Solitario Exploration & Royalty Corp. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; unaudited interim financial statements. The filing identifies the registrant as Solitario Exploration & Royalty Corp. (Colorado), a development-stage mining company focused on the Mt. Hamilton project in Nevada, mineral exploration and royalty interests.
Business Context and Reporting Period
- Following completion of the Mt. Hamilton feasibility study on February 22, 2012, Solitario earned an 80% interest in Mt. Hamilton LLC and began capitalizing qualifying development costs.
- The company reported proven and probable Mt. Hamilton reserves of 22.527 million tons containing approximately 487.1 thousand ounces of gold and 3.028 million ounces of silver.
- Management stated that development remains subject to permitting and obtaining required capital, neither of which was in place at September 30, 2012.
- Common shares outstanding were 34,479,958 as of November 5, 2012.
Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $0.2 million in 2012 and 2011 | $0.2 million in 2012 and 2011 |
| Net loss attributable to Solitario shareholders | $(1.359) million vs. $(0.906) million | $(2.414) million vs. $(1.916) million |
| Loss per share, basic and diluted | $(0.04) vs. $(0.03) | $(0.07) vs. $(0.06) |
| Net cash used in operating activities | Not separately provided | $(2.135) million vs. $(5.031) million |
| Net cash provided by investing activities | Not separately provided | $5.016 million vs. $0.175 million |
| Net cash provided by financing activities | Not separately provided | $(1.288) million vs. $7.698 million |
| Cash and cash equivalents | $2.025 million at September 30, 2012 vs. $0.432 million at December 31, 2011 | |
| Working capital | $5.177 million at September 30, 2012 vs. $0.345 million at December 31, 2011 |
- Exploration expense declined to $0.507 million in the third quarter and $1.585 million for the nine-month period, compared with $1.724 million and $3.486 million, respectively, in the prior-year periods.
- General and administrative expense was $0.571 million for the quarter and $1.863 million year to date, versus $0.625 million and $2.270 million in the comparable periods.
- Quarterly loss included a $0.729 million noncash loss from remeasuring RMB warrants and a $0.024 million mineral-property impairment.
- Income-tax benefits were $0.436 million for the quarter and $0.432 million year to date.
- Marketable equity securities totaled $7.648 million at September 30, 2012, including $6.841 million of Kinross shares. The company sold 180,000 Kinross shares for $1.591 million of proceeds and recognized a $1.464 million gain during the first nine months.
Debt, Liquidity and Capital Resources
- Short-term margin debt was $0.394 million at September 30, 2012, down from $2.0 million at December 31, 2011.
- Long-term debt totaled approximately $3.068 million before considering presentation details, comprising Augusta-related debt and a $1.5 million RMB loan; the balance-sheet carrying amount of long-term debt was $3.068 million including current and noncurrent portions.
- The RMB facility permits borrowings of up to $5.0 million. Solitario drew $1.5 million on August 21, 2012 and had $3.5 million of additional availability at September 30, 2012. Interest is LIBOR plus 5%; the loan is secured by the company’s Mt. Hamilton interest and substantially all remaining assets.
- The company issued 1,624,748 RMB warrants with a $1.5387 exercise price and recorded a $1.379 million warrant liability at September 30, 2012.
- Solitario recorded a $4.0 million current receivable from Sandstorm, due January 15, 2013, related to the sale of a 2.4% Mt. Hamilton NSR royalty. The transaction generated $6.0 million of upfront proceeds and a $7.0 million deferred gain because of a future royalty-payment guarantee.
- Management expected available cash, the Sandstorm receivable, Kinross sales, short-term borrowings and the RMB facility to fund operations through the end of the third quarter of 2013. This is a forward-looking statement and depends on financing availability and asset values.
Material Changes Versus Prior Comparable Period
- Net losses attributable to Solitario increased from $0.906 million to $1.359 million for the quarter and from $1.916 million to $2.414 million for the nine months.
- Lower exploration and general and administrative expenses were more than offset by the new RMB warrant remeasurement loss, lower gains from Kinross sales and substantially lower losses allocated to the noncontrolling interest after Solitario’s ownership increased to 80% from 10%.
- Development spending shifted from expense to capitalization after the feasibility study. Solitario capitalized $1.460 million during the quarter and $2.229 million during the nine months for Mt. Hamilton development.
- Cash increased by $1.593 million year to date, primarily reflecting the Sandstorm royalty proceeds, partially offset by operating cash use, capital expenditures and debt repayments.
- The company discontinued its Triunfo and Espanola properties in Bolivia and recorded a $24,000 impairment.
- Solitario issued 225,000 shares in a related-party private placement to its CEO and CFO for $274,500.
Outlook, Risks and Unusual Items
- Remaining 2012 budgets included approximately $341,000 for non-Mt. Hamilton exploration, $1.271 million for Mt. Hamilton exploration and development, and $0.300 million for Mt. Hamilton leasehold and earn-in payments.
- Failure to make remaining Mt. Hamilton earn-in payments could dilute Solitario’s interest from 80% to 49%, with DHI-US increasing to 51%.
- The company must fund approximately $2.5 million of remaining Augusta obligations, including $0.75 million due in 2013.
- The Sandstorm agreement includes a guarantee requiring MH-LLC to cover any shortfall if Sandstorm does not receive $10 million in royalty proceeds by December 31, 2022. Solitario is jointly and severally liable for MH-LLC obligations to Sandstorm.
- Liquidity is concentrated in Kinross shares and is exposed to market-price declines, margin requirements and potential forced sales. The company also faces commodity-price, permitting, exploration, development, financing and political risks.
- Management reported effective internal control over financial reporting and effective disclosure controls as of September 30, 2012. No legal proceedings or off-balance-sheet obligations were reported.
Investor Verification Points
- Verify receipt of the $4.0 million Sandstorm receivable due January 15, 2013 and the continuing obligations under the royalty guarantee.
- Assess Mt. Hamilton permitting status, development funding needs, earn-in payments and the risk of ownership dilution.
- Reconcile total debt, interest rates, collateral and remaining availability under the RMB facility and margin accounts.
- Monitor the value and liquidity of the Kinross investment, including compliance with margin-account equity requirements.
- Evaluate whether capitalized Mt. Hamilton development costs and the reported feasibility-study reserves remain recoverable.
- Review the potential dilution and future accounting volatility from the 1,624,748 RMB warrants.