transportation. And it pertains to 1 particular bridge that's really kind of in the middle of the road route between mine site, Manh Choh and the processing site at Fort Knox, the Tina River footprint bridge, which happens actually one of the newest bridges on their road route. So that reduction is basically resulting in a net 20% fewer tons that can be delivered and thereby restricting the number of tonnes that can be delivered to the Fort Knox mill. So that's really what's driving the new revised plan. I shouldn't say it's revised. It's revised from what the original feasibility study plan was, but now updated platform with the recent meeting we had with our joint venture partner. So we think it's a worst-case scenario plan, in the sense that this is new information, so we haven't tried to look at what other things can be done to help mitigate the reduction in tons. Kinross is working on that. And we think there'll certainly be updates on that as we go through the year here. But this was important information to get out to our shareholders. So we wanted to get it out. Apologies that it's still the Thanksgiving weekend, but that's how these things turn out. I'll stop there and just -- I think there'll be a lot of questions, and I think that's probably the best format to sort of address investors' questions and shareholders' questions that way. So Romeo, I'll turn it back to you to get to the questions. Mike will join us here as well to help out with answering some of the questions.

No, I appreciate it very much, and thanks for that preamble. So that is going to work. I do have a number of questions. A lot of them have been submitted in advance over e-mail, but also on the boards. So I'm going to run through those, and then this is a live event, so please do in the chat. I give any additional questions, and we'll work through those as available afterwards. If for whatever reason we don't get to your questions today, I'm going to make sure the Contango team gets them sent the full chat transcript. So I'll get back to you as soon as possible. We'll try to get to as many as we can today. The replay for this video will be available probably by 5 Eastern today, so relatively early following the event. But let me get into some questions. So as I said, a lot of these came in over e-mail in advance. First, I'm curious what, if any, specific changes to the repayment schedules are being sought by contango right now.

Yes, Mike, I'll let you answer that one.

Yes. No. So we are in discussions with our lenders. And it was always kind of expected that every time you update the mine plan and each year going into the following year, we would revisit the hedges and the principal repayments with the lenders to make sure they matched up appropriately to the revised plan because the original repayment plan is always based on the feasibility and things always change slightly. So it's intended to -- my first objective is just to kind of push things out by 2 months for each principal repayment and hedge, which more or less solves any kind of cash shortage for 2025. So that's what we're working on. It will take a little bit of time, but they're aware, and we're working with them as we speak.

Great. On to the bridge weight limits, I know a lot of people had questions about those. One is, are the weight limits temporary, seasonal or permanent? Just we so we can get a better understanding of what we're looking at.

Yes. So there, I'm not sure exactly. They're done on a regular basis. The state of Alaska looks at all the weight limits and all the bridges throughout the state on a regular basis. I think it's probably in the neighborhood of once a year. And it goes along with that overall department transportation plan for maintaining Alaska's highways and versus -- the bridges are a principal part of that. So it is something that can change in the future. And so there's certainly a scope for that to change. I mean a bridge has an expected life -- of useful life. And so these weight limits are a reflection of that lifespan. So if that changes for some reason, if there's new funding that gets put into the budget to address that then that can change what the weight limits are.

Okay. Great. So there are potential for additional changes to the bridge's weight limits in the future?

I think so, yes. I mean, I think there's a number of things that I know for the DOT had in its plan to update the Tina bridge. So that's something that still could be done in the future.

Okay. No One question, this is a tough one, but a couple of people asked it, so I thought I'd throw it to you guys, which is could this have been foreseen really in any way beforehand?

No, I don't -- I think not any -- not really at all. It's just -- these are our annual reviews of the State of Alaska DOT does. And again, we didn't really have any sort of heads up on the weight limits, that's relatively recent and very recent. And then the implications are the other thing. So once you get the weight limits, you have to go through and -- this obviously is Kinross, the manager, is doing this and understanding what the effects are going to be on the overall mine plan going forward. And again, I think I said earlier on, I think when Kinross first gets this information, they're going to take a very conservative view. And I think that's the right view to take. And then you're going to look at mitigation strategies, what can we do to change things and adjust things as -- to make the mine plan more effective from a transportation standpoint.

