Business Context and Reporting Period
Solitario Exploration & Royalty Corp. filed its Form 10-K for the fiscal year ended December 31, 2015; the filing was signed March 3, 2016. The company is an exploration-stage mineral company focused on acquiring, exploring, joint venturing, selling, and retaining royalties on precious- and base-metal properties. It operates in one segment, mineral exploration, with limited activities in Peru and Mexico. The filing identifies the registrant as Solitario Exploration & Royalty Corp.; the request metadata uses the name Solitario Resources Corp.
The company completed the sale of its Mt. Hamilton gold project in August 2015 and shifted from development of that project toward property acquisitions, early-stage exploration, joint ventures, and royalty interests.
Financial Results and Key Metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Property and joint venture revenue | $0 | $200,000 |
| Net income attributable to Solitario shareholders | $8.872 million | $(1.833) million |
| Basic and diluted earnings per share | $0.23 | $(0.05) |
| Loss from continuing operations | $(3.440) million | $(1.843) million |
| Gain on discontinued operations | $12.309 million | $0 |
| Exploration expense | $89,000 | $279,000 |
| General and administrative expense | $1.965 million | $2.176 million |
| Net cash used in operating activities | $(1.723) million | $(1.610) million |
| Net cash provided by investing activities | $23.833 million | $(1.691) million |
| Net cash used in financing activities | $(4.879) million | $2.078 million |
| Cash and cash equivalents at year-end | $17.718 million | $487,000 |
| Working capital | $17.811 million | $(1.987) million |
| Total assets | $18.054 million | $19.040 million |
| Shareholders’ equity | $17.875 million | $6.781 million |
| Interest-bearing debt at year-end | $0 | $4.861 million |
The 2015 gain primarily reflects the $12.309 million after-tax gain from selling Mt. Hamilton. Continuing operations remained unprofitable, with a $2.880 million pretax loss and $560,000 of income tax expense. Comprehensive income attributable to shareholders was $10.103 million, including a $1.231 million unrealized gain on marketable equity securities.
Material Changes Versus the Prior Comparable Period
- On August 25, 2015, Solitario sold its 80% interest in Mt. Hamilton LLC for gross proceeds of $24 million. Total transaction proceeds for the combined interests of Solitario and DHI were $30 million.
- The company repaid the $5 million RMB Loan, plus $7,000 of interest and fees, eliminating interest-bearing debt at year-end. An extension fee of $50,000 was paid, and 1,624,748 RMB warrants were extended to August 21, 2016.
- Cash increased by $17.231 million during 2015, primarily from the Mt. Hamilton sale, while investing activities generated $23.833 million of cash.
- Exploration expense declined 68% to $89,000, and Mt. Hamilton capitalized development costs declined to $1.382 million from $2.582 million before the project sale.
- The company sold 380,000 Kinross shares for $809,000 and recorded a $541,000 gain. It also recorded a $1.510 million loss on transferring Ely shares in connection with the Mt. Hamilton transaction.
- Option holders voluntarily cancelled 1.990 million options under the 2006 Plan and 1.250 million options under the 2013 Plan. Only 40,000 options remained outstanding at year-end.
- The board authorized a repurchase program for up to 2 million shares. The company repurchased 145,000 shares for $67,000 during 2015 and subsequently repurchased additional shares.
- During 2015, the company converted its operating interest in the Pedra Branca project into a 1% net smelter return royalty and exited remaining Brazilian operating activities.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management budgeted approximately $635,000 for 2016 exploration and development expenditures, primarily for evaluating and potentially acquiring mineral properties. The company also forecast approximately $1.280 million of 2016 general and administrative expense before non-cash stock compensation.
- 2016 activities are expected to include limited care and maintenance, contract-geologist work, potential acquisitions, and oversight of joint ventures. Milpo is expected to fund and manage additional road building, drilling access, and prefeasibility work at the Bongará zinc project.
- The company has no reported mineral reserves and no commercial mining operations. Future value depends on exploration success, permitting, financing, commodity prices, joint-venture partners, and the ability to sell, develop, or monetize properties or royalties.
- At December 31, 2015, $17.359 million of cash was held in a KeyBank money-market account above the $250,000 FDIC insurance limit. Management disclosed additional exposure to uninsured brokerage assets, including U.S. Treasury securities and money-market accounts.
- Expected 2016 property rentals and option payments were approximately $341,000, of which approximately $327,000 were expected to be paid or reimbursed by joint-venture partners. Contractual obligations also included $94,000 of operating lease payments and $14,000 of mineral-property option and lease payments.
- The company has a history of losses and generated 2015 net income primarily from the Mt. Hamilton disposition rather than recurring operations. Management stated that property sales, joint-venture payments, and royalty proceeds are inherently infrequent.
- Principal risks include commodity-price volatility, lack of reserves, exploration and development uncertainty, permitting and environmental requirements, foreign political and regulatory exposure, dependence on joint-venture partners, title risk, uninsured operating risks, limited stock liquidity, and the need for future capital if projects are developed.
- No material environmental incidents, legal proceedings, or off-balance-sheet arrangements were reported. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company is a smaller reporting company.
Most Important Facts for Investors to Verify
- Confirm that the 2015 profit and cash build are primarily attributable to the one-time Mt. Hamilton sale, not recurring revenue or mining operations.
- Review the allocation of the $24 million sale proceeds, the $12.309 million after-tax gain, transaction costs, and tax treatment.
- Assess cash custody and uninsured concentration risk, particularly the KeyBank and brokerage-account balances.
- Evaluate Bongará and Chambara joint-venture terms, Milpo’s funding obligations, ownership earn-in rights, and the absence of reported reserves.
- Verify 2016 spending plans, expected partner reimbursements, required property payments, and the company’s ability to fund acquisitions or future development.
- Track the remaining RMB warrants, the share-repurchase program, and potential dilution or changes in shares outstanding.
- Consider whether royalties such as Yanacocha and Pedra Branca are likely to generate near-term cash flow; the filing states that near-term royalty revenue cannot be predicted and may not occur.