Solitario Exploration & Royalty Corp. — FY2014 Form 10-K Summary
Business context and reporting period
Solitario Exploration & Royalty Corp. is a development-stage mineral company focused primarily on advancing its 80%-owned Mt. Hamilton gold project in Nevada, while maintaining a limited portfolio of exploration and royalty interests in Peru, Mexico and Brazil. The filing covers the fiscal year ended December 31, 2014 and was filed March 27, 2015.
The company has never developed or operated a mine. Mt. Hamilton is its only project with reported proven and probable reserves. Other properties are held for potential sale, joint venture, development or royalty creation.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Property and joint venture revenue | $200,000 | $300,000 |
| Net loss attributable to Solitario shareholders | $1.833 million | $2.052 million |
| Basic and diluted loss per share | $0.05 | $0.06 |
| Net cash used in operating activities | $1.610 million | $2.237 million |
| Net cash used in investing activities | $1.691 million | Net cash provided of $2.517 million |
| Net cash provided by financing activities | $2.078 million | $1.196 million |
| Cash and cash equivalents | $869,000 | $2.092 million |
| Working capital | Deficit of $1.987 million | $2.531 million |
| Total assets | $19.040 million | $19.500 million |
| Total shareholders’ equity | $6.781 million | $7.963 million |
Revenue consisted of a $200,000 Bongará joint-venture delay-rental payment. Revenue is infrequent and the company does not have operating mine revenue. The filing does not provide a meaningful operating margin because the company is not in production; reported losses primarily reflect exploration, corporate, financing and non-cash stock compensation costs.
At December 31, 2014, the company had $5.000 million of RMB principal outstanding, presented as $4.861 million of current debt after a $139,000 warrant discount. The loan bears interest at 90-day LIBOR plus 5%, was approximately 5.23% at year-end, is secured by substantially all company assets, and was due August 20, 2015. The company had no UBS margin-loan balance at year-end.
Marketable equity securities totaled $2.308 million at fair value, including 480,000 Kinross shares and approximately 19.5% of Ely. The company sold 120,000 Kinross shares for $556,000 and recognized a $472,000 gain. It also recorded a $1.580 million unrealized loss on marketable securities in other comprehensive income.
Material changes versus the prior comparable period
- Net loss attributable to Solitario shareholders improved by $219,000, or approximately 11%, primarily because exploration expense, general and administrative costs and equity-method losses declined.
- Exploration expense declined to $279,000 from $797,000 as Latin American activities were reduced to care and maintenance and no drilling was conducted in those regions.
- General and administrative expense, excluding non-cash stock-option compensation, declined to approximately $1.397 million from $1.824 million. Total reported general and administrative expense was $2.176 million versus $2.244 million.
- Non-cash stock-option compensation increased to $779,000 from $420,000, principally due to the August 2014 grant of 1.990 million options.
- Cash declined by $1.223 million during 2014, compared with a $1.476 million increase in 2013. The change reflects operating cash use, Mt. Hamilton spending and the absence of the $4.000 million Sandstorm royalty proceeds received in 2013.
- Debt increased as the company borrowed an additional $1.500 million under the RMB facility, bringing principal to $5.000 million. The prior Augusta long-term debt had been fully repaid in 2013.
- Mt. Hamilton mineral property costs capitalized declined to $2.582 million from $2.784 million, while the carrying value of mineral properties increased to $14.660 million from $12.098 million.
- The company completed an updated Mt. Hamilton feasibility study and received a U.S. Forest Service environmental assessment decision and finding of no significant impact. It also recorded a $20,000 impairment related to the Pachuca project, compared with $13,000 of impairments in 2013.
Mt. Hamilton project and outlook
The October 2014 updated feasibility study reported 22.5 million tons of proven and probable reserves containing approximately 545,400 ounces of gold and 4.46 million ounces of silver. The study contemplated open-pit mining and heap-leach processing, a 10,000-ton-per-day production rate and a 6.5-year mine life, based on assumed prices of $1,300 per ounce for gold and $20 per ounce for silver.
