Solitario Exploration & Royalty Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2012, compared with the same periods in 2011. Solitario is a development-stage mining company focused on exploration, royalty interests and development of the Mt. Hamilton project in Nevada. Completion of the Mt. Hamilton feasibility study on February 22, 2012 increased Solitario’s interest in Mt. Hamilton LLC to 80% and shifted the company toward development activities.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net loss attributable to Solitario shareholders | $0.4 million in 2012 vs. $0.8 million in 2011 | $1.1 million in 2012 vs. $1.0 million in 2011 |
| Loss per share, basic and diluted | $0.01 vs. $0.03 | $0.03 vs. $0.03 |
| Exploration expense | $0.6 million vs. $0.9 million | $1.1 million vs. $1.8 million |
| Gain on sale of marketable securities | $1.1 million vs. $0.3 million | $1.5 million vs. $1.9 million |
| Net cash used in operating activities | Not separately provided | $1.9 million vs. $3.6 million |
The filing does not report operating revenue or meaningful operating margins; the company remains pre-production. The six-month loss before taxes was $1.3 million, and the six-month net loss was $1.3 million, including noncontrolling-interest effects. Comprehensive loss was $3.9 million, primarily reflecting a $2.6 million after-tax unrealized loss on marketable equity securities.
At June 30, 2012, cash and cash equivalents were $5.6 million, compared with $0.4 million at December 31, 2011. Working capital was $6.4 million versus $0.3 million at year-end 2011. Current assets included a $4.0 million receivable due from Sandstorm on January 15, 2013 and $1.4 million of marketable securities.
Total debt consisted of $3.1 million in short-term margin loans and $2.2 million of long-term debt, net of discount, including $0.7 million current. Total liabilities also included a $7.0 million deferred gain related to the Sandstorm royalty sale. The company had total assets of $24.6 million and total shareholders’ equity of $10.5 million at June 30, 2012.
Material changes versus the prior comparable period
- Exploration expense declined because Mt. Hamilton development costs became capitalized after completion of the feasibility study. The company capitalized $0.5 million in the second quarter and $0.8 million in the first six months.
- General and administrative expense declined to $0.6 million in the second quarter and $1.3 million for the first six months, from $0.7 million and $1.6 million, respectively.
- The company sold 180,000 Kinross shares during the first six months for $1.6 million of proceeds and recognized a $1.5 million gain. Its Kinross holdings declined to 670,000 shares from 850,000 at December 31, 2011.
- Cash increased primarily from the $6.0 million upfront payment under the Sandstorm royalty transaction, proceeds from Kinross sales and net short-term borrowings.
- Noncontrolling interest declined materially as Solitario’s ownership of Mt. Hamilton LLC increased from 10% in the comparable 2011 period to 80% in 2012.
- On June 26, 2012, the CEO and CFO purchased an aggregate 225,000 shares in a related-party private placement for $274,500.
Guidance, outlook, risks and unusual items
- Management expected available cash, the $4.0 million Sandstorm receivable, planned Kinross sales and borrowing capacity to fund operations through the end of the second quarter of 2013.
- Remaining 2012 budgets were approximately $1.2 million for exploration excluding Mt. Hamilton, $2.7 million for Mt. Hamilton exploration and development, and $0.5 million for Mt. Hamilton leasehold and earn-in payments.
- Development of Mt. Hamilton remains subject to permits and additional capital, neither of which was in place at June 30, 2012. Solitario has never developed a mineral property.
- Solitario sold a 2.4% net smelter returns royalty on Mt. Hamilton to Sandstorm for $10.0 million, consisting of $6.0 million received upfront and $4.0 million due January 15, 2013. The gain was deferred because MH-LLC guaranteed Sandstorm at least $10.0 million of royalty proceeds through December 31, 2022.
- Failure to make the remaining $150,000 cash and 25,000-share earn-in payment due to DHI-US in August 2012 could result in loss of Solitario’s entire Mt. Hamilton interest. Later payment failures could reduce its interest to 49%.
- Margin loans are secured primarily by Kinross shares and are callable or subject to forced liquidation if minimum account equity requirements are not maintained. At June 30, account equity was 47% at UBS and 35% at RBC. By August 6, outstanding balances had been reduced to $0.4 million at UBS and $1.0 million at RBC.
- The company’s significant concentration in Kinross creates exposure to equity-price volatility, liquidity risk and potential margin calls. The filing identifies no material changes to previously disclosed risk factors.
- Management reported no legal proceedings, defaults, mine-safety matters or off-balance-sheet obligations and concluded that internal and disclosure controls were effective as of June 30, 2012.
Important facts for investors to verify
- Whether the $4.0 million Sandstorm receivable was collected on January 15, 2013 and whether the royalty guarantee or deferred gain created subsequent obligations.
- Whether Solitario completed the August 2012 Mt. Hamilton earn-in payment and maintained its 80% ownership interest.
- Current Kinross share prices, remaining share holdings, collateral coverage and margin-loan balances.
- Permitting status, updated capital requirements and development economics for Mt. Hamilton.
- Progress toward funding the remaining long-term debt, royalty-related commitments and future development expenditures.