Solitario Zinc Corp.
Annual Report 2001

Plain-text annual report

Solitario Resources 2001 Annual Report: Metals for the Future RLS 0 5 10 Kilometers Solitario believes that Pedra Branca may be a large-scale district comprised of a series of PGM deposits that, in aggregate, could constitute a major new source of PGM production. RLS Highlights of 2001 n Solitario recently completed a very successful drilling program as part of its exploration initiative at the Pedra Branca platinum-palladium (“PGM”) project in Brazil. In total, 14 of 22 drill holes intersected significant mineralization. n Several major PGM and gold mining companies have expressed interest in a possible joint venture on the Pedra Branca project based on recent exploration results. Discussions are ongoing. n S o l i t a r i o ’s former joint venture partner, Rockwell Ventures Inc., spent $2.0 ( 1 ) million on the Pedra Branca PGM project before terminating its option to earn an interest in June 2001. n Solitario invested $1.0 million in a Secured Note financing offered by Crown Resources Corporation, thereby increasing Solitario’s exposure to gold. The total Secured Note financing, completed in October 2001, raised $3.6 million. n In Peru, the advanced Bongará zinc project and the drill-ready La Pampa gold project were placed on care and maintenance during 2001, pending commodity price improvements. Recently, several companies have expressed an interest in the La Pampa project. n Solitario dropped its option to earn an interest in the Rincon del Tigre PGM property in Bolivia and the Tocantinzinho gold property in Brazil during 2001. (1) All figures are in U.S. dollars. Solitario Resources Corporation (1) Cedro II Prospect: East-West Cross Section Trapia I Prospect: East-West Cross Section Curiu Prospect: East-West Cross Section Solitario achieved its major objective to identify and develop exploration tools that would more effectively target mineralization. This was demonstrated by Solitario’s 62% success rate for drilling mineralized holes. Obviously, this is a very significant development for advancing Pedra Branca. RLS Message to Shareholders Solitario focused on building its asset base in 2001 through a successful PGM exploration program at Pedra Branca and its investment in Crown Resources Corporation, which controls the high-grade Crown Jewel gold deposit. We were very careful to fund only those projects and investments that have sound economics at today’s commodity prices, and, in the case of Pedra Branca, a significant upside in both the property and the commodity potential. Solitario significantly advanced the Pedra Branca PGM pro j e c t re p resent a fully diluted 14% interest in Crown Re s o u rc e s . in northeastern Brazil during 2001. The Company re g a i n e d 100% control of the project with the withdrawal of our former Solitario believes that the Pedra Branca PGM project is on the verge of becoming one of the more important new joint ve n t u re part n e r, Ro c k well Ve n t u res Inc., which spent PGM discoveries in the past ten years. With this emerging a p p roximately $2.0 million exploring the pro p e rt y. So l i t a r i o p roject, Solitario is poised to take advantage of the stro n g announced significant drilling results on new, pre v i o u s l y PGM commodity market that exists today and that is undrilled prospects in early 2002 that indicate exciting new expected to grow substantially over the next decade. geologic potential for the pro p e rt y. We are currently planning Solitario is also ve ry well positioned in the gold arena with f u rther exploration drilling on a wide array of targets. In October 2001, Solitario invested $1.0 million in a $3.6 million Se c u red Note issued by Crown Re s o u rc e s Corporation, which owns 41% of So l i t a r i o. The Se c u re d Notes are fully secured by all the assets of Crown, with $3.05 million of the proceeds currently held in escrow, pending a its Yanacocha royalty and its stake in Crown Re s o u rces. We look forw a rd to keeping you, our share h o l d e r s , informed of new developments concerning these and other p rojects during 2002. Si n c e re l y, successful reorganization of Crow n’s debt stru c t u re. T h i s Christopher E. He r a l d Ma rk E. Jones, III i n vestment increases So l i t a r i o’s exposure to gold and could Chief Exe c u t i ve Of f i c e r C h a i r m a n Solitario Resources Corporation (3) Drilling subsequently proved that ground magnetics were able to discover and define shallowly buried ultramafic bodies. SRL Pedra Branca Project Pedra Branca Project, Brazil Rockwell Exploration Program To fully appreciate the potential of the Pedra Br a n c a Rockwell spent approximately $2.0 million on the property PGM project, it must be re a l i zed that Pedra Branca is during an 18-month period. Exploration work consisted m o re than a single deposit or area of mineralization. mainly of collecting 11,000 soil and rock samples Solitario believes Pedra Branca may be a large-scale throughout much of the property, detailed geologic district comprised of a series of PGM deposits that, in mapping, and drilling 31 core holes on five different a g g regate, could constitute a major new source of PGM prospects. Most of the drilling (21 holes) was conducted p roduction. This district currently extends for over 50 on the advanced Esbarro prospect where RTZ and Altoro kilometers in a north-south direction, and 15 kilometers Gold Corp. (which Solitario acquired in October 2000) in an east-west dire c t i o n . The 190,000-acre Pedra Branca project area is situated in n o rtheastern Brazil. Solitario currently controls a 100% i n t e rest in the pro p e rt y, except for 25,000 acres, where Solitario is earning a 70% interest. The project has been the focus of nearly all of So l i t a r i o’s exploration efforts during the past eight months. In early June 2001, our former joint had already completed 40 holes. At Esbarro, 6 of the 21 holes intersected significant mineralization. Drilling on the Curiu and Trapia I prospects was more successful with one out of the two holes drilled in each prospect intersecting strong PGM mineralization. The three holes drilled on each of the Ipueiras and Esbarro II prospects failed to intersect mineralization. ve n t u re part n e r, Ro c k well Ve n t u res Inc., terminated its Solitario Exploration Program option to earn a 60% interest in the pro p e rt y. So l i t a r i o Exploration Strategy: m o b i l i zed its field crews and began an intensive field and Develop More Effective Exploration Tools data compilation program in early Ju l y. New exploration The major objective of So l i t a r i o’s 2001 exploration pro g r a m strategies and prospects we re developed and successfully was to develop exploration tools that would more effective l y tested with a two-phase drilling program which began in target shallow, open-pittable mineralization. It was November 2001 and concluded in Fe b ru a ry 2002. re c o g n i zed that individual ultramafic bodies discove red to Solitario Resources Corporation (5) Pedra Branca Drill Hole Location & Ground Magnetics Blue Colors Indicate Potential Ultramafic Bodies 01CD07 CEDRO III Ultramafic Subcrops 01CD06 CEDRO V Ultramafic Subcrops CEDRO II Ultramafic Subcrop 01CD03 01CD04 01CD05 CEDRO I Ultramafic Subcrops CD09 CD10 CD08 01CD01 CEDRO IV Ultramafic Subcrop 01CD02 SERRO DO GALLO 0 200 Meters With all three Solitario holes intersecting significant PGM mineralization at shallow depths, Cedro II is the most promising prospect drilled in 2001. RLS Pedra Branca Project date often contained the targeted PGM-bearing strata. tool for detecting new targets. Solitario tested a technique T h e re f o re, So l i t a r i o’s exploration strategy focuses first on using panned heavy mineral concentrates from stream finding and defining ultramafic bodies, and then drill testing sediments. This method proved very successful in detecting for the presence of the favorable mineralized stratigraphy. new mineralization up to two kilometers away from the Magnetic Surveys Solitario believed that ground magnetic surveying could detect s h a l l owly buried ultramafic bodies. Ground magnetics we re first conducted over known mineralized ultramafic bodies. These surveys not only defined the outcropping ultramafic bodies accurately, but it was noted that some of the magnetic anomalies extended considerably beyond the mapped outcro p s . This suggested that the ultramafic rocks extended below non- m i n e r a l i zed and non-magnetic country rocks. Dr i l l i n g outcropping source. We are currently using this tool to discover new target areas. Phase I and II Drilling Program Solitario began its Phase I drilling program in mid- November 2001. T h i rteen holes we re drilled on six d i f f e rent prospects and nine of the thirteen drill holes intersected significant mineralization. Phase II drilling began in mid-Ja n u a ry 2002 and was completed in early Fe b ru a ry. Nine holes we re completed on four different prospects. subsequently proved that ground magnetics we re effective in Significant drill hole intercepts for both Phase I and II are the discove ry and definition of shallowly buried ultramafic presented on page nine. The following summarizes the bodies. Based on these results, the ground magnetometry interpretation of these results for each prospect: p rogram was expanded to cover the entire 45-kilometer tre n d C e d ro I: The magnetic anomaly at Cedro I, although limited of known ultramafic bodies. Twe n t y - t h ree significant magnetic to an area measuring about 100 x 150 meters, is ve ry intense. anomalies we re defined within this ground magnetic surve y The two holes at Cedro I intersected thick intervals of with each constituting a potential drill target. Geochemistry Rock and soil geochemical testing were effective in defining ultramafic rocks with high-grade PGM mineralization in one hole. These holes demonstrate that even small magnetic anomalies can re p resent important targets. PGM mineralization, but much less valuable as a regional Cedro II: With all three Solitario holes intersecting Solitario Resources Corporation (7) 0 200 Meters Magnetic Map of the Santo Amaro Area Blue Colors Indicate Potential Ultramafic Bodies The discovery of Santo Amaro demonstrates that numerous additional mineralized bodies may yet be discovered. RLS remains open in all directions. Definition drilling is C e d ro II C D - 0 3 Pedra Branca Project Prospect Name Hole Number Interval (meters/feet) Pt g/t Pd g/t PGM +Gold C e d ro I C D - 0 9 2 . 0 / 6 . 6 6 . 0 / 1 9 . 7 9 . 1 / 2 9 . 8 1 8 . 2 / 5 9 . 