Contango Silver & Gold Inc. (CTGO) FY 2023 MD&A

Item 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and the related notes and other information included elsewhere in this report.

Overview

The Company was formed on September 1, 2010 as a Delaware corporation. The Company engages in exploration for gold, silver, and copper ores in Alaska. The Company’s largest asset is a 30.0% membership interest in Peak Gold, LLC, which leases approximately 675,000 acres from the Tetlin Tribal Council and owns approximately 13,000 State of Alaska mining claims for exploration and development through its wholly-owned subsidiary, CORE Alaska, LLC. The Company’s wholly-owned subsidiary, Contango Minerals Alaska, LLC, owns 100% interest in the mineral rights to approximately 154,000 acres of State of Alaska mining claims located north and northwest of the Manh Choh Project.  The Company is actively working to acquire additional properties in Alaska for exploration.  The acquisitions may include leases or similar rights from Alaska Native corporations or may include filing Federal or State of Alaska mining claims by staking claims for exploration.

Neither the Company nor the Peak Gold JV has commenced producing commercially marketable minerals. To date, neither the Company nor the Peak Gold JV has generated any revenue from mineral sales or operations. Neither the Company nor the Peak Gold JV has any recurring source of revenue. The Company’s ability to continue as a going concern is dependent on the Company’s ability to raise capital to fund future exploration and working capital requirements. In the future, the Company and the Peak Gold JV may generate revenue from a combination of mineral sales and other payments resulting from any commercially recoverable minerals from the Manh Choh Project. The Company does not expect the Peak Gold JV to generate revenue from mineral sales prior to mid-2024. If the Company’s properties or the Manh Choh Project fails to contain any proven reserves, the Company’s ability to generate future revenue, and the Company’s results of operations and financial position, would be materially adversely affected. Other potential sources of cash, or relief of demand for cash, include external debt, the sale of shares of the Company’s stock, joint ventures, or alternative methods such as mergers or sale of our assets. No assurances can be given, however, that the Company will be able to obtain any of these potential sources of cash. The Company will need to generate significant revenues to achieve profitability and the Company may never do so.

Claim Rentals Expense.  Claim rental expense primarily consists of State of Alaska rental payments and annual labor payments. We recognized claim rental expense of $0.5 million for the year ended June 30, 2023, compared to $0.6 million for the year ended June 30, 2022. Claim rental expense decreased for the year ended December 31, 2023 because the Company relinquished approximately 69,000 acres located on the Eagle/Hona prospect in November 2022.

Exploration Expense.  Exploration expense for the year ended June 30, 2023 was $7.9 million compared to $8.5 million for the year ended June 30, 2022.  Prior year exploration expense relates to spending on our 100% owned state claims on the Eagle/Hona and Shamrock Property, as well as exploration activity on our Lucky Shot Property.  There was no exploration program on the Company's 100% owned state claims this fiscal year, and only six months worth of exploration work related to the Lucky Shot property.  The Lucky Shot property was on care and maintenance from January 2023 through June 2023.

General and Administrative Expense. General and administrative expense for the fiscal year ended June 30, 2023 and 2022 were $9.1 and $10.3 million, respectively. The Company’s general and administrative expense primarily relates to legal fees, payroll and benefit related fees, and stock-based compensation expense.  The current year decrease in general and administrative expenses primarily relates to the reduction in stock-based compensation expense.   The stock-based compensation expense for the year ended June 30, 2023 was approximately $2.9 million, compared to $4.0 million for the year ended June 30, 2022.  The Company also did not pay bonuses during the year ended June 30, 2023, compared to $0.5 million in bonuses paid during the year ended June 30, 2022.

Loss from Equity Investment in the Peak Gold JV.  The loss from the Company’s equity investment in the Peak Gold JV for the fiscal year ended June 30, 2023 and 2022 was $21.1 million and $3.7 million, respectively.  Pursuant to the terms of the A&R JV LLCA, the Company and KG Mining are required to jointly fund the joint venture operations in proportion to their membership interests in the Peak Gold JV to avoid dilution.  The Company invested $21.1 million in the Peak Gold JV during the year ended June 30, 2023, and $3.7 million during the year ended June 30, 2022.   The portion of the cumulative loss that exceeds the Company’s cumulative investment will be suspended and recognized against earnings, if any, from the Company’s investment in the Peak Gold JV in future periods. The suspended losses for the period from inception to June 30, 2023 are $4.3 million.

Interest Expense.  On May 17, 2023, the Company entered into a credit and guarantee agreement for a senior secured loan facility for up to $70 million.  On April 26, 2022, the Company closed on a $20,000,000 unsecured convertible debenture to QRC.  In connection with the closing of the Credit Agreement, the Company entered into an amendment to the convertible debenture that raised the stated interest rate from 8% to 9%.  The debenture currently bears interest at 9% per annum, payable quarterly, with 7% paid in cash and 2% paid in shares of common stock of the Company (See Note 15 to our Consolidated Financial Statements for discussion on both debt arrangements). The current year interest expense of $2.0 million includes a full year of interest expense related to the convertible debenture with QRC, and interest expense related to the Company's $10 million draw-down on the senior secured loan facility.  Prior year interest expense of $330,047 primarily includes the accrued interest related to the convertible debenture for approximately one quarter.

