Solitario Zinc Corp. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed March 5, 2021. The filing identifies the registrant as Solitario Zinc Corp. and describes it as an exploration-stage mineral company. The company trades on NYSE American under XPL and on the TSX under SLR. It had 58.1 million shares outstanding at year-end and 58,379,116 shares outstanding as of March 5, 2021.
Business Context
Solitario acquires and explores mineral properties, primarily zinc-related projects, and expects to monetize assets through sales, joint ventures, development or royalties. It has never developed or operated a mine and has no commercial mining operations. Core assets are a 39% interest in the Florida Canyon zinc project in Peru and a 50% interest in the Lik zinc-lead-silver project in Alaska. The company also holds an 85% interest in the Chambara project in Peru and acquired an option on the Gold Coin property in Arizona during 2020.
Financial Highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Mineral property revenue | $0 | $408,000 |
| Net loss | $939,000 | $3,289,000 |
| Basic and diluted loss per share | $0.02 | $0.06 |
| Exploration expense | $413,000 | $1,807,000 |
| General and administrative expense | $1,044,000 | $1,368,000 |
| Net cash used in operating activities | $1,010,000 | $2,639,000 |
| Net cash provided by investing activities | $976,000 | $3,109,000 |
| Cash and cash equivalents | $605,000 | $574,000 |
| Short-term investments | $5,798,000 | $6,829,000 |
| Marketable equity securities | $1,620,000 | $1,039,000 |
| Working capital | $7,875,000 | $8,487,000 |
The company reported no operating revenue in 2020. Other income and investment-related gains were important to the result, including a $360,000 unrealized gain and a $50,000 realized gain on marketable equity securities, $127,000 of interest and dividend income, a $44,000 gain on conversion of the SilverStream note, and $60,000 of PPP loan forgiveness. These items were partly offset by a $92,000 derivative loss.
Liquidity, Debt and Capital Resources
- Year-end liquid assets included $605,000 of cash, $3,989,000 of U.S. Treasury securities, $1,809,000 of certificates of deposit and $1,620,000 of marketable equity securities.
- Current liabilities were $174,000, including $10,000 remaining under the PPP loan. The company also reported a $125,000 long-term asset retirement obligation related to the Lik project.
- The company had no conventional long-term debt and no off-balance-sheet arrangements.
- Approximately $595,000 of cash was held in uninsured brokerage or foreign-bank accounts.
- In February 2021, the company established a $9 million at-the-market equity program. It was not obligated to sell shares but expected to use a portion of the program for working capital and operations.
- Management stated that cash, short-term investments and marketable securities were adequate for expected expenditures over the following year, but additional capital would be required for any major development decision.
Material Changes Versus 2019
- Net loss declined by $2.35 million, primarily because exploration expense fell by $1.39 million, general and administrative expense fell by $324,000, and investment results improved from a $711,000 unrealized loss to a $360,000 unrealized gain.
- Exploration spending declined substantially because the Florida Canyon drilling program was completed in 2019 and COVID-19 reduced 2020 work. Solitario incurred $22,000 at Florida Canyon and $14,000 at Lik in 2020.
- Revenue fell to zero from $408,000 in 2019, when the company recognized income from a royalty sale.
- Operating cash use declined by $1.63 million, largely because the company made no 2020 payments toward the Florida Canyon drilling program; it funded $1.58 million of that program in 2019.
- Marketable equity securities increased by $581,000, including receipt of Vox Royalty shares upon conversion of the SilverStream note and higher quoted market values.
- The company abandoned the La Promesa project and recorded a $6,000 impairment. It also acquired a $17,000 initial interest in the Gold Coin option property.
- Shares outstanding declined modestly following the repurchase of 24,700 shares for $5,000. Stock options outstanding increased to 5.56 million from 4.37 million, including 1.325 million options granted in 2020.
Projects, Outlook and Management Commentary
- Florida Canyon: Nexa held 61% and managed the project. Nexa may earn up to 70% by funding expenditures and committing to production based on a positive feasibility study. Nexa funded exploration in 2020 and was expected to advance road access, permitting and resource work in 2021. Solitario was not required to fund 2021 exploration, and its prior $1.58 million drilling contribution is treated as an advance against future development funding.
- Lik: Solitario and Teck each held 50%. No field work occurred in 2020 because of COVID-19 restrictions and staffing limitations. The parties considered a 2021 program of approximately 1,000 meters of drilling, soil sampling and induced-polarization geophysics, subject to approval and COVID-19 conditions.
- 2021 budget: Planned exploration and development expenditures were approximately $921,000, excluding significant Gold Coin or newly acquired project costs. Management forecast approximately $747,000 of 2021 general and administrative expense excluding non-cash stock compensation.
- Gold Coin: The company acquired an option to purchase a 100% interest. The agreement includes up to $242,000 of staged payments, $1.025 million of work commitments during the first four years, and a retained 2% net smelter return royalty for the underlying owner unless buyout options are exercised.
- Reserves and development: No project had reported proven and probable mineral reserves as of December 31, 2020. The economic studies for Florida Canyon and Lik were preliminary economic assessments and do not establish commercial viability.
Risks, Contingencies and Unusual Items
- The company has a long history of losses, reporting losses in 24 of its 27 years of operations, and does not expect consistent operating revenue or cash flow absent asset sales, joint ventures or project development.
- COVID-19 could delay exploration, restrict travel and staffing, increase costs and impair access to capital. The company reduced salaries, contractor spending, travel and exploration activity in response.
- Commodity prices, particularly zinc, and foreign exchange rates materially affect project economics. The company does not hedge commodity or currency exposure.
- Exploration properties may never establish reserves or become commercially viable, and capitalized mineral property costs could be impaired. No reserves were reported, and no mine has been developed.
- Project advancement depends heavily on Nexa and Teck, which control or manage significant exploration and development decisions. The Lik joint venture requires unanimous approval for annual budgets exceeding $1 million.
- Development would require substantial additional financing, permitting, feasibility work and potentially debt, equity issuance or new joint ventures.
- Management provided a full valuation allowance against deferred tax assets; no income tax benefit was recognized in 2020 or 2019.
- The remaining $10,000 PPP loan was subject to possible forgiveness, but the company stated that forgiveness could not be assured and that the Small Business Administration could review eligibility.
- The independent auditor issued an unqualified opinion. The auditor did not provide an internal-control attestation because the company is a smaller reporting company; management stated that internal controls and disclosure controls were effective.
Investor Verification Checklist
- Verify the current status of the Florida Canyon resource estimate, drilling permits, feasibility work, Nexa’s earn-in position and any required Solitario development funding.
- Confirm whether the proposed 2021 Lik exploration program was approved, completed and funded, and review any resulting exploration results.
- Reconcile current cash, Treasury securities, certificates of deposit and marketable equity securities with subsequent sales, investment-price changes and operating cash burn.
- Assess the potential dilution from the $9 million ATM program, 5.56 million outstanding stock options and any future equity financing.
- Review the absence of mineral reserves and distinguish preliminary economic assessment results from feasibility-level economics.
- Monitor zinc, lead and silver prices, permitting, political and community conditions in Peru and Alaska, and continuing COVID-19 or other operating restrictions.
- Confirm the status of the remaining PPP loan, the January 2021 office lease extension, Gold Coin option commitments and the Lik asset retirement obligation.