Solitario Exploration & Royalty Corp. - Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. Solitario Exploration & Royalty Corp. is an exploration-stage company focused on acquiring precious and base metal properties in Latin America (Mexico, Brazil, Bolivia, Peru) and developing royalty interests. The company does not anticipate developing mineral properties on its own but seeks joint ventures or sales. As of the reporting date, the company held 15 exploration properties and significant equity investments in Kinross Gold Corporation.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Loss (Attributable to Shareholders) | $(905,000) | $(671,000) |
| Loss Per Share (Basic & Diluted) | $(0.03) | $(0.02) |
| Exploration Expense | $775,000 | $681,000 |
| General & Administrative Expense | $478,000 | $514,000 |
| Gain on Derivative Instruments | $112,000 | $527,000 |
| Cash and Cash Equivalents (End of Period) | $249,000 | $800,000 |
| Marketable Equity Securities (Total) | $18,190,000 | $19,606,000 |
| Working Capital | $2,964,000 | $4,318,000 (Dec 31, 2009) |
| Net Cash Used in Operating Activities | $(1,716,000) | $(1,262,000) |
Material Changes vs. Prior Period
- Increased Net Loss: The net loss increased by $234,000 compared to Q1 2009. This was primarily driven by a significant reduction in the unrealized gain on derivative instruments (down from $527,000 to $112,000) and a shift from a stock option compensation benefit of $121,000 in 2009 to an expense of $9,000 in 2010.
- Higher Exploration Spend: Exploration expenses rose by $94,000 due to increased drilling and reconnaissance activities in Mexico (La Noria, Palmira) and other projects (Pedra Branca, Cajatambo).
- Reduced Administrative Costs: Non-stock option general and administrative costs decreased by approximately $166,000 due to reduced salaries, office costs, and legal/accounting fees (avoiding restatement costs incurred in 2009).
- Cash Position: Cash and cash equivalents declined by $1,697,000 during the quarter, largely due to the repayment of accrued taxes ($366,000) and increased exploration spending.
Guidance, Outlook, and Material Developments
- New Joint Ventures:
- Pachuca Real (Mexico): Signed a definitive agreement with Compania De Minas Buenaventura S.A.A. on April 28, 2010. Buenaventura committed to $2.0 million in work over 18 months (total $12.0 million over 4.5 years) to earn a 51% interest, with potential to earn up to 65%.
- Mercurio (Brazil): Signed a letter agreement with Regent Holdings, Ltd. on March 9, 2010. Regent will pay $1.0 million over four years and invest $900,000 to earn 100% ownership, leaving Solitario with a 1.5% to 2.0% net smelter royalty.
- Kinross Gold Investment: Solitario holds 1,050,000 shares of Kinross Gold. A tranche of the "Kinross Collar" (a zero-premium equity collar) expired in April 2010, releasing 400,000 shares. The company plans to sell additional Kinross shares in 2010 to fund operations, forecasting the sale of 250,000 shares for approximately $4.75 million.
- 2010 Budget: The full-year exploration expenditure budget is approximately $4.7 million. General and administrative costs are expected to remain lower than 2009 levels.
- Risks: Liquidity is heavily dependent on the market value of Kinross shares. The company faces counterparty risk with UBS regarding the Kinross Collar and market risk regarding the valuation of its stock option liability (denominated in Canadian dollars).
Investor Verification Checklist
- Verify the status and terms of the new joint venture agreements with Buenaventura (Pachuca Real) and Regent Holdings (Mercurio) signed in March/April 2010.
- Monitor the market price of Kinross Gold Corporation, as Solitario's liquidity and asset valuation are highly sensitive to this single holding.
- Review the expiration and terms of the remaining Kinross Collar tranche (100,000 shares due April 2011) and the May 2010 covered call option.
- Confirm the company's ability to fund its $4.7 million exploration budget given the current cash balance of $249,000 and reliance on future Kinross sales.
- Assess the impact of the stock option liability (classified as a liability due to Canadian dollar denomination) on future earnings volatility.