Contango Ore (OTC:CTGO) is executing on its strategy to locate and develop gold deposits with the potential to be processed at Kinross Gold's (NYSE:KGC) underutilized Fort Knox mill near Fairbanks, Alaska.
This includes advancing Contango’s Manh Choh Project (formerly known as the Peak Gold Project) to a producing mine. Contango holds 30% of the Peak Gold LLC 70-30 joint venture with Kinross. Contango will continue to explore joint venture lands while exploring prospective targets on its nearby 100% owned State of Alaska claim areas and its recently acquired Shamrock Project in Alaska.
Recent corporate developments:
- Acquired the 82.7 mi2 Shamrock Project 70 miles from the Fort Knox mill.
- Renamed the Peak Gold Project to the Manh Choh Project in close consultation with the local Upper Tanana Athabascan Village of Tetlin.
- Updated the Peak Gold resource to comply with new mineral and reserve reporting requirements, in advance of listing on the NYSE American exchange. (The resource reported is identical to that reported earlier.)
Plans for advancing the Manh Choh Project:
- Commencing an $18 million development program.
- Commencing permitting the Manh Choh Project in the second half of 2021.
- Targeting the completion of a Feasibility Study in late 2022.
Contango has recognized and acted upon the opportunity to process gold ore at Kinross’ underutilized Fort Knox mill. This has the potential to greatly shorten the timeline from exploration to the monetization of its gold deposits. This simplifies, de-risks, and accelerates the path to production while reducing capital costs and costs related to engineering and permitting a mill. In addition, the Contango management team is uniquely qualified to locate, advance and place gold resources within an evolving production scheme at Fort Knox.
We have a high level of confidence that the Manh Choh Project will be advanced to production to feed the “hungry” mill complex at Fort Knox. Kinross is incented to acquire ore streams to optimize and extend the life of its investment at Fort Knox. Peak Gold has budgeted $18 million of development work in 2021 at Manh Choh. This includes three drill rigs to infill the Peak Gold deposits and define resources on the margin of the deposits to upgrade the classification of Indicated and Inferred resources to the Indicated and Measured categories. In addition, they plan to drill areas between the proposed pits which have not been fully tested. The Manh Choh Project provides a significant foundation of value to investors in Contango.
We maintain our Buy rating and set our 12-month price target at $31.00 per share.
Investment Thesis
Contango Plans to Feed a “Hungry Mill” at Kinross’ Fort Knox Mine Complex
We believe that the joint venture of Kinross Gold and Contango in a 70-30 joint venture in Peak Gold places Contango in a competitive position to process ore at the “hungry” underutilized mill at the Fort Knox Mine Complex.
Kinross’ “Aspirational Plan” for the Fort Knox Mine Complex
Kinross’ “aspirational plan” is to initially transport ore from the Manh Choh Project’s Peak Gold Deposits as early as 2024. Contango is working on expanding the Peak Gold Deposits, develop its other 100% owned gold targets on State of Alaska Claims (Eagle and Hona targets) and its recently acquired Shamrock Gold Project. We believe that these other projects appear to have ample time to be developed to feed Kinross’ Fort Knox Mine Complex in 2028 and beyond.
Review of a potential construction timeline and production profile
Kinross estimates initial production from the Manh Choh Project of one million gold equivalent ounces (AuEq.) over a 4.5-year mine life at a grade of ~6 g/t AuEq. They plan to ship ore from the Manh Choh Project 250 miles to the Fort Knox mill, at a rate of 3,500 tpd. Contango forecasts its share of annual production of 65,000 AuEq. oz with a $750 AISC, including trucking and toll charges.
Kinross’ Overall Target Timelines for the Manh Choh Gold Project
Kinross estimates completion of a feasibility study in late 2021, permitting in 2022, construction in 2023 and commencing production in 2024. Construction was estimated to be ~$110 million. Upon formation of Peak Gold, LLC, Contango was funded to production with ~$30 million, and contributed ~$12 million for its share of development and operating expenses. Contango anticipated that construction would be about ~$20 to 25 million, which would be funded by debt.