7 5 . 2 / 1 6 . 9 8 . 0 / 2 6 . 2 2 8 . 9 / 9 4 . 8 C D - 0 4 C D - 0 5 i n c l . 4 . 0 / 1 3 . 0 C e d ro III C e d ro IV C D - 0 6 C D - 0 1 2 . 3 / 7 . 5 1 . 9 / 6 . 2 1 5 . 0 / 4 9 . 2 Cu r i u C U - 0 1 1 0 . 1 / 3 3 . 1 Santo Amaro S A - 0 1 2 9 . 5 / 9 6 . 8 i n c l . 5 . 0 / 1 6 . 4 S A - 0 2 3 9 . 1 / 1 2 8 . 2 i n c l . 1 2 . 4 / 3 9 . 3 S A - 0 4 S A - 0 5 3 9 . 1 / 1 2 8 . 2 1 1 . 1 / 3 6 . 4 0 . 6 / 1 . 8 2 . 2 / 7 . 2 Trapia I T U - 0 2 4 7 . 9 / 1 5 7 . 1 4 . 0 / 1 3 . 1 3 . 8 / 1 2 . 5 9 . 6 / 3 1 . 5 T U - 0 3 Trapia West TW- 1 0 2 7 . 6 / 9 0 . 5 i n c l . 8 . 7 / 2 8 . 4 5 . 1 / 1 6 . 7 1 . 7 7 0 . 3 7 1 . 2 2 0 . 4 7 1 . 1 5 0 . 2 8 0 . 3 8 1 . 0 7 0 . 4 2 0 . 8 2 0 . 3 7 2 . 2 4 0 . 6 7 1 . 9 8 0 . 6 9 1 . 1 5 0 . 5 0 0 . 8 0 0 . 7 8 1 . 0 0 0 . 3 7 0 . 4 4 0 . 8 1 0 . 9 1 0 . 5 7 0 . 4 6 0 . 2 0 8 . 3 4 0 . 7 2 2 . 4 8 0 . 9 5 3 . 3 8 0 . 6 3 0 . 9 0 1 . 3 5 1 . 3 6 0 . 8 3 0 . 5 8 3 . 0 4 1 . 1 4 1 . 7 7 0 . 8 6 1 . 5 1 0 . 7 5 0 . 5 9 3 . 2 9 2 . 2 1 1 . 0 9 0 . 7 8 0 . 6 7 1 . 6 3 0 . 7 7 1 . 5 0 0 . 7 7 1 0 . 1 3 1 . 0 9 3 . 7 1 1 . 5 2 4 . 5 5 0 . 9 1 1 . 3 2 2 . 4 3 1 . 7 8 1 . 7 3 0 . 9 8 5 . 4 6 1 . 8 4 3 . 7 8 1 . 5 7 2 . 7 1 1 . 2 7 1 . 3 9 4 . 2 0 3 . 3 5 1 . 5 3 1 . 2 4 1 . 5 0 2 . 5 7 1 . 4 1 2 . 1 5 1 . 0 1 (9) significant PGM mineralization at shallow depths, Cedro II is the most promising prospect drilled in 2001. Drilling suggests that strong PGM mineralization occurs over an area at least 350 meters long and 100 meters wide and planned on this outstanding prospect. Cedro III: Two holes were drilled into the Cedro III magnetic anomaly. A reinterpretation of the magnetic, geologic and geochemical data will be undertaken before any additional drilling is conducted on this prospect. Cedro IV: Three holes were drilled into Cedro IV. Although significant thicknesses of ultramafic rocks were intersected, mineralization was low grade. No further work is planned on this prospect. Curiu: This prospect is three kilometers northeast of Esbarro. Two of the three holes drilled at Curiu intersected high-grade PGM values over significant widths at shallow depths. More drilling to define mineralization is planned on this high-grade prospect. Santo Amaro : Di s c ove red by Solitario in the summer of 2001, this prospect is situated approximately 18 kilometers north of the n o rthernmost portion of the main Pedra Branca trend. T h e d i s c ove ry of Santo Amaro demonstrates that numero u s Solitario Resources Corporation Yanacocha Gold District, Northern Peru Solitario’s Royalty Holdings Anomalous Areas (with deposits) 0 5 10 KM There is no cap on payments Solitario could receive on its Yanacocha royalty, which is situated just several kilometers north of the largest gold mine in South America, Minera Yanacocha. RLS Yanacocha and Other Projects additional mineralized ultramafic bodies may yet be discove re d . Solitario’s interest to a net smelter return (“NSR”) royalty. Of the five holes drilled at Santo Amaro No rth, four we re we l l - Solitario has received $5.7 million in cash and expects to m i n e r a l i zed. Additional drilling, as well as continued surf a c e receive three additional annual payments of $100,000. exploration along this emerging new trend, are planned for 2002. Solitario’s gold royalty ranges from 2% to 5%, depending Trapia 1: Solitario’s two drill holes, combined with on the prevailing price of gold. Solitario also retains a 3% previous drilling, trace impressive, thick intersections of NSR royalty for all silver produced and a 2% NSR royalty moderate-grade mineralization for over 250 meters down- for copper production. There is no cap on payments dip. This indicates excellent potential for building open-pit Solitario could receive on its Yanacocha royalty, which is tonnage. With mineralization open in three directions, situated just several kilometers north of the largest gold additional drilling is planned during 2002. mine in South America, Minera Yanacocha. Trapia We s t : One of four holes at Trapia West intersected Gold Price/Ounce NSR Royalty s t rong PGM values. Drilling at Trapia West indicates a moder- ate-grade (1.5 g/t PGM) zone with limited expansion potential. Solitario achieved its major objective to identify and deve l o p exploration tools that would more effectively target mineralization. This was demonstrated by So l i t a r i o’s 62% success rate for drilling mineralized holes. Obv i o u s l y, this is a ve ry significant development for advancing Pedra Branca. Yanacocha Royalty, Peru Over $400 $360-$400 $320-$360 Under $320 Other Projects 5% 4% 3% 2% Bongará (Zinc) and La Pampa (Gold), Peru The Bongará zinc project and the La Pampa gold project, both 1 0 0 % - owned and located in Pe ru, we re placed on a care and maintenance status for 2001. With the current price of zinc at In February 2000, Solitario sold its mineral interests in its US$0.36 per pound, we do not believe it would be prudent to 150,000-acre Yanacocha gold property in northern Peru to seek a joint ve n t u re partner for the advanced-staged Bongará Newmont Mining Corporation. The agreement converted p roject at this time. Consequently, we plan on continuing the Solitario Resources Corporation (11) Solitario Resources Corporation c a re and maintenance program until zinc prices improve . Investment in Crown’s Secured Note Financing With gold prices improving, Solitario has initiated a search for In October 2001, Solitario invested $1.0 million in a $3.6 a joint ve n t u re partner at La Pampa. In t e rested parties are million Se c u red Note financing issued by Crown Re s o u rc e s c u r rently conducting pro p e rty evaluations. Corporation, which owns 41% of So l i t a r i o. The Se c u re d Rincon del Tigre (PGM), Bolivia Drilling at Rincon del Ti g re in southeastern Bolivia consisted of completing eight core holes totaling 1,120 meters on the Palmarito PGM-zone in August and September 2001. Results for all eight holes we re sub-economic (less than 1.0 gpt PGM). Although additional surface work was conducted to identify new targets, none we re defined. Solitario decided to return the land position to the original owners before Notes are fully secured by all the assets of Crown, primarily consisting of its 100% interest in the Crown Jewel deposit and 9.6 million shares of So l i t a r i o. Fu rt h e r m o re, $3.05 million of the proceeds are currently held in escrow pending a successful reorganization of Crow n’s debt stru c t u re. T h e Notes have a 10% interest rate. So l i t a r i o’s investment could re p resent a fully diluted 14% interest in Crown with c o n version of debt to equity and exe rcise of warrants. significant new land payments became due. In Ma rch 2002, Crown filed a vo l u n t a ry petition for pro t e c t i o n Tocantinzinho (Gold), Brazil The Tocantinzinho gold property is located in the south- central part of the Amazon basin in northern Brazil. Extensive sampling indicated good gold grades over a 600 x 60-meter structural trend. Additional sampling conducted two years ago was incorporated into the data base during a to re o r g a n i ze under Chapter 11 of the United States Ba n k ru p t c y Code. The Plan of Reorganization was pre-negotiated with the existing $15.0 million Conve rtible De b e n t u re holders and the Se c u red Note holders. If the Plan of Reorganization is approve d in a timely manner by all stakeholders and the bankru p t c y c o u rt, Crown could emerge from Chapter 11 in mid-2002. review of the project in mid-2001. This new data Following Chapter 11, Crown plans to use the remaining diminished the grade and continuity of the mineralized proceeds of the Secured Note financing to resume zone, and in October 2001, it was decided to terminate our permitting the high-grade Crown Jewel gold project in option to earn an interest in the property. Washington state. Solitario Resources Corporation (12) Management’s Discussion & Analysis The following discussion should be read in conjunction with the consolidated financial statements of Solitario Re s o u rces Corporation (“Solitario”) for the ye a r s ended December 31, 2001, 2000 and 1999, included elsewhere in this re p o rt . Solitario's financial condition and results of operations are not necessarily i n d i c a t i ve of what may be expected in future years. Unless otherwise indicated, all re f e rences to dollars are to U.S. dollars. Results of Operations Solitario had a loss of $3,657,000 or $0.16 per share in 2001 compare d with net income of $4,285,000 or $0.24 per share in 2000 and a loss of $6,003,000 or $0.36 per share in 1999. During 2001 Solitario continued an exploration program in Brazil and Bolivia on its platinum group metals deposits which included the Pe d r a Branca and Tocantinzinho pro p e rties in Brazil and the Rincon del Ti g re p ro p e rty in Bolivia. This resulted in an increase in exploration expense and additional general and administrative expenses for travel, legal, and explo- ration support. During 2001, Solitario re c o rded $120,000 in exploration consulting fees paid to the former president of Altoro for assistance with Brazilian and Bolivian activities compared to $30,000 in consulting fees in 2000 and none in 1999. During 2001, Solitario wrote down its Tocantinzinho and Rincon del Ti g re pro p e rties with a charge of $1,274,000 to pro p e rty abandonment compared to no write-downs in 2000 and $63,000 in 1999. In April 2000 Solitario completed a transaction with an affiliate of Newmont Mining Corporation (“New m o n t”) and sold its interest in its Yanacocha pro p e rty for proceeds of $6,000,000 million and a sliding scale net smelter return royalty (“NSR”) that varies with the price of gold. T h e cash consideration was $5,600,000 with $400,000 deferred over a four ye a r period, pending release of certain contingent liabilities. Solitario re c e i ve d $100,000 of the deferred proceeds, plus interest in April 2001. So l i t a r i o re c o rded a gain on the sale of the Yanacocha pro p e rty of $5,809,000 during the second quarter of 2000. In October 2000, Solitario, completed a Plan of Arrangement (the “Pl a n” ) with Altoro Gold Corp. of Va n c o u ve r, Canada (“A l t o ro”), where by Altoro became a wholly owned subsidiary of So l i t a r i o. In connection with the Plan, Solitario issued an aggregate of 6,228,894 shares to Altoro share h o l d- ers and option holders. Solitario also re s e rved 825,241 Solitario shares for issuance upon the exe rcise of 825,241 warrants in exchange for Altoro war- rants. During 2000, Solitario issued 261,232 shares upon the exe rcise of the above warrants and 302,898 of the warrants