Solitario Exploration & Royalty Corp. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed July 29, 2014. The company was a development-stage mineral company focused primarily on the 80%-owned Mt. Hamilton project in Nevada, with interests in the Bongará zinc project in Brazil and other exploration and royalty properties. The interim financial statements were unaudited. No operating revenue was reported.
Financial condition and results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net loss attributable to Solitario shareholders | $539,000, or $0.01 per share | $1.071 million, or $0.03 per share |
| Prior comparable loss | $438,000, or $0.01 per share | $1.429 million, or $0.04 per share |
| Exploration expense | $136,000 | $184,000 |
| General and administrative expense | $404,000 | $935,000 |
| Net cash used in operating activities | Not separately provided | $964,000 |
- Comprehensive loss: $907,000 attributable to Solitario shareholders for the quarter and $1.253 million for the six-month period, including unrealized losses on marketable equity securities of $368,000 and $182,000, respectively.
- Liquidity: Cash and cash equivalents were $1.226 million at June 30, 2014, compared with $2.092 million at December 31, 2013. Working capital was $1.973 million, compared with $2.531 million at year-end.
- Investments: Marketable equity securities totaled $3.720 million at fair value, including $2.070 million of Kinross shares and approximately $1.649 million of other securities. The company held 500,000 Kinross shares at June 30 and 480,000 shares as of July 29, 2014.
- Debt: The $802,000 UBS margin loan was fully repaid and terminated. Long-term RMB debt remained $3.500 million before discount, or $3.252 million net of discount, bearing interest at 90-day LIBOR plus 5%.
- Capital spending: Mt. Hamilton capitalized costs were $1.258 million for the first six months, including $840,000 of development expenditures, $302,000 of capitalized interest, $100,000 of property payments and $16,000 of capitalized depreciation.
- Equity: A February 2014 private placement issued 1.6 million shares for gross proceeds of $1.680 million; net proceeds were approximately $1.630 million. Shares outstanding were 39.248 million at June 30, compared with 37.512 million at December 31, 2013.
Material changes versus the prior comparable periods
- Second-quarter net loss increased to $539,000 from $438,000, primarily because gains on Kinross sales fell to $103,000 from $270,000 and the non-cash warrant gain fell to $41,000 from $758,000.
- Six-month net loss improved to $1.071 million from $1.429 million, helped by lower exploration and general and administrative expenses, higher gains on marketable securities, and a smaller equity-method investment loss.
- Exploration expense declined substantially, from $698,000 to $184,000 for the six-month period, reflecting reduced activity in Peru and Mexico and the closure of exploration offices in Bolivia and Brazil.
- The equity-method investment in PBM was reduced to zero during the six months. The company reported $181,000 of unrecognized losses related to its remaining 49% interest.
- The company recorded a $20,000 impairment related to the Pachuca project in Mexico, compared with $13,000 of impairments on other properties in the prior-year period.
- Accumulated other comprehensive income declined to $278,000 from $460,000, primarily due to marketable-security valuation changes.
Guidance, outlook, risks and unusual items
- Management budgeted approximately $964,000 of Mt. Hamilton development expenditures and $765,000 of leasehold acquisition and earn-in payments for 2014, all expected to be capitalized.
- The company expected to draw the remaining $1.5 million available under the RMB facility during the third quarter of 2014 for Mt. Hamilton development, earn-in payments and approved corporate purposes.
- Management stated that cash, anticipated Kinross-sale proceeds and potential RMB borrowings were expected to fund planned operations for the next year, but acknowledged the need for additional capital to develop Mt. Hamilton.
- The company planned to sell approximately 360,000 Kinross shares during 2014, although sales could be delayed or reduced because of the lower Kinross share price and the February equity financing.
- Key risks include the absence of required permits and development capital for Mt. Hamilton, the company’s lack of prior mineral-property development experience, dependence on financing and asset sales, commodity and equity-price volatility, and concentration in Kinross securities.
- The RMB warrants, covering 1,624,748 shares at an exercise price of $1.5387, were recorded as a $359,000 liability at June 30. Changes in their modeled fair value produced a $219,000 loss for the six-month period.
- Management reported no material changes to previously disclosed risk factors, no legal proceedings, no off-balance-sheet obligations and effective disclosure controls and internal control over financial reporting as of June 30, 2014.
Investor verification points
- Verify the availability, terms and actual drawdown of the remaining RMB facility and the company’s ability to fund Mt. Hamilton development.
- Reconcile planned Kinross share sales with actual sales, current market value and resulting liquidity concentration.
- Review Mt. Hamilton permitting status, feasibility-study assumptions, capital requirements and the basis for capitalizing development costs.
- Assess dilution from the 1.625 million RMB warrants, outstanding options and future equity financing.
- Evaluate the recoverability of mineral-property balances and the implications of PBM’s zero carrying value and unrecognized losses.