Business Context and Reporting Period
Solitario Zinc Corp. (identified in the request as Solitario Resources Corp.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company is an exploration-stage mineral company focused primarily on zinc-related properties, royalties and strategic acquisitions. Its core assets were interests in the Lik project in Alaska and the Florida Canyon project in Peru, both advanced through joint ventures.
The company has no producing mines, has never developed a mineral property and has no consistent recurring revenue source. Common stock traded on NYSE American under the symbol XPL. There were 58.1 million shares outstanding at September 30, 2020 and November 9, 2020.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $0 | $0 in 2020; $408,000 in 2019 |
| Net loss | $53,000, or approximately $0.00 per share | $405,000, or $0.01 per share |
| Exploration expense | $112,000 | $269,000 |
| General and administrative expense | $226,000 | $816,000 |
| Net cash used in operating activities | Not presented for the quarter | $716,000 |
| Cash and cash equivalents | $413,000 at September 30, 2020 | $574,000 at December 31, 2019 |
| Short-term investments | $6.317 million | $6.829 million at December 31, 2019 |
| Marketable equity securities | $1.844 million at fair value | $1.039 million at December 31, 2019 |
| Total assets | $24.380 million | $24.532 million at December 31, 2019 |
| Total liabilities | $372,000 | $401,000 at December 31, 2019 |
| Working capital | $8.355 million | $8.487 million at December 31, 2019 |
There is no meaningful operating revenue or operating margin because the company remains in the exploration stage. The nine-month loss benefited from non-cash gains of $584,000 on marketable equity securities, a $50,000 realized gain on securities sales and $44,000 of other income from conversion of the SilverStream note. These items were partly offset by a $90,000 derivative loss.
Investing activities provided $490,000 of cash in the first nine months, primarily from sales of short-term investments and marketable securities. Financing activities provided $65,000, consisting primarily of a $70,000 Paycheck Protection Program loan. Cash decreased by $161,000 during the period to $413,000.
Debt was limited to the $70,000 PPP loan, bearing interest at 1% with a two-year term, plus ordinary lease and other liabilities. The company expected to repay the loan less any forgiveness within twelve months. A $125,000 asset retirement obligation related to the Lik project was recorded as a long-term liability.
Material Changes Versus the Prior Comparable Period
- Third-quarter net loss declined to $53,000 from $1.480 million; nine-month net loss declined to $405,000 from $2.923 million.
- Exploration expense decreased to $112,000 from $815,000 in the quarter and to $269,000 from $1.680 million year to date. The primary driver was the absence of comparable Florida Canyon drilling costs incurred in 2019.
- General and administrative expense decreased to $226,000 from $319,000 in the quarter and to $816,000 from $1.065 million year to date, reflecting staff and salary reductions, lower professional costs and reduced travel and investor-relations spending.
- Marketable equity securities generated a $333,000 unrealized gain in the quarter and a $584,000 gain year to date, compared with losses of $347,000 and $736,000, respectively, in 2019.
- The company recorded no mineral-property sale revenue in 2020, compared with $408,000 from the 2019 royalty sale.
- Interest income fell to $3,000 in the quarter and $111,000 year to date from $43,000 and $205,000, respectively, due to lower investment balances and low interest rates.
- Cash used in operations improved to $716,000 from $2.385 million, primarily because of the reduced exploration program and lower cash administrative costs.
- The company received 137,255 Vox Royalty shares upon conversion of the SilverStream note and recorded a $44,000 gain. It also sold 2.9 million Vendetta shares for $123,000 of proceeds during the first nine months.
Guidance, Outlook, Risks and Unusual Items
- Management reduced its 2020 exploration budget to approximately $493,000 from $976,000, including an approximately $90,000 Lik project budget. Full-year exploration spending was expected to remain below 2019 levels.
- Management expected 2020 general and administrative costs to be lower than in 2019 and anticipated continued use of funds for Lik, Florida Canyon, reconnaissance exploration and corporate expenses.
- Management stated that cash, short-term investments and marketable securities were adequate to fund expected expenditures for at least the following year. It expected to liquidate investments as needed and may sell additional marketable securities.
- COVID-19 prompted reduced exploration plans, salary reductions, lower contractor and non-core spending, delayed capital costs and the PPP loan. Management stated that the pandemic had not materially disrupted administrative activities through September 30, 2020, but future effects remained highly uncertain.
- Exploration programs depend substantially on joint-venture partners Teck and Nexa. Delays, funding limitations, commodity prices, permitting, political and regulatory developments, and the absence of proven and probable reserves could materially affect project value.
- Marketable securities and derivative instruments introduced earnings volatility. At September 30, 2020, the company held $1.844 million of marketable equity securities and had $19,000 of Kinross call-option liabilities. Outstanding options covered 5.698 million common shares and were excluded from diluted loss per share because they were anti-dilutive.
- The company had no material legal proceedings, no off-balance-sheet obligations and no material changes to previously disclosed risk factors other than pandemic-related risks. Management concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Confirm the company’s legal name and corporate identity, given the filing identifies the registrant as Solitario Zinc Corp.
- Assess liquidity excluding volatile marketable equity securities and determine the timing and terms of short-term investment maturities.
- Monitor whether the PPP loan receives forgiveness and the resulting repayment obligation.
- Review updated exploration budgets, drilling activity and funding responsibilities for Lik and Florida Canyon.
- Evaluate the fair values and liquidity of the Vendetta, Kinross and Vox holdings and the effect of future market movements on earnings.
- Assess dilution from 5.698 million outstanding stock options and the company’s share-repurchase activity.
- Review future SEC mineral-property disclosures and qualified-person technical reports required under the SEC’s modernized mining disclosure rules beginning with fiscal 2021.