Contango Oil & Gas Company has announced plans to spin off shares of its wholly-owned subsidiary, Contango ORE (CORE) to shareholders in December.  CORE was set up to explore for gold and rare earth minerals and currently controls 750,000 acres in Alaska.  The purpose of the spin off is to separate a speculative venture from Contango’s established oil and natural gas business.

Contango Chairman and CEO Ken Peak described the spin off  in a press release issued today.  Here is a brief excerpt:

In our gold exploration effort we have run ground geophysical surveys with induced polarization (IP) which measures the conductivity/resistivity of underlying sub-surface rocks. Conductivity indicates the presence of metals – which are, of course, the hoped for result. Based on our geology and IP results, we are reviewing our options for our 2011 exploration program. Our current plan is to fly airborne magnetic, electromagnetic, and radiometrics early next summer (the E&P equivalent to ‘seismic’) to help us decide if we have a “prospect” worthy of initial exploration drilling.

Our Rare Earth Elements (REE) exploration program is at the very early ‘idea’ stage. Our strategic concept is that REE’s will become increasingly valuable as the world moves to embrace “green energy” in the form of wind power and electric/hybrid automobiles all of which, together with a number of critical military applications, require REE’s. In furtherance of our strategy, we have staked claims in Alaska that may be prospective for REE’s. We will spend this winter developing our plans on how best to proceed with a low cost exploration program.

The press release indicates that CORE will maintain a “bare-bones” cost structure given the highly speculative nature of this venture.  Contango shareholders will receive one share of CORE for each ten share ownership interest in Contango.  The record date is set for October 15.

Contango first disclosed information regarding the gold prospect in Alaska in a press release (pdf) in early March.  There was brief mention of potential rare-earth minerals in the company’s recently filed 10-K report covering the year ended June 30, 2010.  However, from today’s press release, it appears that CORE plans to study this prospect in more detail.  The domestic availability of rare-earth minerals has been in the news recently due to increasing concerns regarding America’s dependence on imports of materials with key applications in a variety of industries including national defense.

As a recent Wall Street Journal article pointed out, China is currently the dominant producer and user of rare earth elements.  With China producing 97 percent of rare-earth oxides and periodically imposing quotas on exports, new sources of domestic production are being considered despite potential environmental issues associated with extraction. While highly speculative, CORE’s venture in this area could have large payoffs if economically viable deposits are found.

Disclosure:  The author of this article owns shares of Contango Oil & Gas.

Contango Plans to Spin Off Minerals Exploration Subsidiary
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4 thoughts on “Contango Plans to Spin Off Minerals Exploration Subsidiary

  • October 3, 2010 at 10:52 pm

    As a shareholder of Contango as well, I’m scratching my head wondering why this unit needs to be spun off. Is it a way to Ken Peak to increase his exposure to it by buying shares on the open market or does he simply want to give shareholders pure plays rather than a mixed bag? Thoughts?

    • October 4, 2010 at 8:19 am

      It’s possible that some shareholders didn’t like the venture into Alaska and Peak wanted to create pure plays. The minerals venture seems to be getting bigger than the modest initial investment. It is intriguing but speculative in my opinion … I’m willing to stick around with the spun off shares to see how it plays out.

  • October 14, 2010 at 10:23 am

    Contango issued a press release on CORE this morning:

    Based on the existing investment in CORE and a $3.5 million cash infusion immediately before distribution, Contango estimates that CORE is worth $0.45 per Contango share implying a per-share price of $4.50 and a market cap of $7 million based on the 1-for-10 distribution ratio.

    This will be an interesting speculative “lottery ticket” – I plan to hold. But it is about as far from a “value investment” as I can imagine. Ben Graham told us that it’s ok to speculate if you clearly understand that you’re speculating and separate speculative operations from investments. This is a speculation.

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