Solitario Zinc Corp. (now identified in the request as Solitario Resources Corp.) — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018, and was filed February 28, 2019. Solitario is an exploration-stage mineral company focused primarily on zinc-related properties and operates in one segment: mineral exploration. It has never developed or operated a producing mine and has no reported proven or probable mineral reserves.
- Core assets: a 39% interest in the Florida Canyon zinc project in Peru and a 50% interest in the Lik zinc-lead-silver project in Alaska.
- Florida Canyon is operated by Nexa Resources, which funded most historical expenditures and began a 17,000-meter, 41-hole drilling program in late 2018.
- Lik is jointly owned with Teck; 2018 activities included mapping, geochemistry, geophysics, core relogging and environmental evaluation.
- The company had four full-time U.S. employees as of February 28, 2019 and relies substantially on contractors and joint-venture partners.
Financial performance, liquidity and capital resources
| Metric | 2018 | 2017 |
|---|---|---|
| Mineral property sale revenue | $502,000 | None |
| Net loss | $3.598 million | $942,000 |
| Basic and diluted loss per share | $0.06 | $0.02 |
| Exploration expense | $1.254 million | $699,000 |
| General and administrative expense | $1.954 million | $1.202 million |
| Net cash used in operating activities | $1.357 million | $1.658 million |
| Net cash provided by investing activities | $1.361 million | $1.785 million |
| Cash and cash equivalents | $117,000 | $214,000 |
| Short-term investments | $10.223 million | $11.642 million |
| Marketable equity securities | $1.585 million | $2.643 million |
| Working capital | $11.448 million | $14.472 million |
| Total assets | $27.903 million | $30.395 million |
| Long-term debt | None | None |
The $502,000 of 2018 revenue resulted from selling the non-producing Yanacocha royalty to Newmont. Revenue from property sales and joint-venture payments is irregular and is not a dependable recurring source.
Cash, Treasury securities, certificates of deposit and marketable equity securities totaled approximately $11.9 million at December 31, 2018. The company stated these resources were adequate to fund expected expenditures for the following year. Accounts payable were $688,000, including $527,000 accrued to Nexa for Florida Canyon drilling.
Cash flow was supported by $1.371 million of net short-term investment sales. Financing activities used $101,000 for share repurchases. The company had no long-term debt and no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Net loss increased to $3.598 million from $942,000, principally because of higher exploration costs, higher general and administrative expense, a $1.058 million unrealized loss on marketable equity securities, and the absence of 2017 derivative gains.
- Exploration expense increased to $1.254 million from $699,000. Florida Canyon expense increased primarily because of the drilling program; Lik and reconnaissance activities also increased.
- General and administrative expense increased to $1.954 million from $1.202 million, including $660,000 of non-cash stock-option expense versus $50,000 in 2017.
- Marketable equity securities declined to $1.585 million from $2.643 million, largely reflecting the decline in Vendetta’s share price.
- Current assets and working capital declined, while mineral properties remained recorded at $15.657 million.
- The company adopted ASU 2016-01, recording a $576,000 cumulative adjustment from accumulated other comprehensive income to accumulated deficit. Adoption of the revenue standard had no material effect.
- The company repurchased 263,100 shares for $101,000 in 2018; cumulative repurchases under the program totaled 930,900 shares for $449,000.
Guidance, outlook, risks and unusual items
- Management budgeted approximately $2.345 million for 2019 exploration and development, including approximately $1.053 million for the remaining Florida Canyon drilling program, $210,000 for Lik, and additional funds for reconnaissance and La Promesa activities.
- Florida Canyon drilling was expected to resume after the rainy season, with completion of the remaining 37 holes targeted during 2019. Nexa also planned additional road construction.
- Solitario may owe Nexa an additional $1.053 million if the drilling program reaches the relevant 5,100-meter threshold; the amount would be credited against future Florida Canyon development funding obligations.
- Management forecast 2019 general and administrative costs of approximately $1.122 million, excluding non-cash stock-option expense, and expected interest income to decline as investments were used to fund operations.
- In January 2019, the company sold royalty interests and a royalty purchase option to SilverStream for Cdn$250,000 in cash and a one-year Cdn$350,000 promissory note bearing 5% simple interest.
- Neither Florida Canyon nor Lik has reported mineral reserves, and neither project has commercial mining operations. Economic studies are preliminary and do not assure development, financing or profitability.
- Key risks include commodity-price volatility, particularly zinc; exploration and permitting uncertainty; dependence on Nexa and Teck; political, regulatory, environmental and community risks in Peru and Alaska; title risks; limited insurance; financing needs; and market volatility in the company’s equity investments.
- The company reported no material environmental incidents, material environmental non-compliance or legal proceedings during 2018.
- The audited financial statements received an unqualified opinion. The auditor did not provide an opinion on internal control over financial reporting because the company is a smaller reporting company.
Most important facts for an investor to verify
- Confirm the registrant’s current legal name and ticker information; the filing identifies the entity as Solitario Zinc Corp., while the request identifies Solitario Resources Corp.
- Reconcile the MD&A reference to a $3.528 million loss with the audited financial statements, which report a $3.598 million net loss.
- Review the Florida Canyon drilling results, remaining funding obligations and Nexa’s decision-making and earn-in rights.
- Assess whether the absence of reserves, feasibility-level certainty and commercial production supports the carrying value of the $15.657 million mineral-property balance.
- Evaluate liquidity after the planned 2019 exploration budget, share repurchases, operating expenditures and potential Florida Canyon payments.
- Monitor the value and liquidity of the Vendetta investment and the risk that further market declines could reduce capital resources.
- Review the terms and collectability of the Cdn$350,000 SilverStream promissory note and the accounting for the January 2019 royalty transaction.