expired unexe rcised. T h e remaining 261,111 warrants expired unexe rcised during 2001. Primarily as a result of the issuance of Solitario shares in connection with the Pl a n , Crown Re s o u rce Corp. of Colorado (“CRCC”) ownership percentage of Solitario was reduced from 57.2% (immediately prior to the transaction) to 41.2% at December 31, 2001. In t e rest income was $236,000, $360,000, and $144,000 in 2001, 2000 and 1999, re s p e c t i ve l y. The change in interest income was primarily the result of larger cash balances related to the Yanacocha sale during 2000, c o m p a red to 2001 and 1999. Included in the 1999 loss was a $5,094,000 cumulative effect of a change in accounting principle for exploration costs on pro p e rties without prove n and probable re s e rves from capitalizing all expenditures to expensing all costs, other than acquisition costs, prior to the establishment of proven and p robable re s e rves. Exploration expense was $1,464,000 in 2001 compared to $1,182,000 in 2000 and $666,000 in 1999. The increase from 1999 was primarily as a result of So l i t a r i o’s expansion of its exploration to include Brazil and Bolivia as well as an expansion of the focus of exploration to include platinum g roup metals during 2000 after the Altoro acquisition. The incre a s e d exploration during 2001 included two separate drilling programs at Pe d r a Branca in Brazil as well as a drilling program at Rincon del Ti g re in Bolivia. Ad d i t i o n a l l y, field geology including trenching and sampling was conducted at Tocantinzinho during 2001. During the year ended December 31, 2001, Solitario incurred $511,000 of general and administrative expenses compared with $372,000 in 2000, and $75,000 in 1999. General and administrative expenses consist of adminis- t r a t i ve (office rent, payroll, insurance, banking and automobile) legal, accounting and auditing, travel and share h o l d e r - related costs. T h e i n c reased activities in Brazil and Bolivia and increases in accounting and s h a reholder costs accounted for the increase in general and administrative expenses during 2001 compared to 2000. The sale of the Yanacocha pro p- e rty and the Altoro transaction during 2000 account for the increase in gen- eral and administrative costs compared to 1999. Solitario Resources Corporation (13) C RCC provides management and technical services to Solitario under a man- agement agreement originally signed in 1994 and modified in April 1999 and again in November 2000. The modified agreement, which has a three ye a r term, provides for reimbursement to CRCC of direct out-of-pocket costs. Additionally the agreement provides for payment of seve n t y - f i ve percent of e xe c u t i ve and administrative salaries and benefits, rent, insurance and inve s t o r relations costs (“Ad m i n i s t r a t i ve Costs”) as well as payment of certain allocated i n d i rect costs and expenses paid by CRCC on behalf of So l i t a r i o. Prior to November 2000, Ad m i n i s t r a t i ve Costs we re reimbursed at fifty percent and a management fee of 2% was charged on direct Solitario expenses paid by C RCC. Prior to April 1999, the agreement reimbursed CRCC for direct out- of-pocket costs; for certain allocated indirect costs; and payment of a serv i c e fee equal to 7% of expenditures. Management service fees paid to CRCC by Solitario in 2001, 2000 and 1999 we re $590,000, $414,000 and $333,000, re s p e c t i ve l y. The fees will generally fluctuate period-to-period based on the overall level of administrative and exploration activities during the period. De p reciation, depletion, and amortization expense was $46,000 in 2001 c o m p a red with $18,000 in 2000, and $35,000 in 1999. The increase in d e p reciation expenses during 2001 related to additions to pro p e rt y, plant and equipment related to the Altoro transaction being depreciated for the entire year as well as certain additional equipment purchased during 2001. Solitario regularly performs evaluations of its assets to assess the re c ove r a b i l i t y of its investments in these assets. All long-lived assets are re v i ewed for impair- ment whenever events or circumstances change which indicate the carry i n g amount of an asset may not be re c overable utilizing established guidelines based upon future net cash flows from the asset. Wr i t e - d owns relating to exploration pro p e rties amounted to $1,274,000 in 2001 compared to $63,000 in 1999. T h e re we re no pro p e rty write-downs in 2000. So l i t a r i o w ro t e - d own $636,000, re p resenting the investment in the Rincon del Ti g re p ro p e rty in Bolivia and $639,000, re p resenting the investment in the Tocantinzinho pro p e rty in Brazil, after exploration programs performed dur- ing 2000 and 2001 failed to identify economic deposits on those pro p e rt i e s . Both of these pro p e rties we re acquired from Altoro during 2000. Liquidity and Capital Resources Due to the nature of the mining business, the acquisition, exploration, and d e velopment of mineral pro p e rties re q u i res significant expenditures prior to the commencement of production. Solitario has in the past financed its activi- ties through the sale of securities, joint ve n t u re arrangements, and the sale of i n t e rests in its pro p e rties. To the extent necessary, Solitario expects to contin- ue to use similar financing techniques. As a result of the Altoro transaction, Solitario's 2001 acquisition and explo- ration programs have been devoted to pro p e rties in Brazil and Bolivia as we l l as Pe ru. Solitario also has approximately $8,000 of assets in Canada, consist- ing primarily of marketable equity securities. Total foreign assets, as re p o rt e d in the consolidated balance sheet as of December 31, 2001, amounted to $3,819,000. Solitario is exposed to risks normally associated with fore i g n i n vestments, including political, economic, and social instabilities, as well as f o reign exchange controls and currency fluctuations. Fo reign inve s t m e n t s may also be subject to laws and policies of the United States affecting fore i g n trade, investment, and taxation, which could affect the conduct or pro f i t a b i l i- ty of future operations. Additions to mineral pro p e rties for land and leasehold costs during 2001 we re $95,000, primarily for pro p e rty and lease payments on Rincon del Ti g re and Tocantinzinho, compared to $4,820,000 during 2000. The additions during 2000 related primarily to the acquisition of Altoro pro p e rties as follows: T h e Pedra Branca pro p e rty in Brazil of $3,627,000; the Tocantinzinho pro p e rty in Brazil of $621,000; and the Rincon del Ti g re pro p e rty in Bolivia of $558,000. T h e re we re no capitalized exploration costs during 2001 and 2000 due to So l i t a r i o’s decision to expense exploration costs on pro p e rties without p roven and probable re s e rves, compared to additions of $991,000 for lease- hold acquisition costs and exploration expenditures in 1999. During 2000, Solitario re c e i ved $6,000,000 from the sale of its Ya n a c o c h a p ro p e rty to Newmont. Newmont retained $400,000 to be paid out in four annual payments of $100,000 plus interest pending the release of certain con- tingent liabilities. Solitario re c e i ved the first payment of $100,000, plus inter- est of $6,000, in April 2001. Solitario re c o rded pro p e rty acquisition costs of $42,000 and $4,705,000 fro m the issuance of its shares during 2001 and 2000 re s p e c t i ve l y. The additions re c o rded during 2000 we re in connection with the acquisition of Altoro. No other shares we re issued in 2001, 2000, or 1999. Primarily as a result of the issuance of shares in connection with the acquisition of Altoro, CRC C ’s ow n- ership percentage has been reduced from 57.2% (prior to the Altoro transac- tion) to 41.2% as of December 31, 2001. Cash and cash equivalents amounted to $2,723,000 at December 31, 2001. These funds are generally invested in short-term interest-bearing deposits and securities, pending investment in current and future projects. Restricted cash held by Newmont amounted to $325,000, including $217,000 in other (long-term) assets. Wo rking capital at December 31, 2001 was $2,794,000. Solitario believes that its existing funds are sufficient to meet its curre n t l y planned operating activities and mandatory pro p e rty payments through 2002. Solitario will need substantial additional financing in order to bring its pro p e r- ties into production. T h e re is no assurance that such financing will be ava i l- able when needed or that, if available, it can be secured on favorable terms. Joint Ve n t u r e s In December 1996, Solitario signed an agreement re g a rding the Bongará p roject with a subsidiary of Cominco Ltd. (“Cominco”) of Va n c o u ve r, B.C., Canada. Cominco had the right to earn a 65% interest in the Bongará pro j- ect by (among other things) spending a minimum of $17,000,000 over a five Solitario Resources Corporation (14) year period from Ja n u a ry 2000 forw a rd. Cash payments of $118,000, includ- ing value added taxes of 18%, we re been paid to Solitario by Cominco in Ja n u a ry 2000 and 1999. In Fe b ru a ry 2001, Cominco terminated their option to acquire an interest in the Bongará project. Solitario currently holds a 100% interest in the project covering approximately 28,500 hectares and may seek a new joint ve n t u re partner to explore and develop this pro p e rt y. Solitario acquired the Pedra Branca platinum-palladium (“PGM”) Pro j e c t located in Ceará State, Brazil, as part of the Altoro acquisition in Oc t o b e r 2000. Altoro signed an agreement in 1999, which was modified in 2000, with Eldorado Gold Corporation (“El d o r a d o”) where by Solitario can earn a 70% interest in concessions covering approximately 10,000 hectares, by spending $2,000,000 on exploration by August 2003. Solitario can earn an additional 20% (90% total) by spending an extra $1,000,000 by Au g u s t 2005. Should Eldorado be diluted to 10%, Eldorado may conve rt its intere s t to a 2% NSR. Ad d i t i o n a l l y, Solitario (through Altoro) has applied for con- cessions in its own name covering approximately 61,000 hectares for a total of 71,000 hectares at the Pedra Branca Project. In Fe b ru a ry 2000, Altoro signed a letter of intent, which was subsequently assigned to Ro c k well Ve n t u res, Inc., of Va n c o u ver Canada (“Ro c k well), granting Ro c k well an option to earn a 60% interest in Altoro’s share of the Pedra Br a n c a Project. Under the terms of the agreement, Ro c k well was re q u i red to spend $7,000,000 