Common Stock: Contact Gold (TSXV: C)
Current Market Price: $.145 CAD
Market Capitalization: $10.4 million CAD
**Note: All values in this article are expressed in Canadian Dollars (CAD) unless otherwise noted.
Contact Gold Stock – Summary of the Company
Contact Gold is a mineral exploration company focused in gold properties in Nevada. They have acquired and control the rights to several properties which are currently in the exploration stage. Contact Gold was founded in 2000 and is headquartered in Vancouver Canada.
Revenue and Cost Analysis
The company does not have any properties that are currently producing and therefore does not have any revenue. They consistently run a net loss and are likely to continue to do so for the foreseeable future.
In 2019 Contact Gold had a net loss of $11.2 million, an increase from an $8.5 million net loss in 2018.
Contact Gold spent $3 million on exploration expenses in 2019, a decrease from $4.4 million in 2018. However, drilling and exploration expenses were the company’s largest expense in both years, followed by compensation related expenses, including share based compensation.
Contact Gold – Royalty and Streaming Agreements
Several of the company’s claims have net smelter royalties attached, ranging from 1% to 4%.
Balance Sheet Analysis
Contact has an OK balance sheet, with sufficient short term liquidity. However, given their burn rate, they will need to raise additional capital in the medium term. The company’s liability levels appear manageable, with the exception of their preferred stock obligation outstanding, which is their largest long term liability.
The company’s assets are mostly long term exploration assets, which were valued at $38.4 million at the end of 2019.
Contact Gold – Debt Analysis
The company does not have any debt outstanding as of year-end 2019, but they do have a preferred stock liability which carries a 7.5% annual cash dividend.
Contact Gold Stock – Share Dynamics and Capital Structure
As of year-end 2019, the company had 84.4 million common shares outstanding. They also have 11.1 million preferred shares outstanding. These preferred shares carry a cash dividend of 7.5% per year and are convertible into a total of 10.6 million common shares. Fully diluted shares outstanding is around 95 million common shares.
Contact has a dilutive capital structure. Investors should carefully consider their place in the capital structure before investing.
Contact Gold Stock – Dividends
The company does not pay a dividend and is unlikely to do so for the foreseeable future.
Management – Skin in the game
Insiders at Contact Gold have been net buyers of the company’s stock in the recent past. This is generally viewed as a bullish signal for the stock.
Contact Gold Stock – 3 Metrics to Consider
Debt to Equity Ratio
Total Liabilities/Total Share Holder Equity
$15.7 million/$24 million = .66
A debt to equity ratio of .66 means that the company uses a mix of debt and equity in its capital structure, but relies more on equity for financing.
Price to Book Ratio
Current Share Price/Book Value per Share.
$.145/$.25 = .58
Based on fully diluted shares outstanding, Contact Gold has a book value per share of $.25. At the current market price this implies a price to book ratio of .58, meaning the company’s stock currently trades at a discount to the book value of the company.
Working Capital Ratio
Current Assets/Current Liabilities
$1.2 million/$500 thousand = 2.4
A working capital ratio of 2.4 indicates sufficient short term liquidity. Contact should not have a problem meeting its near-term obligations.
Gold Market – Economic Factors and Competitive Landscape
Gold mining is a highly competitive, capital intensive business. The company will need to compete fiercely for both new projects and capital. However, given the current economic environment of global money printing and zero or negative interest rates, it would appear gold companies are poised to benefit from a strong economic tailwind.
Contact Gold Stock – Summary and Conclusions
The company owns several promising exploration stage properties located in a proven gold region in Nevada. Contact is actively exploring its properties and incurred significant drilling expenses in both 2018 and 2019. They appear to be in descent financial health, but given their burn rate, they will certainty need to raise more capital in the medium term.
Most concerning are the royalty’s attached to their claims and the unfavorable capital structure for common stock holders. The terms of the preferred shares present a significant risk to common shareholders and the net smelter royalty’s limit upside.
Given the company’s undervaluation based on their book value, I think Contact equity may be an acceptable small allocation for highly risk tolerant investors within a well-diversified portfolio of exploration stocks. I will not be allocating yet, but I will continue to monitor the company’s progress and reassess the company in the near future.
Disclaimer
This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.
This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.