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Liquidity and Capital Resources

As of June 30, 2023, the Company had approximately $11.9 million of cash.

The Company’s primary cash requirements have been for general and administrative expenses, capital calls from the Peak Gold JV for the Manh Choh Property, and exploration expenditures on the Lucky Shot Property.  The Company’s sources of cash have been from common stock offerings, the issuance of the $20 million unsecured convertible debenture to QRC, and the senior secured loan facility for up to $70 million.

The Joint Venture Management Committee has proposed a significant budget to complete and start the operations of the Manh Choh mine. Specifically, the Management Committee has approved a budget for 2023, with cash calls totaling approximately $180 million, of which the Company’s share is approximately $54 million.  As of the date of this filing, the Company has funded $36.5 million of the approved 2023 budget.  This budget primarily relates to completion of the Manh Choh camp, mine access road construction, earthworks, general construction and installation, pre-production stripping, etc.  The Company will be required to make capital contributions of 30% of the budgeted amounts when cash calls are received from the Peak Gold JV or face the possible dilution of its interest in the Peak Gold JV.

On August 2, 2023, CORE Alaska, LLC (“CORE Alaska”), a subsidiary of Contango ORE, Inc. (the “Company”), pursuant to an ISDA Master Agreement entered into with ING Capital Markets LLC (the “ING ISDA Master Agreement”) and an ISDA Master Agreement entered into with Macquarie Bank Limited (the “Macquarie ISDA Master Agreement”), in accordance with its obligations under that certain Credit and Guarantee Agreement, by and among the Company, its subsidiaries, ING Capital LLC (“ING”) and Macquarie Bank Limited (“Macquarie”), entered into a series of hedging agreements with ING and Macquarie for the sale of an aggregate of 124,600 ounces of gold at a weighted average price of $2,025 per ounce. The hedge agreements have delivery obligations beginning in July 2024 and ending in December 2026, and represent approximately 45% of the Company’s interest in the projected production from the Manh Choh mine over the current anticipated life of the mine.

On July 24, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC and Freedom Capital Markets (collectively, the “Underwriters”), relating to an underwritten public offering (the “Underwritten Offering”) of 1,600,000 shares (the “Underwritten Shares”) of the Company’s common stock. All of the Underwritten Shares are being sold by the Company. The offering price of the Underwritten Shares was $19.00 per share, and the Underwriters agreed to purchase the Underwritten Shares from the Company pursuant to the Underwriting Agreement at a price of $17.77 per share (the “Purchase Price”), which includes a 6.5% Underwriters discount.  The net proceeds from the Underwritten Offering were $28.3 million after deducting underwriting discounts and commissions and offering expenses.

On June 8, 2023, the Company entered into a Controlled Equity OfferingSM Sales Agreement with Cantor Fitzgerald & Co., pursuant to which the Company may offer and sell from time to time up to $40,000,000 of shares of the Company’s common stock through the Agent (the “ATM Offering”).  Sales of the common stock, pursuant to the Sales Agreement, may be made in sales deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, including sales made directly on or through the New York Stock Exchange or on any other existing trading market for the Company’s common stock. The Company has no obligation to sell any of the common stock under the Sales Agreement and may at any time suspend or terminate the offering of its common stock pursuant to the Sales Agreement upon notice and subject to other conditions. The Agent will act as sales agent and will use commercially reasonable efforts to sell on the Company’s behalf all of the common stock requested to be sold by the Company, consistent with the Agent’s normal trading and sales practices, on mutually agreed terms between the Agent and the Company.  The Company pays the Agent a commission of 2.75% of the gross proceeds of the Shares sold through it under the Sales Agreement.  As of June 30, 2023 the Company had sold a total of 158,461 shares of common stock through the ATM Offering for net proceeds of approximately $4.1 million.

On May 17, 2023, the Company entered into the Credit Agreement with ING Capital LLC and Macquarie Bank Limited. The Credit Agreement provides for a senior secured loan facility of up to US$70 million, of which $65 million is committed in the form of a term loan facility and $5 million is uncommitted in the form of a liquidity facility. The Company drew $10 million on the term loan facility at the initial closing, with future draws subject to certain additional conditions being met.  The Company entered into amendments to the Credit Agreement extending the time for the Company to satisfy the remaining conditions to a second borrowing on the term loan facility, and satisfied such remaining conditions as of the date of this filing.

