Solitario Resources Corp. (Solitario Zinc Corp.) — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2017. The company was an exploration-stage mineral company focused on acquiring and evaluating precious- and base-metal properties and royalty interests. The filing reflects the former Solitario Exploration & Royalty Corp. name; the company changed its name to Solitario Zinc Corp. effective July 17, 2017.
Subsequent to quarter-end, on July 12, 2017, the company acquired Zazu Metals Corp. and obtained a 50% interest in the Lik zinc project. Its principal mineral interests after the acquisition were the 39% Bongará zinc project in Peru and the 50% Lik zinc project in Alaska.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Revenue | No revenue reported | No revenue reported |
| Exploration expense | $188,000 | $339,000 |
| General and administrative expense | $560,000 | $860,000 |
| Total costs, expenses and other | $749,000 | $1.201 million |
| Other income | $143,000 | $582,000 |
| Net loss | $517,000 | $530,000 |
| Basic and diluted loss per share | $0.01 | $0.01 |
| Net cash used in operating activities | Not separately provided | $1.053 million |
Profit margins are not meaningful because the company reported no revenue and operated at a net loss. Other income included gains on derivative instruments of $113,000 for the quarter and $285,000 for the six-month period, plus a $221,000 gain on sales of marketable equity securities for the six-month period.
| Balance-sheet metric | June 30, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $169,000 | $119,000 |
| Short-term investments | $12.732 million | $15.250 million |
| Working capital | $16.328 million | $16.671 million |
| Total assets | $17.331 million | $17.614 million |
| Current liabilities | $250,000 | $126,000 |
| Shareholders’ equity | $17.081 million | $17.488 million |
The company had no material traditional debt reported at June 30, 2017. A $1.5 million secured convertible debenture issued to Zazu, plus $13,000 of accrued interest, was recorded as a current receivable and was eliminated in consolidation after the acquisition.
Material changes versus the prior comparable period
- Second-quarter net loss increased to $517,000 from $162,000, primarily because general and administrative expense increased to $560,000 from $256,000. Acquisition-related legal and due-diligence costs were a major contributor.
- Six-month net loss improved to $530,000 from $651,000, despite higher general and administrative expense, because of higher interest income, a larger gain on equity-security sales, larger derivative gains, and the absence of 2016 Mexico-related impairment and asset-sale losses.
- Six-month operating cash use increased to $1.053 million from $1.000 million.
- Investing activities provided $1.131 million in the first six months of 2017, compared with $16.266 million used in the prior-year period. The 2017 amount primarily reflected net sales of short-term investments, partly offset by the $1.5 million Zazu loan.
- Exploration expense was broadly stable for the six-month period, declining to $339,000 from $342,000. Bongará exploration increased, while reconnaissance activity declined during the acquisition process.
- The company repurchased 38,700 shares for $28,000 during the first six months and had repurchased 659,300 shares for $343,000 since the program began.
Guidance, outlook, risks and unusual items
- Management expected 2017 exploration expenditures to exceed 2016 levels, with increased activity anticipated at the Lik project.
- Management expected additional acquisition-related costs, including investment-banking fees, in the quarter ending September 30, 2017. It expected general and administrative costs to decline after the acquisition-related peak.
- Cash, short-term investments and marketable equity securities were considered adequate to fund expected expenditures over the next year. The company expected to use these resources for exploration, potential mineral-property acquisitions and share repurchases.
- At June 30, 2017, short-term investments included $9.733 million of U.S. Treasury securities and $2.999 million of bank certificates of deposit. The company also held $2.017 million of marketable equity securities and $673,000 of Vendetta warrants valued using a Black-Scholes model.
- The company remains dependent on future mineral-property sales, joint ventures, financing or other capital sources if it proceeds with project development. It has never developed a mineral property, and none of its exploration properties had proven and probable reserves.
- Key risks include commodity-price volatility, exploration and development uncertainty, permitting and regulatory risks, political and environmental risks, financing needs, and the possibility that mineral properties will not become economically recoverable.
- Acquisition risks include integration challenges, additional purchase-accounting and transaction costs, management distraction, failure to realize expected benefits from Lik, and dilution and potential volatility from issuing 19,788,183 shares and granting 1,782,428 replacement options.
- The filing states that disclosure controls were effective as of June 30, 2017 and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Verify the final purchase-price accounting for the Zazu acquisition, estimated at approximately $13.9 million, and the resulting carrying value and economics of the Lik project.
- Assess post-acquisition exploration plans, budgets, ownership terms and funding requirements for Lik and Bongará.
- Review the valuation sensitivity of Vendetta warrants, marketable securities and covered-call derivatives, including the effect of market prices and Black-Scholes assumptions.
- Confirm the amount and timing of acquisition-related costs and their effect on cash balances and operating cash flow.
- Evaluate the company’s ability to fund exploration and any future development without substantial equity dilution, debt or asset sales.
- Reconcile the reported share count of approximately 38.7 million at June 30, 2017 with approximately 58.4 million shares outstanding after the acquisition.