Right. A couple of people asked this, how does this impact Manh Choh's mine life?

Actually, it will extend it. I mean, if you're delivering fewer tons over a certain number of ore -- certain number of tons of ore, then obviously, it's going to extend it. And previous mine plan went to '28, and this one is now going to go to '29. So that's just a consequence of a fixed number of tons being delivered.

And Mike, I got kind of a follow-up on ASIC numbers. So guidance is the life of mine, ASIC is estimated at about 1,400, but next year's does appears higher for 2025 at 1,625 I think. Can you just clarify for folks in the audience what's going on there?

Yes. No. So when we got the updated kind of numbers from Kinross, they updated for the life of mine and that included the truck restrictions, which drove up the ASIC. And what really happens is next year, there's less tons being delivered, less ounces being produced, ASIC is a function of the number of ounces sold at the end of the year. And so your denominator comes down but your costs are relatively fixed. And so next year, just due to the timing of the mine plan, how many ounces are being produced and the relatively fixed cost nature of production, your ASIC goes up higher than the life of mine, but in later years of the mine life when we're producing far more ounces, we're going to have a much lower ASIC. So you're going to have some -- this year -- next year is at 1,600, then later years, it's going to be lower than 1,400, and it all averages out to that amount. These are estimates, and we've had to put these together quickly, but we're pretty confident with these numbers. And as Rick said, I think these are conservative, and we'll look to hopefully improve.

Awesome. I appreciate that clarification. I know a number of people had asked but up next is the question that most people asked, I got text, e-mails, et cetera. And that's, does this impact the trucking model or the estimates for any other Contango projects for a Lucky Shot or for Johnson Tract?

Yes. Absolutely not. The specific bridge in play here is between the Manh Choh site and the Fort Knox site along the Alaska Highway and Richardson Highway specifically. So short answer is no. At Lucky Shot, we're looking at using rail to transport ore and not necessarily to Fort Knox, just we've got other options there. And then Johnson Tract records, that's we're looking at more of a marine barge access there. So yes, I think it's a good question and very relevant to the discussion to date but absolutely not.

Great. No, I appreciate, I guess a lot of people ask, so I appreciate the clarification. One is a bit technical, but I'm curious is, will Contango mitigate the increase in wet ore by dewatering the excavation or stockpiling or on site to allow moisture to gravity drain before shipping.

Yes. The moisture thing was not something that was anticipated in the feasibility study to the degree that it has been a factor. There have been some -- I don't think at Manh Choh we can do anything to adjust moisture. We had a very wet year this year and so that's a consequence of that. I think at Fort Knox, there might be some things to cover the stockpiles there to keep the moisture back to a limit or limit the amount of moisture there that takes place while the stockpile sits at Fort Knox.

Great. I appreciate that. Just 1 question, and I don't know the degree to which you can answer, but it's how long before the Alaska Highway Department replaces the obsolete bridges between Manh Choh and Fairbanks? And how long were bridge conditions known to the state highway department?

So the first question in terms of how long this lease will last. I think we kind of answered that before. They'll -- the state of Alaska Department of Transportation, I think, looked at these on a regular basis. And again, don't quote me on this, but I think it's roughly annually. And so that's the plan we have in front of us. And I should emphasize this applies to all trucks, all trucks on the highway. It's not singling out ore trucks at all, it's all trucks. So this has a consequence to people getting their groceries and everything else in Alaska because pretty much everything goes up that highway and across that bridge. So it's -- I'm sure the state of Alaska DOT is looking at that because, as I said, everything in Alaska, in interior Alaska, Fairbanks and the surrounding area pretty much comes across that bridge. So it's an important thing for the economy of the state. So I think DOT will be looking at that closely.