on exploration within four years from July 2000, with a minimum e x p e n d i t u re of $1,000,000 during the first ye a r. In addition, Ro c k well issued to Solitario a total of 125,433 shares and $50,000 in cash in May 2000 upon re g u- l a t o ry approval of the agreement. In June of 2001, Ro c k well terminated its option under the agreement. At December 31, 2001, Solitario owns 100% of the Pedra Branca project, subject to the Eldorado Lease discussed above . So l i t a r i o’s exploration and development activities, funding opportunities and joint ve n t u res may be materially affected by commodity prices and fluctua- tions. Commodity market prices are determined in world markets and are affected by numerous factors beyond So l i t a r i o’s contro l . Exploration Activities A significant part of Solitario's business invo l ves the re v i ew of potential pro p- e rty acquisitions and continuing re v i ew and analysis of pro p e rties in which it has an interest, to determine the exploration and development potential of the pro p e rties. In analyzing expected levels of expenditures for work commit- ments and pro p e rty payments, So l i t a r i o’s obligations to make such payments fluctuate greatly depending on whether, among other things, Solitario makes a decision to sell a pro p e rty interest, convey a pro p e rty interest to a joint ve n- t u re, or allow its interest in a pro p e rty to lapse by not making the work com- mitment or payment re q u i re d . In acquiring its interests in mining claims and leases, Solitario has entere d into agreements, which generally may be canceled at its option. Solitario is re q u i red to make minimum rental and option payments in order to maintain its interests in certain claims and leases. Solitario estimates its 2002 mineral p ro p e rty rental and option payments, all of which will be paid by Solitario, is a p p roximately $95,000. Solitario charged operations $1,464,000 during 2001 compared to $1,182,000 in 2000 and $666,000 in 1999 for exploration expenditures on mineral pro p e rties. The increase in the expenditures in 2001 is related specif- ically to drilling programs at both the Pedra Branca Pro p e rty in Brazil and the Rincon del Ti g re pro p e rty in Bolivia as well a general expansion of the focus of So l i t a r i o’s exploration activities to include platinum group metals related to A l t o ro which increased the number and scope of pro p e rties to be eva l u a t e d and the number and cost of exploration personnel. Exploration charged to operations is exc l u s i ve of amounts spent on its pro p e rties by third parties. Solitario has budgeted $1,210,000 for exploration expenditures, to be charged to operations, during 2002 which would be in addition to any expenditure s by joint ve n t u re part n e r s . New Accounting Pronouncements In August 2001, the Financial Accounting St a n d a rds Board issued St a t e m e n t No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” ( “ S FAS No. 144”). SFAS No. 144 Supersedes SFAS No. 121, and prov i d e s for the use of probability weighted cash flow estimation in determining cash f l ows for the impairment of assets as well as establishing methods for account- ing for assets to be disposed of other than by sale. Solitario is re q u i red to implement SFAS No. 144 on Ja n u a ry 1, 2002 and has not determined the impact that this statement will have on its consolidated financial position or results of operations. In July 2001, the Financial Accounting Standards Board issued Statement No. 141 (“SFAS No. 141”), “Business Combinations.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. Solitario implemented SFAS No. 141 during 2001 and it has not had a material impact on its consolidated financial position or results of operations. In July 2001, the Financial Accounting St a n d a rds Board issued St a t e m e n t No. 142, “Goodwill and Other Intangible Assets” (“SFAS No.142”). SFA S No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including good- will re c o rded in past business combinations, will cease upon adoption of this statement. Solitario intends to implement SFAS No. 142 on Ja n u a ry 1, 2002 and it is not expected to have a material impact on its consolidated financial position or results of operations. Solitario Resources Corporation (15) Solitario will adopt Statement 143, “Accounting for Asset Re t i re m e n t Ob l i g a t i o n s” (“SFAS 143”), no later than Ja n u a ry 1, 2003. Under SFAS 143, the fair value of a liability for an asset re t i rement obligation cove red under the scope of SFAS 143 would be re c o g n i zed in the period in which the liability is i n c u r red, with an offsetting increase in the carrying amount of the re l a t e d l o n g - l i ved asset. Over time, the liability would be accreted to its present va l u e , and the capitalized cost would be depreciated over the useful life of the re l a t e d asset. Upon settlement of the liability, an entity would either settle the obliga- tion for its re c o rded amount or incur a gain or loss upon settlement. So l i t a r i o is still studying this newly-issued standard to determine, among other things, whether it has any asset re t i rement obligations which are cove red under the scope of SFAS 143. The effect to Solitario of adopting this standard, if any, has not yet been determined. Differences between Canadian and U.S. GAAP The consolidated financial statements have been pre p a red in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) which differ in some respects from Canadian GAAP. The material differences, in respect to these financial statements between U.S. and Canadian GAAP, and their effect on So l i t a r i o’s financial statements, are summarized in Note 11 to the audited financial statements included elsew h e re in this re p o rt. R i s k s So l i t a r i o’s mineral pro p e rties are located in South America and consist of a variety of interests including unpatented and patented claims and fee land held 100% by Solitario or under lease or option or purchase agreements. T h e p ro p e rties have been located in Pe ru, Bolivia and Brazil. Solitario acts as operator on all of its pro p e rties that are not held in joint ve n t u res. The suc- cess of projects held under joint ve n t u res that are not operated by Solitario is substantially dependent on the joint ve n t u re part n e r. Pro p e rties held by Solitario are subject to the laws of Pe ru, Bolivia and Br a z i l , w h e re it operates. These countries have, from time to time, experienced peri- ods of political and economic instability. Fo reign pro p e rties, operations and i n vestments may be adversely affected by local political and economic deve l- opments, including nationalization, exchange controls, currency fluctuations, taxation and laws or policies as well as, bylaws and policies of the Un i t e d States affecting foreign trade, investment and taxation. Certain other re g i o n s in which Solitario may conduct operations have also been subject to political and economic instability, creating uncertainty and the potential for a loss of re s o u rces located in these re g i o n s . e xchange for the expenditure of a specified amount), the sale by Solitario of i n t e rests in pro p e rties or other assets, and the issuance of debt and common stock. Solitario will need to raise additional cash, or enter into a joint ve n t u re arrangement, in order to fund the development and initial operation of any p ro p e rty it desires to deve l o p. New financing or acceptable joint ve n t u re p a rtners may or may not be available on a basis that is acceptable to So l i t a r i o. Ac c o rd i n g l y, there is no assurance that Solitario will be successful in its attempt to develop any projects it now has or may discover in the future . A large number of companies are engaged in the exploration and deve l o p- ment of mineral pro p e rties, many of which have substantially greater techni- cal and financial re s o u rces than So l i t a r i o. T h e re f o re, Solitario may be at a dis- a d vantage with respect to many of its competitors in the acquisition, explo- ration and development of mining pro p e rties. The marketing of minerals is affected by numerous factors, many of which are beyond the control of So l i t a r i o. These include the price of the raw or refined minerals in the mar- ketplace, imports of minerals from other countries, the availability of ade- quate milling and smelting facilities, the price of fuel, the availability and the cost of labor, and the market price of competitive minerals. In connection with the acquisition of So l i t a r i o’s pro p e rties, Solitario conducts limited re v i ews of title and related matters, and obtains certain re p re s e n t a t i o n s re g a rding ow n e r s h i p. Although Solitario believes it has conducted re a s o n a b l e i n vestigations (in accordance with standard mining practice) of the validity of ow n e r s h i p, there can be no assurance that it holds good and marketable title to all of its pro p e rt i e s . The development, production and sale of minerals is subject to federal, state, p rovincial and local regulation in a variety of ways, including enviro n m e n t a l regulation and taxation. Federal, state, and local environmental re g u l a t i o n s generally have a significant effect on all companies, including So l i t a r i o , engaged in mining or other extractive activities, particularly with respect to the permitting re q u i rements imposed on such companies, the possibilities of p roject delays, and the increased expense re q u i red to comply with such re g u- lations. Solitario believes it is in substantial compliance with all such re g u l a- tions in all the jurisdictions in which it operates. Fu t u re legislation and regulations are expected to continue to emphasize the p rotection of the environment and, as a consequence, the activities of Solitario may be more closely regulated to further the cause of enviro n m e n t a l p rotection. Such legislation and regulations, as well as future interpretation of existing laws, may re q u i re substantial increases in capital and operating costs to Solitario and delays, interruptions, or a termination of operations, the extent of which cannot be pre d i c t e d . The capital re q u i red for exploration and development of pro p e rties is substan- tial. Solitario has financed operations through utilization of joint ve n t u re arrangements with third parties (generally providing that the third party will obtain a specified percentage of So l i t a r i o’s interest in a certain