Solitario Zinc Corp. 2020 Q2 Form 10-Q Summary
Business context and reporting period
Solitario Zinc Corp. is an exploration-stage mineral company focused primarily on zinc-related properties, royalties and potential acquisitions. Its core assets are the Lik project in Alaska and the Florida Canyon project in Peru, held through joint ventures. The company has not developed or operated a mineral property. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, and was filed July 28, 2020.
Financial condition and key metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Revenue | $0 | $0 |
| Net income (loss) | $255,000 | $(352,000) |
| Basic and diluted EPS | $0.00 | $(0.01) |
| Exploration expense | $44,000 | $157,000 |
| General and administrative expense | $254,000 | $590,000 |
| Interest income | $27,000 | $108,000 |
| Unrealized gain on marketable equity securities | $484,000 | $251,000 |
| Net cash used in operating activities | Not separately provided | $(521,000) |
Revenue and operating margins are not meaningful because the company had no mineral-property sales or other revenue during the 2020 periods. The second-quarter profit was driven primarily by a $484,000 unrealized gain on marketable equity securities, lower exploration and administrative spending, and $44,000 of income from converting the SilverStream note into Vox Royalty shares.
At June 30, 2020, total assets were $24.4 million, including $371,000 of cash, $6.682 million of short-term investments, $1.533 million of marketable equity securities and $15.617 million of mineral properties. Working capital was $8.359 million, compared with $8.487 million at December 31, 2019.
Total liabilities were $393,000, consisting primarily of $123,000 of accounts payable, a $70,000 Paycheck Protection Program loan, a $47,000 Kinross call-option liability and a $125,000 Lik project asset-retirement obligation. The PPP loan bears interest at 1% and may be partially or wholly forgiven if qualifying expenses are met. The company had no long-term debt other than the asset-retirement obligation and reported no off-balance-sheet obligations.
Material changes versus the prior comparable period
- Second-quarter net income improved to $255,000 from a $1.002 million loss in the prior-year quarter. Six-month net loss narrowed to $352,000 from $1.443 million.
- Exploration expense fell to $44,000 from $702,000 in the quarter and to $157,000 from $865,000 for the six-month period. The prior-year expense included substantial Florida Canyon drilling costs; 2020 exploration was reduced in response to COVID-19 and lower planned activity.
- General and administrative expense declined to $254,000 from $321,000 in the quarter and to $590,000 from $746,000 for six months, reflecting staff and salary reductions and lower legal, office, travel and investor-relations costs.
- Marketable equity securities produced a $484,000 unrealized gain in the quarter and a $251,000 gain for six months, compared with losses of $63,000 and $389,000, respectively, in 2019. These gains are non-cash and market-sensitive.
- Six-month 2020 results included a $25,000 realized gain on the sale of 2 million Vendetta shares and $44,000 of income from conversion of the SilverStream note. The comparable 2019 period included $408,000 of mineral-property-sale revenue, with no similar sale in 2020.
- Cash and cash equivalents declined from $574,000 at December 31, 2019 to $371,000 at June 30, 2020. Short-term investments declined modestly from $6.829 million to $6.682 million, while marketable equity securities increased from $1.039 million to $1.533 million.
Cash flow, outlook and risks
Operating activities used $521,000 of cash during the first six months of 2020, compared with $995,000 in the prior-year period. Investing activities provided $252,000, including $162,000 from net short-term investment sales, $76,000 from Vendetta share sales and $14,000 from derivative activity. Financing activities provided $66,000, including the $70,000 PPP loan, partly offset by $4,000 used for share repurchases.
The company reported $7.053 million of cash and short-term investments at June 30, 2020 and stated that its cash, investments and marketable securities were adequate to fund expected expenditures for the next year. Management expects continued operating cash use and plans to fund exploration, general and administrative costs, potential acquisitions and limited share repurchases from existing resources.
Management reduced its 2020 exploration budget to approximately $493,000 from $976,000. The revised Lik project budget was approximately $90,000, compared with approximately $528,000 previously planned for Solitario's share of a joint drilling program. Management expected full-year 2020 exploration spending to be below 2019 levels and did not anticipate significant additional property sales during 2020.
COVID-19 had not materially disrupted administrative activities as of June 30, 2020, but joint-venture partners reduced planned exploration programs. Key risks include further pandemic-related restrictions, delays or cancellations of exploration, commodity-price and market volatility, reliance on joint-venture partners, uncertainty regarding economic viability of mineral properties, access to future capital, fluctuations in the value of equity investments and the potential non-forgiveness of the PPP loan.
Important facts for investors to verify
- Verify the company’s current legal name, trading symbol and filing identity; the filing identifies the registrant as Solitario Zinc Corp. and its common stock as XPL.
- Assess the sustainability of reported earnings, which depended significantly on unrealized investment gains rather than operating revenue.
- Review the status and economics of the Lik and Florida Canyon projects, including revised exploration plans and joint-venture funding obligations.
- Confirm the composition, liquidity and market risk of the $6.682 million short-term investment portfolio and $1.533 million marketable equity portfolio.
- Determine whether any portion of the $70,000 PPP loan was ultimately forgiven and identify the remaining repayment obligation.
- Monitor cash burn, potential additional capital needs, planned acquisitions and the continuation or reduction of the share-repurchase program.
- Review mineral-property impairment risk, the $125,000 Lik asset-retirement obligation and the absence of proven and probable reserves.