Contango Silver & Gold - Update on Hedges

0:04 When they're coming in quite quickly, I'll say good morning, good afternoon or good evening, depending on where in the world you're signing in from. I'm very thrilled today to be joined by Rick Van Nuenhuis, CEO of Contango Silver and Gold, and Mike Clark, the company's CFO, for a very exciting event. I imagine particularly for Mike, is this the last time I'll ever ask him about hedges. So it's presumably something he's quite pleased about. But here's how today's gonna work just for the folks in the room. I got a number of questions just to talk about the company's most recent exciting news from this morning. But this is an interactive event. I know some people already submitted questions in advance on email. Appreciate those. We'll get to them. For everybody else, there's a chat button at the bottom. Please feel free to ask questions during today's event. I'll get to as many as we can. We're hoping this is going to be a pretty quick event, probably 20, 25 minutes. So I don't get to your question. Also, make sure the Contango team gets them afterwards so you can walk through them.

0:50 The only other thing I'll say is this is being recorded and will be available for replay probably about 3 p.m. Eastern. It'll pop right in your inbox, but it'll also be available on Six's YouTube channel shortly thereafter. But let me get right into the protein because this is exciting news. Rick, I want to start with the headline. You converted the last 15,000 ounces of hedged gold into debt, which means for the first time, thrilled to say it live and on air. The hedge book is completely gone. So walk us through what this announcement actually means for Contango shareholders. Well, I guess it's doing what we say we're going to do. First and foremost, we obviously didn't put the hedges in place because we were betting on a Gold price. We are betting against the Gold price. They were put in place because the banks made us put them in place back in 2023 when we were trying to put this mine into production.

1:41 As fate would have it, Gold went up and more than doubled in price.

1:47 Now we have exposure to that upside in the Gold price. And this should really be Mike's day because we've been working at this for a while.

2:00 And so investors invest in a Gold producing company and particularly a junior Gold producing company because they want that exposure, that leverage to the upside in the Gold price. If you're betting against Gold, then don't invest in Gold. I mean, that's pretty simple investment advice. So, you know, Where we are now, we believe in the upside in the Gold price. We think this is a good base from which to put the hedges to rest and replace it with debt. Not with equity. We didn't like our share price or we weren't going to issue any equity at this price, but replacing it with debt just made a lot of sense.

2:47 I'll let Mike explain the details, but obviously we're a self-funded junior explorer producer. Our advanced stage projects are funded by our cash flow from Moncho. And what this does is just give us more exposure to the upside in the Gold price. Our plan is to go from 60,000oz of production

3:12 up to 200,000oz of Gold production and 5Moz of Silver production here in the next 4 or 5 years. Awesome. Mike, I'm going to let you get in here because as Rick said, this is some degree your show and I want you to get into the math. So these contracts were struck at 19.35oz Gold trading, obviously north of US$4,000 for a while. And settling them out cost, as I understand it, 33M. So how should people think about the math here? What's the cost of buying out those hedges versus what the 15,000oz are worth to the company selling at potential spot over the next year and a half? Yes. These remaining hedges were the March and June 2027 hedges that we restructured over a year ago when we pushed the debt facility out. And so that price actually came down from the 2025 to 1935. But so those were the final 2 remaining hedge deliveries that we had for 15,000oz.

4:11 And when we locked in this hedge settlement, Gold was trading at about US$4,035.

4:18 And so to settle them, we had to settle them using a forward curve, which was roughly US$100 more. So the way I look at it is it cost us US$1.5M

4:28 in paying for the forward curve on those ounces. In addition to that, the other way I'd look at this as well is you paid that, so I guess our floor price is at US$41.35 on settling these hedges. The only other cost to us is our debt's increased from US$12.6M to US$46.3M. So you are going to pay an incremental amount of interest, albeit at a lower rate coming down from 8.9 to 7.4. So there'll be about $2 million in interest charges that we may pay, assuming we take the debt to the full term. Obviously, if we pay it back early, that interest charge will come down. But the total cost is the 1.5 on the forward curve you're paying versus spot price, and then the interest on the increment of that increase. Great. I appreciate that. Helpful to run through the numbers, obviously, for something like this.

