Solitario Zinc Corp. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing identifies the registrant as Solitario Zinc Corp., formerly Solitario Exploration & Royalty Corp.; the request metadata refers to Solitario Resources Corp. The company is an exploration-stage mineral company focused primarily on zinc assets in North and South America.
Business Context and Key Developments
- On July 12, 2017, Solitario acquired Zazu Metals Corp. in an asset acquisition for approximately $16.1 million, issuing 19.8 million common shares and replacement options. The acquisition added a 50% interest in the Lik zinc-lead-silver project in Alaska.
- The company changed its name to Solitario Zinc Corp. effective July 17, 2017.
- Core assets at year-end were a 50% interest in Lik, operated with Teck Resources, and a 39% interest in the Florida Canyon zinc project in Peru, operated and primarily funded by Nexa Resources.
- The company also held the 85% Chambara exploration project in Peru, La Promesa in Peru, and several non-producing royalty interests.
- No commercial mining operations, proven or probable reserves, or consistent operating revenue existed at December 31, 2017.
Financial Results and Metrics
| U.S. dollars in thousands, except per-share data | 2017 | 2016 | Change |
|---|---|---|---|
| Property and joint venture revenue | $0 | $0 | No change |
| Exploration expense | $699 | $628 | Increased $71 |
| General and administrative expense | $1,202 | $2,163 | Decreased $961 |
| Net loss | $(942) | $(1,710) | Loss narrowed $768 |
| Basic and diluted loss per share | $(0.02) | $(0.04) | Improved |
| Net cash used in operating activities | $(1,658) | $(1,835) | Use decreased $177 |
| Total assets | $30,395 | $17,614 | Increased $12,781 |
| Working capital | $14,472 | $16,671 | Decreased $2,199 |
| Long-term debt | $0 | $0 | No change |
- Other income included a $578,000 gain on sale of marketable equity securities, a $271,000 gain on derivatives, and $123,000 of net interest and dividend income.
- The 2017 loss benefited from lower general and administrative expense, primarily because non-cash stock-option expense fell to $50,000 from $970,000.
- Cash and cash equivalents were $214,000. Short-term investments totaled $11.642 million, including $10.395 million in U.S. Treasury securities and $1.247 million in insured certificates of deposit.
- Marketable equity securities totaled $2.643 million, principally consisting of Vendetta and Kinross holdings.
- Cash flow from investing activities was a net inflow of $1.785 million, mainly reflecting sales or maturities of short-term investments. Financing cash use was $32,000 for share repurchases.
- Shareholders’ equity increased to $30.129 million, primarily because of shares issued in the Zazu acquisition.
Material Changes Versus 2016
- The Zazu acquisition substantially increased mineral properties from $46,000 to $15.657 million and increased shares outstanding from 38.7 million to 58.4 million at year-end.
- Exploration expense increased 11%, including $124,000 for Florida Canyon, $54,000 for Lik, $41,000 for La Promesa, and $480,000 for reconnaissance activity.
- General and administrative expense declined 44%; excluding stock-option expense, such costs were broadly stable at approximately $1.15 million versus $1.19 million.
- The company recorded no property impairments or abandonment losses in 2017, compared with $13,000 of property impairments and $14,000 of asset-sale losses in 2016.
- Derivative gains declined to $271,000 from $672,000, while gains on marketable equity security sales increased to $578,000 from $40,000.
- Other comprehensive loss was $136,000 in 2017, compared with other comprehensive income of $601,000 in 2016.
Outlook, Risks and Unusual Items
- Management budgeted approximately $792,000 for 2018 exploration and property evaluation, excluding potential drilling programs. Planned general and administrative expense, excluding stock-option expense, was approximately $1.217 million.
- Florida Canyon’s 2018 program included completion of an access road, permitting, underground tunneling, drilling, resource definition, and feasibility-related work. Nexa is responsible for funding the project under the joint-venture arrangement.
- At Lik, Solitario and Teck planned a 2018 gravity survey, environmental baseline work, and camp rehabilitation. Potential drill testing could occur in 2019 if anomalies are identified.
- The Lik Block Agreement terminated because the required expenditure to earn an additional interest was not completed. Teck retained a 50% interest, and the parties were negotiating an updated operating agreement.
- The company recorded a $125,000 asset-retirement obligation for existing Lik exploration disturbances.
- Management stated that existing cash, short-term investments, and marketable securities were sufficient to fund expected expenditures for the next year, but additional capital would be required for future mine development or operations.
- Principal risks include exploration failure, lack of mineral reserves and near-term revenue, commodity-price volatility, permitting and environmental requirements, political and operating risks in Peru and other foreign jurisdictions, dependence on joint-venture partners, property-title risk, limited insurance, and the need for future financing.
- The 2017 Tax Cuts and Jobs Act reduced deferred tax assets by $4.494 million, offset by a valuation allowance; no income-tax benefit was recognized in 2017. The company maintained full valuation allowances against significant tax-loss carryforwards.
- The audited financial statements received an unqualified opinion. Management concluded that disclosure controls and internal control over financial reporting were effective; no external auditor attestation was required because the company is a smaller reporting company.
Investor Verification Checklist
- Verify the valuation, technical assumptions, resource estimates, recoveries, mine plans, and economic results in the Florida Canyon and Lik PEAs; neither project had reported mineral reserves.
- Confirm the final terms and governance provisions of the updated Lik joint operating agreement with Teck.
- Assess whether Nexa continues to fund and advance Florida Canyon and whether the planned road, permitting, drilling, and feasibility work occurs as scheduled.
- Reconcile liquidity using cash, Treasury securities, certificates of deposit, marketable securities, and required 2018 exploration and property payments.
- Monitor potential dilution from 1.982 million outstanding options and the additional 2.3 million options subject to shareholder approval.
- Evaluate exposure to zinc, lead, silver, gold, and foreign-exchange prices, as well as permitting, community, environmental, political, and joint-venture risks.
- Review the accounting and future market impact of the company’s Vendetta and Kinross investments and the adoption of new financial-instrument accounting rules in 2018.