Overview
We are a Houston-based company, whose primary business is to explore in the state of Alaska for (i) gold ore and associated minerals and (ii) rare earth elements. We have leased or have control over approximately 794,280 acres of Alaskan Native, Federal and state of Alaska properties for the exploration of gold and associated minerals and rare earth elements. We anticipate that from time to time we will acquire additional acreage in Alaska for the exploration of gold and associated minerals and rare earth elements through leases or obtaining additional mining claims.
Background
Contango Mining Company (“Contango Mining”), a wholly owned subsidiary of Contango Oil & Gas Company (“Contango”), was formed on October 15, 2009 as a Delaware corporation for the purpose of engaging in exploration in the state of Alaska for (i) gold ore and associated minerals and (ii) rare earth elements. Contango Mining initially acquired a 50% interest in the Properties (defined below) from Juneau Exploration, L.P., (“JEX”) in exchange for $1 million and a 1% overriding royalty interest in the Properties under a Joint Exploration Agreement (the “Joint Exploration Agreement”). On September 15, 2010, Contango Mining acquired the remaining 50% interest in the Properties by increasing the overriding royalty interest in the Properties granted to JEX to 3% pursuant to an Amended and Restated Conveyance of Overriding Royalty Interest (the “Amended ORRI Agreement”), and JEX and Contango Mining terminated the Joint Exploration Agreement. We believe JEX expended approximately $1 million on exploratory activities and related work on the Properties prior to selling the initial 50% interest to Contango Mining. JEX continues to assist the Company in acquiring land in Alaska and Mr. Brad Juneau, the sole manager of the general partner of JEX has recently been elected a director, President and Acting Chief Executive Officer following a medical leave of absence of our Chairman, Mr. Kenneth R. Peak.
The Company was formed on September 1, 2010 as a Delaware corporation and on November 29, 2010, Contango Mining assigned the Properties and certain other assets and liabilities to Contango. Contango contributed the Properties and $3.5 million of cash to the Company, pursuant to the terms of a Contribution Agreement (the “Contribution Agreement”), in exchange for approximately 1.6 million shares of the Company’s common stock. The transactions above took place between companies under common control.
Contango distributed all of the Company’s common stock to Contango’s stockholders of record as of October 15, 2010, promptly after the effective date of the Company’s Registration Statement Form 10 on the basis of one share of common stock for each ten (10) shares of Contango’s common stock then outstanding.
The Company had no operating history prior to the contribution of Contango Mining’s assets and liabilities. The financial statements of the Company include the financial position, results of operations, and cash flows of Contango Mining since its inception on October 15, 2009 (the “Inception”). The equity structure was retroactively adjusted to reflect the capital structure of the Company. References that describe the operations of the Company include the operations of Contango Mining for the periods prior to November 29, 2010.
The Company holds a 100% leasehold interest in approximately 675,000 acres from the Tetlin Village Council, the council formed by the governing body for the Native Village of Tetlin, an Alaska Native Tribe (“Tetlin Lease”). The Tetlin Lease has a 10 year term beginning July 2008 with an option to renew 50% of the acreage for an additional ten years. If the properties under the Tetlin Lease are placed into commercial production, the Tetlin Lease will be held throughout production and the Company would be obligated to pay a production royalty to the Native Village of Tetlin, which varies from 2% to 5%, depending on the type of metal produced and the year of production. In June 2011, the Company paid the Tetlin Village Council $75,000 in exchange for reducing the production royalty payable to them by 0.25%. In July 2011, the Company paid the Tetlin Village Council an additional $150,000 in exchange for further reducing the production royalty by 0.50%. These payments lowered the production royalty to a range of 1.25% to 4.25%, depending on the type of metal produced and the year of production. On or before July 15, 2020, the Tetlin Village Council has the option to increase its production royalty by (i) 0.25% by payment to CORE of $150,000, or (ii) 0.50% by payment to CORE of $300,000, or (iii) 0.75% by payment to CORE of $450,000.