5:18 Rick, I want to talk about timing because I know Gold dipped. I was at a conference below 4,000 late June. I saw a lot of frowns that I hadn't seen in quite some time.

5:28 For the first time under 4,000 is November And it seems like the Contango team moved on this almost immediately. Your quote in the PR called this pullback an opportunistic window. So my question is, how much did that price move factor into pulling the trigger right now rather than taking a beat, waiting, see where it goes?

5:47 Yeah, no, Look, we think the $4,000 Gold price is a good support level for Gold. And there's a variety of, you know, you can talk to Chartists and they can show you ChartWise why that makes sense. I mean, what I look at is central bank buying and central banks. So I mean, look, you had gold ran up to 5500 very rapidly. And obviously, I think everybody kind of felt it was great. We all had smiles when we were talking to each other. We all thought we were heroes and very smart for being in the gold business. But it corrected and it corrected 30%, which is a pretty significant correction.

6:30 But as I said, the central bank buying is what's been driving the Gold price. They're the biggest buyers of Gold. And they stopped buying. When Gold was US$5,500, they just kind of let off the gas pedal a little bit. And it came back down to US$4,000. And now they're buying again. BMO just had a report out this morning reporting on central bank buying.

6:54 They bought 41 tons of gold in May. And that's Poland, was one of the larger buyers. The Czech Republic, Singapore, Kazakhstan, Uzbekistan. Russians are selling and we all know why they have to sell. So

7:13 it's meaningful that when the central banks who have been the major buyers of Gold, come back in and support that US$4,000 Gold level. We think it was the right time. Obviously, you've got to work these things out with the bankers. They've got to get approval. We've seen this US$4,000 dip down to the US$4,000 level several times.

7:39 Mike got all the paperwork organised and all the authorisations completed with the banks, which they have lots of a lot of that kind of work to do. So

7:51 once once we came back down to that 4000 dollar level, we pulled the trigger and here we are. Well, you know, that's opportunistic window, like you said. And Mike, as I understand it, the amendment also brought the interest rate down from 8.9% to 7.4% with no restructuring fees. So congratulations there. However, you sorted that out. That's not a deal, as I understand it, a lender gives a borrower that they're worried about. So what was the conversation with the lenders like and what does it say about how they're viewing Contango Sovereign Gold right now? Yeah, we've

8:21 been having these discussions for a while. You know, Rick and I weren't very comfortable when Gold was $5,000. So we didn't want to make that conversion then. It just didn't seem like the right time. But you know, the lenders were very supportive. I think they viewed the hedges as more risky than debt, just given the potential for Gold to go back up to US$5,000, US$6,000.

8:41 So they were more excited to see that come off the books, which ironically they put in place to protect themselves. So they were supportive. There was some back and forth on getting the right interest rate and not paying a restructuring fee. So that didn't kind of happen easily. But at the end of the day, we all kind of worked together to get to a spot that we were comfortable with and as were they. And once we got those terms locked down, it moved very quickly and they're pleased with this,

9:09 as are we. Great. One thing I wanted to ask, it's not the biggest story, obviously, but it's a little part of the setup. As I understand, you also spent $715,000 on put contracts at 3100 strike, covering those same 15,000oz. So you've got a floor under the position without putting a ceiling back on. Just curious if you could explain how the protection works, why they run it was the right level. How did this part of the arrangement come together? Yeah, no, the puts were a requirement of the lenders. They wanted to see downside protection at $3,000 or $3,100. So they were the ones pushing for that. We put these in place using a European-style put where they actually funded it. So we'll just pay them back. That got added to the debt and we'll just pay them back in March and June of next year on the same timing as the principal repayments.

10:00 But more or less, it was driven by them.

