Business Context and Reporting Period
Solitario Exploration & Royalty Corp. was an exploration-stage precious- and base-metals company focused on acquiring, exploring, joint-venturing and developing mineral properties and royalty interests. The unaudited Form 10-Q covers the three and six months ended June 30, 2011, with comparisons to the corresponding 2010 periods. The company held exploration properties in the United States, Mexico, Brazil, Bolivia and Peru and was advancing the Mt. Hamilton gold project in Nevada.
Financial Performance and Position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | No material revenue reported | No material revenue reported | No material revenue reported | No material revenue reported |
| Net loss | $1.370 million | $1.357 million | $2.064 million | $2.332 million |
| Net loss attributable to Solitario shareholders | $0.849 million | $1.292 million | $1.010 million | $2.197 million |
| Loss per share | $0.03 | $0.04 | $0.03 | $0.07 |
| Exploration expense | $0.921 million | $0.953 million | $1.762 million | $1.728 million |
| Gain on sale of marketable securities | $0.302 million | $0.553 million | $1.870 million | $0.553 million |
| Cash used in operating activities | Not separately provided | Not separately provided | $3.554 million | $3.095 million |
- Cash and cash equivalents were $4.905 million at June 30, 2011, compared with $0.478 million at December 31, 2010.
- Total assets were $31.436 million, including $14.751 million of marketable equity securities and $8.833 million of mineral properties.
- Working capital was $3.934 million at June 30, 2011, compared with $0.134 million at year-end 2010.
- Total shareholders’ equity was $21.228 million, versus $13.776 million at December 31, 2010.
- Debt included $2.699 million of Mt. Hamilton-related long-term debt, of which $0.700 million was current. The balance sheet also reported $2.017 million of short-term margin loan debt; management stated that the RBC margin loan had been repaid and that $2.000 million was outstanding under a UBS secured credit line at June 30, 2011.
- Marketable securities declined to $14.751 million from $19.771 million at December 31, 2010, primarily reflecting Kinross share sales and market-value changes. The company held 855,000 Kinross shares at June 30, 2011.
Material Changes Versus the Prior Comparable Period
- Net loss attributable to Solitario shareholders improved by $0.443 million in the second quarter and $1.187 million for the six-month period, primarily because of lower stock-option expense, larger noncontrolling-interest credits and higher Kinross-sale gains.
- Six-month gain on sale of marketable securities increased to $1.870 million from $0.553 million as Kinross sales increased to 125,000 shares from 40,000 shares.
- General and administrative expense increased for the six-month period to $1.645 million from $1.560 million, driven by higher salaries, bonuses, legal and accounting costs, travel and investor-relations activities. Second-quarter expense declined to $0.689 million from $1.082 million because of lower stock-option expense.
- Exploration spending shifted toward Mt. Hamilton. Six-month Mt. Hamilton exploration expense was $1.020 million, while spending on other projects declined; total exploration expense was broadly stable.
- The company completed a $9.775 million common-stock offering of 3.910 million shares at $2.50 per share, generating $8.937 million of net proceeds.
- On May 17, 2011, the company paid $1.520 million in cash and issued 344,116 shares valued at $1.000 million to reduce the maximum Mt. Hamilton net smelter royalty from 8% to 6%.
- The Kinross collar expired on April 12, 2011, leaving all Kinross shares unhedged.
- Beginning January 1, 2011, stock options were classified as equity rather than liabilities, eliminating the $2.775 million stock-option liability and increasing additional paid-in capital by $1.240 million, with a $0.992 million reduction in accumulated deficit, net of deferred taxes.
Guidance, Outlook, Risks and Unusual Items
- Management budgeted approximately $4.676 million for 2011 exploration, including approximately $1.581 million at Mt. Hamilton. A broader Mt. Hamilton exploration, development, land and earn-in budget was described as approximately $2.800 million.
- Management expected to sell approximately 171,000 Kinross shares over the following year for estimated proceeds of approximately $2.702 million and believed cash and marketable securities were adequate to fund expected expenditures through the end of 2011.
- Management stated that additional capital would be needed to develop Mt. Hamilton or other mineral deposits and could be obtained through joint ventures, debt, equity issuance, property sales or additional Kinross sales. Availability and terms were not assured.
- Remaining Mt. Hamilton earn-in commitments totaled $3.250 million at June 30, 2011, consisting of $0.750 million in cash and $2.500 million in Ely private-placement investments. Failure to make required payments could result in loss of the company’s interest in the project, although the agreement permits an opt-out if the project is deemed uneconomic.
- Mt. Hamilton remained subject to feasibility work, permitting, financing and development risks. No positive feasibility study, required development permits or financing for mine construction were yet in place.
- The company’s liquidity was materially exposed to fluctuations in Kinross’s market price. Kinross shares were concentrated in the investment portfolio and were also collateral for the UBS secured credit line, which required maintenance of a minimum equity-value percentage and allowed asset liquidation if the threshold was breached.
- The company remained an exploration-stage business with no history of developing a mineral property and no established operating revenue or proven and probable reserves disclosed in this filing.
- Other unusual items included a $0.381 million six-month loss from the equity-method investment in Pedra Branca, a $0.325 million fair value of Ely warrants, and a $5.040 million net after-tax decline in the fair value of marketable securities recorded in other comprehensive income.
- Management reported no legal proceedings, no material changes to previously disclosed risk factors, no off-balance-sheet obligations and effective disclosure controls and internal control over financial reporting as of June 30, 2011.
Investor Verification Priorities
- Reconcile the reported $2.017 million short-term debt on the balance sheet with management’s statement that the RBC margin loan was fully repaid and that $2.000 million was outstanding under the UBS credit line.
- Verify the remaining Mt. Hamilton earn-in schedule, required cash and Ely-investment commitments, royalty terms and consequences of opting out or failing to fund.
- Assess the fair value, liquidity and concentration risk of the 855,000 Kinross shares and the collateral requirements of the UBS credit line.
- Compare actual 2011 exploration and general-and-administrative spending with management’s budgets and determine whether additional financing will be required.
- Review the status and economics of the Mt. Hamilton feasibility study, permitting, metallurgical work, resource definition and development plan.
- Evaluate the impact of stock issuance, option exercises and future potential equity financing on share dilution.