Solitario Exploration & Royalty Corp. — Q1 2014 Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; filed May 6, 2014. The filing identifies the registrant as Solitario Exploration & Royalty Corp. and describes it as a development-stage mineral company focused on the 80%-owned Mt. Hamilton project in Nevada, with additional exploration and royalty interests in Latin America. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / Prior period |
|---|---|---|
| Revenue | No operating revenue reported | No operating revenue reported |
| Net loss attributable to Solitario shareholders | $532,000 | $991,000 loss |
| Basic and diluted loss per share | $0.01 | $0.03 |
| Net cash used in operating activities | $488,000 | $791,000 |
| Net cash used in investing activities | $138,000 | $3.638 million provided |
| Net cash provided by financing activities | $578,000 | $933,000 |
| Cash and cash equivalents at period end | $2.044 million | $2.092 million at December 31, 2013 |
| Working capital | $2.914 million | $2.531 million at December 31, 2013 |
| Total assets | $20.070 million | $19.500 million at December 31, 2013 |
| Long-term debt, net | $3.198 million | $3.144 million at December 31, 2013 |
| Short-term margin debt | None at March 31, 2014 | $802,000 at December 31, 2013 |
There is no meaningful operating margin because the company reported no operating revenue and remains focused on exploration and development. Total costs, expenses and other were $550,000, compared with $949,000 in Q1 2013. Comprehensive loss attributable to Solitario shareholders was $346,000, compared with $1.875 million in Q1 2013.
Material changes versus Q1 2013 and year-end 2013
- Net loss attributable to shareholders declined by $459,000, primarily due to a $300,000 gain on the sale of Kinross shares, lower exploration expense, lower general and administrative expense, and a smaller equity-method investment loss.
- Exploration expense fell to $48,000 from $362,000 as activities in Peru and Mexico were reduced to limited care and maintenance.
- General and administrative expense declined to $531,000 from $627,000, including lower stock-based compensation expense of $56,000 versus $125,000.
- The company recorded a $260,000 loss from revaluation of RMB warrants, compared with a $99,000 gain in Q1 2013.
- Mt. Hamilton capitalized costs increased to $646,000 from $515,000, including $485,000 of development expenditures, $153,000 of capitalized interest, and $8,000 of capitalized depreciation.
- The company completed a private placement of 1.6 million shares for gross proceeds of $1.680 million and recorded net proceeds of approximately $1.630 million.
- The UBS secured margin loan was repaid in full and terminated. Long-term RMB borrowings remained $3.5 million before discount, with $1.5 million of undrawn availability during the stated availability period.
- Marketable equity securities increased to $4.210 million from $3.973 million at year-end. The portfolio included 530,000 Kinross shares and approximately $1.991 million of Ely shares.
- Common shares outstanding increased to 39.213 million from 37.512 million at December 31, 2013.
Cash flow, debt and liquidity
- Operating cash usage was $488,000, while $535,000 was spent on additions to mineral properties.
- Financing inflows from the equity offering were partly offset by $802,000 of short-term borrowing repayment and a $250,000 payment to the noncontrolling interest holder in connection with the Mt. Hamilton earn-in.
- The RMB loan carried an interest rate of 5.25% at March 31, 2014, based on 90-day LIBOR plus 5%, and was secured by the company’s 80% interest in Mt. Hamilton LLC and other assets.
- Management stated that existing cash, anticipated Kinross share sales and potential RMB borrowings were expected to fund operations for the next year, but additional capital will be needed to develop Mt. Hamilton or other properties.
Guidance, outlook, risks and unusual items
- Management budgeted approximately $1.035 million for Mt. Hamilton development expenditures and approximately $765,000 for leasehold acquisition and earn-in payments during 2014; these amounts were expected to be capitalized.
- Exploration activity in Mexico and Peru was expected to remain reduced, while limited mineral-property acquisitions could continue.
- Management anticipated selling approximately 360,000 Kinross shares during 2014 for assumed proceeds of $1.8 million, but stated that sales could be delayed or reduced because of the stock price and the equity financing.
- The Kinross investment represented a significant concentration of assets and liquidity. Management noted that the Kinross price had declined below its $5.00 budgeting assumption and had responded by reducing Latin American exploration and certain administrative expenditures.
- Mt. Hamilton development remains subject to obtaining permits and sufficient capital; neither was in place at March 31, 2014. The company has never developed a mineral property.
- The RMB warrant liability increased to $400,000 from $140,000, producing a material noncash loss driven by changes in the company’s share price and valuation assumptions.
- The company recorded no mineral-property impairment in Q1 2014, compared with $10,000 of write-downs in Q1 2013.
- There were no material changes to previously disclosed risk factors, no legal proceedings, no off-balance-sheet obligations, and management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2014.
Investor verification points
- Verify the current market value and liquidity implications of the concentrated Kinross and Ely investments, including planned or completed subsequent share sales.
- Confirm Mt. Hamilton permitting status, development milestones, capital requirements and the 80% joint-venture ownership structure.
- Assess the availability, maturity and security terms of the remaining RMB borrowing capacity and the company’s ability to fund ongoing development.
- Review the valuation and potential dilution associated with the 1.625 million RMB warrants and other outstanding equity awards.
- Reconcile the 2014 capital budget with actual cash use, capitalized costs and future financing needs.
- Evaluate the company’s continuing losses, lack of operating revenue and dependence on equity sales, asset sales, debt and joint-venture financing.