Solitario Exploration & Royalty Corp. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period ended March 31, 2011. The interim financial statements are unaudited. The company was renamed Solitario Resources Corp. subsequently, but the filing identifies the registrant as Solitario Exploration & Royalty Corp.
Business context
Solitario was a development-stage mineral exploration and development company focused on precious- and base-metal properties and royalty interests. On February 22, 2012, completion of the Mt. Hamilton feasibility study resulted in Solitario earning an 80% interest in Mt. Hamilton LLC and reporting proven and probable reserves. The company had not previously developed a mineral property and stated that required permits and development capital were not yet in place.
The reported Mt. Hamilton proven and probable reserves totaled 22.527 million tons containing approximately 487.1 thousand ounces of gold and 3,028.2 thousand ounces of silver.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | No delay-rental or operating revenue | No delay-rental or operating revenue |
| Loss before taxes | $971 thousand | $449 thousand |
| Net loss | $862 thousand | $694 thousand |
| Net loss attributable to Solitario shareholders | $670 thousand | $161 thousand |
| Loss per basic and diluted share | $0.02 | $0.01 |
| Net cash used in operating activities | $891 thousand | $1.980 million |
| Net cash provided by investing activities | $9 thousand | $1.381 million |
| Net cash provided by financing activities | $687 thousand | $591 thousand |
| Cash and cash equivalents at period end | $237 thousand | $470 thousand |
Exploration expense declined to $524 thousand from $841 thousand, while general and administrative expense declined to $671 thousand from $956 thousand. The company recorded a $332 thousand gain on Kinross share sales, compared with $1.568 million in the prior-year quarter. Interest expense was $68 thousand, and the company recorded a $109 thousand income-tax benefit versus $245 thousand of tax expense in Q1 2011.
Comprehensive loss was $1.751 million, including an $889 thousand after-tax unrealized loss on marketable equity securities. Total assets were $20.467 million, including $8.921 million of marketable equity securities and $9.236 million of mineral properties. Total shareholders’ equity was $12.188 million.
Liquidity, debt and cash flow
- Working capital was $302 thousand at March 31, 2012, compared with $345 thousand at December 31, 2011.
- Short-term borrowings totaled $2.792 million, consisting of a $2.000 million UBS secured credit line and $792 thousand of RBC margin loans, collateralized primarily by Kinross shares.
- Long-term debt had a carrying value of $2.855 million, including $741 thousand classified as current. A $750 thousand payment was due in June 2012.
- Operating cash use improved year over year, principally because Q1 2011 included a Mt. Hamilton drilling program and higher corporate costs.
- Investing cash flow was substantially lower because Kinross sale proceeds declined to $353 thousand from $1.648 million.
- Management expected Kinross sale proceeds and additional borrowing against Kinross shares to fund operations through the end of Q1 2013, but stated that future Mt. Hamilton development would require additional capital.
Material changes versus the prior comparable period
- Net loss attributable to Solitario shareholders increased to $670 thousand from $161 thousand, primarily because the Kinross sale gain fell by $1.236 million.
- Exploration expense decreased by $317 thousand, and general and administrative expense decreased by $285 thousand, partly offsetting the lower investment gains.
- Mt. Hamilton development costs of $220 thousand were capitalized after completion of the feasibility study; $115 thousand of nearby lease acquisitions were also capitalized.
- Solitario’s ownership in Mt. Hamilton LLC increased to 80%, and the company began reporting two segments: exploration and mining development and operations.
- Kinross holdings declined to 820,000 shares from 850,000 shares at December 31, 2011; the company subsequently reported 805,000 shares as of May 4, 2012.
- Noncontrolling interest increased from a deficit of $1.640 million at December 31, 2011 to $662 thousand, reflecting the Mt. Hamilton earn-in accounting entries.
Outlook, risks and unusual items
- Management budgeted approximately $2.117 million for 2012 exploration excluding Mt. Hamilton, $1.324 million for Mt. Hamilton expenditures, and $1.675 million for Mt. Hamilton leasehold and earn-in payments.
- Failure to make the $750 thousand June 2012 Augusta-related payment or the $150 thousand cash and 25,000-share August 2012 earn-in payment could result in loss of the entire Mt. Hamilton interest. Failure to make later payments could dilute Solitario to 49% ownership.
- DHI-US elected to have Solitario fund DHI-US’s share of post-feasibility development costs as a loan bearing 8% interest; Solitario advanced $49 thousand during the quarter.
- Liquidity is highly concentrated in Kinross shares. A significant decline in Kinross’s market price could reduce liquidity, trigger collateral requirements or force asset sales. The UBS and RBC arrangements permitted collateral liquidation if required equity thresholds were breached.
- The company had no operating revenue, remained loss-making, and required future property sales, joint ventures, debt, equity issuance or Kinross share sales to fund development.
- No material changes to previously disclosed risk factors, no legal proceedings, and no off-balance-sheet obligations were reported. Management concluded that internal controls and disclosure controls were effective as of March 31, 2012.
Investor verification points
- Verify the subsequent payment status and financing of the $750 thousand June 2012 debt obligation and August 2012 Mt. Hamilton earn-in obligations.
- Reconcile the company’s stated Kinross sale plans, collateral requirements and current market value against actual share sales and debt balances.
- Assess whether Mt. Hamilton permitting, development capital and cost-sharing arrangements support the feasibility-study assumptions.
- Review reserve estimates, feasibility-study economics and the company’s limited operating and mine-development history.
- Confirm the effect of marketable-security price changes, deferred taxes and noncontrolling-interest accounting on equity and liquidity.