Solitario Exploration & Royalty Corp. — Fiscal 2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011. Solitario was primarily an exploration-stage precious- and base-metal company with properties and royalty interests in the United States, Peru, Brazil, Mexico and Bolivia. The company had no producing mines and had never developed a mineral property. Following completion of the Mt. Hamilton feasibility study on February 22, 2012, Solitario became a development-stage company and earned an 80% interest in the Mt. Hamilton LLC project.
At December 31, 2011, Solitario held 12 exploration properties and royalty interests, operated in one segment, and had 34.2 million common shares outstanding. The filing was audited by Ehrhardt Keefe Steiner & Hottman PC, which issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | 2011 | 2010 | Change or comment |
|---|---|---|---|
| Property and joint venture revenue | $242,000 | $200,000 | Limited and irregular revenue |
| Net loss attributable to Solitario shareholders | $3.377 million | $4.066 million | Loss narrowed by $689,000 |
| Loss per share, basic and diluted | $0.10 | $0.14 | Improved despite higher share count |
| Total exploration expense | $5.946 million | $4.033 million | Increased primarily because of Mt. Hamilton |
| General and administrative expense | $2.857 million | $4.280 million | Lower largely because of reduced stock-option expense |
| Net cash used in operations | $7.931 million | $5.440 million | Higher operating cash burn |
| Cash and cash equivalents | $432,000 | $478,000 | Broadly stable year over year |
| Working capital | $345,000 | $134,000 | Improved, but remained limited |
| Total assets | $22.054 million | $29.608 million | Declined mainly from lower investment values |
| Shareholders' equity | $13.873 million | $13.776 million | Slight increase |
Revenue consisted principally of a $200,000 Bongará joint-venture delay-rental payment and $42,000 recognized from a $50,000 Mercurio payment after eliminating the project's remaining capitalized cost. The company expects future property-sale and joint-venture revenue, if any, to be infrequent.
Other significant 2011 items included a $1.937 million gain on sales of Kinross shares, a $623,000 equity-method loss from Pedra Branca, a $137,000 derivative loss, $163,000 of net interest expense, a $635,000 income-tax benefit and a $10,000 mineral-property impairment. Comprehensive loss was substantially affected by a $9.425 million after-tax-related decline in the fair value of marketable equity securities.
Liquidity, capital resources and debt
- The company raised $8.937 million net from a public offering of 3.91 million shares at $2.50 per share. Proceeds funded debt repayment, the Mt. Hamilton royalty buy-down, exploration and working capital.
- At year-end, Solitario had a $2.0 million short-term margin loan secured by Kinross shares. The loan was callable and subject to a minimum account equity requirement of 40%.
- At March 8, 2012, total short-term margin borrowing was $2.5 million, including a subsequent $500,000 RBC borrowing. The filing reported approximately $8.9 million of value for 820,000 Kinross shares at that date.
- Mt. Hamilton long-term debt had a discounted carrying value of $2.802 million, including a $727,000 current portion. Scheduled payments to Augusta totaled $3.25 million through 2015 before discounting.
- The company stated that cash, marketable securities and available borrowing capacity were expected to fund operations through the end of 2012, but additional capital would be required for long-term exploration and mine development.
Material changes versus the prior comparable period
- Mt. Hamilton exploration expense increased to $3.7 million from $1.214 million, while non-Mt. Hamilton exploration expense declined to $2.246 million from $2.819 million.
- General and administrative expense excluding stock-option costs rose to $2.160 million from $1.767 million, driven by higher salaries, a $245,000 bonus, legal and accounting costs, and shareholder-relations spending. Non-cash stock-option expense fell to $697,000 from $2.513 million.
- The company recorded a $1.937 million Kinross-sale gain versus $995,000 in 2010, but recognized a $137,000 derivative loss versus a $152,000 gain.
- Unlike 2010, Solitario recorded no gain on deconsolidation of Pedra Branca; instead, its equity-method loss from Pedra Branca increased to $623,000 from $220,000.