pro p e rty in The mining industry is subject to risks of human injury, environmental liability and loss of assets. Solitario maintains insurance coverage consistent with indus- t ry practice, but can give no assurance that this level of insurance can cover all risks of harm to Solitario associated with being invo l ved in the mining business. Solitario Resources Corporation (16) To the Board of Directors and Stockholders of Solitario Resources Corporation, Denver, Colorado We have audited the consolidated balance sheets of Solitario Resources Corporation and subsidiaries (Solitario) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001 which, as described in Note 1, have been prepared on the basis of accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Solitario's management. Our responsibility is to express an opinion on these finan- cial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Solitario Re s o u rces Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles gener- ally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the consoli- dated balance sheet at December 31, 2001 includes land and leasehold costs of $3,693,000. Note 1 to the consolidated financial statements emphasize s that the re c ove ry of these costs is ultimately dependent upon the deve l o p- ment of economically re c overable ore re s e rves, the ability of Solitario to obtain the necessary permits and financing to successfully place the pro p e r- ties into production, and upon future profitable operations. As discussed in Note 2 to the consolidated financial statements, Solitario changed its method of accounting for exploration costs on properties with- out proven and probable reserves in 1999. Deloitte & Touche LLP Denver, Colorado April 1, 2002 Solitario Resources Corporation Independent Auditors’ Reports Comments by Independent Auditors for Canadian Readers on U.S.-Canada Reporting Conflict To the Board of Directors and Stockholders of Solitario Resources Corporation, Denver, Colorado In Canada, reporting standards for auditors do not permit the addition of explanatory paragraphs in the auditors’ report to emphasize a matter when such matter is adequately disclosed in the notes to the financial statements. Our report to the Board of Directors and Stockholders dated April 1, 2002 is expressed in accordance with auditing standards generally accepted in the United States of America, which permits the inclusion of an explanato- ry paragraphs in the auditors’ report to emphasize a matter regarding the financial statements. Deloitte & Touche LLP Denver, Colorado April 1, 2001 (17) Consolidated Balance Sheets Years Ended December 31, 2001 2000 (in thousands of U.S. dollars, except share amounts) Assets Current assets: Cash and cash equivalents Restricted cash Investments in marketable equity securities Prepaid expenses and other Total current assets Mineral properties, net Note Receivable from Crown, net of discount Other assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Due to CRCC Total current liabilities Stockholders’ equity: Preferred stock, $0.01 par value; authorized 10,000,000 shares; none outstanding Common stock, $0.01 par value; authorized 50,000,000 shares; issued and outstanding 23,407,134 and 23,344,647 Additional paid-in capital Accumulated deficit Accumulated other comprehensive income (loss) Total stockholder’s equity See notes to consolidated financial statements. On behalf of the Board: Christopher E. Herald, Director Solitario Resources Corporation Daniel Leonard, Director $ $ $ $ 2,723 108 268 69 3,168 3,693 893 349 8,103 44 62 106 — 234 21,189 (13,167) (259) 7,997 8,103 $ $ $ $ 6,334 116 220 40 6,710 4,873 — 377 11,960 70 81 151 — 234 21,147 (9,510) (62) 11,809 11,960 (18) Consolidated Statements of Operations (in thousands of U.S. dollars, except per share amounts) Revenues: Mineral property option proceeds Gain on sale of assets Interest income Costs and expenses: Exploration Depreciation, depletion and amortization General and administrative Management fees - CRCC Asset write-downs Other, net Net income (loss) before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle Net income (loss) Earnings (loss) per common share: Basic before cumulative effect of change in accounting principle Change in accounting principle Basic earnings (loss) per share Diluted before cumulative effect of change in accounting principle Change in accounting principle Diluted earnings (loss) per share Weighted average of shares outstanding Basic Diluted See notes to consolidated financial statements. Solitario Resources Corporation $ $ $ $ $ $ 2001 — — 236 236 1,464 49 511 590 1,274 5 3,893 (3,657) — (3,657) (0.16) — (0.16) (0.16) — (0.16) 23,387 23,387 Years Ended December 31, 2000 $ $ $ $ $ $ 100 5,811 360 6,271 1,182 18 372 414 — — 1,986 4,285 — 4,285 0.24 — 0.24 0.23 — 0.23 18,163 18,350 $ $ $ $ $ $ 1999 100 19 144 263 666 35 75 333 63 — 1,172 (909) (5,094) (6,003) (0.05) (0.31) (0.36) (0.05) (0.31) (0.36) 16,855 16,855 (19) Consolidated Statements of Stockholders’ Equity (in thousands of U.S. dollars, except share amounts) Balance at January 1, 1999 Comprehensive income (loss): Net loss Net unrealized loss on marketable equity securities Comprehensive loss Balance at December 31, 1999 Comprehensive income (loss): Shares issued: Acquisition of Altoro Exercise of warrants Comprehensive income (loss): Net income Net unrealized gain on marketable equity securities Comprehensive income Balance at December 31, 2000 Shares issued: For mineral property Comprehensive loss: Net loss Net unrealized loss on marketable equity securities Comprehensive income Common Stock Shares Amount Additional Paid-in Capital Ac c u m u l a t e d De f i c i t Ac c u m u l a t e d Ot h e r C o m p re h e n s i ve Income (loss) To t a l 16,854,521 $ 169 $ 16,507 $ (7,792) $ — — — — — — (6,003) — — 17 — (148) — $ 8,901 (6,003) (148) (6,151) 16,854,521 169 16,507 (13,795) (131) 2,750 6,228,894 261,232 — — 62 3 — — 4,464 176 — — — — 4,285 — — — — 69 — 4,526 179 4,285 69 4,354 23,344,647 234 21,147 (9,510) (62) 11,809 62,487 — — — — — 42 — — — (3,657) — — — (197) — 42 (3,657) (197) (3,854) Balance at December 31, 2001 23,407,134 $ 234 $ 21,189 $ (13,167) $ (259) $ 7,997 See notes to consolidated financial statements. Solitario Resources Corporation (20) Consolidated Statements of Cash Flows (in thousands of U.S. dollars) Operating activities: Net income (loss) Adjustments: Depreciation, depletion and amortization Asset write-downs Gain (loss) on asset sales Cumulative effect of change in accounting principle Other Changes in operating assets and liabilities, excluding effects of acquisition: Prepaid expenses and other current assets Accounts payable Due to CRCC Net cash used in operating activities Investing activities: Payments for acquisition, net of cash acquired Investment in Crown prommissory notes and warrants Additions to mineral properties and other Proceeds from asset and mineral property sales Decrease (increase) in other assets Net cash provided by (used in) in investing activities Financing activities: Issuance of common stock Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Noncash investing and financing activities: Securities received for mineral property transactions, sale of Argentina subsidiary Issuance of stock for property acquisitions See notes to consolidated financial statements. Solitario Resources Corporation 2001 2000 1999 Years Ended December 31, $ (3,657) $ 4,285 $ (6,003) 49 1,274 — — 2 (38) (26) (19) (2,415) — (1,000) (52) 13 (157) (1,196) — — (3,611) 6,334 2,723 — 42 $ 18 — (5,811) — 99 (77) (73) 42 (1,517) (374) — (55) 5,715 — 5,286 179 179 3,948 2,386 6,334 — 4,705 $ 35 63 (19) 5,094 — (11) (12) 34 (819) — — — 19 (59) (40) — — (859) 3,245 $ 2,386 21 — (21) Notes to Consolidated Financial Statements 1. Business & Summary of Significant Accounting Policies: Business and company formation Solitario Re s o u rces Corporation (“So l i t a r i o”) engages principally in the acquisition, exploration, and development of mineral pro p e rties. So l i t a r i o’s mineral pro p e rties are located in Brazil, Bolivia and Pe ru. Solitario was incorporated in the state of Colorado on November 15, 1984 as a wholly-owned subsidiary of Crown Re s o u rce Corp. of Colorado (“CRCC”). In October 2000 Solitario completed a Plan of Arrangement ( “the Pl a n”) where by Solitario issued 6,228,894 shares of its common stock to the s h a reholders of Altoro Gold Corp. (“A l t o ro”) in exchange for 100% of the outstanding s h a res of Altoro. Primarily as a result of the issuance of shares in connection with the Plan, CRC C ’s ownership of So l i t a r i o’s shares was reduced from 57.3% (just prior to the transaction) to 41.2% as of December 31, 2001. See Note 9. Financial reporting The consolidated financial statements include the accounts of Solitario and its wholly- owned subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation. The consolidated financial statements are pre p a red in a c c o rdance with accounting principles generally accepted in the United States of America, and are expressed in U.S. dollars. See Note 11 for differences betwe e n Canadian and U.S. generally accepted accounting principles. In performing its activities, Solitario has incurred certain costs for land and leasehold i n t e rests. The re c ove ry of these costs is ultimately dependent upon the development of economically re c overable ore re s e rves, the ability of Solitario to obtain the necessary permits and financing to successfully place the pro p e rties into production, and upon f u t u re profitable operations, none of which is assure d . Use of estimates The preparation of financial statements in conformity with generally accepted account- ing principles re q u i res management to make estimates and assumptions that affect the re p o rted amounts of assets and liabilities and disclosure of contingent assets and liabili- ties at the date of the financial statements and the re p o rted amounts of re venues and expenses during the re p o rting period. Actual results could differ from those estimates. Cash equivalents and restricted cash Cash equivalents include investment in highly-liquid debt securities with maturities of t h ree months or less when purchased. Restricted cash consists of $300,000, plus inter- est, held by Newmont Mining Company and due Solitario in three annual payments, pending the release of certain contingent liabilities, see Note 2. The long-term port i o n of restricted cash of $200,000, plus interest, is included in other assets. Mineral properties Land and leasehold costs are capitalized in cost