Solitario Exploration & Royalty Corp. — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and six months ended June 30, 2016. Solitario is an exploration-stage mineral company focused on acquiring precious- and base-metal exploration properties, royalty interests and related assets for potential sale, joint venture or future development. Following the August 2015 sale of its 80% interest in the Mt. Hamilton project for gross proceeds of $24 million, the company shifted away from project development toward exploration, acquisitions and royalties.
The company’s core mineral asset is its carried interest in the Bongará project in Peru. During the period, Solitario acquired a royalty on non-producing Montana mineral leases and closed its Mexican exploration office.
Financial condition and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net loss attributable to Solitario shareholders | $162,000, or approximately $0.00 per share | $651,000, or $0.02 per share |
| Prior comparable net loss | $141,000 | $591,000 |
| Exploration expense | $220,000 | $342,000 |
| General and administrative expense | $256,000 | $698,000 |
| Net cash used in operating activities | Not separately provided | $1.0 million |
- The filing reports no recurring operating revenue for the periods presented. Gain on sales of marketable equity securities was $30,000 in both the quarter and six-month period.
- Total assets were $17.7 million at June 30, 2016, including $251,000 of cash, $16.0 million of short-term investments and $1.0 million of marketable equity securities.
- Short-term investments comprised approximately $7.5 million of U.S. Treasury securities and $8.5 million of bank certificates of deposit.
- Working capital was $17.1 million at June 30, 2016, compared with $17.8 million at December 31, 2015.
- Current liabilities were $273,000. The company had no outstanding RMB loan balance and reported no off-balance-sheet obligations.
- Net cash used in investing activities was $16.3 million, primarily reflecting purchases of Treasury securities, certificates of deposit, Vendetta Mining units and a Montana royalty.
- The company used $201,000 to repurchase 406,000 shares during the six months. Since inception of the program, it had repurchased 551,000 shares for $268,000.
- Shareholders’ equity was $17.5 million at June 30, 2016, compared with $17.9 million at December 31, 2015.
Material changes versus the prior comparable period
- Quarterly net loss increased to $162,000 from $141,000; six-month net loss increased to $651,000 from $591,000.
- Exploration expense increased sharply to $220,000 for the quarter and $342,000 for six months, from $7,000 and $32,000, respectively, as the company expanded reconnaissance and acquisition-related activities.
- General and administrative expense declined to $256,000 for the quarter and $698,000 for six months, from $478,000 and $1.03 million, respectively. The reduction primarily reflected lower legal, accounting and stock-option expenses following the Mt. Hamilton transaction and option cancellations.
- Gain on marketable equity security sales declined to $30,000 from $364,000 in both comparable periods.
- Derivative gains were $133,000 for the quarter and $132,000 for six months, including a $215,000 gain on Vendetta warrants, partly offset by losses on Kinross covered calls.
- The company recorded income tax benefits of $175,000 for the quarter and $237,000 for six months, with no comparable benefits in 2015. These benefits were associated with deferred taxes on unrealized investment gains and did not create net deferred tax assets because of a full valuation allowance.
- Cash and cash equivalents declined from $17.7 million at year-end 2015 to $251,000 at June 30, 2016, substantially because cash was transferred into short-term investments.
Guidance, outlook, risks and unusual items
- Management expects 2016 exploration expenditures to exceed 2015 levels and intends to continue evaluating and potentially acquiring exploration properties and related assets.
- General and administrative spending is expected to continue at approximately the quarterly rate reported for the second quarter.
- Management stated that cash, short-term investments and marketable securities are adequate to fund expected expenditures for at least the next year. Future development of existing or acquired projects could require additional capital through cash, joint ventures, debt, equity issuance or asset sales.
- The company expects continued operating cash use during the remainder of 2016 and may continue share repurchases under its authorization through December 31, 2016.
- Solitario closed its Mexican exploration office, sold the Norcan and Aconchi projects while retaining 1% royalties, and recorded a $10,000 mineral-property write-down and a $14,000 loss on other Mexican assets.
- Two Kinross covered calls, covering 100,000 shares in total, were outstanding at June 30, 2016 and had a combined liability of $128,000. The filing states that the calls could be exercised because Kinross’s share price exceeded the exercise prices.
- The RMB warrants covering 1.6 million shares were valued at zero at June 30, 2016 and were expected to expire in August 2016 without exercise.
- Key risks include exploration and acquisition uncertainty, commodity-price volatility, political and regulatory developments, fair-value changes in investments and derivatives, and the need for additional capital if projects advance to development.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings or changes to previously disclosed risk factors were reported.
Important facts investors should verify
- Verify the composition, maturities, liquidity and custodial or insurance status of the $16.0 million short-term investment portfolio.
- Assess whether planned exploration and acquisition spending can be sustained from existing liquidity, particularly given only $251,000 of cash held directly at quarter-end.
- Review the status and economics of the Bongará project, the Montana royalty and any newly targeted acquisitions.
- Evaluate the volatility and valuation methodology for marketable securities, Vendetta warrants and Kinross covered calls.
- Confirm the expiration and disposition of the RMB warrants and the remaining authorization under the share repurchase program.
- Consider that the company has no established recurring revenue stream and that future property sales, joint ventures or royalties may be infrequent or uncertain.