Executive Summary / Key Takeaways

• Contango ORE has successfully transitioned its 30% owned Manh Choh project into production, generating significant cash flow that is now primarily directed towards aggressive debt reduction and fulfilling gold hedge obligations.
• The company's strategic focus on the Direct Ship Ore (DSO) model, exemplified by Manh Choh and planned for Johnson Tract, offers distinct advantages in capital efficiency and permitting timelines compared to traditional mining and milling operations.
• Strong operational performance at Manh Choh in Q1 2025 exceeded production expectations with favorable initial cash costs, contributing to substantial cash distributions from the joint venture.
• Contango is actively advancing its high-potential Johnson Tract exploration project, with a recent Initial Assessment highlighting robust economics and a rapid payback period utilizing the DSO approach.
• While facing risks including pending legal challenges related to ore transport and the impact of gold price volatility on derivative liabilities, the company is positioned to become largely debt-free and unhedged in the coming years, potentially unlocking significant future free cash flow.

Contango ORE, Inc. (NYSE:CTGO) is an Alaskan-focused gold exploration and production company that has recently undergone a significant transformation. Formed in 2010, the company's journey has been marked by strategic partnerships and acquisitions aimed at consolidating a portfolio of promising gold and associated mineral projects in Alaska. A pivotal moment arrived with the establishment of the Peak Gold Joint Venture (JV) in 2015, later restructured in 2020 to bring in Kinross Gold Corporation (KGC) as the majority 70% partner and operator of the flagship Manh Choh project. This collaboration with a large, experienced gold producer provided the operational expertise and capital necessary to advance Manh Choh towards production. More recently, in 2024, Contango expanded its footprint and growth pipeline through the acquisitions of HighGold Mining (HGMCF) (adding the high-grade Johnson Tract project) and Avidian Gold Alaska (AVGDF), further solidifying its position in key Alaskan mining districts.

At the heart of Contango's strategy, particularly for its key assets like Manh Choh and Johnson Tract, is the Direct Ship Ore (DSO) model. This approach bypasses the need to build a costly and complex mill and tailings facility at the mine site. Instead, high-grade ore is mined, potentially crushed, and then transported to an existing processing facility. The tangible benefits of this model are significant and quantifiable. It results in a substantially smaller environmental footprint at the mine site, dramatically reduces initial capital expenditures (avoiding the hundreds of millions required for a new mill), and accelerates the permitting timeline. As demonstrated at Manh Choh, where state and federal permits were secured within approximately 1.5 years, the DSO model offers a distinct advantage in bringing projects online faster compared to the typical five-year-plus permitting process for traditional mill-based operations in North America. This capital efficiency and speed are critical differentiators for a junior company like Contango, mitigating funding risks and shortening the path to potential cash flow. While the company is open to exploring various processing solutions for future projects, including potential mill acquisitions or direct shipping to Asia, the DSO model remains a core strategic pillar, leveraging existing infrastructure and minimizing upfront investment.

Production Success Fuels Financial Transformation

The most significant recent development for Contango has been the successful transition of the Manh Choh project into the production phase. The JV commenced processing ore in July 2024 and poured its first gold bar shortly thereafter. This marked a fundamental shift for Contango, moving from a purely exploration-focused entity with negative operating results to one benefiting from the profitability of a producing asset.

For the three months ended March 31, 2025 (Q1 2025), Contango reported $19.3 million in income from operations, a stark contrast to the $2.9 million loss in Q1 2024. This dramatic improvement was directly driven by the $22.32 million in equity income recognized from the Peak Gold JV's operations, compared to a negligible loss in the prior year period.

The Manh Choh project exceeded production expectations in Q1 2025, recovering approximately 65,000 ounces of gold (19,500 ounces net to Contango), which was roughly 30% more than planned. This strong performance contributed to substantial cash distributions from the JV to Contango, totaling $24.0 million in Q1 2025 and an additional $9.0 million subsequent to quarter-end. Since production commenced in July 2024, Contango has received $73.5 million in distributions.

Operational metrics at Manh Choh have also been favorable. For Q1 2025, the project reported a Cash Cost on a By-product Basis of $1,334 per ounce sold and an All-In Sustaining Cost (AISC) of $1,374 per ounce sold. While management maintains its full-year 2025 AISC guidance at a higher $1,625 per ounce, this is attributed to anticipated increases in sustaining capital later in the year (for ore haul route equipment) and the inclusion of a $5.7 million exploration drill program within the JV budget. The lower Q1 costs reflect operational improvements implemented since the initial start-up phase, such as better water management and efficiency in handling ore moisture and ice/snow on trucks.