- Marketable equity securities declined to $10.361 million from $19.771 million, primarily reflecting Kinross share sales and market-price declines.
- Solitario adopted ASU 2010-13 and changed stock-option accounting from liability to equity treatment. The adoption eliminated a $2.775 million stock-option liability and increased additional paid-in capital by $1.240 million, net of related tax effects.
- Solitario abandoned the Paria Cruz project and recorded a $10,000 impairment. Buenaventura also terminated its option on Pachuca-Real, leaving Solitario with 100% ownership.
Mt. Hamilton development, outlook and unusual items
The February 2012 feasibility study reported 22.527 million tons of proven and probable reserves containing 487,100 ounces of gold and 3.028 million ounces of cyanide-soluble silver. The proposed open-pit, heap-leach operation assumed an eight-year mine life, 8,500 tons of ore per day, average annual production of 48,000 ounces of gold and 330,000 ounces of silver.
| Feasibility-study item | Reported amount |
|---|---|
| Initial capital cost | $71.9 million |
| Sustaining capital, including closure costs | $35.3 million |
| Working capital | $7.1 million |
| Total cash cost per gold-equivalent ounce | $589 |
| Average gold-equivalent production | 54,000 ounces annually |
These feasibility-study figures are not historical operating results. Management stated that the company did not have the funds to finance the estimated $71.9 million initial capital requirement. Planned 2012 activities included permitting, engineering, development work and financing efforts. The Plan of Operations was expected to be submitted to the U.S. Forest Service in April 2012, but timing of permits and construction remained uncertain.
Management budgeted approximately $3.442 million for 2012 exploration, including $1.325 million for Mt. Hamilton development costs, plus approximately $1.675 million for Mt. Hamilton lease, royalty and earn-in payments. It also anticipated approximately $5.040 million of proceeds from selling 360,000 Kinross shares. General and administrative costs, excluding stock-option expense, were projected at approximately $1.695 million.
Key risks, contingencies and unusual items
- Mt. Hamilton requires substantial additional financing, permits, reclamation bonding and mining expertise. Failure to make required payments could reduce or eliminate Solitario's interest in the project.
- Contractual obligations listed at December 31, 2011 totaled $16.125 million, including short-term margin loans, Mt. Hamilton land and royalty obligations, earn-in payments and long-term debt.
- The company is highly exposed to Kinross share-price volatility. A margin call could require forced sales of Kinross shares and materially impair liquidity.
- The feasibility study depends on assumptions regarding reserves, recoveries, commodity prices, capital and operating costs, permitting, environmental requirements and closure costs that may not be achieved.
- Solitario has a long history of losses, reporting losses in 16 of 18 operating years. It had no producing properties and no reserves at December 31, 2011; the Mt. Hamilton reserves were established after year-end.
- Exploration properties outside Mt. Hamilton had no reported reserves. Properties may be impaired or abandoned if exploration results do not support economic potential.
- Operations are subject to permitting, environmental, political, taxation, currency, community, title, weather and FCPA risks in Peru, Brazil, Mexico and Bolivia.
- The company maintained limited insurance coverage and did not maintain political-risk insurance. It reported no material environmental incidents or regulatory non-compliance during 2011.
Most important facts for an investor to verify
- Whether Solitario secured financing sufficient for the Mt. Hamilton construction requirement and subsequent development obligations.
- The status and timing of the Mt. Hamilton Plan of Operations, Record of Decision, environmental permits and reclamation bonding.
- Compliance with the Mt. Hamilton earn-in, royalty buy-down, lease and Augusta debt-payment requirements.
- Current Kinross holdings, margin debt, collateral values and applicable margin-call thresholds.
- Whether the feasibility-study reserve, production, cost and commodity-price assumptions remain current.
- Progress, funding and partner commitments at Bongará, Pedra Branca, Pachuca-Real and other exploration properties.
- Cash burn, proceeds from Kinross sales, additional equity or debt financing, and the company's ability to fund obligations beyond 2012.