10:04 It's not that much money to kind of protect us on the downside if gold does correct more so. And those puts do still carry value. So I don't look at that as a cost. Like you can always sell those in the future here. So, But that just made the lenders happy. Yeah. Great. Fair enough. Sometimes you got to pay the piper.

10:24 Rick, one question for you just on the repayment schedule, because there's a thing that struck me as interesting. As I understand it, 1000000.25 through the end of this year. But the big payments, the $15.5 million, the $28.8 million, land in 2027.

10:39 And they line up seemingly almost exactly with when Moncho production is guided to nearly double. Obviously, 2027 is the big year for Moncho production. Was that payment schedule designed around the South Pit ramp? What was the thinking there? Am I just being conspiratorial and nuts?

10:56 No, it was more along where the original delivery of the hedges was supposed to take place. It aligns with what our payment schedule via the hedges would have been, which again, does reflect back on the original mine plan, which, you know, 2027 was always the nice big year of production and low cost, because this year we're doing all the pre-stripping and as we transition from North Pit to South Pit. So, you know, it does line up with, you know, the expected large amount of cashflow from that extra production from South Pit. So, they both seem to sort of align with one another. And again, that all goes back to the original mine plan from the Feasibility Study.

11:48 Yeah, great. And speaking of getting into more details on the South Pit, you mentioned Moncho's in a transitional phase right now, obviously, as mining moves over from the North Pit, with that higher

11:57 grade campaign closing out in 2026. What does the transition actually look like on the ground? And when will investors start seeing it in the production numbers? You should start seeing the transition took place over the whole year. We're finished mining in the North pit now. We're pre-stripping, doing a lot of pre-stripping in the South pit. We'll see a sulphide production increase in the next 0.5. And then next year again, you're just in the best part of the ore body, if you will.

12:33 That's why 2027 has always been a low-cost year, because you've paid for the pre-stripping this year, and then you're in that high-grade sulphide ore. Obviously, they've been working on the mill to add more Oxygen in the plant, which helps make the reactions go quicker when you're in that sulphide ore. So all that work is always all taking place this year so that we can benefit from it next year. Great. Let's talk about the sweet year, 2027. I know you've guided it at 75,000oz, 80,000oz with cash costs, like you said, way lower because of all the work done this year, 1,200oz to 1,300oz. So every one of those ounces is now going to sell at whatever Gold is doing that day, whatever Mike can make happen with the spot price.

13:23 So at current prices, that's emerging, approaching US$3,000

13:28 an ounce. How does that change what Contango can do with the cash? Like how does that change your situation next year? Yeah, obviously, we've got strong cash flows from Moncho and now we don't have to deliver into those $2,000 hedges. So, we were exposed to the upside completely now.

13:51 This year always aligned really well with how we plan to spend money to advance our other projects, Lucky Shot, Johnson Track and Kitsalt. This is just giving us more comfort, obviously, and more exposed cash flow if the Gold price goes up. And as we just talked about, if the Gold price goes down for whatever reason, we protected the downside. The other thing I want to mention here in terms of our overall costs, we've seen when the war in Iran taking place, People got nervous about the price of diesel, price of oil, and what the effects are on the mining companies, because diesel is a big part of any mining operation, and especially for us with our direct shipping or model and the transport costs.

14:47 So I think all those are part of the reason why all the gold equities have gone down as a result of the Iran war. But now here we see gold's trading at less than $70, or sorry, oil's trading at less than $70 a barrel. And so we've had 4 months of artificially high oil prices as a result of the war. And now we're, you know, are we heading into a different period?

