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

Good afternoon, good evening, depending on where in the world you're signing in from today. I really appreciate you for taking the time out to join us today. And today, I am joined by Contango ORE, CEO, Rick Van Nieuwenhuyse; CFO, Mike Clark. Gentlemen, how are you today?

Good. Good to be back on the 6ix platform, Romeo.

Yes. Good to see you guys. Now here's how today is going to go. I'm going to ask Rick and Mike a few questions. Then we're going to open it up to questions from the live audience. So today is an interactive event. Please feel free to use the chat bot on the bottom right of the screen any time during today's presentation. I'll say that today's event is also being recorded. I will be available on both YouTube and at 6ix.com probably tomorrow morning, Eastern Time, quite early in the day. Now Rick, before I get into the few questions that I've got, I'd love if you could just give us a quick review and wrap up of 2024's production.

Sure. So we started production at our Manh Choh project in joint venture with Kinross mining at Manh Choh, transporting the ore to the Fort Knox mill just located outside of Fairbanks by a truck. And we had the first gold pour in July. I think it was July 8. And then roughly a month of processing at Manh Choh in the first campaign or first batch. And then a second batch in September and then a third batch in November. And the third batch was above plan, if you will. In total, we produced about 42,000 ounces of gold. Most of that came in at the end of 2024, by the end of 2024. There's only few little stagger ounces that actually occurred in 2025, got sold in 2025, with basically 42,000 ounces. And that original guidance was between 30,000 and 35,000. So this was definitely well above guidance. Cost came in the neighborhood of our guidance around $1,200. I think all of this was -- original guidance was all based on the feasibility study. And so we produced more gold at roughly the guidance cost that we gave $1,200. I think feasibility study had $1,116 in there. Clearly, costs have moved up a bit. But obviously, the price of gold has moved up even more significantly from -- we did the feasibility study. We used a $1,400 gold price for establishing reserves, if you will. And so that was basically 3 batches delivering about 42,000 ounces net to Contango for our 30% share of production. In total, the mine produced about 200,000 ounces. So this is not really a small mine. It's very good grade. Again, it's the feasibility study grade and using the $1,400 gold price cutoff resulting in a little over 8 grams per tonne. And now we're using $2,500 gold price for the 2025 and the going forward mine by life of mine plan. And of course, that brings us to sort of November when we gave guidance towards the middle end of November, I think it was now, where for the 2025 mine plan and the life of mine going forward, our costs have gone up, and I'll explain a little bit why they went up. And our production guidance actually went down from what the original guidance was from the feasibility study by 15% or so. And obviously, that was not taken as good news by the market. And our share price got hit very hard. I think we're off about 40% in that week of trading, so to speak. I thought it was a little overdone for, we're still going to generate 60,000 ounces of production and generating good strong cash flows, roughly $50 million of free cash is expected to come out. That was the guidance. We think it is a conservative plan. I think that's what we typically expect from Kinross. And if they look back on 2024, I mean the original guidance was between 30,000 and 35,000 ounces and we produced 42,000. So obviously, there's no guarantee that we'll do the same thing this year, but I think -- it's fair to say that when Kinross puts a mine plan forward, it's something they're going to meet or beat. So I think that's our attitude on the existing mine plan. I took the opportunity to buy more shares. Chairman also bought more shares at the low price that we think we obviously still believe in the company and believe in the business plan. So Mike, anything you want to add to that?

No, no, that's perfect. I think the only thing kind of outstanding is we're waiting for the Q4 financial reports from Kinross so we can get the actual cash cost and ASIC costs that we should have in the next month or so.

Awesome. Speaking of and Rick, there are a number of questions I thought of for how to kind of figure out your head space and how you're thinking about the future of the company. But I guess, one, just to jump off of what you just said. Why did you and the Chairman just invest a lot of -- to my eyes, a lot of money in Contango stock?