Additionally, the Company holds 18,560 acres in unpatented mining claims from the state of Alaska for the exploration of gold and associated minerals (together with the Tetlin Lease, the “Gold Properties”). The Company also holds interests in 3,440 acres in unpatented Federal mining claims and 97,280 acres in unpatented mining claims from the state of Alaska (which the Company is considering abandoning effective December 1, 2012) for the exploration of rare earth elements (the “REE
Properties”, and together with the Gold Properties, the “Properties”). If any of the Properties are placed into commercial production, the Company would also be obligated to pay a 3% overriding royalty to JEX.
Our Properties consist of mineral leases and unpatented mining claims. We believe that we hold good title to our Properties in accordance with standards generally accepted in the minerals industry. As is customary in both the gold and rare earths industries, we conduct only a perfunctory title examination at the time we acquire a property. Before we begin any mining activities, however, we will conduct a full title examination and perform curative work on any defects that we deem significant. A significant amount of additional work consisting of at least another two years is likely required in the exploration of the Properties before any determination as to the economic feasibility of a mining venture can be made. Due to harsh weather conditions in Alaska, our work months are restricted to May through October. The following table summarizes our property holdings as of September 7, 2012:
Jurisdiction
Project Name
No. of Claims
Acreage
Gold
Tetlin Village Council
Tetlin Lease
n/a
675,000
State of Alaska
TOK / Tetlin
122
11,360
LAD / Triple Z
45
7,200
167
693,560
Rare Earth Elements
Federal
Salmon Bay
123
2,460
Stone Rock
49
980
Alatna *
127
20,320
Spooky *
166
26,560
Wolf *
202
32,320
Swift *
113
18,080
780
100,720
Grand Total
947
794,280
* We are considering abandoning these claims effective December 1, 2012 to devote more time and resources to our remaining acreage.
Strategy
Our exploration strategy is predicated upon two core beliefs: (1) that the only competitive advantage in a commodity-based business is to be among the lowest cost producers and (2) that virtually all the mining industry’s value creation occurs through the discovery of mineral deposits that can be developed to the state of a commercially viable producing ore body. While we do not have previous experience in the gold or rare earth element industries, we plan to focus our business strategy on the following elements:
Using our limited capital availability to increase our reward/risk potential on selective prospects. We will concentrate our risk investment capital on our prospects in Alaska. We have leased approximately 675,000 acres and control another 18,560 acres consisting of 167 unpatented state of Alaska mining claims in Eastern Alaska for the exploration of gold and associated minerals. We also own 3,440 acres consisting of 172 unpatented Federal mining claims and 97,280 acres consisting of 608 unpatented state of Alaska mining claims for the exploration of rare earth elements. The Company is considering abandoning the 608 unpatented state of Alaska claims effective December 1, 2012 in order to devote more time and resources to the remaining claims.
Exploration prospects are inherently risky as they require large amounts of capital with no guarantee of success. Furthermore, we may never achieve a competitive advantage in the conduct of our business, since it is unlikely that our Properties will have commercially viable mineral deposits. Should the Properties prove to have known deposits, or mineral ore, we will be required to develop our own mining operations or contract with third parties to mine our mineral ore. We may only become a low cost producer if the mineral ore is of high quality and the cost of the infrastructure necessary to mine the mineral ore is low relative to other producers, including our competitors located in China if rare earth elements are mined.
Our strategic initiatives are to undertake cost efficient and effective exploration activities to discover mineralization and potential mineral reserves which may enhance the value of our Properties. If we are successful in our exploration activities, we may consider a joint venture or sale of our Properties to qualified mining companies.
Maximize Value Creation per Share. We believe that the primary objective of a business is to maximize value creation per share. As a result, we intend to keep our G&A and interest costs to a minimum.
Structuring Incentives to Drive Behavior. We believe that equity ownership aligns the interests of our consultants, executives and directors with those of our stockholders. The Company’s directors and officers do not receive cash compensation for their work for the Company.