On December 23, 2022, the Company completed the issuance and sale of an aggregate of 283,500 shares of the Company’s common stock, for $20.00 per share, and warrants  entitling each purchaser to purchase shares of common stock for $25.00 per share (the “December 2022 Warrants”) in a private placement  to certain accredited investors. Net proceeds from the December 2022 Private Placement totaled approximately $5.6 million. (See Note 7 – Stockholder’s Equity for further discussion). On January 19, 2023, the Company completed the issuance and sale of an aggregate of 117,500 shares, for $20.00 per share, and warrants  entitling each purchaser to purchase shares of common stock for $25.00 per share (the “January 2023 Warrants”) in a private placement  to certain accredited investors. Net proceeds from the January 2023 Private Placement totaled approximately $2.3 million.  In May 2023, the Company offered the holders of its December 2022 Warrants and January 2023 Warrants (with an original exercise price of $25.00) the opportunity to exercise those warrants at the reduced exercise price of $22.00 and receive shares of common stock, par value $0.01 per share of Contango ORE, Inc. by paying the reduced exercise price in cash and surrendering the original warrants on or before May 9, 2023.  As of May 10, 2023, a total of 313,000 December 2022 Warrants and January 2023 Warrants have been exercised resulting in total cash to the Company of $6.9 million and the issuance of 313,000 shares of Company common stock upon such exercise. Such shares of common stock were issued in reliance on an exemption from registration under the Securities Act, pursuant to Section 4(a)(2) thereof. The bases for the availability of this exemption include the facts that the issuance was a private transaction which did not involve a public offering and the shares were offered and sold to a limited number of purchasers.  In connection with the accelerated exercise of the December 2022 Warrants and January 2023 Warrants, the Company agreed to issue new warrants to purchase shares of Company common stock at $30.00 per share to the exercising holders in the amount of the respective December 2022 Warrants and January 2023 Warrants that were exercised by such holders.  As a result, the Company has issued new warrants to purchase 313,000 shares of Company common stock.

On April 26, 2022, the Company closed on a $20,000,000 unsecured convertible debenture to QRC. The debenture was purchased at par.

The Company’s cash needs going forward will primarily relate to capital calls from the Peak Gold JV, exploration of the Contango Properties,  and general and administrative expenses of the Company.  If a large budget is undertaken, and no additional financing is obtained, the Company can elect not to fund its portion of the approved budget, in which case the Company would maintain sufficient liquidity to meet its working capital requirements for the next twelve months; however, its membership interest in the Peak Gold JV would be diluted. If the Company’s interest in the Peak Gold JV is diluted, the Company may not be able to fully realize its investment in the Peak Gold JV.  Also, if no additional financing is obtained, the Company may not be able to fully realize its investment in the Contango Properties.  The Company has limited financial resources and the ability of the Company to arrange additional financing in the future will depend, in part, on the prevailing capital market conditions, the exploration results achieved at the Peak Gold JV Property, as well as the market price of metals. The Company cannot be certain that financing will be available to the Company on acceptable terms, if at all.

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Further financing by the Company may include issuances of equity, instruments convertible into equity (such as warrants) or various forms of debt.  The Company has issued common stock and other instruments convertible into equity in the past and cannot predict the size or price of any future issuances of common stock or other instruments convertible into equity, and the effect, if any, that such future issuances and sales will have on the market price of the Company’s securities. Any additional issuances of common stock or securities convertible into, or exercisable or exchangeable for, common stock may ultimately result in dilution to the holders of common stock, dilution in any future earnings per share of the Company and may have a material adverse effect upon the market price of the common stock of the Company.

Off-Balance Sheet Arrangements

None.

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company has identified below the critical accounting estimate that is of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management.  Actual results may differ from these estimates under different assumptions or conditions.

Business Combinations.  In determining whether an acquisition should be accounted for as a business combination or asset acquisition, the Company first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the single identifiable asset or the group of similar assets is not deemed to be a business, and is instead deemed to be an asset. If this is not the case, the Company then further evaluates whether the single identifiable asset or group of similar identifiable assets and activities includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the single identifiable asset or group of similar identifiable assets and activities is a business.  The Company accounts for business combinations using the acquisition method of accounting. Application of this method of accounting requires that (i) identifiable assets acquired (including identifiable intangible assets) and liabilities assumed generally be measured and recognized at fair value as of the acquisition date and (ii) the excess of the purchase price over the net fair value of identifiable assets acquired and liabilities assumed be recognized as goodwill, which is not amortized for accounting purposes but is subject to testing for impairment at least annually.  The Company measures and recognizes asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets, which includes transaction costs. Goodwill is not recognized in asset acquisitions. Contingent consideration in asset acquisitions payable in the form of cash is recognized when payment becomes probable and reasonably estimable, unless the contingent consideration meets the definition of a derivative, in which case the amount becomes part of the asset acquisition cost when acquired. Contingent consideration payable in the form of a fixed number of the Company’s own shares is measured at fair value as of the acquisition date and recognized when the issuance of the shares becomes probable. Upon recognition of the contingent consideration payment, the amount is included in the cost of the acquired asset or group of assets. The Company carries a liability for contingent consideration related to the acquisition of AGT.  In estimating the fair value of the contingent consideration at each reporting period, the Company makes estimates regarding the probability and timing of reaching the milestones associated with payment of the consideration, as well as the weighted average cost of capital used to discount the liability to its present value as of the balance sheet date.  The estimate of the fair value of the contingent consideration is sensitive to changes in any one of these estimates.

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Recently Issued Accounting Pronouncements. See Part II. Item 8. “Financial Statements and Supplementary Data - Note 4 - Summary of Significant Accounting Policies” of this Annual Report on Form 10-K.