Solitario Exploration & Royalty Corp. - 10-Q Summary (Period Ended Sept 30, 2009)
Business Context and Reporting Period
Solitario Exploration & Royalty Corp. is an exploration-stage company focused on acquiring precious and base metal properties in Latin America (Mexico, Brazil, Bolivia, Peru) for future sale, joint venture, or royalty development. The company does not anticipate developing properties on its own. This report covers the quarterly and nine-month periods ended September 30, 2009.
Key Financial Metrics
| Metric | 9 Months Ended Sept 30, 2009 | 9 Months Ended Sept 30, 2008 |
|---|---|---|
| Revenue | $200,000 (Joint venture payments) | $200,000 |
| Net Loss (Attributable to Shareholders) | $(2,436,000) | $271,000 (Net Income) |
| EPS (Basic & Diluted) | $(0.08) | $0.01 |
| Cash and Cash Equivalents | $629,000 | $3,088,000 (End of period 2008) |
| Working Capital | $1,982,000 | $3,415,000 |
| Exploration Expense | $2,596,000 | $3,312,000 |
| Gain on Sale of Marketable Securities | $1,409,000 | $3,576,000 |
| Loss on Derivative Instruments | $(299,000) | $1,966,000 (Gain) |
Material Changes vs. Prior Period
- Profitability Shift: The company reported a net loss of $2.4 million for the nine months ended Sept 30, 2009, compared to a net income of $271,000 in the same period of 2008. This reversal was primarily driven by a shift from a $1.97 million gain on derivative instruments in 2008 to a $299,000 loss in 2009, and a significant reduction in gains from the sale of marketable equity securities.
- Exploration Costs: Exploration expenses decreased by approximately 22% ($716,000) year-over-year due to reduced drilling activity and a more conservative approach to expenditures amidst economic uncertainty.
- Liquidity: Cash and cash equivalents declined from $1.94 million at year-end 2008 to $629,000 at Sept 30, 2009. Net cash used in operating activities was $3.9 million, an improvement from $5.0 million in the prior year.
- Derivative Volatility: The fair value of the "Kinross Collar" (a zero-premium equity collar on Kinross Gold Corp. shares) fluctuated significantly, contributing to the volatility in earnings.
Guidance, Outlook, and Material Events
- Terminated Acquisition: On November 2, 2009 (subsequent to the reporting period), Solitario's agreement to acquire Metallic Ventures Gold Inc. was terminated after Metallic Ventures accepted a superior offer. Solitario received a termination fee of $2.2 million.
- Impact of Termination Fee: Management anticipates the $2.2 million fee will cover current expenditures for the remainder of 2009, eliminating the immediate need to sell additional Kinross Gold shares. The fee is expected to generate approximately $450,000 in currently payable taxes due in Q1 2010.
- Exploration Outlook: The full-year 2009 exploration budget is approximately $4.4 million. Activities remain focused on the Pedra Branca project (Brazil) and the Newmont Strategic Alliance areas.
- Derivative Exposure: The company holds 1.05 million shares of Kinross Gold Corp. 500,000 of these shares are subject to the Kinross Collar, which limits upside appreciation above specific thresholds but provides downside protection. Changes in Kinross stock price materially impact the company's earnings and equity.
Investor Verification Checklist
- Kinross Holdings: Verify the current market price of Kinross Gold Corp. shares, as Solitario's liquidity and equity value are heavily dependent on this single asset class.
- Derivative Liability: Review the fair value of the Kinross Collar and covered call options, as unrealized gains/losses on these instruments drive significant volatility in reported net income.
- Termination Fee Taxation: Confirm the actual tax liability and cash outflow associated with the $2.2 million Metallic Ventures termination fee in the subsequent 10-Q or 10-K.
- Exploration Progress: Monitor assay results from the Pedra Branca and Chonta drilling programs to assess the viability of the company's core assets.
- Stock Option Liability: Note that stock options are classified as liabilities (due to Canadian dollar pricing) and their fair value changes impact the income statement.