Solitario Exploration & Royalty Corp. — Q1 2017 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. Solitario is an exploration-stage mineral company focused on acquiring precious- and base-metal properties, advancing projects through joint ventures, and potentially selling properties or creating royalties. It has never developed a mineral property and reported no operating revenue for the quarter.
The company identified its carried interest in the Bongará project as its core mineral property asset and initiated a preliminary economic assessment during the first quarter. Its exploration portfolio also includes La Promesa in Peru and a Montana royalty property.
Financial condition and results
| Metric | Q1 2017 | Q1 2016 or prior period |
|---|---|---|
| Net loss | $13,000 | $489,000 loss |
| Loss per share, basic and diluted | $0.00 | $0.01 loss |
| Exploration expense | $151,000 | $122,000 |
| General and administrative expense | $300,000 | $442,000 |
| Interest income | $46,000 | $12,000 |
| Gain on sale of marketable equity securities | $221,000 | None |
| Gain on derivative instruments | $172,000 | $1,000 loss |
| Net cash used in operating activities | $385,000 | $632,000 |
| Net cash provided by investing activities | $363,000 | $15.967 million used |
Total assets were $17.492 million at March 31, 2017, compared with $17.614 million at December 31, 2016. Current assets were $16.837 million, including $91,000 of cash and cash equivalents, $14.989 million of short-term investments, and $1.685 million of marketable equity securities. Working capital was $16.721 million, compared with $16.671 million at year-end 2016.
Short-term investments consisted of $10.490 million in U.S. Treasury securities and $4.499 million in bank certificates of deposit. Current liabilities were $116,000. The company reported no debt, no off-balance-sheet obligations, and shareholders’ equity of $17.376 million.
Comprehensive loss was $106,000, reflecting a $93,000 unrealized loss on marketable equity securities. The company’s loss margin and operating margin are not meaningful because it had no reported operating revenue.
Material changes versus the prior comparable period
- Net loss improved by $476,000, primarily because of lower general and administrative costs, higher interest income, a $221,000 gain on Vendetta shares, and a $172,000 derivative gain.
- General and administrative expense declined by $142,000, largely because Q1 2016 included $152,000 of bonuses related to the prior Mount Hamilton transaction.
- Exploration expense increased by $29,000 to $151,000, driven by greater reconnaissance activity and work related to Bongará and potential acquisitions.
- The company sold 1.480 million Vendetta shares for $259,000 and recorded a $221,000 gain.
- The company exercised 2.240 million Vendetta warrants for $167,000 and held 8.0 million Vendetta shares and 5.0 million Vendetta warrants at quarter-end.
- Cash used in operations declined by $247,000 year over year. Investing cash flow shifted from a $15.967 million use in Q1 2016, mainly for purchases of Treasury securities and CDs, to a $363,000 source in Q1 2017.
- The company repurchased and cancelled 8,400 common shares for $6,000 during the quarter. Since inception of the program, it had repurchased 629,000 shares for $321,000.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects full-year 2017 exploration expenditures to exceed 2016 levels and expects general and administrative costs to remain at comparable quarterly amounts.
- Management expects continued operating cash use during 2017 and intends to use cash and investments for exploration, potential mineral-property acquisitions, strategic transactions, and limited share repurchases.
- Management stated that cash, short-term investments, and marketable equity securities are adequate to fund expected expenditures over the next year.
- Management does not expect marketable equity-security sales or derivative gains and losses to be significant or predictable sources of income for the remainder of 2017.
- Future development or operation of mineral projects would require additional capital, potentially from cash reserves, joint ventures, debt, equity issuance, or asset sales.
- Recovery of mineral-property costs depends on discovering economically recoverable deposits, obtaining permits and financing, and achieving profitable operations; none is assured.
- Marketable securities and Vendetta warrants are subject to commodity, equity-market, valuation, and volatility risk. The Vendetta warrants are valued using a Black-Scholes model.
- The company dropped its royalty interests in the Aconchi and Norcan properties in Mexico without recording a mineral-property write-down.
- No material changes were reported to the risk factors in the 2016 Form 10-K. The company reported no legal proceedings, no defaults, and no off-balance-sheet obligations.
- Disclosure controls and procedures were deemed effective as of March 31, 2017, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the composition, maturities, liquidity, and custody or insurance coverage of the $14.989 million short-term investment portfolio.
- Assess the fair value sensitivity of the $1.685 million marketable equity portfolio and the $574,000 Vendetta warrant asset.
- Track Bongará’s preliminary economic assessment, joint-venture activity, exploration results, and any related funding requirements.
- Evaluate whether expected exploration spending and potential acquisitions could accelerate cash consumption beyond current operating projections.
- Review the company’s ability to generate future revenue, given its lack of operating revenue and historically infrequent property-sale or joint-venture proceeds.
- Monitor the share repurchase program, which had 1.371 million shares remaining under the stated authorization at March 31, 2017.