15:17 And so what are our oil and sustaining costs going to be next year? Well, we'll see where all this sort of levels out, but let's say it's a little higher. We're only, a big increase in oil prices only results in another US$100 an ounce kind of production. It's not like a big, it's rather contained. So if we're at US$1,500 all in sustaining costs next year and you've got a US$4,000 Gold price, that's a pretty healthy margin. And if Gold goes to 5 or higher, as some people are predicting, then obviously we're completely exposed to that. So these are pretty significant numbers. Gold goes up 1000 bucks, that's another $15 million free cashflow. So

16:04 these are very meaningful for a company our size. And keep in mind and always remind people to keep in mind that, you know, we've only got 31 million shares outstanding. So when you talk about leverage, all of these changes in prices, think about it on a per share basis. That's great. Mike, somebody in the chat asked, they said their shareholder and they want to explain in further detail the jump in debt. And that's actually the question I was gonna ask next. So it works well. Rick's quote in the PR emphasizes you can repay at any time and you want to pay it down ahead of schedule. My question is why was taking on debt the right tool here rather than,

16:42 as Rick referenced in his intro, issuing equity or just letting the hedges run off into maturity? Give us the kind of dollars and cents rationalization. Yeah. Well, issuing equity at these price levels just wasn't acceptable to us. So we weren't even looking at that.

17:00 And you know, the intention still is to pay these down ahead of schedule. And especially if gold goes back up to 5,000, we're going to have that much more ability to repay it early. So and we do have a fair amount of cash still on hand. So as we get closer to the end of the year and as production goes, get through campaign 3 and 4, we'll continue to look at what our cash balance is and then look to pay that back early. We just want to make sure we have plenty of cash on hand to advance our other projects. And, you know, the debts come down in the interest rate. So it's

17:32 manageable for us. But the intention is still to try to have this paid off ahead of the maturity date in June. Great. I appreciate that. Last one from me, Rick. I'd love if you could zoom out. I know of the 150 or so people in the room, half of them have said they're not Contango shareholders. So I'd love you to paint a picture for that crowd. You've got Kitsil Valley drilling past the halfway mark on 40,000 meter program. Johnson Tract moving through fast 41 in their year permitting. And Lucky Shot

18:03 drills turning again, exciting exploration news seemingly all the time. Now you get the gold engine funding, all of it is unhedged. So how would you frame the Contango story today for folks who are in the room deciding whether This is the moment to get involved. Well, I think a good way to frame that is, and just the analysts, obviously, when we made our news release this morning, all the analysts took that information and put it into their models. And what we see is, And they all said, you know, hey, you know, the hedges were holding this company back. And so now that that's no longer holding, that's no longer an issue that's holding the company back. And we're trading at about a quarter of our net asset value price to now.

18:49 And whereas there are peer group averages double that, 0.55. So we're a hell of a bargain at these equity prices. And now you don't have that excuse of, oh, well, they're hedged. And so, you know, they're not making as much money as they could. Now we'll make as much money as the Gold price will allow us to make. So I think That's a very strong reason to, as an investor, to take another new look at Contango. The fact that we're unhedged, we've got this growth profile from going from 60,000oz of production to 200,000oz of Gold and 5Moz of Silver. That Silver mostly coming from Kitsalt.

19:35 And as we've seen, we're generating strong exploration results in all 3 of our main projects while the Moncho engine keeps churning out Gold and keeps generating cash flow for us. So self-funded growth profile and a Gold producer in a safe jurisdiction with only 31 million shares outstanding. Good pitch. I love it. That's it for me. A couple of questions really quick, 2 that came in online and then I'll get to a couple from the chat if I can. But this is a short event today. Rick, quick 1 for you. When is mining meant to start at Kitsilts? What's the general timeline for that project? There's a lot of work to do before we're putting any sort of guidance out on mining.

20:24 We have a five-year plan. I'll kind of stick with that. I guess we're in the first year of that. We're halfway through the first year of that. Just to remind people, we'll put out a new MRE, mineral resource estimate here on Kitsalt before the end of the month. We've got 40,000 meters of drilling ongoing. We're already through half of that. They're drilling over 500 meters a day out there, which is amazing. That's wild. And hats off to the team out there, the drillers and the geologic team out there. That's an amazing feat to process that much core every day.

