Solitario Exploration & Royalty Corp. - 10-Q Summary
Business Context and Reporting Period
Company: Solitario Exploration & Royalty Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Solitario is an exploration-stage company focused on acquiring precious and base metal properties in Latin America (Mexico, Brazil, Bolivia, Peru) for future sale, joint venture, or royalty development. The company does not anticipate developing properties on its own. A significant portion of its assets consists of an investment in Kinross Gold Corporation ("Kinross") common stock.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Loss (Attributable to Shareholders) | $(2,059,000) | $(2,923,000) |
| Loss Per Share (Basic & Diluted) | $(0.07) | $(0.10) |
| Exploration Expense | $1,478,000 | $2,047,000 |
| General & Administrative Expense | $1,924,000 | $1,223,000 |
| Gain on Derivative Instruments | $530,000 | $(2,731,000) Loss |
| Gain on Sale of Marketable Securities | $490,000 | $2,583,000 |
| Cash and Cash Equivalents (End of Period) | $929,000 | $1,857,000 |
| Working Capital | $2,377,000 | $3,415,000 (Dec 31, 2008) |
| Total Assets | $24,387,000 | $26,463,000 (Dec 31, 2008) |
| Stock Option Liability | $1,278,000 | $531,000 (Dec 31, 2008) |
Material Changes vs. Prior Period
- Reduced Net Loss: The net loss decreased by approximately $864,000 compared to the prior year period. This improvement was driven primarily by a significant swing in derivative instrument results (from a $2.7M loss to a $0.5M gain) and reduced exploration expenses.
- Exploration Expenses: Decreased by $569,000 (28%) due to weather/permitting delays at Chonta and Pedra Branca, and a strategic reduction in spending on strategic alliance properties due to economic uncertainty.
- General & Administrative (G&A) Costs: Increased by $701,000. This was primarily due to a $730,000 increase in stock-based compensation expense (from $17k to $747k) related to the revaluation of stock option liabilities. Excluding stock compensation, G&A costs remained relatively flat.
- Derivative Instruments: The company recorded a gain of $530,000 in 2009 compared to a loss of $2.7M in 2008. This change reflects the valuation of the Kinross Collar and covered call options, influenced by Kinross stock price movements and the expiration of certain tranches.
- Investment Sales: Proceeds from the sale of Kinross shares dropped significantly to $667,000 in 2009 compared to $2.2M in 2008, resulting in a lower realized gain ($490k vs $2.6M).
Outlook, Risks, and Management Commentary
- Liquidity Strategy: Management intends to liquidate portions of its Kinross holdings to fund operations. They forecast selling 150,000 shares in 2009 for expected proceeds of $2.4M. Subsequent to the period end, 20,000 shares were sold for $387,000.
- Exploration Outlook: Full-year 2009 exploration budget is approximately $4.4M. Drilling programs delayed in Q2 are expected to resume in Q3. The company is being conservative with expenditures due to commodity price reductions.
- Derivative Risks: The company holds a "Kinross Collar" on 500,000 shares, providing downside protection (Floor Price ~$13.69) but capping upside potential. Fluctuations in Kinross stock price materially impact the company's net loss and equity.
- Stock Option Liability: The company classifies stock options as liabilities (priced in CAD, functional currency USD). Changes in the stock price and exchange rates significantly impact the liability balance and compensation expense.
- Joint Ventures: Key projects include Pedra Branca (Anglo Platinum), Bongara/Chambara (Votorantim), and the Newmont Strategic Alliance. Anglo Platinum has earned a 30% interest in Pedra Branca and may earn up to 65%.
- Asset Write-down: A $10,000 write-down was recorded for the abandoned Purica project in Mexico.
Investor Verification Checklist
- Kinross Exposure: Verify the current market price of Kinross Gold Corp. stock, as it directly impacts the valuation of Solitario's largest asset ($20.1M) and the fair value of the Kinross Collar derivative liability.
- Stock Option Liability: Monitor the price of Solitario's common stock on the TSX and the USD/CAD exchange rate, as these drive the non-cash stock option compensation expense and liability balance.
- Exploration Progress: Confirm the status of drilling programs at Chonta and Pedra Branca, which were delayed in Q2 and are critical to the company's asset value.
- Derivative Expirations: Track the expiration dates of the remaining Kinross Collar tranches (April 2010 and April 2011) and any new covered call options sold.
- Cash Burn Rate: Assess the sustainability of the $929k cash balance against the projected $4.4M exploration budget and G&A costs, noting the reliance on selling Kinross shares for funding.