Solitario Exploration & Royalty Corp. — Q3 2014 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Solitario is a development-stage mineral company focused on its 80%-owned Mt. Hamilton project in Nevada, with additional exploration, royalty and joint-venture interests in Latin America. The company has not previously developed a mineral property.
- Mt. Hamilton development costs are capitalized; necessary permits and development capital were not yet in place.
- Bongará in Brazil is subject to a joint venture under which Votorantim is earning a 70% interest.
- Common shares outstanding at November 3, 2014: 39.25 million.
Financial Results and Key Metrics
| US$ in thousands, except per-share data | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Property and joint venture revenue | 200 | 200 | 200 | 200 |
| Net loss attributable to Solitario | (505) | (202) | (1,576) | (1,631) |
| Loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.04) | $(0.05) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | (1,256) | (1,811) |
| Comprehensive loss attributable to Solitario | (1,199) | (474) | (2,452) | (4,456) |
Revenue was unchanged, while the company remained unprofitable. Based on reported revenue, approximate net loss margins were negative 253% for Q3 and negative 788% for the first nine months; these ratios are not economically meaningful because revenue was minimal and the business remains focused on exploration and development.
- Q3 general and administrative expense increased to $794,000 from $413,000, primarily because non-cash stock-option expense increased to $511,000 from $13,000.
- Q3 exploration expense declined to $58,000 from $76,000.
- Q3 gains included $69,000 from sales of marketable equity securities and a $77,000 gain from revaluing the warrant liability.
- Mt. Hamilton capitalized costs totaled $1.97 million for the first nine months, including $1.38 million of development expenditures and $463,000 of capitalized interest.
| Balance-sheet metric | September 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $1.917 million | $2.092 million |
| Current assets | $4.976 million | $3.784 million |
| Current liabilities | $5.031 million | $1.253 million |
| Working capital | $(55,000) | $2.531 million |
| Mineral properties | $14.044 million | $12.098 million |
| Total assets | $19.901 million | $19.500 million |
| Total shareholders’ equity | $7.588 million | $7.963 million |
Current assets were approximately 0.99 times current liabilities. Marketable equity securities totaled $3.012 million at fair value, including 480,000 Kinross shares valued at $1.584 million and 15.7 million Ely shares valued at approximately $1.410 million.
Cash Flow, Debt and Liquidity
- Cash declined by $175,000 during the first nine months, from $2.092 million to $1.917 million.
- Operating cash use was $1.256 million; investing cash use was $997,000, mainly reflecting Mt. Hamilton expenditures; financing provided $2.078 million.
- The company raised $1.630 million net from a February 2014 private placement of 1.6 million shares.
- The UBS margin loan, which was $802,000 at December 31, 2013, was fully repaid and terminated.
- The RMB loan increased from $3.5 million to $5.0 million, the facility maximum, and bears interest at 90-day LIBOR plus 5%; the reported rate was 5.23% at September 30, 2014.
- The RMB loan was reclassified as current because it is due in full in August 2015. The balance-sheet amount was $4.806 million net of discount.
- Management stated that existing liquidity was insufficient to repay the RMB loan at maturity and that outside financing, asset sales, additional borrowing or an extension or restructuring of the loan would be required.
Material Changes, Outlook and Risks
- The nine-month net loss improved modestly to $1.576 million from $1.631 million, driven by lower exploration and administrative costs, higher gains on marketable securities, and a smaller equity-method investment loss.
- The improvement was partly offset by a $142,000 nine-month loss on the warrant liability, compared with a $953,000 gain in 2013, and higher non-cash stock-option expense of $622,000 versus $206,000.
- Management expected reduced exploration activity in Peru and Mexico for the remainder of 2014 and budgeted approximately $964,000 for Mt. Hamilton development expenditures plus approximately $765,000 for leasehold and earn-in payments.
- Management expected to sell approximately 360,000 Kinross shares during 2014, with planned proceeds of approximately $1.8 million, subject to market conditions.
- Management was exploring the sale of equity or debt securities, additional borrowing, asset sales and a possible RMB loan extension. There was no assurance that financing or restructuring would be available on acceptable terms.
- If the RMB loan cannot be repaid or restructured, the lender may declare a default and foreclose on security interests covering the Mt. Hamilton interest and substantially all other assets.
- Market value declines in Kinross and Ely shares could materially reduce liquidity. The company also faces permitting, development-capital, commodity-price, exploration and project-execution risks.
- The company recorded a $20,000 impairment related to the Pachuca project during the first nine months. No material legal proceedings were reported.
Important Facts for Investors to Verify
- Whether Solitario obtained sufficient financing or amended the RMB loan before its August 2015 maturity.
- The terms, dilution and availability of any subsequent equity, debt or asset-sale financing.
- Current market values and liquidity of the Kinross and Ely shareholdings.
- Mt. Hamilton permitting progress, updated capital requirements and the feasibility of development or monetization alternatives.
- The status and economics of the Bongará joint venture and the company’s other exploration and royalty interests.
- The potential dilution from 1.625 million RMB warrants and newly granted options covering 1.990 million shares.