Solitario Exploration & Royalty Corp. — Q2 2013 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013. The unaudited filing covers a development-stage mining company focused on the 80%-owned Mt. Hamilton project in Nevada and a portfolio of exploration properties in the United States, Mexico, Brazil and Peru. The company has no operating mine or established revenue base.
Financial condition and results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Net loss attributable to Solitario | $(438) thousand | $(385) thousand | $(1.429) million | $(1.055) million |
| Loss per share | $(0.01) | $(0.01) | $(0.04) | $(0.03) |
| Exploration expense | $336 thousand | $554 thousand | $698 thousand | $1.078 million |
| General and administrative expense | $517 thousand | $621 thousand | $1.144 million | $1.292 million |
| Net cash used in operating activities | Not separately reported quarterly | $(1.677) million | $(1.887) million |
The company reported no operating revenue. Results were driven by exploration and corporate costs, a $270 thousand gain on Kinross share sales, a $758 thousand second-quarter gain from revaluing RMB warrants, and a $425 thousand second-quarter loss from the 49% equity-method investment in Pedra Branca do Mineracao. There are no meaningful operating margins because the company is not producing or selling minerals.
- Cash and liquidity: Cash and equivalents were $3.351 million at June 30, 2013, versus $616 thousand at December 31, 2012. Reported working capital was $2.643 million, down from $4.245 million.
- Investments: Marketable equity securities totaled $4.022 million at fair value, including $3.111 million of Kinross shares and approximately $911 thousand of other securities. The company held 610,000 Kinross shares at June 30.
- Debt: Current liabilities included a $1.118 million UBS margin loan and $700 thousand of current long-term debt. Long-term debt totaled $3.902 million, including $3.035 million drawn under the RMB facility and approximately $867 thousand of Augusta debt after discount.
- Capital spending: Mt. Hamilton mineral-property additions totaled $1.257 million in the first six months, including $768 thousand of development expenditures, $373 thousand of capitalized interest and $100 thousand of property payments.
- Equity: Solitario shareholders’ equity was $5.700 million at June 30, down from $8.688 million at year-end 2012, primarily reflecting net losses and unrealized declines in marketable securities.
Material changes versus the prior comparable period
- Second-quarter loss attributable to Solitario increased to $438 thousand from $385 thousand, despite lower exploration and general and administrative expenses.
- Six-month loss increased to $1.429 million from $1.055 million. The principal adverse factors were lower Kinross sale gains and a substantially larger loss from the Pedra Branca investment.
- Kinross sale gains declined to $270 thousand for the first six months from $1.464 million in the prior-year period; shares sold declined to 60,000 from 180,000.
- Exploration expense declined 35% for the quarter and 35% for the six-month period as activities in Mexico, Peru and Brazil were reduced and Mt. Hamilton development costs were capitalized.
- Other comprehensive loss was $3.989 million for the first six months, including a $2.553 million net unrealized loss on marketable equity securities.
- The company borrowed an additional $2.0 million under the RMB facility during the first six months. The RMB warrant liability declined from $1.138 million at year-end to $282 thousand, producing an $857 thousand year-to-date noncash gain.
Outlook, commentary, risks and unusual items
- Management budgeted approximately $2.043 million for Mt. Hamilton development expenditures and approximately $1.675 million for leasehold acquisition and earn-in payments during 2013. These amounts were expected to be capitalized.
- Management expected exploration activity outside Mt. Hamilton to remain reduced during the remainder of 2013, while continuing limited Latin American property acquisitions.
- Mt. Hamilton development remains subject to permitting and the availability of sufficient capital. The company has never developed a mineral property.
- Management stated that cash, potential Kinross sales, margin borrowing and available RMB borrowings were expected to fund planned operations for the next year, but additional financing may be required for development.
- The company’s liquidity is highly concentrated in Kinross shares. A material decline in Kinross’s market value could trigger additional margin requirements, forced sales, spending reductions or additional financing needs.
- At June 30, the company had $1.750 million of remaining Augusta obligations, including $750 thousand due in 2014 and $1.0 million due in 2015, generally payable through private placements in Ely common stock. Ely may self-fund some or all of these obligations.
- The company recorded $13 thousand of mineral-property write-downs during the first six months on Cerro Azul, Atico and Jaripo.
- On July 26, 2013, after quarter-end, the company completed a private placement of 2,451,892 shares for $2.060 million and repaid its UBS margin loan. As of August 6, 2013, it reported no short-term borrowing and $1.5 million of remaining availability under the RMB facility.
- Management reported effective disclosure controls and internal control over financial reporting. No material changes to previously disclosed risk factors, legal proceedings or off-balance-sheet obligations were reported.
Investor verification items
- Verify the current market value, liquidity and collateral requirements associated with the Kinross and other equity investments.
- Reconcile the post-quarter-end equity offering proceeds with the UBS margin-loan repayment and remaining working-capital resources.
- Review Mt. Hamilton permitting status, development budget, capital requirements and the feasibility study assumptions.
- Confirm the timing and funding mechanics for the remaining Augusta obligations and the related Ely share subscriptions.
- Assess the terms, security interests, interest costs and remaining availability under the RMB facility, including the 1,624,748 outstanding warrants.
- Evaluate the recoverability of capitalized Mt. Hamilton costs and the company’s ability to finance development without mineral-production revenue.