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

This is the last time I'll ever ask him about hedges. So presuming something he's quite pleased about. But here's how today, it's going to work just for the folks in the room. I got a number of questions just to talk about the company's most recent exciting news from this morning. But this is an interactive event. I know somebody already submitted questions in advance on e-mail. I appreciate those. We'll get to them. [Operator Instructions] I'll get to as many as we can. We're hoping this is going to be a pretty quick event, probably 20, 25 minutes. So I don't get to your question, also make sure the Contango team gets them afterwards, you can walk through them. The only other thing I'll say is this is being recorded and will be able for replay probably about 3:00 p.m. Eastern. Pop right in your inbox will also be available on Youtube channel shortly thereafter.

But let me get right into the protein because this is exciting news. Rick, I want to start with the headline. You converted the last 15,000 ounces of hedged gold into debt, which means for the first time, thrilled to say it's live and on air. The hedge book is completely gone. So walk us through what this announcement actually means for Contango shareholders.

Well, I guess it's doing what we say we're going to do, first and foremost. We obviously didn't put the hedges in place because we were betting on the gold price. We are betting against the gold price. They were put in place because the banks made us put them in place back in [ '23 ] when we were putting -- trying to put this mine into production. So as they would have it, gold went up and more than doubled in price. And so now we have exposure to that upside in the gold price. And this should really be Mike today because he's been -- we've been working at this for a while. And so -- and investors invest in a gold producing company and particularly a junior gold producing company because they want that exposure, that leverage to the upside in the gold price. If you're -- if you're betting against gold, then don't invest in gold. I mean that's pretty simple investment advice. So where we are now, we believe in the upside in the gold price. We think this is a good base from which to put the hedges to rest and replace it with that. Not with equity. We didn't like our share price or we weren't going to issue any equity at this price, but replacing it with debt just made a lot of sense. And so I'll let Mike explain the details, but obviously, we're a self-funded junior explorer producer. Our advanced stage projects are funded by our cash flow from [ Mono ] and what this does is just give us more exposure to the upside in the gold price. Our plan is to go from 60,000 ounces of production up to 200,000 ounces of gold production and 5 million ounces of silver production here in the next 4 or 5 years.

Awesome. Mike, I'm going to let you get in here because as Rick said, this is some [ degree ] year show, and I want you to get in the math. So these contracts were struck at 1935 announced. Gold trading, obviously, north of 4,000 for a while. And setting a [ out ] cost, as I understand at $33 million. So how should people think about the math here? What's the cost of buying out those hedges versus what the 15,000 ounces are worth to the company selling a potential spot over the next 1.5 years.

Yes. No. So these remains hedges where the March and June [ 20 ], 27 hedges that we structured over a year ago when we pushed the debt facility out so that price actually came down from the 2025 to 1935. But -- so those were the final two remaining hedge deliveries we had for 15,000 ounces. And when we locked in this hedge settlement, gold was trading at about $4,000 and $35. And so to settle them, we had to [ sell ] them using a forward curve, which was roughly $100 more. So the way I look at it is it cost us $1.5 million in paying for the forward curve on those ounces. In addition to that, the other way I'd look at this as well is you paid that -- I guess, our floor price is at 41%, 35% on settling these hedges when -- the only other kind of cost to us is our debt increased from [ 12.6% ] to 46.3%. So are going to pay an incremental amount of interest, albeit at a lower rate coming down from 8.9% to 7.4%. So there'll be about $2 million in interest charges that we may pay assuming we take debt to the full term. Obviously, if we pay back early, that interest charge will come down, but the total cost is the 1.5% on the forward curve you're paying versus spot price and then the interest on the incremental increase.

[ Should ] add up full run through the numbers, obviously, for something like this. Rick, I want to talk about timing because I know gold [ dip ] I was at a conference below 4,000 in late June. I saw a lot of frowns that I hadn't seen in quite some time. For the first time [ e4,000s ] November. And it seems like the Contango team moved on this almost immediately. [ You ] in the PR called this pullback in opportunistic window. So my question is how much did that price move factor into pulling the trigger right now rather than taking a beat, waiting, see where it is?