21:11 And so, at the end of that, at the end of this year's program, we add the 40,000 plus meters into the MRE that we have. We'll use that then to start outlining a path forward on, here's our vision of what production will look like. And we'll do that next year, probably about this time with an SK 1300 initial assessment, very similar to what we did at Johnson Track. So it outlines, here's the plan, we're going to stick with this DSO approach. We're looking at several options in terms of where to process the ore, the Kitsault ore and coincidentally the Johnson track ore. So I'd say look for guidance on when we envision production at Kitsalt, roughly this time next year.

22:00 Awesome. Appreciate it. 1 for you, Mike. How does today's news affect free cash flow over the next 12 to 18 months? Well, free cash flow doesn't really change if all things stay equal. We're either delivering it to the hedges at $4,100 an ounce or we're paying down the debt. So, I'd look at it more so if you believe in Gold's price is gonna go up to say 5,000, you're gonna increase your free cashflow by 15 million. If you think it's going down then to say 3,100, then you would argue it's gonna go down by that much. But if gold stays the same, I kind of look at it as neutral. And so you ask me how happy I might be done with these hedges today. I'll be happier when all that debt's repaid early next year, because that's truly when we're fully out of having all that debt and hedge in place.

22:49 And see that's the answer of a good CFO. He's never happy, that's good. No, he's at best okay, that's fine. That's all right. This is really good day. Yeah, there you go. T from the chat, I think we've already gone over that question on production predicted in 27-month shows. So I'll skip that. Barry from the chat asked a question that I'm sure will shock the room with trauma. Do you think you'll be forced into hedges at Lucky Shot? Might as well ask you guys now. I can start. You know, We're a junior company, single asset producer. You're looked at very differently from lenders when you're doing that. As you grow and have multiple mines in production, you get very different treatment. In addition to that, to move forward with LuckyShot, we're already fully funded to do that.

23:35 So I don't envision us going back to lenders for LuckyShot. And then depending on where we're at in 2030, we should have sufficient cash to advance those projects into production with minimal debt, if any. I'll just say, just the quantum here, what we're envisioning for Lucky Shot is on the order of 50, 60 million dollars to get it into production, part of which we're spending this year completing all the underground access and the feasibility level mind plan. So, yeah, it's a different quantum. There you go. Brad, from the chat, I'm going to shoot your question through rather than make Mike do a bit of math on the call, but I will send that question through so we can handle that afterwards. There's one question from Russell that, Rick, I happen to know that you're not gonna be able to answer, but I'll ask it anyway. Somebody wants to know whether you're going to be using a mill or purchasing a mill. What are you gonna do with a mill for Kitzbaum?

24:33 Yeah, so We're looking at a couple of different options. There are 3 different opportunities ahead of us. I don't like to really say stay tuned, we're under CA, so we've got to be a little careful about what we talk about openly. But it is probably the biggest priority of the company right now is securing a mill processing facility for both Kitsalt and Johnson Track. Perfect. Then final question. I assume they mean non-Kitsalt, but somebody is curious if there's any news on the former Dolly Varden properties, their additional properties. Well, yeah, they're all kind of in that southern golden triangle area there. And we are doing exploration work on the other properties.

25:23 Porter Idaho is 1 and Mountain Boys another one, I think. So, yeah, there's early stage exploration activity going on on those other properties in the Golden Triangle neighborhood. Great. Appreciate it. So I'll be honest, I'm excited. This is the last time that we'll talk about hedges on a webinar. Mike, I'm sure you're excited. It's the last time I'll ask you a hedge question. I appreciate you guys running through all the questions today. I know there were some that we didn't get to. I think I've referred to them in the chat. I will be sending those through to the team, so they'll be able to get back to you either via phone or via email. But thanks, everyone. I know it was quite a large crowd. Thanks for coming on short notice. I'd appreciate everybody's time. And Mike and Rick, as always, thanks for giving us the lowdown live. Go Velvety! And rooting for whoever team people support tonight, Rick, I hope your team wins. But for those in the chat, I hope your team wins too, unless they're in competition.

26:16 Have a great afternoon everybody. Talk to you soon. Thanks everybody.