Solitario Exploration & Royalty Corp. — FY2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016; it is an annual report rather than a standalone fourth-quarter filing. Solitario was an exploration-stage mineral company operating in one segment. Its strategy was to acquire, explore and advance mineral properties or royalties, primarily through joint ventures, and ultimately sell, develop or monetize those interests.
The principal assets included the 39%-owned Bongará zinc project and 85%-owned Chambara project in Peru, the La Promesa project, the Yanacocha royalty in Peru, royalties in Brazil, Mexico and Montana, and marketable securities. The Bongará project was managed and funded by Milpo, which could earn additional ownership. The company had five full-time U.S. employees as of March 10, 2017.
Financial performance and key metrics
| U.S. dollars, in thousands except per-share data | 2016 | 2015 |
|---|---|---|
| Property and joint venture revenue | $0 | $0 |
| Loss from continuing operations | $1,710 | $3,440 |
| Net income (loss) | $(1,710) | $8,872 |
| Basic and diluted EPS | $(0.04) | $0.23 |
| Net cash used in operating activities | $(1,835) | $(1,723) |
| Total assets | $17,614 | $18,054 |
| Working capital | $16,671 | $17,811 |
| Long-term debt | $0 | $0 |
| Shareholders’ equity | $17,488 | $17,875 |
At year-end, cash was $119,000, U.S. Treasury securities were $7.510 million, certificates of deposit were $7.499 million, and marketable equity securities were $1.339 million. Total current assets were $16.797 million versus current liabilities of $126,000. The company reported no off-balance-sheet arrangements.
Investing activities used $15.516 million, primarily reflecting net purchases of Treasury securities and certificates of deposit. Financing activities used $248,000 for share repurchases. The company purchased 475,600 shares for $248,000 during 2016 and had repurchased 620,600 shares for $315,000 since the program began.
There was no operating revenue in 2016 or 2015, and margin measures are not meaningful for the exploration-stage business. Major 2016 non-cash or market-related items included a $672,000 gain on derivatives, $970,000 of stock-based compensation expense, a $40,000 gain on sales of marketable securities and a $353,000 income-tax benefit.
Material changes versus the prior comparable period
- Net results shifted from $8.872 million of income in 2015 to a $1.710 million loss in 2016, principally because 2015 included a $12.309 million after-tax gain from the sale of the Mt. Hamilton project.
- Loss from continuing operations improved to $1.710 million from $3.440 million, aided by higher derivative gains, a gain rather than a loss on marketable-security sales, lower depreciation, higher interest income and a tax benefit.
- Exploration expense increased to $628,000 from $89,000, driven primarily by reconnaissance and acquisition-evaluation activity. General and administrative expense increased to $2.163 million from $1.965 million, although expense excluding stock compensation declined.
- Operating cash use increased to $1.835 million from $1.723 million. The company converted most cash into short-term investments, reducing cash and cash equivalents from $17.718 million to $119,000 while maintaining substantial liquidity.
- The company closed its Mexico exploration office, retained 1% royalties on the Norcan and Aconchi projects, abandoned Canta Colorado in Peru and recorded $13,000 of mineral-property impairments plus a $14,000 loss on other Mexican assets.
- Milpo continued managing Bongará and Chambara. Chambara was on care and maintenance, and no field work was planned there for 2017.
Outlook, commentary, risks and unusual items
- Management budgeted approximately $813,000 for 2017 exploration and evaluation, focused mainly on potential new mineral-property acquisitions. It forecast approximately $1.107 million of 2017 general and administrative expense excluding non-cash stock compensation.
- Solitario engaged SRK in early 2017 to prepare a Preliminary Economic Assessment for the sulfide portion of the Bongará Florida Canyon deposit, expected by the end of the second quarter of 2017. No mineral reserves were reported for any project.
- Management stated that current cash, short-term investments and marketable securities were adequate for expected expenditures over the next year, but future development could require additional capital, joint ventures, debt, equity issuance or asset sales.
- Royalty properties were early-stage and non-producing; management did not expect near-term royalty revenue unless third parties develop and operate the underlying projects.
- Key risks include the lack of mineral reserves or producing assets, uncertain exploration results, commodity-price and currency volatility, permitting and environmental requirements, political and regulatory risks in Latin America, reliance on joint-venture partners, limited insurance coverage, competition, title uncertainty and the need for future financing.
- The company has a history of losses, reporting losses in 20 of its 23 years of operations. It has never paid a dividend and does not anticipate paying one in the foreseeable future.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that internal control over financial reporting and disclosure controls were effective; no auditor attestation was required because Solitario was a smaller reporting company.
Most important facts for investors to verify
- Whether Milpo’s Bongará work and the planned SRK assessment establish an economically viable project, resource base or future reserve; the filing reports no mineral reserves.
- The company’s ability to fund exploration and acquisitions from its liquid assets, especially given minimal cash, recurring operating cash outflows and no operating revenue.
- The valuation and volatility of Vendetta securities and warrants, including the $735,000 warrant asset valued using a Black-Scholes model and the related $629,000 2016 gain.
- Whether any royalty property advances to production, since current royalties are non-producing and provide no assured near-term revenue.
- Potential dilution, capital allocation and the continuation of the share-repurchase program, which was authorized through December 31, 2017.
- Permitting, environmental, political, community and joint-venture risks affecting the Peruvian projects and any future acquisitions.