Solitario Zinc Corp. (NYSE American: XPL) — Q3 2019 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2019, filed November 1, 2019. The filing identifies the registrant as Solitario Zinc Corp. (the request metadata refers to Solitario Resources Corp.). Solitario is an exploration-stage company focused primarily on zinc-related and other base- and precious-metal properties. Its core assets were interests in the Florida Canyon project in Peru and the Lik project in Alaska, with exploration conducted independently and through joint ventures.
Financial condition and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Mineral property revenue | $0 | $0 | $408,000 | $502,000 |
| Exploration expense | $815,000 | $344,000 | $1,680,000 | $686,000 |
| General and administrative expense | $319,000 | $344,000 | $1,065,000 | $1,509,000 |
| Net loss | $1,480,000 | $723,000 | $2,923,000 | $2,340,000 |
| Basic and diluted loss per share | $0.03 | $0.01 | $0.05 | $0.04 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(2,385,000) | $(1,014,000) |
- September 30, 2019 cash and cash equivalents were $335,000; U.S. Treasury securities were $7.318 million; and marketable equity securities were $1.014 million. Total cash and short-term investments were $7.653 million.
- Working capital was $8.759 million, compared with $11.448 million at December 31, 2018. Total assets were $24.787 million and shareholders’ equity was $24.413 million.
- The filing reports no debt. Liabilities consisted primarily of accounts payable, operating lease liabilities, and a $125,000 asset retirement obligation related to Lik.
- Cash increased by $218,000 during the first nine months, ending at $335,000, after $2.615 million of investing cash inflows and $12,000 of financing cash outflows.
- Interest income was $205,000 for the first nine months, compared with $109,000 in the prior-year period. Unrealized losses on marketable equity securities were $736,000, and derivative losses were $36,000.
Material changes versus the prior comparable periods
- Q3 net loss increased to $1.480 million from $723,000, primarily because exploration expense increased by $471,000, the unrealized securities loss increased by $273,000, and a $36,000 derivative loss was recorded.
- Nine-month net loss increased to $2.923 million from $2.340 million. Exploration expense rose by $994,000, partly offset by lower general and administrative expense and higher interest income.
- Florida Canyon exploration expense increased substantially as Nexa completed the 2018/2019 drilling program. Solitario’s total commitment was $1.580 million, including a final $527,000 payment recorded in Q3.
- Marketable equity securities declined to $1.014 million from $1.585 million at December 31, 2018, reflecting a cumulative unrealized loss of $865,000. Solitario acquired additional Vendetta units for $233,000 and held 14.45 million Vendetta shares at quarter-end.
- The January 2019 Royalty Sale generated $408,000 of recognized revenue, consisting of cash and a SilverStream convertible note. This replaced the $502,000 Yanacocha royalty sale recognized in the 2018 comparable period; property sales are not expected to be recurring.
- Solitario adopted ASC 842 on January 1, 2019, recording an $82,000 office lease asset and related liability. The adoption had an immaterial effect on operations and cash flows.
Outlook, management commentary, risks and unusual items
- Management expected remaining 2019 exploration spending to decline after completion of the Florida Canyon drilling commitment and the seasonal wind-down of Lik activities, although full-year 2019 exploration expense was expected to exceed 2018.
- General and administrative costs and stock-option expense were expected to continue at approximately comparable quarterly rates. Interest income was expected to decline as short-term investments were used to fund operations.
- Management stated that cash, short-term investments, and marketable equity securities were adequate to fund expected expenditures for the next year. Longer-term development would require cash reserves, joint ventures, debt or equity financing, or asset sales.
- Key risks include the early-stage nature of the properties, commodity-price volatility, permitting and political risks, the ability to establish economically recoverable reserves, joint-venture performance, financing availability, property impairment, market volatility in Vendetta and Kinross securities, derivative valuation, and collectability of the SilverStream Note.
- The SilverStream Note, with an approximate September 30 fair value of $268,000 including accrued interest, was due December 31, 2019 and could be converted only if SilverStream completed a qualifying initial public offering.
- The Lik asset retirement obligation was $125,000. Solitario maintained reclamation bond insurance, but the timing and ultimate cost of reclamation remain uncertain.
- No legal proceedings, material changes to previously disclosed risk factors, defaults, or off-balance-sheet obligations were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the status and collectability or settlement of the SilverStream Note due December 31, 2019.
- Review subsequent exploration results, budgets, and partner commitments for Florida Canyon and Lik.
- Monitor liquidity usage, Treasury security maturities, and the expected timing of any additional capital requirements.
- Assess the valuation and volatility of Vendetta shares, Vendetta warrants, Kinross shares, and related derivatives.
- Verify whether the share repurchase program, authorized for up to two million shares through December 31, 2019, was extended or completed after the filing date.
- Evaluate whether the exploration properties can ultimately support economically recoverable reserves, permits, financing, and development.