centers and will be depleted on the basis of economic re s e rves using the units-of-production method. If there are insufficient economic re s e rves to use as a basis for depleting such costs, a mineral pro p e rty write-off will be made in the period in which the determination is made. Solitario re c o rds the proceeds from the sale of pro p e rty interests to joint ve n t u res as a reduction of the related pro p e rt y’s capitalized cost. Proceeds which exceed the capital- i zed cost of pro p e rty are re c o g n i zed as re venue over the period that the joint ve n t u re remains active as a result of the payment. When such proceeds are associated with p ro p e rties subject to a joint ve n t u re, they are re c o rded as re venue in accordance with the terms of the joint ve n t u re and the transfer of the pro p e rty interest to the joint ve n- t u re partner during the term of the joint ve n t u re. During 1999, Solitario changed its method of accounting for exploration costs on p ro p e rties without proven and probable re s e rves from capitalizing all expenditures to expensing all costs incurred, other than acquisition costs, prior to the establishment of p roven and probable re s e rves. See Note 2. Marketable equity securities Solitario's equity securities are classified as available-for-sale and are carried at fair va l u e , which is based upon market quotes of the underlying securities. The cost of mark e t a b l e equity securities sold is determined by the specific identification method. Foreign exchange The United States dollar is the functional currency for all of So l i t a r i o’s foreign sub- sidiaries. Although So l i t a r i o’s exploration activities have been conducted primarily in Brazil, Bolivia and Pe ru, substantially all of the land, leasehold, and exploration agre e- ments of Solitario are denominated in United States dollars. Solitario expects that a sig- nificant portion of its re q u i red and discre t i o n a ry expenditures in the foreseeable future will also be denominated in United States dollars. Fo reign currency gains and losses are included in the results of operations in the period in which they occur. Income taxes Income taxes are provided for the tax effects of transactions re p o rted in the financial statements and consist of taxes currently due plus deferred taxes related to cert a i n income and expenses re c o g n i zed in different periods for financial and income tax re p o rting purposes. De f e r red tax assets and liabilities re p resent the future tax re t u r n consequences of those differences, which will either be taxable or deductible when the assets and liabilities are re c ove red or settled. De f e r red taxes are also re c o g n i zed for oper- ating losses and tax credits that are available to offset future taxable income and income t a xes, re s p e c t i ve l y. A valuation allowance is provided, if it is more likely than not that some portion or all of the deferred tax assets will not be re a l i ze d . Earnings per share The calculation of basic earnings per share is based on the weighted average number of common shares outstanding during the years ended December 31, 2001, 2000 and 1999. The calculation of diluted earnings per share for the year ended December 31, 2000 includes the effect of common stock equivalents, which include employee stock options and warrants, unless inclusion would be anti-dilutive. The potentially dilutive securities, stock options, we re 2,282,000, 1,615,000 and 1,178,000 at December 31, 2001, 2000 and 1999, re s p e c t i ve l y. The effects of these securities are not included in the computation of diluted earnings per share in 1999 or 2001 as their inclusion would be anti-dilutive . Solitario Resources Corporation (22) Employee stock compensation plans Solitario follows Accounting Principles Board Opinion (“APBO”) No. 25, “Ac c o u n t i n g for Stock Issued to Em p l oye e s”. Under So l i t a r i o’s stock option plans, the exe rcise price of stock options issued to employees equals the market price of the stock on the meas- u rement date. As a result of repricing of its options in 1999, Solitario accounts for all grants which have been repriced as variable awards and re c o rds increases and decre a s e s in compensation expense during the period based upon changes in the market price of So l i t a r i o’s stock as re q u i red by APBO 25. Segment reporting Solitario operates in one segment, minerals exploration. All of So l i t a r i o’s operations are located in South America as further described in note 2 to these financial statements. So l i t a r i o’s United States assets consist primarily of cash and cash equivalents at December 31, 2001 of $2,698,000. Solitario conducts certain administrative functions in the United States. Solitario holds certain Canadian and South American assets t h rough its Canadian wholly-owned subsidiary, Altoro. New accounting pronouncements In August 2001, the Financial Accounting St a n d a rds Board issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”). S FAS No. 144 Supersedes SFAS No. 121, and provides for the use of pro b a b i l i t y weighted cash flow estimation in determining cash flows for the impairment of assets as well as establishing methods for accounting for assets to be disposed of other than by sale. Solitario is re q u i red to implement SFAS No. 144 on Ja n u a ry 1, 2002 and has not determined the impact that this statement will have on its consolidated financial posi- tion or results of operations. In July 2001, the Financial Accounting St a n d a rds Board issued Statement No. 142, “ Goodwill and Other Intangible Assets” (“SFAS No.142”). SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only a p p roach. Amortization of goodwill, including goodwill re c o rded in past business combinations, will cease upon adoption of this statement. Solitario is re q u i red to implement SFAS No. 142 on Ja n u a ry 1, 2002 and has not determined the impact that this statement will have on its consolidated financial position or results of operations. In July 2001, the Financial Accounting St a n d a rds Board issued Statement No. 141 ( “ S FAS No. 141”), “Business Combinations.” SFAS No. 141 re q u i res that the pur- chase method of accounting be used for all business combinations initiated after Ju n e 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amort i zed. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impair- ment, and write-downs may be necessary. Solitario adopted SFAS No. 141 during 2001 and it has not had a material impact on its consolidated financial position or results of operations. Solitario will adopt Statement 143, “Accounting for Asset Re t i rement Ob l i g a t i o n s” ( “ S FAS 143”), no later than Ja n u a ry 1, 2003. Under SFAS 143, the fair value of a liability for an asset re t i rement obligation cove red under the scope of SFAS 143 would be re c o g- n i zed in the period in which the liability is incurred, with an offsetting increase in the car- rying amount of the related long-lived asset. Over time, the liability would be accreted to its present value, and the capitalized cost would be depreciated over the useful life of the related asset. Upon settlement of the liability, an entity would either settle the obligation for its re c o rded amount or incur a gain or loss upon settlement. The Company is still studying this newly-issued standard to determine, among other things, whether it has any asset re t i rement obligations which are cove red under the scope of SFAS 143. The effect to Solitario of adopting this standard, if any, has not yet been determined. Reclassifications C e rtain amounts in the financial statement of the prior years have been reclassified to conform to current year pre s e n t a t i o n . 2. Mineral Properties: Change in accounting principle During 1999, Solitario changed its method of accounting for exploration costs on pro p- e rties without proven and probable re s e rves from capitalizing all expenditures to expens- ing all costs, other than acquisition costs, prior to the establishment of proven and pro b- able re s e rves. The $5,094,000 cumulative effect of the change on prior years is included in the loss for 1999. The effect of the change in 1999 was to increase the loss before c u m u l a t i ve effect of change in accounting principle by $69,000 or $0.00 per share . Peru Solitario holds exploration concessions or has filed applications for concessions cove r i n g a p p roximately 220,000 acres in Pe ru. These applications are subject to normal admin- i s t r a t i ve approvals and the pro p e rties are subject to an annual rental of $5.00 per h e c t a re (approximately 2.45 acres per hectare) in June of each ye a r. Bongará Since 1993, Solitario acquired exploration concessions or has filed claims for concessions c u r rently covering approximately 21,000 acres in northern Pe ru (the “Bongará pro j e c t” ) . In December 1996, Solitario signed an agreement re g a rding the Bongará project with a s u b s i d i a ry of Cominco Ltd. (“Cominco”) of Va n c o u ve r, B.C., Canada. After a modifi- cation signed in 1999, Cominco had the right to earn a 65% interest in the Bongará p roject by spending a minimum of $17,000,000 over a five year period. Cash payments of $118,000, including value added taxes of 18%, we re paid to Solitario by Cominco in Ja n u a ry 2000 and 1999. In Fe b ru a ry 2001 Cominco terminated their option to acquire an interest in the Bongará project. Solitario currently holds 100% interest in the pro p e r- ty and may seek a new joint ve n t u re partner to explore and develop this pro p e rt y. Yanacocha On April 26, 2000 Solitario completed a transaction with an affiliate of New m o n t Mining Corporation (“New m o n t”) and sold its interest in its Yanacocha pro p e rty for $6 million and a sliding scale net smelter return royalty (“NSR”) that varies with the price of gold. Newmont retained $400,000 of the $6 million purchase price to be paid in four annual installments plus interest pending release of certain contingent liabilities. Solitario re c e i ved the first payment of $100,000 plus interest of $6,000, in April 2001. Solitario re c o rded a gain on the sale of the Yanacocha pro p e rty of $5.8 million during the second quarter of 2000. Other Peruvian properties Solitario holds concessions comprising approximately 9,000 acres on the La Pa m p a , Solitario Resources Corporation (23) and Sapalache exploration pro p e rties. Solitario will conduct limited exploration activi- ties while it seeks joint ve n t u re partners to explore and develop