The joint venture has approved a budget of $18 million (Contango’s share is ~$5.4 million) in 2021. This is to fund in-fill and condemnation drilling plus additional hydrology, geotechnical, metallurgical work and engineering and environmental studies for the feasibility study and permitting.
The Shamrock Project
The 100% owned, ~82.7 mi2 Shamrock Project is located in central Alaska. The project is sandwiched between the Trans-Alaska Pipeline and the Alaska Highway, about 70 miles (113 km) from Fairbanks, Alaska. The project has excellent access through a network of designated roads to maintain the Trans-Alaska Pipeline. In addition, a high-voltage power line traverses the southern property that provides power to the operating Pogo gold mine.
The project is in the Richardson Mining District. Contango reports that placer gold was discovered in the district in 1905 and intermittently mined through 2010. It has been estimated that about 120,000 oz of gold have been mined from the district. The district is unglaciated, characterized by gentle sloping hills and broad aluviam-filled valleys overlain by windblown loess ranging from a few meters to 50 meters thick.
Contango staked the Shamrock Project after Coeur Mining (NYSE:CDE) dropped the project in late 2020. Coeur acquired the Shamrock Project as part of its acquisition of the Sterling Gold Project in Nevada, though they considered it to be a non-core asset. Contango acquired all of Coeur’s geochemical sampling, drill data and geophysical surveys on the project. Contango was attracted to the project due to the potential to replicate a “Pogo-type” gold deposit.
We believe that the Shamrock Project is a good fit for Contango’s business strategy to develop gold assets in close proximity to the Fort Knox Mine Complex. The project is large and exhibits a variety of styles of mineralization with past gold production. As it is situated on a major transportation corridor with a network of roads and trails established to maintain the Trans Alaska Pipeline, the project has good infrastructure and access. As the project has only begun to be explored comprehensively with modern mining methods, we expect that the Shamrock Project has the potential to be part of Contango’s plan to source high-grade gold ore for Kinross’ Fort Knox Mill.
Our Valuation and Assessment
Peak Gold deposits appears to be on track to commence production in 2024. We estimate total annual production of about 223,000 AuEq. (~66,700 AuEq. to Contango) ounces annually over the first four years and about 108,000 AuEq. (~33,300 AuEq. to Contango) ounces in the fifth year. The joint venture estimates a $750 AISC including mining, transportation and toll charges. We estimate Contango currently has about 6.15 million outstanding shares.
Our valuation assessment assumes Contango’s share of production of ~66,700 AuEq. over the first four years and ~33,300 AuEq. in year five. We estimated a NPV5% with production commencing in 2024, assuming a $750 AISC, a $1,750 gold price, and calculated a pre-tax value of $188.8 million, at ~$31.00 per share. We also considered the present value of an annual estimated cash flow at a multiple of 5x and calculated a pre-tax value of $254.9 million (net their 30% share of capital costs), at ~$41 per share.
Comments qualifying our valuation assessment
We are confident that the Peak Gold deposits may reach production in 2024. Most importantly, we view the development of the Manh Choh Project and other projects and deposits may be essential for Kinross’ Fort Knox mill to sustain or optimize operations. This is also important to the Fairbanks-North Star borough and the State of Alaska. Also, we believe that with the change in administration in the United States, projects on patented claims or private land will achieve a premium relative to projects on unpatented claims or federal leased land. In addition, there is a high probability of loose monetary policy and fiscal stimulation through 2024, potentially leading to higher gold and silver prices. We also expect a higher level of interest in Contango as the company’s shares trade on an established exchange.
The addition of the Shamrock Project provides support for our thesis and belief that our estimate may be conservative. The development of Contango’s other projects, as the Manh Choh Project advances to construction, increases the potential that cash flow to Contango may persist long after the Peak Gold deposit resources are mined and processed. This may provide investors confidence that Contango should be rerated utilizing comparable earning multiples by taking into account a longer cash flow profile. We maintain our Buy rating and 12-month price target of $31 per share.