Great. Next one involves a bit of aftermath, but curious in our perspective. And that's -- if nothing changes in the conditions identified in the press release this morning, what spot gold price would be required to eliminate this projected impact to cash flow?

That's probably a tough question. I'm probably going to ask Mike to see if we can put some parameters around that because it's a bit hard to manage it, putting the number on something. But Mike, help me out here.

Yes, it's a bit of a thumb suck. We modeled everything in the press release and currently what we use in all of our internal models is $2,500 with the first -- for the next 2 years, we are hedged and I'm being a little more aggressive in the delivery now. So almost 80% of our gold is going into the hedge, leaving only -- or 75%, sorry, is going to the hedges of 25% going -- selling at spot. So if gold goes up to $3,000, we're going to benefit $125 or whatever on that. And that's going to help our bottom line. But it's a little tough to know. And I think there's still -- we still need to do more work. We need to kind of finalize what we're going to defer on the lender side from a principal and if any hedges. But I think if we get this -- if gold was up at $3,000, I think most of this pain will go away.

Great. There's one question that came in over e-mail that's reflected by Danny in the chat. So Dan, let me know if this covers your question. But it's really -- will Contango need to revise the projected time lines without Lucky Shot and Johnson Tract based on this news?

Yes. I think the fair answer to that is once we get some of the things lined out with our lenders, I've always said that the first order of our business is to pay back the debt. So that is the first thing we're going to address here, is working out of a payback schedule for -- with our lenders. And then we'll address and look at what we can afford to do at both Lucky Shot and Johnson Tract. I think that's a fair way to look at it. So it's kind of a stay tuned kind of an answer, I guess.

Great. This one, I think, is probably for Mike, but either of you can answer. And that's -- this came in a couple of e-mails. Do you foresee any need for further dilution based on this news?

Mike, do you want to go or you want me to go?

You can start and I can fill in.

Yes. Again, it's a bit of a repeat answer in the sense that the first order of business is just sit down with our bankers and work out a repayment schedule of the debt. That's the most important thing. I mean we're still generating a fair bit of cash flow here, right? Delivering 60,000 ounces of gold is where we're going to generate $50 million of free cash flow. So there's a lot to work with here. We just have to sit down with our lenders and work it out.

Yes. And we have some time here as well. We're not in a rush. And there's -- we're still in production for campaign 3 right now, throwing off lots of gold. So I think in Q1, we'll have everything kind of finalized with the lenders, if not sooner, and then work towards coming up with the strategy going forward.

I appreciate that. A couple of questions on the chat that haven't been addressed and what we've already gone through. This one, I think what we've touched on, but [ C Sam ] asks, do you know the current expected lifespan of the bridge based on their most recent guidance?

No, I don't. I don't have the answer to that. And I'm not sure that they actually publicize that, but I'm not sure.

Okay. [ M. A. Pelche ] asked from the chat is adding smaller and lighter trucks and options or more trips for the same times.

I think the general answer I'd have there is those are all things that Kinross as manager will be looking at to look at the -- are there mitigation strategies that can work for getting us back to something closer to our original expected mine plan. Again, the original here is the feasibility study. So that always continues to be sort of the base case, if you will, and as you -- when you have a feasibility study, it seems when you have your first year production, you're going to adjust it as you know things. This new thing that we know now with the elimination of the bridges, I say is brand new. So it kind of impacted what was originally planned versus what we're now going to be able to do. And again, I would characterize it as a bit of a worst-case scenario in the sense that you get new information, you have to -- and it coincides with our year-end when we normally have a joint venture meeting, to say, hey, here's our new plan. And so definitely, there was a fair bit of work going on in the last little bit here since our joint venture meeting.

Great. One question. This is speaking of mitigation strategy, something that Chad asked, why not just fix the bridge or offer the system fixing the bridge?

