Solitario Zinc Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The filing identifies the registrant as Solitario Zinc Corp., formerly Solitario Exploration & Royalty Corp.; the company is an exploration-stage mineral company and has not developed a mineral property.
On July 12, 2017, the company acquired Zazu Metals Corp. in an asset purchase recorded at a total purchase price of $16.227 million. The acquisition added a 50% interest in the Lik zinc project in Alaska and resulted in the issuance of 19.788 million Solitario shares and 1.782 million replacement options. The company’s other core asset is its 39% interest in the Florida Canyon zinc project in Peru.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | No material revenue reported | No material revenue reported | No material revenue reported | No material revenue reported |
| Net income (loss) | $77 thousand | $(1.119) million | $(453) thousand | $(1.770) million |
| Basic and diluted EPS | $0.00 | $(0.03) | $(0.01) | $(0.05) |
| Exploration expense | $180 thousand | $132 thousand | $519 thousand | $474 thousand |
| General and administrative expense | $40 thousand | $1.213 million | $900 thousand | $1.911 million |
| Net cash used in operations | Not separately reported for the quarter | $(1.308) million | $(1.436) million |
Q3 2017 other income included a $357 thousand gain on the sale of marketable equity securities, $38 thousand of interest income and an $18 thousand loss on derivative instruments. For the nine months, these amounts were $578 thousand, $114 thousand and a $267 thousand derivative gain, respectively. The company reported no operating margin because it did not report material operating revenue.
At September 30, 2017, cash and cash equivalents were $261 thousand, short-term investments were $11.971 million, and marketable equity securities were $2.819 million. Total current assets were $15.235 million, current liabilities were $141 thousand, and working capital was approximately $15.094 million. Total assets were $31.139 million and shareholders’ equity was $30.873 million. The company reported no debt; it recorded a $125 thousand asset retirement obligation related to Lik.
Material changes versus the prior comparable period
- Q3 net income improved to $77 thousand from a $1.119 million loss, primarily because 2016 included substantial non-cash stock-option expense and 2017 included a larger gain on securities sales and a credit related to capitalization of acquisition costs.
- Nine-month net loss narrowed to $453 thousand from $1.770 million. Stock-option expense declined to $23 thousand from $970 thousand, while gains on securities sales increased to $578 thousand from $40 thousand.
- Exploration expense increased to $180 thousand in Q3 and $519 thousand for the nine months, reflecting increased Florida Canyon activities, completion of a preliminary economic assessment, reconnaissance work and evaluation of the Lik project.
- Mineral properties increased to $15.774 million from $46 thousand at December 31, 2016, principally due to the acquired Lik project, recorded at $15.728 million.
- Shares outstanding increased to 58.443 million at September 30, 2017 from 38.694 million at December 31, 2016, primarily because of the Zazu acquisition.
- Cash flow from investing activities changed to $1.478 million provided in the first nine months of 2017 from $15.761 million used in 2016, reflecting sales of short-term investments and the different acquisition and investment activity.
Guidance, outlook, commentary, risks and unusual items
- Management expects full-year 2017 exploration expenditures to exceed 2016 levels and anticipates continued evaluation of Lik, Florida Canyon and potential acquisitions.
- Management expects non-acquisition general and administrative costs to continue at approximately the Q3 2017 rate and operating cash use to remain generally in line with the first nine months of 2017.
- The company expects to use cash and short-term investments for Lik exploration and development evaluation, potential mineral-property acquisitions, operations and limited share repurchases. Management stated that available cash, short-term investments and marketable securities were adequate for expected expenditures over the next year.
- Mineral properties have no proven and probable reserves. Recovery of capitalized property costs depends on successful exploration, permitting, financing, development, production or future sale, none of which is assured.
- Commodity-price volatility, exploration and development uncertainty, permitting and environmental requirements, political and regulatory changes, and the ability to realize the Lik investment are material risks.
- The Lik project carries a $125 thousand estimated reclamation obligation. The timing of reclamation is uncertain, and no discount was applied.
- The company exercised all Vendetta warrants during the period and held no Vendetta warrants at September 30, 2017, reducing expected future derivative fair-value volatility.
- The company adopted ASU 2017-01 and treated the Zazu transaction as an asset purchase. It expected the 2018 adoption of the new revenue standard to have no material impact, while the impact of the new equity-investment guidance had not been determined.
- Management reported effective disclosure controls as of September 30, 2017 and no material changes in internal control over financial reporting.
- On November 7, 2017, the board extended the share-repurchase program through December 31, 2018. As of that date, 659,300 shares had been repurchased for $343 thousand, leaving authorization for up to 1.341 million additional shares.
Most important facts for investors to verify
- Confirm the final accounting, valuation and exploration results for the 50% Lik zinc project acquired from Zazu.
- Assess whether the company’s cash, Treasury securities, CDs and marketable securities can fund planned exploration and acquisitions without additional equity or debt financing.
- Monitor exploration spending, permitting, reclamation obligations and any future impairment of the Lik and Florida Canyon interests.
- Separate recurring operating performance from non-recurring securities-sale gains, derivative gains and acquisition-related accounting credits.
- Review dilution from the 19.788 million acquisition shares, replacement options and other outstanding equity awards.
- Track commodity prices, joint-venture progress at Florida Canyon and management’s plans for Lik exploration and development.