Solitario Exploration & Royalty Corp. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016; filed November 7, 2016. The company was an exploration-stage mineral property and royalty company and reported no operating revenue for the period.
Business Context
Solitario focuses on acquiring and holding precious- and base-metal exploration properties, royalty interests and related assets for potential sale, joint venture or future development. Its core carried interest was the Bongará project in Peru. The company sold its 80% interest in Mt. Hamilton LLC in August 2015 for gross proceeds of $24.0 million, so 2015 results include a substantial discontinued-operations gain that did not recur in 2016.
Financial Position and Results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | None reported | None reported | None reported | None reported |
| Net loss attributable to Solitario | $(1.119) million | $9.950 million income | $(1.770) million | $9.359 million income |
| Loss/income per diluted share | $(0.03) | $0.25 | $(0.05) | $0.24 |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(1.436) million | $(1.443) million |
| Total assets | $17.450 million at September 30, 2016 | $18.054 million at December 31, 2015 | ||
| Working capital | $16.812 million at September 30, 2016 | $17.811 million at December 31, 2015 |
- Q3 total costs, expenses and other were $1.183 million, including $1.213 million of general and administrative expense, $132,000 of exploration expense and a $163,000 gain on derivatives.
- Nine-month total costs, expenses and other were $2.104 million. Exploration expense increased to $474,000 from $48,000, while general and administrative expense increased to $1.911 million from $1.513 million, primarily because of non-cash stock-option expense.
- Q3 and nine-month stock-option expense was $939,000 and $970,000, respectively, including $721,000 of expense from cancellation of previously issued options. No options remained outstanding at September 30, 2016.
- Cash and cash equivalents were $307,000. Short-term investments were $15.506 million, consisting primarily of $7.006 million of U.S. Treasury securities and $8.500 million of bank certificates of deposit. Marketable equity securities were $1.098 million.
- The company had no outstanding debt at September 30, 2016. Its prior $5.0 million RMB loan was repaid in August 2015.
- Net cash used in investing activities was $15.761 million, principally reflecting purchases of short-term investments, Vendetta units and Montana royalties. Financing cash use was $214,000 for share repurchases.
- Net margins are not meaningful because the company reported no operating revenue and is principally funding exploration and corporate activities from cash and investments.
Material Changes Versus the Prior Comparable Period
- Net results shifted from income to loss because 2015 included a $12.746 million after-tax gain on the Mt. Hamilton discontinued operation. The 2015 gain reflected $24.0 million of cash proceeds received by Solitario.
- Exploration spending increased substantially as the company shifted toward evaluating potential acquisitions and reconnaissance activities in Peru and elsewhere.
- Non-stock-option general and administrative expense declined to $274,000 in Q3 and $941,000 for nine months, but total general and administrative expense increased because of option-cancellation charges.
- Marketable-equity-security results improved from a $1.333 million Q3 2015 loss to a $10,000 Q3 2016 gain; the nine-month comparison improved from a $969,000 loss to a $40,000 gain.
- Derivative gains increased to $163,000 in Q3 and $295,000 for nine months, including gains on Vendetta warrants and Kinross covered calls.
- The company 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 $14,000 loss on other Mexican assets.
- The company repurchased 424,000 shares during the first nine months for $214,000 and had repurchased 569,000 shares for $281,000 since the program began.
Outlook, Risks and Unusual Items
- Management expected 2016 full-year exploration expense to exceed 2015 levels and anticipated continuing reconnaissance and acquisition evaluation activities.
- Management stated that cash, short-term investments and marketable securities were adequate to fund expected expenditures for at least the following year. Future development of exploration properties could require additional capital through cash reserves, joint ventures, debt, equity issuance or asset sales.
- Management expected to use available funds for exploration, potential acquisitions and limited additional share repurchases. The repurchase authorization covered up to two million shares through December 31, 2016 and could be suspended or terminated.
- Investment liquidity and valuation remain relevant risks: the company held substantial marketable securities and derivative instruments, including Vendetta warrants valued using a Black-Scholes model and Kinross covered calls with a $56,000 liability.
- The company recorded a $264,000 nine-month deferred tax benefit, but reported no net deferred tax asset because a full valuation allowance was maintained.
- Exploration-stage operations are subject to commodity-price volatility, uncertainty regarding mineralization and project economics, permitting and political risks, and the possibility that acquisitions or joint ventures will not be completed or generate value.
- No material legal proceedings, off-balance-sheet obligations or changes to disclosed risk factors were reported. Management concluded disclosure controls were effective.
Investor Verification Checklist
- Verify the composition, maturities, custody and liquidity of the $15.506 million short-term investment portfolio and the company’s limited cash balance of $307,000.
- Assess the recurring cash burn excluding non-cash option expense and derivative fair-value gains.
- Review the Bongará joint-venture and carried-interest arrangements, including funding obligations and project status.
- Evaluate the assumptions and market inputs supporting the $412,000 Vendetta warrant valuation and the $56,000 Kinross covered-call liability.
- Confirm the effect of the Mt. Hamilton sale on comparability of 2015 earnings and cash flows.
- Monitor exploration spending, potential acquisitions, retained Mexican royalties and any future capital needs.
- Reconcile the cash-flow presentation and management discussion regarding discontinued-operation cash uses, as the filing text is not entirely clear on the period-specific amount.