Estimated initial development capital was approximately $91.7 million, substantially exceeding the company’s available resources. Management expected to seek project financing, a joint-venture partner or another monetization transaction. Construction was targeted for the second half of 2015, subject to financing and remaining permits, including the Nevada air-quality permit and other local and state approvals.
Management’s 2015 budget included approximately $846,000 of exploration and development spending, including $732,000 for Mt. Hamilton, plus approximately $735,000 of claim, lease and advance royalty payments. No Mt. Hamilton exploration drilling was planned. Management also expected to sell its remaining Kinross shares, with assumed proceeds of approximately $1.440 million, although actual proceeds would depend on market prices.
Subsequent to year-end, Votorantim completed its earn-in to 61% of the Bongará project, leaving Solitario with 39%, and transferred its interest to affiliate Compañía Minera Milpo. Beginning in January 2015, Solitario accounted for Bongará and Chambara under the equity method. Milpo planned further road construction and a prefeasibility study at Bongará. Anglo Platinum subsequently placed the Pedra Branca project on care and maintenance and sought a joint-venture partner.
Risks, contingencies and unusual items
- Going-concern uncertainty: The independent auditor included an explanatory paragraph stating that substantial doubt exists regarding the company’s ability to continue as a going concern because it lacked sufficient liquidity to repay the RMB loan when due. Management’s refinancing and funding plans were not assured.
- Default and foreclosure risk: Failure to repay the RMB loan could permit the lender to foreclose on pledged assets, including the Mt. Hamilton interest and other company assets.
- Financing risk: Mt. Hamilton requires approximately $91.7 million of initial capital, and no construction financing was in place at year-end.
- Ownership dilution or reduction: Failure to make required Mt. Hamilton advance royalty and royalty buy-down payments could reduce Solitario’s interest from 80% to 49%.
- Royalty and contractual obligations: Mt. Hamilton requires $300,000 annual advance royalty payments and potential royalty buy-down payments totaling $5.0 million. The company also remains jointly and severally liable for obligations under the Sandstorm royalty agreement, including a potential shortfall guarantee.
- Commodity and market exposure: Project economics, property values and liquidity depend heavily on gold, silver and other commodity prices, as well as the market value of Kinross and Ely securities.
- Reserve and feasibility sensitivity: Mt. Hamilton reserves and projected economics depend on assumptions regarding metal prices, recoveries, costs, permitting, reclamation and construction timing that may not be achieved.
- Exploration and joint-venture risk: Most exploration properties lack reserves, depend on partners and may be impaired or abandoned if economic potential is not demonstrated.
- Unrecognized equity-method losses: Solitario’s unrecognized losses related to its 49% Pedra Branca interest were $652,000 at December 31, 2014; the recorded investment had been reduced to zero.
- Limited revenue visibility: The company expects property sales, joint-venture payments and royalty revenues, if any, to occur infrequently and has not budgeted joint-venture or delay-rental receipts for 2015.
Most important facts for investors to verify
- Whether the RMB loan was refinanced, repaid or placed in default after its August 2015 maturity date.
- Whether sufficient financing or a strategic partner was obtained to fund Mt. Hamilton’s approximately $91.7 million development requirement.
- Whether the remaining Mt. Hamilton air-quality and local permits were obtained and whether construction commenced.
- Actual 2015 cash balances, security-sale proceeds, operating cash burn and compliance with Mt. Hamilton payment obligations.
- Changes in gold and silver prices and their effect on the updated feasibility study’s reserve economics.
- The completed ownership and accounting treatment of Bongará, Chambara and Pedra Branca following the post-year-end transactions.
- Whether the company’s going-concern uncertainty was resolved and whether any lender foreclosure, asset sale or material dilution occurred.