Solitario Exploration & Royalty Corp. — FY2013 Form 10-K Summary
Business context and reporting period
Solitario Exploration & Royalty Corp. is a development-stage mining company focused primarily on developing its 80%-owned Mt. Hamilton gold project in Nevada and maintaining or advancing exploration and royalty properties in Peru, Mexico and Brazil. The audited fiscal year ended December 31, 2013. The company has never developed or operated a mine.
Mt. Hamilton is the only property with reported proven and probable reserves. The company operated with seven full-time employees as of February 28, 2014 and substantially reduced foreign exploration activities during 2013.
Key financial metrics
| US$ in thousands, except per-share data | 2013 | 2012 |
|---|---|---|
| Property and joint venture revenue | 300 | 300 |
| Net loss attributable to shareholders | (2,052) | (3,297) |
| Basic and diluted loss per share | (0.06) | (0.10) |
| Net cash used in operating activities | (2,237) | (3,504) |
| Net cash provided by investing activities | 2,517 | 3,870 |
| Net cash provided by financing activities | 1,196 | (182) |
| Cash and cash equivalents | 2,092 | 616 |
| Working capital | 2,531 | 4,245 |
| Total assets | 19,500 | 23,483 |
| Total shareholders’ equity | 7,963 | 9,217 |
Revenue consisted of $200,000 of Bongará delay-rental payments and $100,000 of Mercurio delay-rental payments. The company had no mining production revenue. Operating profitability and operating margins are not meaningful because the company remains pre-production and reported a loss.
Exploration expense declined to $797,000 from $1.986 million. Mt. Hamilton development expenditures were capitalized; total Mt. Hamilton capitalized costs were $2.784 million, including $1.884 million of development costs, $726,000 of interest and $174,000 of property payments.
At December 31, 2013, short-term margin debt was $802,000 and long-term debt, net of discount, was $3.144 million. The underlying RMB loan balance was $3.5 million, bearing interest at 90-day LIBOR plus 5%. Total contractual obligations were reported at $12.658 million, including Mt. Hamilton commitments, the margin loan and RMB debt.
Material changes versus the prior comparable period
- Net loss attributable to shareholders improved by $1.245 million, primarily due to lower exploration and general and administrative costs, a $313,000 gain on early debt termination, a $998,000 gain on the RMB warrant liability and capitalization of Mt. Hamilton interest and development costs.
- Cash increased by $1.476 million to $2.092 million, supported by a $2.060 million equity placement, $2.0 million of additional RMB borrowings and $4.0 million received from the 2012 Sandstorm royalty sale.
- Investing cash flow declined because the Sandstorm royalty proceeds fell to $4.0 million from $6.0 million in 2012 and marketable-security sale proceeds declined.
- Marketable equity securities declined to $3.973 million from $7.093 million, generating a $3.454 million after-tax unrealized loss in other comprehensive income. Kinross holdings declined to 600,000 shares from 670,000 shares.
- Augusta-related Mt. Hamilton debt was fully settled through a $1.3 million Ely share subscription, producing a $313,000 gain on early retirement of debt.
- Solitario’s Mt. Hamilton interest remained 80%, but failure to make required payments could reduce its interest to 49% and increase DHI’s interest to 51%.
Projects, outlook and management commentary
Mt. Hamilton’s reported proven and probable reserves totaled 22.527 million tons grading 0.022 ounces of gold per ton and 0.136 ounces of silver per ton, containing 487,100 ounces of gold and 3.028 million ounces of silver. The 2012 feasibility study contemplated an eight-year mine life, 48,000 ounces of average annual gold production, 330,000 ounces of average annual silver production, initial capital of $71.9 million and sustaining capital of $35.3 million.
The company’s 2014 priority was permitting Mt. Hamilton. Construction could begin as early as the fourth quarter of 2014, but required permits and project financing were not in place. Management targeted completion of major permits in the third quarter of 2014 and budgeted approximately $1.895 million for Mt. Hamilton permitting, development, land and earn-in payments. The filing separately describes a 2014 exploration and development budget of approximately $1.130 million plus approximately $765,000 of property, royalty and DHI payments.
The company expects to fund operations through Kinross share sales, additional RMB borrowings, equity or debt financing and joint-venture funding. It had not secured the estimated $71.9 million required to develop Mt. Hamilton. Management stated that existing cash, available credit, marketable securities and the UBS facility were expected to fund planned expenditures through the end of 2014.
Key project and financial risks include permitting delays or an Environmental Impact Statement requirement, inability to obtain development financing, cost escalation, gold and silver price volatility, margin-call exposure on Kinross-backed debt, reliance on joint-venture partners, environmental and reclamation obligations, foreign-country regulatory risk, and the company’s history of losses.
Other notable items include a $13,000 mineral-property impairment in 2013, a $1.012 million equity-method loss related to Pedra Branca, and a $3.454 million unrealized after-tax loss on marketable securities. The Sandstorm royalty sale includes a guarantee requiring MH-LLC to fund any shortfall if Sandstorm does not receive $10 million in royalty proceeds by December 31, 2022.
Important facts for investors to verify
- Whether Mt. Hamilton received all required environmental, state and federal permits and whether project financing was secured.
- Whether the feasibility-study capital, operating-cost, recovery, reserve and commodity-price assumptions remain valid.
- The maturity, collateral requirements and covenant status of the RMB facility and UBS margin loan, including exposure to Kinross price declines and margin calls.
- The company’s ability to meet Mt. Hamilton advance royalty, royalty buy-down, land and earn-in obligations without material dilution or additional debt.
- The status of the Sandstorm royalty guarantee and the company’s potential obligation to fund any shortfall.
- The liquidity and market value of Kinross and Ely investments used to fund operations.
- The company’s subsequent February 2014 private placement of 1.6 million shares for $1.680 million gross proceeds and the cancellation of 1.797 million options.
- Whether exploration joint-venture partners continue funding Bongará, Pedra Branca and Pachuca Norte, since these projects have no reported reserves except Mt. Hamilton.