Yes. No. Look, we think the $4,000 gold price is a good support level for gold, and there's a variety of -- you can talk to charters and they can show you charts why that makes sense. I mean what I look at is central bank buying and central banks. So [ look ], you had gold ran up to 5,500 very rapidly. And obviously, I think everybody kind of felt it was great. We all had smiles when we were talking to each other, we all thought we were heroes and very smart for being in the gold business, but it corrected. And it corrected 30%, which is a pretty significant correction. And -- but as I said, the Central Bank buying is what's been driving the gold price. They are the biggest buyers of gold, and they stop buying. When gold was 5,500, they just kind of let off the gas pedal a little bit and it came back down to 4,000, and now they're buying again. BMO just had a report this morning reporting on central bank buying. They bought 41 tonnes of gold in May. And that's Poland was one of the larger buyers, Czech Republic, Singapore, Kazakhstan, Uzbekistan, Russians are selling, and we all know why they have to sell. So it's meaningful that when the central banks who have been the major buyers of gold come back in and support that $4,000 gold level. So -- we think that's -- it was the right time. Obviously, you've got to work these things out with the bankers. They've got to get approvals. So we've seen this $4,000 dip down to the $4,000 level several times. And -- we got -- Mike got everything, all the paperwork organized and all the authorizations completed with the banks, which they have lots of -- a lot of that kind of work to do. So once we came back down to that 4,000 whatever we pull trigger here we are.

Not [ opportunistically ] like you said. And Mike, as I understand the amendment also brought the interest rate down from [ 8.9% ] to 7.4 with no restructuring fees. So congratulations there. over you sorted that out. That's not a deal, as I understand that a lender gives a borrower that they're worried about. So what was the nation what the lenders like and what it says about how they're viewing Contangos over [ gold ]

We've been having these discussions for a while. Rick and I weren't very comfortable when the gold was [ 5,000 ]. So we didn't want to make that conversion then. It just didn't seem like the right time. But the lenders were very supportive. I think they view the hedges as more risky than debt, just given the potential for gold to go back up to $5,000, $6,000. So they were more excited to see that come off [ the ] which ironically they put in place to protect themselves. So they were supportive. There was some back and forth on getting the right interest rate and not [ any ] restructuring fees, so that didn't kind of happen easily. But at the end of the day, we all come over together to get to a spot that we were comfortable with and as were the -- but once we kind of got those terms locked down, they move very quickly, and they're pleased with this as are we.

Great. One thing I wanted to ask, it's not the big [ history ]. Obviously, it's a little part of the setup. As I understand, you also spent $715,000 on put contracts, a [ 3100 ] strike. Covering those same 15,000 ounces. You got a floor under the position without putting a ceiling back on. Just curious if you could explain how that protection works, why they run at the right level? How did this part of the arrangement come together?

Yes. No, the puts were a requirement of the lenders. They wanted to see downside protection at 3,000 or [ 3,100 ]. So they were the ones pushing for that. We put these in place using kind of a European style put where they actually funded it. So we'll just pay them back. That [ added ] to the debt, and we'll just pay them back in March of next year on the same timing of the principal repayments. But more or less, it was driven by them and -- but we're -- it's not that much money to kind of protect us on the downside. It all does correct more so. And those puts do still carry value. So I don't look at that as a cost like you can always sell those in the future here. So -- but that just made the lenders happy.

Yes. Great. Fair enough. Sometimes you got to pay the piper. I get it. Rick, one question for you just on the repayment schedule because there's a thing that struck me is interesting. As I understand $1 million a quarter through the end of this year, but the big payments of $15.5 million, the $28.8 million land in 2027. And they line up seemingly almost exactly with when [ Monte ] production is guided to nearly double. Obviously, '27 is the big year for [ Mantra ] production. Was that payment schedule design around the South hit ramp? What was the thinking there? Am I just being conspiratorial on not?