Strengthening the Balance Sheet: Debt and Hedges

Contango's improved financial position is being strategically deployed to strengthen its balance sheet. As of March 31, 2025, the company held $34.98 million in cash. Despite a working capital deficit of $53.90 million, management is confident in its liquidity for the next twelve months, primarily relying on expected future cash distributions from the Peak Gold JV.

A key focus is the reduction of outstanding debt. The company has a Secured Credit Facility and a Convertible Debenture. Significant principal payments have been made on the Secured Facility, including $13.8 million in January 2025 and another $8.2 million subsequent to quarter-end, bringing the balance down to approximately $30 million. The Facility balance is projected to be reduced further to around $15 million by the end of 2025. An amendment to the Secured Facility in February 2025 deferred $10.6 million of principal and 15,000 hedged ounces into the first half of 2027, extending the maturity date to June 30, 2027. This adjustment was made to better align the repayment schedule with the JV's extended ore haul plan.

Contango also has gold hedge contracts in place, totaling 86,739 ounces as of March 31, 2025, with a weighted average price of $2,009 per ounce. These hedges, required as part of the debt financing, represent approximately 42% of the company's interest in projected Manh Choh production through June 2027. While providing revenue certainty for debt repayment, rising gold prices result in significant unrealized losses on these contracts, impacting the reported net loss (a $40.48 million unrealized loss in Q1 2025). Management's strategy is to continue delivering into these hedges, aiming to cut the remaining volume in half by the end of 2025 (to around 43,000 ounces). The goal is to become largely debt-free and unhedged by the end of 2026, with the amended Facility providing flexibility into 2027. This disciplined approach, including the use of "Carry Trades" for efficient cash management related to hedge settlements, is aimed at maximizing future free cash flow once these obligations are met.

Growth Pipeline: Johnson Tract and Exploration

Beyond Manh Choh, Contango holds a portfolio of exploration properties in Alaska, with the Johnson Tract project standing out as the primary growth driver. Acquired through the HighGold transaction, Johnson Tract is a high-grade gold-equivalent project located near tidewater, making it well-suited for the DSO model.

A recently completed Initial Assessment (IA) for Johnson Tract highlights its robust potential. Based on a seven-year life of mine underground operation utilizing the DSO approach, the IA projects a pre-tax NPV(5%) of $359 million and a pre-tax IRR of 37.4%. Post-tax, these figures are $224.5 million and 30.2%, respectively. The IA estimates initial capital costs of $213.6 million and sustaining capital of $61.3 million, with an estimated AISC of $860 per gold equivalent ounce sold and a non-discounted payback period of just 1.3 years. These metrics underscore the project's attractive economics, particularly the low projected operating costs and rapid capital return.

The next steps for Johnson Tract involve advancing the permitting process. This year's focus is on permitting the access road to the mine site from the coast and a barge landing facility. Permitting the underground exploration drift is expected to take about a year for the state permit. Formal permitting for the access road and barge landing is planned for next year after gathering necessary information this summer. While the Lucky Shot property remains in care and maintenance, management is open to strategic discussions regarding processing solutions for both Johnson Tract and Lucky Shot, potentially including finding a partner or acquiring a mill.

Competitive Positioning

Contango operates within the competitive landscape of gold and associated mineral exploration and production, primarily focused on Alaska and the broader North American market. Key competitors include companies like Vista Gold (VGZ), Platinum Group Metals (PLG), TRX Gold (TRX), Caledonia Mining (CMCL), and Hycroft Mining (HYMC).

Contango's competitive positioning is significantly shaped by its strategic focus on high-grade deposits and the DSO model. This approach provides a distinct advantage in capital efficiency and speed to market compared to rivals pursuing traditional mill-based developments (like VGZ or potentially HYMC's restart). The Johnson Tract IA's projected AISC of $860/GEO is notably competitive, suggesting a potential cost advantage over some peers, particularly those with higher operating costs or complex processing requirements. While companies like CMCL demonstrate strong current production and profitability, Contango's strategy aims to leverage its high-grade assets and efficient development model to achieve superior margins and cash flow generation once its projects are fully online and unburdened by debt and hedges.

