Solitario Exploration & Royalty Corp. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited interim financial statements. Solitario is a development-stage mineral exploration and development company focused primarily on its 80%-owned Mt. Hamilton project in Nevada, with additional exploration properties in the United States, Mexico, Brazil and Peru. The company has not yet developed a mineral property and reported no operating revenue.
Financial condition and results
| Metric | Q1 2013 / March 31, 2013 | Comparable period / December 31, 2012 |
|---|---|---|
| Net loss attributable to Solitario shareholders | $991,000; $0.03 per share | $670,000; $0.02 per share |
| Total net loss | $994,000 | $862,000 |
| Exploration expense | $362,000 | $524,000 |
| General and administrative expense | $627,000 | $671,000 |
| Operating cash flow | $(791,000) | $(891,000) |
| Cash from investing activities | $3.638 million | $9,000 |
| Cash from financing activities | $933,000 | $687,000 |
| Cash and cash equivalents | $4.396 million | $616,000 |
| Working capital | $4.119 million | $4.245 million |
| Total assets | $21.982 million | $23.483 million |
| Total shareholders’ equity | $7.397 million | $9.217 million |
The filing does not provide a meaningful revenue or operating margin figure because Solitario had no operating revenue and remains pre-production. Comprehensive loss was $1.878 million, including an $884,000 after-tax unrealized loss on marketable equity securities.
Assets, liquidity and debt
- Marketable equity securities totaled $5.683 million at fair value, including $5.313 million of Kinross Gold shares and $370,000 of other securities. The company held 670,000 Kinross shares at March 31, 2013.
- Current marketable securities were $2.538 million, and noncurrent marketable securities were $3.145 million.
- Short-term margin debt was $1.5 million, secured primarily by Kinross shares. The UBS facility bears a floating rate based on 2.25% plus one-month LIBOR and is subject to minimum account-equity requirements.
- Long-term debt, net of discount, was $3.519 million on the balance sheet. The company owed $2.5 million under the RMB facility and had approximately $2.279 million of Augusta-related debt before subsequent-event modifications.
- The RMB facility permits borrowings of up to $5 million during the availability period. The company borrowed $1 million during the quarter and an additional $1 million on April 24, 2013.
- Liquidity increased primarily because Solitario collected a $4 million receivable from the 2012 sale of a royalty interest. Management stated that existing cash, planned Kinross sales, additional borrowing and available RMB financing were expected to fund planned operations for the next year.
Material changes versus Q1 2012
- Net loss attributable to Solitario shareholders increased by $321,000, primarily because the company recorded no gain from Kinross sales versus a $332,000 gain in Q1 2012, and recognized a $313,000 loss from its equity-method investment versus $109,000 previously.
- Exploration expense declined by $162,000 as more Mt. Hamilton development costs were capitalized. The company capitalized approximately $515,000 of Mt. Hamilton development, depreciation and interest costs during Q1 2013.
- General and administrative expense declined by $44,000, including lower stock-option expense of $125,000 versus $174,000.
- Cash increased by $3.780 million, compared with a $195,000 decrease in Q1 2012, primarily due to the $4 million royalty-sale receivable collection and $1 million of RMB borrowing.
- Marketable securities declined by $1.410 million in fair value, producing an after-tax comprehensive loss of $884,000 from unrealized securities losses.
- The company recorded a $99,000 gain from revaluing RMB warrants, compared with no comparable gain in Q1 2012.
- Common shares outstanding increased to 34.647 million from 34.480 million at year-end 2012, principally from option exercises and shares issued to a noncontrolling shareholder.
Outlook, commentary and risks
- Management budgeted approximately $2.043 million for Mt. Hamilton expenditures and approximately $1.675 million for Mt. Hamilton leasehold acquisition and earn-in payments during 2013, with these amounts expected to be capitalized.
- Management expected to reduce exploration in Mexico and Peru and certain administrative spending after the Kinross share price declined to $5.28 on May 7, 2013, while maintaining planned Mt. Hamilton permitting and development expenditures.
- The company budgeted sales of approximately 360,000 Kinross shares during 2013 for assumed proceeds of $3.6 million, but indicated that lower market prices could require additional share sales, further debt reduction, spending cuts or new debt or equity financing.
- Kinross represents a significant concentration of assets. A further decline in its market value could impair liquidity, trigger margin requirements or require forced sales of collateral.
- Mt. Hamilton development remains subject to obtaining permits and sufficient capital, neither of which was fully in place at March 31, 2013. Solitario also faces the risks typical of mineral exploration, development-stage operations, commodity prices, permitting, financing availability and foreign operations.
- On April 22, 2013, the company reduced its required 2013 Ely subscription from $750,000 to $500,000 and acquired 5.131 million Ely shares. The transaction satisfied the 2013 $750,000 Augusta payment obligation through the amended arrangement.
- There were no legal proceedings, material changes to previously disclosed risk factors, or off-balance-sheet obligations reported. Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2013.
Important facts for investors to verify
- Reconcile the company’s cash runway and 2013 funding plan against Kinross price volatility, margin-loan requirements and available RMB borrowing capacity.
- Verify the post-quarter debt balances, including the additional $1 million RMB draw and the amended Augusta payment obligations.
- Assess whether Mt. Hamilton permitting, development spending and required earn-in payments remain achievable with available capital.
- Review the valuation and concentration risk of Kinross and Ely equity investments and the potential effect of further unrealized losses.
- Evaluate dilution risk from 1.625 million RMB warrants, outstanding options and potential future equity financing.
- Confirm that the reported interim loss and cash flows are not representative of future periods, as the company remains pre-revenue and development-stage.