these pro p e rties. Brazil Pedra Branca Solitario acquired the Pedra Branca platinum-palladium (PGM) Project located in Ceará State, Brazil, as part of the Altoro acquisition in October 2000. Altoro signed an agreement in May of 1999 with Eldorado Gold Corporation (“El d o r a d o”) where- by Solitario can earn a 70% interest in concessions covering approximately 24,000 a c res, by spending $2 million on exploration over three years. Solitario can earn an additional 20% (90% total) by spending an extra $1 million within five years of the s i g n a t u re date. Should Eldorado be diluted to 10% this interest conve rts to a 2% NSR. Ad d i t i o n a l l y, Solitario (through Altoro) has applied for concessions in its ow n name covering approximately 166,000 acres for a total of 190,000 acres at the Pe d r a Branca Project. In Fe b ru a ry 2000, Altoro signed a letter of intent, which was subsequently assigned to Ro c k well Ve n t u res, Inc., of Va n c o u ver Canada (“Ro c k well), granting Ro c k well an option to earn a 60% interest in Altoro’s share of the Pedra Branca Project. Under the terms of the agreement, Ro c k well was re q u i red to spend $7 million on exploration within four years from July 2000, with a minimum expenditure of $1 million during the first ye a r. In addition, Ro c k well issued to Solitario a total of 125,433 shares and $50,000 in cash in May 2000 upon re g u l a t o ry approval of the agreement. In June of 2001, Ro c k we l l terminated its option under the agreement. At December 31, 2001, Solitario ow n s 100% of the Pedra Branca project subject to the Eldorado Lease discussed above . In October 2000, Solitario re c o rded $3,627,000 in mineral pro p e rty additions for the Pedra Branca project in connection with the acquisition of Altoro. Tocantinzinho In November 1998 Altoro entered into an option agreement (subsequently modified) to acquire a 100% interest in the Tocantinzinho gold pro p e rty in Brazil. The agre e- ment cove red washing licenses for approximately 10,000 acres located in the Para St a t e in Brazil. Solitario terminated the agreement in December of 2001 and re c o rded a p ro p e rty-write down of $639,000. Bolivia Rincon del Tigre Land and leasehold and exploration costs Mineral pro p e rty costs for all So l i t a r i o’s pro p e rties are comprised of land and leasehold costs at December 31, 2001 and 2000. The following items comprised the additions to exploration costs: (in thousands) Geologic, drilling, and assay Field expenses Ad m i n i s t r a t i ve Total exploration costs 2 0 0 1 $ 707 2 4 3 5 1 4 $ 1 , 4 6 4 Exploration expense 2 0 0 0 $ 284 3 9 4 5 0 4 $ 1 , 1 8 2 1999 $ 179 7 6 4 1 1 $ 666 Included in the consolidated balance sheet at December 31, 2001 are total assets of $3,819,000 related to So l i t a r i o’s foreign operations. Assets totaling $3,811,000 are located in South America in Brazil, Bolivia, and Pe ru. Assets totaling $8,000 are located in Canada. Asset write downs Solitario regularly performs evaluations of its assets to assess the re c overability of its i n vestments in these assets. Upon determining that certain pro p e rties did not have suf- ficient potential for economic mineralization Solitario re c o rded write-downs to explo- ration pro p e rties of $1,274,000 and $63,000 in 2001 and 1999 re s p e c t i ve l y. T h e re we re no write-downs to exploration pro p e rties in 2000. 3. Acquisitions: As described in Note 9, in October 2000, Solitario acquired 100% of the outstanding common stock of Altoro (the “Tr a n s a c t i o n”). Solitario accounted for the Tr a n s a c t i o n using the purchase method of accounting. The purchase price was $4,996,000, which included the issuance of 6,228,884 shares valued at $4,526,000. The purchase cost of mineral pro p e rties acquired was $4,466,000. This amount was allocated as follow s : Pedra Branca in Brazil, $3,573,000; Tocantinzinho in Brazil, $447,000; and Rincon del Ti g re in Bolivia, $447,000. The fair value of the remaining assets acquired was $666,000 and the fair value of the liabilities assumed was $136,000. The pro forma results, assuming the transaction occurred as of Ja n u a ry 1, 1999 are as follow s : (in thousands) Re ve n u e s Net income (loss) Basic and diluted income (loss) per share Year ended December 31, 1999 $ 280 $ ( 8 , 4 9 5 ) $ (0.37) 2 0 0 0 $ 6,278 $ 3,410 $ 0.15 Since April 1999 Altoro entered into a series of agreements which allow Solitario to earn a 100% interest in concessions covering 127,000 acres at the Rincon del Ti g re PGM pro p e rty located in Santa Cruz State, Bolivia. The agreements re q u i re d Solitario to spend $3.15 million on exploration over six years and to issue 800,000 s h a res of Altoro, 100,000 shares of which we re issued in 1999 and 2000. T h e remaining 700,000 shares of Altoro we re to be issued as 233,333 shares of So l i t a r i o. Solitario issued 70,834 shares under these agreements during 2001. In December 2001, Solitario terminated these agreements, made a cash payment to the owner of the Rincon del Ti g re concessions of $35,000 and re c o rded a mineral p ro p e rty write-down of $636,000. So l i t a r i o’s remaining share payments we re can- celed upon termination. 4. Related Party Transactions: On June 26, 2001, Solitario agreed to acquire 200,000 shares of Canyon Re s o u rc e s Corporation common stock from Crown Re s o u rces Corporation, (“Crow n”), which ow n s 100% of CRCC, at its fair market value of $200,000 at that date. Solitario sold the s h a res for $245,000 in Fe b ru a ry 2002, the fair market value at that date. On October 19, 2001, Solitario acquired $1,000,000 of conve rtible secured notes fro m Crown of a total of $3,600,000 in a conve rtible secured note financing (Se c u re d Notes). Crown expects to use a portion of the proceeds from this financing to re s t ru c- t u re Crow n’s existing $15 million 5.75% conve rtible subordinated debentures (the Solitario Resources Corporation (24) “ De b e n t u re s”) as well as to initiate permitting on its Crown Jewel gold project in the state of Washington. The Se c u red Notes are secured by all the assets of Crown, consist- ing primarily of its interest in the Crown Jewel pro p e rty and CRCC whose assets con- sist primarily of a 41.2% equity interest in So l i t a r i o. The Se c u red Notes have a five - year term and carry a 10% interest rate payable quart e r l y in cash or Crown common stock, at the election of the Company. Proceeds of $3,250,000 from the Se c u red Notes are being held in escrow pending re s t ructuring of the De b e n t u res (the “Escrowed No t e s”). Solitario invested $650,000 in these Escrowe d Notes. The Escrowed Notes are conve rtible into Crown common shares at a conve r- sion price of $0.35 per share, subject to adjustment. In addition, the Escrowed No t e holders have been issued five - year warrants for eve ry share into which the Escrowe d Notes are conve rtible, which warrant will be exe rcisable into a Crown common share at $0.75 per share, subject to adjustment. Solitario also invested $350,000 in a Se c u re d Note (the “Solitario No t e”), which funds we re made immediately available to Crow n for general corporate purposes. The Solitario Note is conve rtible into Crown common s h a res at a conversion price of $0.2916 per share, subject to adjustment. In addition, Solitario has been issued a five - year warrant for eve ry share into which the So l i t a r i o Note is conve rtible, which warrant will be exe rcisable into a Crown common share at $0.60 per share, subject to adjustment. The terms of the Solitario Note and the related warrants are otherwise identical to the terms of the Escrowed Notes and warrants. In Ma rch 2002, the holders of the Se c u re d Notes released $200,000 from the escrowed funds to Crown, of which So l i t a r i o’s share of the advance was $56,000. Per the terms of the Se c u red Notes, as amended, the release of the remaining escrowed funds is conditional upon the successful completion of a re s t ructuring of the De b e n t u res, on terms acceptable to the holders of the Se c u re d Notes, by June, 30, 2002. Solitario re c o rded the purchase of the Se c u red Notes at par $1,000,000, less a dis- count for the fair value of the warrants, from both the Escrowed Note and the Solitario Note (the “Wa r r a n t s”), of $110,000 on the day of the transaction utilizing a Black-Scholes model. The discount will be amort i zed to interest income over the life of the Se c u red Notes and $4,000 was included in interest income during 2001 as a m o rtization of this discount. C RCC provides management and technical services to Solitario under a management a g reement originally signed in 1994 and modified in April 1999 and again in December 2000. The modified agreement, which has a three year term, provides for reimbursement to CRCC of direct out-of-pocket costs; payment of seve n t y - f i ve per- cent of exe c u t i ve and administrative salaries and benefits, rent, insurance and inve s t o r relations costs (“Ad m i n i s t r a t i ve Costs”) and payment of certain allocated indire c t costs and expenses paid by CRCC on behalf of So l i t a r i o. Prior to December 2000, Ad m i n i s t r a t i ve Costs we re reimbursed at fifty percent and a management fee of 2% was charged on direct Solitario expenses paid by CRCC. Prior to April 1999, the a g reement reimbursed CRCC direct out-of-pocket costs; for certain allocated indire c t costs; and payment of a service fee equal to 7% of expenditures. Management serv- ice fees paid to CRCC by Solitario in 2001, 2000 and 1999 we re $590,000, $414,000 and $333,000, re s p e c t i ve l y. Net amounts due to CRCC as of De c e m b e r 31, 2001 and 2000 we re $62,000 and $81,000, re s p e c t i ve l y, related to the manage- ment services and fee. 5. Income Taxes: So l i t a r i o’s income tax expense (benefit) consists of the follow i n g : (in thousands) De f e r re d U . S . Fo reign Operating loss and c redit carryove r s : U.S. Fo reign Income tax benefit 2 0 0 1 2 0 0 0 1999 $(359) (312) $ – (347) $ – 1 3 5 9 312 $ – - 347 $ – - ( 1 ) $ – Consolidated loss before income taxes includes losses from foreign operations of $3,057,000, $1,275,000 and $664,000 in 2001, 2000 and 1999, re s p e c t i ve l y. The net deferred tax assets/liabilities in the December 31, 2001 and 2000 balance sheets include the following components: (in thousands) De f e r red tax assets: Net operating loss (NOL) carryovers Capital loss carryovers Royalty Other Valuation allowance De f e r red tax assets De f e r red tax liabilities: Exploration and