Contango's U.S.-based assets offer a lower geopolitical risk profile compared to competitors operating in certain international jurisdictions (like TRX or CMCL). However, as a junior producer/developer, Contango currently operates at a smaller scale than established producers, which can sometimes translate to higher per-unit costs in certain areas compared to larger, more efficient operations. The reliance on a joint venture partner (Kinross) for Manh Choh operations also introduces a dynamic where Contango does not have full operational control, although the partnership with an experienced major is a strategic strength.

The company's competitive moat is built on its access to high-potential Alaskan properties and its demonstrated ability to execute the capital-light DSO model. The successful transition at Manh Choh validates this approach and provides the financial foundation to advance the promising Johnson Tract project.

Risks and Challenges

Despite the positive momentum, Contango faces notable risks. The most immediate relate to the Manh Choh ore haul route. While a lawsuit by the Committee for Safe Communities against the state DOT was dismissed, a separate lawsuit filed by the Village of Dot Lake against the U.S. Army Corps of Engineers regarding a wetlands permit remains pending. Although the Peak Gold JV is not a direct defendant, the outcome of this litigation could potentially impact operations. Current bridge weight restrictions also remain in place, although planned updates are scheduled for 2026.

The company's significant derivative liability, while intended to secure debt financing, exposes it to substantial unrealized losses when gold prices rise, impacting reported earnings. While management is actively delivering into these hedges, they represent a cap on upside participation in the current high gold price environment until they are fully delivered.

Reliance on cash distributions from the Peak Gold JV is critical for Contango's liquidity and debt reduction strategy. Any unforeseen operational issues at Manh Choh or changes in JV distribution policies could impact Contango's ability to meet its obligations or fund exploration activities on its wholly-owned properties. While the JV is currently operating from its own cash flow, the risk of future cash calls, though not currently anticipated, could lead to dilution if Contango is unable to fund its share.

Advancing exploration properties like Johnson Tract requires significant capital. While the IA presents attractive economics, securing the necessary financing for development, even under the DSO model, will be crucial and dependent on prevailing capital market conditions and metal prices.

Outlook

Contango's outlook is centered on leveraging the cash flow generated by the Manh Choh project to rapidly improve its financial health. The 2025 guidance of 60,000 ounces of gold production at an AISC of $1,625 per ounce signals continued strong operational performance and profitability from the JV. Expected cash distributions of approximately $80 million in 2025 (based on $2,800 gold) provide the necessary liquidity to execute the debt and hedge reduction strategy.

The projected reduction of the Secured Facility balance to around $15 million by the end of 2025 and the plan to cut the hedge book in half are significant milestones. The goal of being largely debt-free and unhedged by the end of 2026 or early 2027 positions Contango to capture the full benefit of future gold price movements and generate substantial free cash flow from Manh Choh.

Simultaneously, the company is prudently advancing the Johnson Tract project through permitting, aiming to de-risk this high-potential asset. The robust IA economics provide a strong foundation for future development decisions and potential financing. While exploration on other properties like Lucky Shot is currently limited by capital allocation priorities, the strategic focus remains on finding the best path forward for these assets, potentially through strategic partnerships or alternative processing solutions.

Conclusion

Contango ORE is in a transformative phase, successfully transitioning from explorer to producer and using the resulting cash flow to fortify its balance sheet. The Manh Choh project is delivering strong operational results, providing the financial muscle to aggressively pay down debt and deliver into gold hedges. This strategic deleveraging is key to unlocking the company's full potential.

The Johnson Tract project represents a compelling growth opportunity, with recent economic studies highlighting its high-grade nature, low projected costs, and rapid payback under the capital-efficient DSO model. Advancing this project through permitting is a critical next step in building a multi-asset production profile.

While risks such as legal challenges and the impact of hedges on near-term earnings warrant monitoring, the core investment thesis for Contango is centered on the successful execution at Manh Choh, the de-risking and development of Johnson Tract, and the strategic goal of becoming debt-free and unhedged. Achieving these objectives would position Contango to generate significant free cash flow and capitalize on its portfolio of Alaskan gold assets in the coming years. Investors should watch for continued operational performance at Manh Choh, progress on Johnson Tract permitting, and the ongoing reduction of debt and hedge obligations as key indicators of value creation.