Solitario Exploration & Royalty Corp. — Fiscal 2012 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2012, filed March 7, 2013. Solitario was a development-stage mineral company focused primarily on advancing its 80%-owned Mt. Hamilton gold project in Nevada, while maintaining exploration and royalty interests in Peru, Mexico and Brazil. The company had not previously developed or operated a mine.
- Mt. Hamilton became the company’s only property with proven and probable reserves after completion of a feasibility study in February 2012.
- The company operated through two segments: mining development and mineral exploration.
- At December 31, 2012, Solitario had 34.5 million shares outstanding and six U.S. and twelve Latin American full-time employees.
Financial performance and key metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Joint venture and property revenue | $300,000 | $242,000 |
| Net loss attributable to Solitario shareholders | $3.297 million | $3.377 million |
| Basic and diluted loss per share | $0.10 | $0.10 |
| Net cash used in operating activities | $3.504 million | $7.931 million |
| Net cash provided by investing activities | $3.870 million | $193,000 |
| Cash and cash equivalents | $616,000 | $432,000 |
| Working capital | $4.245 million | $345,000 |
| Total assets | $23.483 million | $22.054 million |
| Total shareholders’ equity | $9.217 million | $13.873 million |
- Exploration expense declined to $1.986 million from $5.946 million, largely because $3.129 million of Mt. Hamilton development costs were capitalized after the feasibility study.
- General and administrative expense was $2.680 million, including $732,000 of non-cash stock-option expense.
- Interest expense and dividend income, net, was a $318,000 expense versus $163,000 in 2011.
- The company recorded a $1.528 million gain on sales of marketable equity securities, primarily from selling 180,000 Kinross shares for $1.591 million.
- Marketable equity securities totaled $7.093 million at year-end, including 670,000 Kinross shares. Unrealized losses on these securities reduced comprehensive income by $1.963 million after tax.
- Debt included a $1.500 million short-term margin loan, $2.236 million of Augusta-related debt at carrying value, and a $1.500 million RMB loan before subsequent borrowings.
Material changes versus the prior comparable period
- Solitario earned an 80% interest in Mt. Hamilton following completion of the feasibility study and shifted from exploration toward development.
- Mt. Hamilton development spending increased, with $3.129 million capitalized and $325,000 of related lease payments capitalized during 2012.
- MH-LLC sold a 2.4% net smelter return royalty on Mt. Hamilton to Sandstorm for $10 million. The company received $6 million in 2012 and recognized a $4 million receivable at year-end; the remaining payment was received in January 2013. A $7 million deferred gain was recorded because of a future royalty-payment guarantee.
- The company entered into a facility allowing borrowings of up to $5 million from RMB; it initially borrowed $1.5 million and issued 1,624,748 warrants with a $1.5387 exercise price.
- Operations in Bolivia were discontinued, and the Triunfo and Espanola properties were abandoned. Excelsior in Peru was also abandoned, resulting in total 2012 mineral-property impairments of $31,000.
- Foreign operating assets declined to $1.433 million from $2.251 million.
Mt. Hamilton reserves, outlook and commitments
- Reported proven and probable reserves totaled 22.527 million tons at 0.022 ounces of gold per ton and 0.136 ounces of silver per ton, containing approximately 487,100 ounces of gold and 3.028 million ounces of silver.
- The feasibility study contemplated an eight-year, 8,500-ton-per-day open-pit heap-leach operation, with average annual production of approximately 48,000 ounces of gold and 330,000 ounces of silver.
- Estimated initial capital was $71.9 million, sustaining capital was $35.3 million, and working capital was $7.1 million. Solitario did not have the required construction financing in place.
- The 2013 plan emphasized permitting, additional drilling, metallurgical testing, reserve modeling and updating the economic model. The Plan of Operations was under review by the U.S. Forest Service, and additional permits were required.
- Management budgeted approximately $3.439 million for 2013 exploration and development, including approximately $2.043 million for Mt. Hamilton development; other disclosures state approximately $3.668 million for Mt. Hamilton permitting, planned development, land and earn-in payments.
- Maintaining the 80% Mt. Hamilton interest required substantial future payments, including $2.5 million of Ely-related payments through 2015, cash and stock payments to DHI-US, annual advance royalties, and a potential $5 million royalty buy-down before commercial completion.
Outlook, risks and unusual items
- Management expected to fund 2013 activities through sales of Kinross shares, RMB borrowings and additional margin borrowing. It planned to sell approximately 320,000 Kinross shares for assumed proceeds of $3.2 million, subject to market prices.
- Mt. Hamilton development depended on obtaining permits and approximately $71.9 million of construction capital, neither of which was secured at year-end.
- Failure to make required Mt. Hamilton payments could dilute Solitario’s interest from 80% to 49% and increase DHI-US’s interest to 51%.
- The RMB facility was secured by the company’s Mt. Hamilton interest and substantially all other assets. Margin loans were callable and collateralized primarily by Kinross shares, creating margin-call and forced-sale risk.
- The company remained dependent on volatile gold, silver and base-metal prices, exploration success, joint-venture partners, government approvals, environmental compliance and access to capital.
- Solitario reported losses in 17 of its 19 years of operations and did not expect to pay dividends in the foreseeable future.
- Subsequent to year-end, the company borrowed an additional $1 million under the RMB facility, bringing that balance to $2.5 million at February 28, 2013, and entered into a nonbinding definitive-agreement process with Hochschild for a potential Pachuca Norte joint venture.
Important facts investors should verify
- Current status, timing and cost of Mt. Hamilton permitting, including whether an Environmental Assessment or a more extensive Environmental Impact Statement will be required.
- Availability and terms of financing for the estimated $71.9 million initial capital requirement.
- Compliance with Mt. Hamilton earn-in, royalty, lease and Augusta-related payment obligations and the resulting ownership consequences.
- Current debt balances, interest rates, collateral requirements and potential margin-call exposure.
- Value and concentration of the Kinross investment and the effect of future share sales on liquidity, taxes and earnings.
- Whether Mt. Hamilton feasibility-study assumptions, reserve estimates, recoveries, costs and commodity-price assumptions remain supportable.
- Progress of Bongará, Pachuca Norte and other exploration joint ventures, none of which had reported reserves except Mt. Hamilton.
- The filing text contains a date inconsistency in the signature section; the filing is otherwise identified as the fiscal 2012 Form 10-K filed March 7, 2013.