Well, I mean, we thought it was an incredibly good time to buy stock at a low valuation. I mean if you look back at the last quarter of last year, we had the election and Trump won by a solid margin, which I think is good for the mining industry in general and for resource development projects in general from -- specifically from a permitting standpoint of getting stuff done, which, of course, under the Biden administration has been difficult. So I think from that aspect, it was a positive thing, but the gold price came off $200. And I can speculate as to why all that was. But certainly, crypto took kind of center stage with Trump's endorsement and Elon Musk and all that whole dynamic. And you saw Bitcoin go up and gold price go down -- I mean to the tune of $200. So that was a bit of the backdrop. We went from $20 something down to $18, $17, $18, and then we put out our new guidance and life of mine plan going forward, which obviously was a disappointment to the market, higher cost, lower production. And -- but again, I thought it was like seriously way overdone because we're still producing gold. We're still making money. Our priorities are pay off the debt, delivering to the hedges and advance our other projects, all of which we can -- we're still planning on doing.

And is it fair to say and I guess, Rick, I'll start with you, but this is really a question for both of you. But the announcement in November was a worst-case scenario rather than a kind of guaranteed spot for where Manh Choh production is going to be? And how has that evolved?

Yes, we certainly see it as Kinross putting a conservative plan out there that they're confident they can meet and with the expectation that we think we can beat it. And I'll give you some examples. I'll focus on the -- why are we producing less ounces? Well, because the state government put in place bridge weight restrictions on the Chena Flood Plain Bridge, which meant you can't put as much weight in the truck because it's a gross weight that the bridge weight restrictions are based on. So when you lower that, you lower the amount of gold you can deliver because we do have a fixed number of trucks that we can run a day. And that's why -- sort of a self-imposed limit, but it was basically, I'd say, a commitment to the community that we're going to have -- going to run 60 trucks a day and not more than that. So when you self-impose that, that restricts how much gold you're going to end up producing. So that was certainly part of that, the whole dynamic. And that resulted in the roughly, I'll call it, 15% less production than the original feasibility study guidance. But there's another component here. So in the cost going up, part of that certainly is it costs you the same amount of money to run a truck, whether it's got 43 tonnes of ore in it or 50 tonnes of ore in it. So that's part of it for sure. But there's another big part of it, and that is the feasibility study was done at $1,400 gold. The mine plan going forward is done at $2,500 gold. That's a 40% difference. So when you have a higher gold price that you're assuming what is reserve, you use a lower cutoff grade, which means your average grade goes down. Therefore, your cost per ounce goes up because mills are fixed throughput thing. So our costs going up are certainly related to the bridge weight restrictions and the other limitations on how much -- how many tonnes of ore you put in a truck, but they're also very much related to the gram of gold, average gold grade that went down 100% due to the price of gold and a higher price of gold. And what I think the market failed to appreciate is that dynamic using a higher gold price and a lower cutoff grade adds a year to the mine life. So we don't have less gold. We have actually life of mine, we have actually slightly more gold. And so that's all part of the dynamic. So I think it was a huge overreaction from the market personally. That's why I thought it was a good buying opportunity. I am clear my Chairman shared that view.

I appreciate that. You did mention the bridge, and I'll get straight into it because it come up in the chat. It certainly come up on e-mail. A number of people have written and asking about. Any updates on the bridge, now it's usually capitalize the and bridge, so curious if you got any news there, just so we can let investors know.

Yes. So I mean timing is everything in this business. So the bridge weight restrictions were put in place by the Alaska Department of Transportation, who's responsible for managing all the transportation for us, and that includes the bridges. And they were put in place because essentially, the federal government had not approved their plan, their overall highway plan or how you spend. When you spend federal dollars, they have to approve how you spend those dollars. And it wasn't anything specific. It was just a number of things in the plan that the federal government wasn't happy with. And so was go back to do your homework. And -- but that resulted in -- because they didn't have a time line as to when they could do the proper maintenance and repairs, upgrades, if you will, on bridges, not just this bridge, but a bunch of bridges. And so when you do that, the state says, okay, well, I don't know when that bridge is going to get fixed. I've got to be more restrictive on the bridge weights. So that's when they went in place. Now as it turns out, at the very end of December, the federal government approved the state's plan for the overall plan for spending next year's -- this year's '25 budget. So now they're going to go back. And now that they have an end date on when they can fix the bridges by because they have the money to do that, they'll go back. And it's not going to happen like tomorrow or it's going to happen this year, probably in the summer and only guess when we did the last time and update what those bridge rate restrictions are. So we might well see those come off, and that would mean another couple of tonnes of ore. So it's -- this things are a little bit frustrating, but like I said, it's not the end of the world. We're still hauling ore and we're still hauling gold and making money.

