About a year and half ago we wrote about Contago Oil & Gas’s (MCF) spinoff of Contango Ore (CTGO), a company with mining rights to 750,000 acres in Alaska. After some promising initial studies, the company hoped to find gold or rare earth metals on the property. As we noted, this is a pretty speculative venture, but one which drew quite a bit of interest due to the involvement of Contango CEO Ken Peak who also became Chairman & CEO of CTGO. Mr. Peak has quite an impressive backstory and track record and the fact that he was personally taking charge was quite a vote of confidence. In fact, Mr. Peak recently invested $4 million of his own money in a private placement this past March to fund this year’s operations at a price of $10 per share. His share of the placement represented close to half of the total offering and now Mr. Peak owns over 24% of the company’s shares.
Unfortunately, Mr. Peak has since fallen ill and is now taking a medical leave of absence for up to six months. Mr. Brad Juneau, manager of Juneau Exploration’s GP, was named CEO and Chairman in the meantime. While Mr. Juneau has some experience, this move is hardly reassuring to investors. In fact, CTGO (and MCF) dropped precipitously on the day of the announcement as Mr. Peak is considered quite vital to the operations. A classic ‘key man’ situation. Without Mr. Peak there are serious concerns as to whether or not the company can continue to raise the necessary capital in order to operate. While 2012 was covered by the private placement, there are no guarantees for 2013. Will he be able to kick in more of his money and will investors still be willing to invest if he isn’t involved? An already highly speculative investment just became much, much riskier.
While we wish Mr. Peak a speedy recovery, I would be very concerned if I were a shareholder. Unfortunately, it is not easy to unload this name as it is extremely thinly traded and a sizeable percentage of the shares are controlled by insiders.
Disclosure: Author is long shares of Berkshire Hathaway (and no, not ‘A’ shares).
While your point regarding Contango ORE’s future capital needs makes sense, I would be (and am) less worried about Contango Oil & Gas. Mr. Juneau has been involved in Contango’s exploration efforts since the inception of Contango in 1999. Contango’s longtime outsourcing partner is Juneau Exploration and Mr. Juneau is the managing member. While Mr. Peak’s importance to both Contango ORE and Contango Oil & Gas is clear, shareholders of Contango Oil & Gas would appear to face less key man risk.
Long MCF (significant position) and CTGO (very small CTGO position made up of shares received in 2010 spinoff – very speculative “lottery ticket”).
Ravi,
I should have been clearer that I was discussing Contango ORE and not Contango Oil & Gas. That said, I do think the company would be negatively impacted by this development as losing a successful founder and top executive is a big loss for any company. Honestly, I know next to nothing about MCF though and it is very likely, given its size, that it has a more than adequate bench.
Regarding your other point, perhaps I undersold Mr. Juneau’s experience a bit. However, being the CEO, Chairman, face and leader of a company is more than just having the requisite operational knowledge. That isn’t to say that CTGO is doomed – Mr. Juneau may turn out to be a fantastic leader and strike it big. My point was more that the odds on this ‘lottery ticket’ just got a lot worse.
I hope that Mr. Peak recovers and comes back to the CEO position soon. However, if not, I would view Mr. Juneau as a good choice provided that the “related party” issues are somehow resolved. Juneau Exploration participates with Contango on many prospects and Mr. Juneau is the managing member of Juneau Exploration. So if he were to lead Contango, those interests would probably have to be addressed in some way. But hopefully this is putting the cart before the horse and in six months Ken Peak will be back.
I can’t argue with the concerns on Contango ORE. It’s a speculation, pure and simple, and I’m basically viewing the small amount I have in it as a lottery ticket. To be honest, I hold the shares that were spun off to me as a regret avoidance strategy in case they actually find gold!