| 2019 | 2020 | ||||||
| Price: | 19.75 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 6 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 124 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 112 | TEV/EBIT | 0 | 0 | |||
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With few apologies given for the lack of liquidity or the obligatory caveat that this is only suitable for one's p.a; we're believers that value comes in many shapes and sizes and that while there are optical and practical reasons that some firms won't pick a dollar bill off of the sidewalk, we are happy to stoop over when we see something promising.
Thesis
Two years ago we submitted the idea and outlined the set-up that we were attracted to. It was largely a three-legged stool: pattern recognition based on tax loss selling and typical spin dynamics, only amplified, the character and bona fides of the individuals involved, and calls we had with mining engineers who were enthusiastic about the drilling results that were known at the time. This was never a forever asset as Contango was capital contrained and their jv partner, Royal Gold, is an asset-lite streaming business for whom this development project was merely a foray as they saw the inherent optionality embedded in the prospect.
Where are we now?
In the ensuing time period the company has gotten a better look at the minerality in the ground, has commisioned and released a PEA, and, notably, has hired bankers to sell the project. To boot, in April of last year, Royal Gold, enthused by the project and hoping to wield more leverage, acquired a 13% stake in the common stock of Contango at $26/share. Below please find the salient releases of the above events.
https://www.businesswire.com/news/home/20181114005583/en/Contango-ORE-Announces-Annual-Meeting-Stockholders-Results
In response to the PEA that was released, it is our understanding that the company received inbound interest from multiple parties which led to the company hiring Petrie Partners and Cantor Fitzgerald to advise on strategic alternatives. However, Royal Gold at that time hadn't made its intentions known until they filed an amended 13D/A on January 22 with the following stated purpose.
Royal Gold, Inc. beneficially owns or may be deemed to beneficially own the shares of Common Stock reported on this Schedule 13D. Royal Gold, Inc. beneficially owns the shares of Common Stock for strategic investment purposes. Royal Alaska, LLC, a wholly-owned subsidiary of Royal Gold, Inc. and CORE Alaska, LLC, a wholly-owned subsidiary of the Issuer, are the members of Peak Gold, LLC, a joint venture for development of a mining project in Alaska (the “joint venture”). CORE Alaska, LLC holds a 60% membership interest and Royal Alaska, LLC holds a 40% membership interest in the joint venture. Under the operating agreement for the joint venture, Royal Alaska, LLC serves as the manager of the joint venture and manages, directs, and controls operations of the joint venture. Under the operating agreement for the joint venture, Royal Alaska, LLC has the option to require CORE Alaska, LLC to sell up to 20% of its membership interest in respect of all or certain of the assets of the joint venture in a sale by Royal Alaska, LLC of its entire 40% membership interest in respect of all or certain assets of the joint venture (for a sale of up to 60% of the membership interests in respect of all or certain assets of the joint venture) to a bona fide third party purchaser.
On November 14, 2018, the Issuer publicly announced that it had engaged investment banking firms to advise its board of directors on strategic alternatives.
In connection with the Issuer’s announcement, Royal Gold, Inc. is currently considering all alternatives with respect to its own investment in the Common Stock and its indirect investment, through Royal Alaska, LLC, in the joint venture.
In addition, Royal Gold, Inc. has engaged its own financial adviser to assist in conducting a process to identify the value of and consider a sale of its investment in the Common Stock and/or all or a portion of its indirect interest (separately or together with a sale of the Issuer’s indirect interest) in respect of all or certain of the assets of the joint venture.
Royal Gold, Inc. (1) has engaged and might in the future engage in discussions with the Issuer’s management, members of its board of directors, other stockholders of the Issuer, investment banking firms (both those engaged by the Issuer and other investment banking firms) and other relevant parties, (2) has acquired and in the future might acquire additional securities of the Issuer through open market purchases, private purchases or otherwise, (3) might in the future dispose of all or a portion of its interest in the Issuer and/or its indirect interest in all or certain of the assets of the joint venture if conditions warrant, and exercise its option (as described above) to require CORE Alaska, LLC to sell up to 20% of the aggregate membership interest in respect of all or certain of the assets of the joint venture, or (4) might in the future take any other available course of action, which may involve one or more
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CUSIP No. 21077F100 |
13D |
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types of transactions or have one or more of the results specified in clauses (a) through (j) of Item 4 of Schedule 13D, in each case to the extent deemed advisable by Royal Gold, Inc.
Except as described elsewhere in this Schedule 13D, Royal Gold, Inc. does not currently have any specific plans or proposals that relate to or would result in any of the actions or events specified in clauses (a) through (j) of Item 4 of Schedule 13D. Royal Gold, Inc. reserves the right to acquire, or dispose of, the securities of the Issuer, to close the transaction described in Item 3 of this Schedule 13D, and to formulate other purposes, plans or proposals regarding the Issuer, its assets, or its securities or take other action Royal Gold, Inc. deems advisable.
As such, Contango followed suit by announcing that "CORE is particularly interested in a sale of CORE stock in exchange for cash and/or liquid publicly traded shares."
The PEA resulted in a $26/NAV for CTGO's 60% stake given the inputs at the time. Since then, they have drilled further holes and are working towards an assessment of a potential porphyry deposit (think large very large area of minerality) at the Northern boundary of the Peak project. And, recall, this is the known known. They haven't even tapped the remaining 800k acres of land which, probabilistically, holds considerable stores of mineral content.
The question now becomes, will anybody express interest in acquiring the company and/or will the ultimate price that they can garner be in excess of the current market quote. Given our naivete in the mining space we have based our opinion largely on the input of journalists, engineers, and peer companies. I think a decent summary is that this is a rare property that checks many of the boxes that an acquirer would want to see: shallow pit mine, near infrastruture, with access to a workforce, in a jurisdiction where there's the rule of law. Those, combined with the PEA, lead us to believe that $26 would be a starting point in a discussion and that the negotiating challenge surrounds the remaining acreage. One way or another, I believe that shareholders will get paid for the optionality. Either through the embedded value being paid in the upfront deal consideration or through a spinoff of the acreage similar to how Contango was formed at the outset. The latter would allow us another bite at the apple and, as mentioned in our prior writeup, was a strategy that the CEO espoused years ago.
Recent Industry Consolidation
Increased leverage and a drop in the price of the metal over the past few years has led producers to cut back on their growth capex dollars. As such, as balance sheets have been repaired (and the metal has rebounded somewhat), many larger players have been buying growth of late. It's undoubtedly a fool's errand to predict who might end up acquiring the company but our understanding is that there should be multiple bidders. Agnico Eagle has an Alaska presence and has focused their development on expanding their current two properties in the state. We have also heard Kinross mentioned as well as a slew of mid-tier producers. Also, it appears that Australian miners are making a push into the territory.
Summary
While we are by no means event driven investors we are heartened by the presence of a firm catalyst in place with, hopefully, a determinate time frame. We have two willing sellers in Royal Gold and Contango and purportedly multiple interested parties. It is certainly possible that a mutually agreeable price can't be reached in which case we're left with a hard, non-cashflowing asset and not much else. That Royal Gold paid $26 for a meaningful block of stock adds some comfort to our assessment that intrinsic value resides north of the current stock price.
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