One last one on the bridge, [ Eiden ] from the chat asks, have bridge bypass options been explored. He says that some cursory research suggests there is a potential to bypass the bridge?

Yes. I'll say that certainly, there are a number of opportunities to bypass the bridge. But frankly, I -- and this is me speaking, not trying to speak on behalf of Kinross, but nor the manager or operator. We see them as more community complicating, not as community friendly, if you will. And people said, okay, we'll just break them into singles and take them across. Well, now you got twice as many trucks running. So I think -- and to be perfectly honest and blunt, I think this plan is a plan that can be met. I think over time, there'll be some incremental improvements if they take off the bridge weight restriction and maybe gain a couple of tonnes there. The other -- there were other contributing factors to the overall reduction, and that is that the ice and snow buildup in the summer -- in the wintertime was included in the max load from a state's perspective. So that produced a couple of tonnes there. You pick up a lot of ice and snow when you drive a truck that distance. And then in the summertime, it's mud. Now most of that gets stuck on the trailers, the truck and trailer, mostly it's the trailers from the mine site down to the highway. Highway is generally pretty clear, certainly clear in mud. So solution, put a wash station in and so you get the mud off in the summertime and just proactively knock the ice and snow off at the bottom of the -- before you get on the highway. So because again, the highway is generally pretty clear. So those are all things that they're incremental. But is the mine -- the mine plan that was put forward in terms of tonnage was based on hauling effectively 43 tonnes of ore. But if you can gain back a few more tonnes by knocking off the snow in the wintertime and knocking off or washing off the mud in the summertime, that make that up. The other area was moisture content. The top of the ore body has proven to be more moisture absorbent, if you will, than what was in the feasibility study. Water weighs another couple of tonnes when you pack it into the rocks. So looking at ways, and they're doing this now is looking at ways to not have water accumulating in the bottom of the pit and not having it accumulating anywhere near the stockpile so that the rock doesn't have the ability to sort of tack on the moisture content as well. So those are all mitigations that -- mitigating things that you can do and that they are currently looking at. Getting water away from the bottom of the pit is drainage and putting barriers up where water might leak in, same on the stockpile, just put a drain in and work it that way. And this was the first 6 months of operation we're talking about here, right? In terms of production, not in terms of mining because mining started last year ago, November. So -- but this is -- it's a bit of a learning curve, and you don't know if we get it 100%, but we'll make -- I'm confident we'll make incremental improvements on gaining back some of those tonnes in the truck and trailer percentage.

Appreciate that. Mike, I want to get you in here. I got 2 in a row for you. What's the forecasted time line for debt repayment? And what's had to change after last year's announcement?

Okay. So currently, the debt and hedge -- the debt repayments and hedge deliveries are all targeted to be out by the end -- paid out by the end of December 2026 with the kind of extended mine life and annually lower production and slightly higher cost. It's caused us to kind of look -- relook at it and look to kind of push things out slightly into 2027. So that's what we're currently discussing with the lenders. We're all more or less in agreement on what needs to be done. It's just taking a bit of time to get here. And so we anticipate we should have a final solution in place within the next couple of weeks with an outside date of the end of February. It's really just ticking the boxes. When you extend beyond the maturity date, that means you just have to do a few extra things to the lenders and the fact that we have 2 different lenders there's been some changes in personnel with the lenders and in addition to Christmas holidays. So it's just taken a few extra weeks in what was originally thought it would take, but everything is being very constructive and we're confident we'll be there in the next couple of weeks.

Jason from the chat asks, Michael, throw this to you as well, will the lower production extend the time that we're selling hedged gold and he notes wouldn't it be better to close the hedge sooner rather than later?