In September 2011, the Company granted 40,000 stock options to its directors and officers and an additional 10,000 stock options to its technical consultant, the owner of Avalon Development Corporation, an Alaska domiciled domestic corporation ("Avalon"). These options vest over two years, beginning in September 2011, the date of the grant. Additionally, the Company’s directors, executive officers and our technical consultant were granted an aggregate of 93,906 shares of restricted stock in November 2010. The restricted stock vests over three years, beginning in November 2011, the one-year anniversary of the date the shares were granted. As of June 30, 2012, the Company’s directors, executive officers and our technical consultant beneficially owned approximately 27% of our common stock.
In July 2012, the Company granted an additional 75,000 stock options to its directors and officers and an additional 25,000 stock options to its technical consultant. These options vest over two years, beginning in July 2012, the date of the grant. These options increase the beneficial ownership of our common stock by our directors, officers and technical consultant to approximately 29%. Upon full vesting of the restricted stock and all stock options, the Company’s directors, officers and technical consultant will beneficially own approximately 33% of the Company.
Alliance with JEX. JEX is a private company formed primarily for the purpose of assembling natural gas and oil prospects. JEX was responsible for securing and negotiating the Tetlin Lease and assisting in obtaining the Properties and initially engaged Avalon to conduct mineral exploration activities on the Tetlin Lease. If any of the Properties are placed into commercial production, the Company is obligated to pay a 3% overriding royalty to JEX. JEX will also continue to assist us in acquiring additional acreage in Alaska and provide other consulting services to the Company. Pursuant to an Advisory Agreement dated September 6, 2012 with JEX, the Company agreed to pay JEX a 2% of 8/8ths ORRI on all minerals mined from properties acquired by the Company after July 1, 2012 in the state of Alaska.
In August 2012, Mr. Peak, the Company's Chairman and Chief Executive Officer, received a medical leave of absence from his responsibilities at the Company for up to six months. In his absence, Mr. Brad Juneau was elected President, Acting Chief Executive Officer and a director of the Company. Mr. Juneau continues to be the sole manager of the general partner of JEX.
Exploration and Mining Property
Exploration and mining rights in Alaska may be acquired in the following manner: public lands, private fee lands, unpatented Federal or state of Alaska mining claims, patented mining claims, and tribal lands. The primary sources for acquisition of these lands are the United States government, through the Bureau of Land Management and the United States Forest Service, the Alaskan state government, tribal governments, and individuals or entities who currently hold title to or lease government and private lands.
Tribal lands are those lands that are under control by sovereign Native American tribes or Alaska Native corporations established by the Alaska Native Claims Settlement Act of 1971 (ANSCA). Areas that show promise for exploration and mining can be leased or joint ventured with the tribe controlling the land, including land constituting the Tetlin Lease.
The Federal government owns public lands that are administered by the Bureau of Land Management or the United States Forest Service. Ownership of the subsurface mineral estate can be acquired by staking a twenty (20) acre mining claim, which is granted under the General Mining Law of 1872, as amended (the “General Mining Law”). The Federal government continues to own the surface estate even though the subsurface can be controlled with a right to extract through claim staking. Private fee lands are lands that are controlled in fee-simple title by private individuals or corporations. These lands can be controlled for mining and exploration activities by either leasing or purchasing the surface and subsurface rights from the private owner. Patented mining claims are claims that were staked under the General Mining Law, and through application and approval the owners were granted full private ownership of the surface and subsurface estate by the Federal government. These lands can be acquired for exploration and mining through lease or purchase from the owners. In order to acquire a patent, an applicant must, among other things, prove that improvements have been made on the land of not less than $500, pay a fee of five dollars ($5) per acre, and identify and describe the mineral deposit located in the land. Unpatented mining claims located on public land owned by another entity can be controlled by leasing or purchasing the claims outright from the owners.