Solitario Zinc Corp. — Q1 2019 Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; unaudited interim financial statements prepared under U.S. GAAP. The filing identifies the registrant as Solitario Zinc Corp. and describes it as an exploration-stage mineral company focused primarily on zinc-related properties.
Business Context
- Core assets were the Florida Canyon project in Peru, held through a joint venture with Nexa Resources, and the Lik project in Alaska, held 50% with Teck.
- The company has not developed or operated a mine and has no proven or probable reserves reported for its exploration properties.
- Revenue is historically infrequent and primarily arises from mineral property, royalty, or joint-venture transactions rather than recurring operations.
- Common shares outstanding were approximately 58.14 million at March 31, 2019, and 58.14 million at May 6, 2019.
Financial Position and Results
| Metric | Q1 2019 | Q1 2018 / Dec. 31, 2018 |
|---|---|---|
| Mineral property revenue | $408,000 | $0 in Q1 2018 |
| Net loss | $441,000 | $1.004 million loss in Q1 2018 |
| Basic and diluted loss per share | $0.01 loss | $0.02 loss in Q1 2018 |
| Exploration expense | $163,000 | $180,000 in Q1 2018 |
| General and administrative expense | $425,000 | $403,000 in Q1 2018 |
| Unrealized loss on marketable equity securities | $326,000 | $441,000 in Q1 2018 |
| Net cash used in operating activities | $172,000 | $491,000 used in Q1 2018 |
| Cash and cash equivalents | $538,000 | $117,000 at Dec. 31, 2018 |
| Short-term investments | $9.595 million | $10.223 million at Dec. 31, 2018 |
| Working capital | $11.098 million | $11.448 million at Dec. 31, 2018 |
| Total assets | $27.621 million | $27.903 million at Dec. 31, 2018 |
The company reported no debt or senior financing obligations. Liabilities consisted primarily of accounts payable, operating lease liabilities, and a $125,000 asset retirement obligation related to Lik. Total shareholders’ equity was $26.728 million at March 31, 2019.
Cash Flow, Liquidity, and Investments
- Operating cash use improved to $172,000 from $491,000, largely because of the royalty-sale proceeds and lower operating and exploration spending.
- Investing activities provided $602,000, primarily from net sales of short-term investments. Financing activities used $9,000 for share repurchases.
- Cash, short-term investments, and marketable equity securities totaled approximately $11.392 million, which management stated was adequate to fund expected expenditures over the following year.
- Approximately $9.277 million was invested in U.S. Treasury securities with maturities of 15 days to 20 months.
- Marketable equity securities were valued at $1.259 million, including 11 million Vendetta shares valued at $906,000 and 100,000 Kinross shares valued at $344,000.
Material Changes Versus the Prior Comparable Period
- Q1 2019 included $408,000 of mineral property revenue from the January 2019 royalty sale; there was no comparable revenue in Q1 2018.
- The net loss narrowed by $563,000, primarily because of the royalty-sale revenue, a smaller unrealized investment loss, lower exploration expense, and higher interest income.
- Interest income increased to $72,000 from $26,000.
- General and administrative expense increased to $425,000 from $403,000, although G&A excluding stock compensation declined to $337,000 from $393,000.
- Stock option expense increased to $88,000 from $10,000.
- The company adopted ASC 842 effective January 1, 2019, recording an $82,000 office lease right-of-use asset and corresponding liability. The adoption had an immaterial effect on earnings and cash flow.
- The company repurchased and cancelled 27,900 shares for $9,000 during the quarter, compared with 52,614 shares for $26,000 in Q1 2018.
Guidance, Outlook, Risks, and Unusual Items
- Management expected Florida Canyon drilling to begin in Q2 2019. The company could incur up to $1.053 million during 2019 if Nexa completed the remaining drilling thresholds under the program.
- Solitario budgeted approximately $178,000 for its share of 2019 Lik exploration, with most spending expected in the third and fourth quarters. Full-year 2019 exploration expenditures were expected to exceed 2018 levels.
- The company expected general and administrative expense and stock option expense to remain at approximately comparable quarterly levels for the rest of 2019.
- Under the Florida Canyon drilling agreement, Solitario had a remaining potential funding commitment of $1.053 million as of March 31, 2019; a $527,000 payable recorded at quarter-end was paid in April 2019.
- The January 2019 royalty sale generated $185,000 of cash and a $263,000 fair-value SilverStream convertible note. The note was due December 31, 2019, bore 5% simple interest, and was subject to collectability, currency, and conversion risks.
- Mineral property carrying values depend on future exploration success, economic mineralization, permitting, financing, development, and potential property sales. None of these outcomes is assured.
- Commodity-price volatility, joint-venture performance, political and regulatory developments, market values of equity investments, and the collectability of the SilverStream note could materially affect results.
- Cash equivalents and Treasury securities held in brokerage accounts and foreign banks were not covered by FDIC insurance. Management reported no material changes to previously disclosed risk factors, no legal proceedings, and no off-balance-sheet arrangements.
Investor Verification Priorities
- Verify the status and collectability of the SilverStream note, including its December 31, 2019 maturity and conversion provisions.
- Review progress and remaining funding requirements for the Florida Canyon drilling program and the company’s 2019 Lik exploration budget.
- Assess the market value and concentration risk of the Vendetta and Kinross investments, which produced a $326,000 unrealized loss in Q1.
- Reconcile reported liquidity with cash, Treasury securities, marketable equity securities, the SilverStream note, accounts payable, and lease obligations.
- Monitor whether exploration results, permitting, financing, joint-venture activity, or commodity prices support recovery of the $15.617 million mineral property balance.
- Confirm the impact of share repurchases and outstanding options, including approximately 4.373 million exercisable options at March 31, 2019.