Solitario Exploration & Royalty Corp. — Form 10-Q Summary
Business context and reporting period
Development-stage mineral exploration and development company reporting unaudited results for the three and six months ended June 30, 2015. The company held an 80% interest in the Mt. Hamilton gold project through MH-LLC and maintained other exploration and royalty interests. It had 39.3 million common shares outstanding as of August 10, 2015.
On June 10, 2015, Solitario agreed to sell its 80% Mt. Hamilton interest to Waterton, together with DHI’s 20% interest, for total project proceeds of $30 million. Solitario’s gross share would be $24 million before transaction costs, taxes and other fees. Closing required shareholder and other approvals.
Financial condition and key metrics
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Net loss attributable to Solitario | $141,000 | $591,000 |
| Loss per share, basic and diluted | $0.00 | $0.02 |
| Exploration expense | $7,000 | $32,000 |
| General and administrative expense | $478,000 | $1.032 million |
| Gain on marketable equity securities | $364,000 | $364,000 |
| Net cash used in operating activities | Not separately provided | $653,000 |
- No recurring revenue was reported in the statements of operations; results were affected by gains on securities sales, derivative remeasurement and other non-operating items.
- Comprehensive loss attributable to Solitario was $570,000 for the quarter and $1.618 million for the six-month period, including unrealized losses on marketable securities of $429,000 and $1.027 million, respectively.
- Cash and cash equivalents were $64,000 at June 30, 2015, down from $869,000 at December 31, 2014. Marketable equity securities were $1.125 million, down from $2.308 million.
- Total assets were $18.079 million, including $15.685 million of mineral properties. Total shareholders’ equity was $5.625 million.
- Working capital was negative $4.182 million at June 30, 2015, compared with negative $1.987 million at December 31, 2014.
- The RMB Loan had a principal balance of $5.0 million and a carrying value of $4.969 million, with interest at 90-day LIBOR plus 5%; it was due September 30, 2015 after a subsequent maturity extension.
- Capitalized Mt. Hamilton costs totaled $1.025 million in the first six months, including $491,000 of development expenditures, $339,000 of capitalized interest and $190,000 of property payments.
Material changes versus prior comparable periods
- Quarterly net loss attributable to Solitario improved to $141,000 from $539,000, while the six-month loss improved to $591,000 from $1.071 million.
- Exploration expense declined to $7,000 for the quarter and $32,000 year to date, from $136,000 and $184,000, respectively, as activities in Peru and Mexico were reduced to limited care and maintenance.
- Quarterly general and administrative expense increased to $478,000 from $404,000, primarily because of transaction-related legal and accounting costs and higher stock-option expense. Six-month expense increased to $1.032 million from $935,000.
- The company recorded a $364,000 gain on marketable equity securities in the quarter, compared with $103,000 in the prior-year quarter. It sold 220,000 Kinross shares for $519,000 of proceeds.
- Cash used in operations declined to $653,000 from $964,000, and cash used in investing declined to $152,000 from $480,000. There was no financing cash flow in 2015, compared with $578,000 provided in the first half of 2014.
- The company recorded no mineral property impairment in 2015, compared with a $20,000 Pachuca write-down in the prior-year period.
- Accumulated other comprehensive loss increased to $2.147 million from $1.120 million, primarily due to market declines in marketable equity securities.
Guidance, outlook, risks and unusual items
- Management stated that the company did not have sufficient liquidity to repay the RMB Loan at maturity, creating substantial doubt about its ability to continue as a going concern.
- If the Waterton transaction closed, Solitario expected to use approximately $5 million of proceeds to repay the RMB Loan and shift its focus toward other assets, including the Bongará project, exploration opportunities and royalty interests.
- If the transaction were delayed or failed, Waterton had committed, subject to conditions, to a six-month standby debt facility at 8% interest plus a 2% structuring fee. The facility would be secured by company assets. There was no assurance that it would be available in time or on acceptable terms.
- On August 5, 2015, the RMB Loan maturity was extended from August 21 to September 30, 2015. Solitario paid a $50,000 extension fee and extended 1,624,748 RMB warrants to August 21, 2016.
- Failure to repay the RMB Loan could result in default and allow RMBAH to foreclose on secured assets.
- Management expected exploration spending to remain reduced and anticipated no additional Mt. Hamilton spending after a successful transaction closing. If the transaction failed, further expenditures would depend on available financing.
- Marketable securities remained exposed to commodity and equity-market volatility. The company expected to sell its remaining Kinross shares during 2015; the filing states that the securities’ fair value could materially affect liquidity.
- The company terminated its Pedra Branca joint venture during the quarter and retained a 1% royalty, with no remaining carrying value in the investment.
- The financial statements contain no adjustments for the potential effects of the going-concern uncertainty. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether shareholders approved and whether all conditions to the $30 million Waterton Mt. Hamilton transaction were satisfied and the transaction closed.
- The amount and timing of net proceeds received by Solitario after taxes, fees, the Ely share cancellation arrangement and other transaction adjustments.
- Whether the RMB Loan was repaid or refinanced by September 30, 2015, and whether any standby facility was drawn.
- Subsequent cash balances, sales and valuation of Kinross, Ely and other marketable securities.
- The company’s ability to fund operations and obligations if the Mt. Hamilton transaction failed or was delayed.
- Potential dilution from the 1,624,748 RMB warrants and approximately 3.748 million potentially dilutive options excluded from diluted loss per share.