Contango Ore is a mineral exploration company that spun off from Contango Oil and Gas (MCF). Brad Juneau, MCF’s long-time oil & gas exploration partner, is the CEO. Avalon Development Corporation provides geological services for the company. Contango Ore has interesting drill results though it’s too early to tell if it has an economic deposit.
In 2012, the company had very good drill results on some of its holes in the “Peak Zone” of the “Chief Danny” prospect.
The results from Holes 1216-1219 contained high gold values over substantial widths, with the best section grading an average 192 feet [58.5 meters] grading 11.996 ppm gold [11.996 grams per metric ton], 9.1 ppm silver and 0.243% copper in hole 1218.
While the Peak zone as we currently know it is not big enough to be considered economically viable in our view, if our planned 2013 drilling campaigns are successful in expanding the Peak zone and can identify additional resources on one or more of the prospects we have identified, CORE will have reached a stage where one or more areas of the Tetlin project have become economically attractive. Our 2013 drilling program will include further delineation and expansion of the Peak Zone, with a goal to define the total productive area of the discovery, along with the testing of the other prospects referenced above.
I’ll do a quick back-of-the-envelope calculation to illustrate what the project’s economics might be.
Assume that the deposit measures 500m along strike, 200m along dip, and has a true width of 40m. Arbitrarily assume specific gravity of 2.2 and a grade of 2 grams/ton. That’s 621k ounces of gold. If each ounce has a NPV of $200, the deposit has a NPV of $124M (versus a market cap of $32M). Of course, this figure is likely completely wrong. Most gold projects turn out to be unviable, with a tiny handful making almost all of the industry’s profit. There is a very small chance that the deposit will turn out to be a lot larger than originally anticipated and that it is worth a lot more than $124M. There is a very high chance that the deposit isn’t economic at all.
If the company reports many drill results with less than 1gpt gold (or gold equivalent), then it is likely that the deposit is uneconomic and it would make sense to sell these shares.
Other economic issues
There shouldn’t be any First Nations issues as the company secured rights from the First Nations community (Tetlin) that owns the land. As well, Chief Danny (Tetlin Village’s chief) works as a consultant for the company.
According to a company presentation, road access to Tetlin Village is via an all-season 20 mile gravel road from Alaska Highway east of Tok (Tetlin Road). A minor concern is access to power. A commercial mine would require upgrades to the power infrastructure in the area.
By far the biggest concern is the size of the deposit. The other issues shouldn’t be a problem. If the project is marginal than metallurgical issues will matter.
Brad Juneau and the late Ken Peak operated Contango Oil & Gas with a very high level of integrity and impressive shareholder returns. I like the company that Contango Oil & Gas used to be and believe that Juneau will do a good job at managing Contango Ore. While the company has to be promotional because it needs to raise capital, it is not overly promotional and doesn’t try to mislead investors like your typical junior exploration trash. Their website for example is honest about the project being uneconomic. This is one of the better management teams in the junior exploration space.
I don’t really know if this deposit is economic. I do not think that there is a margin of safety here. When the company announces future drill results or a preliminary feasibility study, it will be worth revisiting.
*Disclosure: Long a whopping 30 shares. This is a meaningless position for me but this is a stock that I will watch.