Yes. No, it's -- we would love to close the hedges, and we're looking at opportunities in ways that we can do that. But currently as it stands, we're just focused right now on just working with the lenders to make sure there's more than sufficient capital or cash in the bank to make all of our payments and deliveries. So right now, it's kind of a balance between principal and hedges. But I think we're going to explore everything we can. And if the mine does better than currently modeled and which at current gold prices, it's $2,700 versus the $2,500, there's plenty of opportunity for that. And we will be looking closely at buying down those hedges as quickly as possible. I think that's our focus right now.

I'll just add that with the third batch sort of being an extra batch, if you will, from 2024, we deliver those to the hedges kind of in advance of when they need it to be. So we're -- we're doing everything we can to reduce that hedge.

Yes. So what Rick is saying is we bought out those -- the 16,000 ounces that were supposed to be delivered in January. We bought those out in December when that gold price dipped and so by doing that, we've freed up between -- if gold prices stay the same when we start batch 2 and our first batch of this year, we should have made about $1.5 million, $2 million at these gold prices by making that trade. So those are the things we keep looking at. And obviously, we would like to be unhedged. And so we'll just keep delivering as quick as possible.

Makes sense. I appreciate everybody in the chat. I know there's quite a few questions there. So I really appreciate everybody shooting them in. I'm going to be bouncing back and forth. And if I don't get to it, please bug me in the chat. I do want to try and get all your questions today. I got one more. Rick, I'll turn it to you first. As the short volume in Contango does appear to keep reducing, what do you think will or could turn around the current comparative weakness in share price?

I think when people say that we're still generating cash. I mean we sell notes and conversations about they won't be able to deliver the hedges, they're going to go bankrupt. And frankly, just complete nonsense. Bankers don't put you out of business. We have a new mine plan, it's based on $1,100 increase in the gold price. That's not a bad thing. We're going to make more money than -- we sure is now going to make more money than we anticipated, that was anticipated and assumed in the feasibility study. So we're going to start the first batch, first campaign for 2025 in February. I think the date was the fourth I think they can start. So -- and we're -- I think we're on time we're on schedule, we're going to produce gold and we'll report on that. And just to let everybody know that it's kind of business as usual. And as Mike says, since we've already delivered the January hedges, this will be sold at spot, which presumably is $2,700 plus. So yes, we're going to make a bunch of money.

That's always good.

It's a good thing for the company.

If you want me to add on to that. I think once we kind of announced the resculpting of a small amount of these principal repayments and hedge deliveries, into what we expect to be early 2027, I think the market may feel a little more relaxed about our position and less concerned about us not being able to deliver.

Sure. I appreciate that. One person wrote it on e-mail and asked what Contango's view on distributing free cash flow to investors via share buybacks, cash dividends versus M&A? I'll throw it to whoever wants to answer first.

Maybe I'll start, Mike, and you jump in. Look, the first order of business is paying off the debt, delivering the hedges, that's business #1. Business #2 is advancing our other projects. And part of that is working on an arrangement to process the ores first from Lucky Shot and then eventually from Johnson Tract. So I'd say those are our 1, 2, 3 priorities. Paying a dividend to shareholders, frankly, is not a priority now. It is a long-term objective of getting this company to where it's making a lot of money and can then distribute that to -- a portion of that to shareholders.

Great. There's kind of 3 categories of questions left. So I'm going to try to just in case in the chat, you think I'm skipping your questions. I'm going to do the Manh Choh ones in order, other projects, and then we'll get into more esoteric questions for Rick, there's some of those in the chat. So first is, have the results from the 2024 exploration program added to the resource base? This is for Manh Choh.

I just asked that question to Kinross actually. So I don't have an answer to it. And it's kind of in 2 parts. It's the pure exploration program, but then it's also using this higher gold price, what does that -- what does that mean in terms of stockpiles and to stockpile grades? Because when you're mining, if you use a $2,500 gold price versus a $1,400 gold price, there's a lot of material that now it's ore. So, yes, we're -- we don't have hard answer to that, but we will -- we are working on that right now.

Great. I know we already went over, but always good to reiterate. [ T Decker ] from the chat asks, when is the next drop and how much?