Maybe that's one thing that Kinross will take a look at. I honestly don't know. I think it's a -- that's a DOT. That's their directive and it's part of an overall plan for state of Alaska. So -- those are all things that I think probably can and should be taken a look at.

Great. Somebody asked from the chat. It's possible for management to work closer with government on weight limit restrictions to understand the engineering parameters and what they expect to occur over the following years.

Yes. And I expect all those discussions to be taking place between Kinross's manager, again, of the joint venture and DOT. And there are lots of details. I'm sure sort of behind just here is the number that you can work with and just getting this information, there's a lot of questions that we have and that Kinross has that we're working on to see if there are mitigating responses to, mitigating answers to.

It makes sense.

Earlier -- just to comment on that. This bridge in these weight restrictions aren't limited to us. It's -- they're across the board. So everybody's groceries, everybody's fuel, everything that comes across that bridge means that there can bring less of it in a truckload and therefore, is more expensive.

Let's see how that works. One question from Kyle Holmes in the chat. Do you expect Kinross to release an updated reserve report from Manh Choh anytime soon?

I think we will. But when we get one, and so far, as I mentioned -- I just mentioned the feasibility study, that is still the base plan in terms of reserves. And I don't believe -- we haven't given -- there's been no indication that we're going to get an update to that anytime soon. So -- I think that's the manager that's in charge of that. And so I think that kind of reading between the lines there is that they don't really see a huge change. It's just, as Mike described, this weight limit has caused a change in the plan that we can deliver for 2025, but the overall life of mine plan in terms of ounces, tonnes and grade are the same, if that makes sense.

Change in schedule. No, yes. Speaking of mitigation strategy, somebody in the chat, it's one of those interesting questions. I don't know if you have a perspective on it. He says, why not just drop a trailer on one side of the bridge and then pick it up on the other side of the bridge with another truck running the drop trailer across the bridge? He says this happens relatively frequently to avoid pinch points.

And I'll -- not being a transportation expert, I will say I'm confident that Kinross will be looking at a number of mitigating strategies to try and get us back to closer to where the original plan was.

I appreciate that. One question I think this might be for Mike. Dan asked the $50 million cash flow, that's pre-settling the hedges. Is that correct?

Correct.

Right. There's one question on the Johnson Tract PEA. When is that expected to be released? And can you give any guidance to shareholders in the interim on this call and what that report might look like?

We won't give any guidance on it at this point. But I think it's going to be ready for the public in early in Q1 2025. Just kind of looking at the -- where we are today with the -- we've got about, I'd say, about half of the information complete and the other half is not complete, and we still need to review it in detail. So I think early 2025 is good guidance.

I appreciate that. It looks like we're through the live questions, give people an opportunity to ask one more. But in the meantime, Rick, I'll throw it to you for just final words people had note.

Yes. No, I appreciate, again, everybody taking time out of their Thanksgiving long weekend at least to the Americans. And stay tuned, there'll be more information that we'll update you as we get it from Kinross as the manager of the people joint venture. I'm sure they are working hard to figure out how to mitigate the transportation plan to get us back closer to where the original plan was in terms -- and again, the original plan being sort of reference back to the feasibility study. Obviously, this is an important project for Kinross. And so this is something they're working on hard. And we certainly had a pretty good and open discussion with them. It is all recent information. So I think everybody just needs to be a little bit patient to understand what it means for 2025, more mitigating -- mitigation opportunities that might be there. And then we'll -- as we get more information, we can obviously provide that more guidance for 2025, but then also for the rest of the life of mine.

Appreciate it. Rick, Mike, thanks so much for coming on so soon after the press release. Not everybody does that. So very kind of you. And folks in the audience, thanks for joining us today. If you do think of any additional questions, shoot them in, and I'll make sure the Contango team gets them as soon as possible. But thank you very much, and have a great Thanksgiving weekend for the Americans.