No, it was more along where the original delivery of the hedges was supposed to take place. So it kind of aligns with what our payment schedule by the hedges would have been. And so which again, does sort of back -- reflect back on the original mine plan, which '27 was always the nice big year of production and low cost because this year, we're doing all the pre-stripping and as we transition from North pit to South pit. So it does line up with the expected large amount of cash flow from that extra production from the South pit. So they both seem to sort of aligned with one another. And again, that all goes back to the original mine plan from the feasibility study.

Great. And speaking of getting into more details on the south pit, you mentioned [ Mantos ] in a transitional phase right now, obviously, as mining moves over from the north pit with that higher grade campaign closing out at 2026. What does the transition actually look like on the ground? And when will investors start seeing it in the production numbers?

Yes. You should start seeing the transition took place over the whole year. We're finished mining in the north now. We're pre-stripping, doing a lot of pre-stripping in the South pit. So we'll see sulfide production increase in the next 2 quarters. And then next year, again, you're just in the sort of the best part of the ore body, if you will. So that's why 2027 has always been a low cost year because you've paid for the pre-stripping this year, and then you're in that high-grade sulfide ore. So obviously, there's -- they've been working on the mill to [ add ] oxygen into the -- more oxygen in the plant, which makes the help make the reactions go quicker when you're in that sulfide ore. So all those -- all that work is always all taking place this year, looking benefit from it next year.

Talk about the suite year 2027. Because I know you've guided at 75,000, 80,000 ounces with cash costs, like you said, way lower because we the work done this year, 1,200 to 1,300. So in every one of those ounces are now going to sell it whatever gold is doing that day, whatever Mike can make happen with the spot price. So at current prices, that's emerging in approaching USD 3,000 an ounce. How does that change what contango can do with the cash? So like how does that change your situation next year?

Yes. Obviously, we've got strong cash flows from Manh Choh and now we don't have to deliver into those $2,000 hedges. So we were exposed to the upside completely now. This year always align really well with how we plan to spend money to advance our other projects, [ Lucky Shot ], [ Johnson Drake ] and [ Kid salt ]. So we're this is just giving us more, I'd say, more comfort. Obviously, and more exposed cash flow if the gold price goes up, and as we just talked about it, the gold price goes down for whatever reason, we protected the downside. The other thing I want to mention here in terms of our overall costs, we've seen -- when the war [ in ] Iran taking place, people got nervous about the price of diesel price of oil, and what the effects are on the mining companies because this still is a big part of any [ money ] integration and especially for us with our -- the direct shipping or model and the transport costs. So I think all those are part of the reason why all the gold equities have gone down as a result of the Iran War. But now here we see gold trading at less than $70 -- or sorry, oil is trading less than $70 a barrel. And so we've had 4 months of, I'll call it artificially high oil prices as a result of the war and now are we heading into a different period. And so what our all-in sustaining costs going to be next year? Well, we'll see where all this sort of levels out, but let's say it's a little higher. I mean we're only a big increase in oil prices only results in another $100 an ounce kind of production. It's not like a big -- it's rather contained. So if we're at $1,500 all-in sustaining costs next year and you've got a $4,000 gold price, that's a pretty healthy margin. And if gold goes to [ 5 ] or higher as some people are predicting, then obviously, we're completely exposed to that. So the -- and these are pretty significant numbers. Schools goes up $1,000, it's another $15 million of free cash flow. So -- it's -- these are very meaningful for a company our size. And keep in mind, and I always remind people that keep in mind that we've only got 31 million shares outstanding. So when you talk about leverage all of these changes in prices, think about it on a per share basis.

That's great. Mike, somebody on the chat asked, I said their shareholder and they want to explain in further detail of the jump in debt. And that was actually the question I was going to ask next. So all Rick's quote and the PR emphasizes you can repay any time and you want to pay it down ahead of schedule. My question is why I was taking on debt the right tool here rather than as Rick referenced the kind of intro issuing equity or just letting the hedges run off into maturity. The kind of dollars and cents rationalization?