development costs Net deferred tax assets/liabilities 2 0 0 1 2000 $ 3,464 6 2 2 1 , 5 6 0 9 1 ( 4 , 7 9 2 ) 9 4 5 $ 2,791 7 1 1 1 , 5 6 0 3 2 ( 3 , 5 1 0 ) 1 , 5 8 4 9 4 5 $ – 1 , 5 8 4 $ – A reconciliation of expected federal income taxes on income (loss) from operations at s t a t u t o ry rates, with the expense (benefit) for income taxes is as follow s : (in thousands) Expected income tax Non-deductible foreign expenses Disposition of investment in Pe ru Fo reign tax rate differences State income tax Valuation allowance Other Income tax benefit 2 0 0 1 $(1,243) 2 0 0 0 $ 1,457 93 109 1999 $ (309) 3 2 – (7) (76) 1,221 12 1,818 12 351 (3,727) (20) ( 2 , 3 7 3 ) 21 ( 3 6 3 ) 2,992 – $ – $ – $ – At December 31, 2001, Solitario has unused U.S. Net Operating Loss (“NOL”) and capital loss carryovers of $3,152,000 and $1,594,000, re s p e c t i ve l y, which begin to e x p i re commencing 2008 and 2004, re s p e c t i ve l y. Solitario also has foreign NOL carry- overs at December 31, 2001 of $6,492,000 that begin to expire four years after the first year in which taxable income arises. Solitario Resources Corporation (25) 6. Fair Value of Financial Instruments: For certain of So l i t a r i o’s financial instruments, including cash and cash equivalents, accounts payable, and the management fees due to CRCC, the carrying amounts approx i m a t e fair value due to their short maturities. So l i t a r i o’s marketable equity securities are carried at their estimated fair value based on quoted market prices. The fair value of the Se c u red Notes is estimated to equal to the face value of the Notes as of December 31, 2001. The fair value of the Warrants was calculated as $47,000 as of December 31, 2001 utilizing a Black-Scholes model. The valuation allowance of $63,000 for the Warrants was charged to Accumulated other compre h e n s i ve loss in stockholders’ equity as of December 31, 2001. 7. Commitments and Contingencies: In acquiring its interests in mineral claims and leases, Solitario has entered into lease agreements, which generally may be canceled at its option. Solitario is re q u i red to make mini- mum rental and option payments in order to maintain its interests in certain claims and leases. See Note 2. Solitario estimates its 2001 mineral pro p e rty rental and option pay- ments, which will be paid by Solitario, to be approximately $95,000. 8. Stock Option Plan: On Ma rch 4, 1994, So l i t a r i o’s Board of Di rectors (the “Board”) adopted the 1994 Stock Option Plan (the “Pl a n”). Up to 1,100,000 shares of So l i t a r i o’s common stock we re a u t h o r i zed for issuance under the Plan. The Board voted for, and shareholders approved, amendments that have increased the authorized shares under the Plan to 3,136,000 as of June 2001. All options have been granted at exe rcise prices which are determined by the Board to be the fair market value on the date of grant. The options expire five years from the date of grant, and are subject to certain vesting provisions, as determined by the Board . The activity in the Plan for the three years ended December 31, 2001 is as follow s : Outstanding, beginning of ye a r Gr a n t e d Fo rf e i t e d Ex p i re d Outstanding, end of year Exe rcisable, end of ye a r 2 0 0 1 2 0 0 0 1 9 9 9 Weighted Ave r a g e Weighted Ave r a g e Op t i o n s Price (Cdn$)1 Op t i o n s Price (Cdn$)1 Op t i o n s 1 , 7 2 4 , 7 5 0 9 8 0 , 0 0 0 – ( 4 2 2 , 7 5 0 ) 2 , 2 8 2 , 0 0 0 1 , 8 1 2 , 5 0 0 1 . 2 2 0 . 9 4 – 1 . 3 1 1 . 0 8 1 . 1 0 1 , 7 0 4 , 7 5 0 4 5 , 0 0 0 ( 2 5 , 0 0 0 ) – 1 , 7 2 4 , 7 5 0 1 , 4 7 2 , 7 5 0 1 . 2 3 1 . 3 0 1 . 1 7 – 1 . 2 2 1.22 1 , 2 6 3 , 7 5 0 1 , 1 6 2 , 0 0 0 ( 1 5 , 0 0 0 ) ( 7 0 6 , 0 0 0 ) 1 , 7 0 4 , 7 5 0 1 , 2 3 1 , 7 5 0 Weighted Ave r a g e Price (Cdn$) 2 . 5 1 1 . 1 9 2 . 2 5 2.41 1 . 2 2 1 . 2 3 (1) In Ma rch 1999, the shareholders of Solitario approved a repricing of existing options for current employees, officers and directors to Cdn$1.16 per share, which was the m a rket price of So l i t a r i o’s stock. The options outstanding at December 31, 2001 have a range of exe rcise prices of between Cdn$1.30 and Cdn$0.94 and a weighted average remaining contractual life of 3.06 ye a r s . As a result of the repricing of existing options in 1999, Solitario began to account for the awards as variable as of July 1, 2000, in accordance with FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation” (an interpretation of APB 25). Accordingly, an increase in the current market price of Solitario common stock above the higher of the option strike price and the market price of Solitario’s common stock as of July 1, 2000, multiplied by vested options outstanding will be recorded as compensation expense in the period of the price increase. A subsequent reduction in the current market price, to the extent of previously recorded compensa- tion expense will be credited as a reduction of compensation expense. There was no compensation expense recorded during 2001 or 2000 as a result of variable accounting for the repriced options. Solitario Resources Corporation (26) Pro forma information has been computed as if Solitario had accounted for its stock options under the fair value method of SFAS No. 123. The fair values of these options were estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 2001, 2000 and 1999, respectively: risk- free interest rate of 4.74%, 6.10% and 5.31%; dividend yield of 0 percent; volatility factor of the expected market price of Solitario’s common stock of 65%, 65% and 68%; and a weighted average expected life of the options of 4.4 years, 4.0 years and 3.6 years. The weighted average fair value of the options granted is estimated at $0.34, $0.48 and $0.40 per share in 2001, 2000 and 1999, respectively. Had Solitario accounted for its stock options under the fair value method of SFAS No. 123, the following results would have been reported: 10. Earnings Per Share: Diluted earnings per share for the year ended December 31, 2000 included the effect of stock options, which are dilutive. The proceeds from the issuance of shares are assumed to be used to purchase common stock in accordance with the treasury stock method. Weighted average number of shares outstanding increased from 18,162,549 to 18,350,069 as a result of the assumption of the exercise of options, which are dilutive common stock equivalents. There was no change to the income available to common shareholders as a result of the assumption of conversion of dilutive common stock equivalents. Basic and diluted earnings per share were the same for the years ended December 31, 2001 and 1999 as the conversions of com- mon stock equivalents would be anti-dilutive. (in thousands, e xcept per share amounts) Net income (loss) As reported Pro forma Net income (loss) per share As reported Pro forma 2 0 0 1 2 0 0 0 1999 $(3,649) (3,984) $ 4,285 4,264 $(6,003) (6,661) $(0.16) (0.17) $ 0.23 0.23 $ (0.36) (0.40) 9. Stockholders' Equity: In October 2000, Solitario, completed a Plan of Arrangement (“the Plan”) with Altoro Gold Corp. of Vancouver, Canada (“Altoro”), whereby Altoro became a wholly-owned subsidiary of Solitario. In connection with the Plan, Solitario issued 6,228,894 shares to Altoro shareholders and option holders. Solitario also reserved 825,241 Solitario shares for issuance upon the exercise of 825,241 warrants in exchange for Altoro warrants. During 2000, Solitario issued 261,232 shares upon the exercise of the above warrants and 302,898 of the warrants expired unexercised. The remaining 261,111 warrants expired unexercised during 2001. Primarily as a result of the issuance of Solitario shares in connection with the Plan, CRCC’s own- ership percentage of Solitario was reduced from 57.2% (prior to the transaction) to 41.2% at December 31, 2001. 11. Differences between Canadian and U.S. GAAP: The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) which differ in some respects from Canadian GAAP. The material differences, in respect to these financial state- ments between U.S. and canadian GAAP, and their effect on Solitario’s financial statements, are summarized below. Change in accounting principle - Under Canadian GAAP the change in accounting principle, as described in Note 2, requires restatement of prior periods. Marketable equity securities - Under Canadian GAAP, marketable securities that are classified as non-current are valued at cost, unless a decline in value is considered to be other than a temporary impairment. The effect on the consolidated statement of operations of these items would be as follows: Solitario Resources Corporation (27) (in thousands except per share data) Net income (loss) under U.S. GAAP Effect of change in accounting principle: Cu m u l a t i ve effect of change in accounting principle Net income (loss) under Canadian GAAP Income (loss) per share under Canadian GAAP: Basic Diluted 2 0 0 1 $ ( 3 , 6 5 7 ) – $ ( 3 , 6 5 7 ) $ ( 0 . 1 6 ) $ ( 0 . 1 6 ) 2 0 0 0 $ 4,285 – $ 4,285 $ 0.24 $ 0.23 As a result of the above, under Canadian GAAP, the following line items in the consolidated balance sheets would be presented as follow s : (in thousands) Ma rketable equity securities Total assets Accumulated other compre h e n s i ve income Total stockholders' equity Total liabilities and stockholders' equity 2 0 0 1 $ 527 $ 8,362 $ – $ 8 , 2 5 6 $ 8 , 3 6 2 As a result of the above, under Canadian GAAP, the following line items in the consolidated statements of cash flows would be presented as follow s : Operating Ac t i v i t i e s : Net income (loss) Cu m u l a t i ve effect of change in accounting principle Net cash used in operating activities 2 0 0 1 $ ( 3 , 6 5 7 ) – $ $ ( 2 , 4 1 5 ) 12. Selected Quarterly Financial Data (Unaudited): (in thousands) 2 0 0 1 2 0 0 0 $ 4,285 – $ $ (1,517) 2 0 0 0 1 9 9 9 $ ( 6 , 0 0 3 ) 5 , 0 9 4 $ ( 9 0 9 ) $ ( 0 . 0 5 ) $ ( 0 . 0 5 ) 2 0 0 0 $ 282 $ 12,022 $ – $ 11,871 $ 12,022 1 9 9 9 $ (909) – $ $ ( 8 1 9 ) Re ve n u e s Net income (loss) Earnings (loss) per common and common e q u i valent share : Ba s i c Fully diluted Ma rch 31, $ 87 $ (535) June 30, $ 63 $ (590) Sept. 30, $ 4 7 $ ( 1 , 8 6 3 ) Dec. 31, $ 39 $ (669) Ma rch 31, $ 1 2 9 $ ( 2 7 2 ) June 30, $ 5 , 9 0 5 $ 5 , 4 7 0 Sept. 30, $ 135 $ (199) Dec. 31, $ 102 $ (714) $ ( 0 . 0 2 ) $ ( 0 . 0 2 ) $ ( 0 . 0 3 ) $ ( 0 . 0 3 ) $ ( 0 . 0 8 ) $ ( 0 . 0 8 ) $ ( 0 . 0 3 ) $ ( 0 . 0 3 ) $ ( 0 . 0 2 ) $ ( 0 . 0 2 ) $ 0.33 $ 0.32 $ ( 0 . 0 1 ) $(0.01) $ ( 0 . 0 6 ) $ ( 0 . 0 6 ) The above quarterly data do not reflect any pro forma adjustments to give effect to acquisition of Altoro as disclosed in Notes 3 and 9. Solitario Resources Corporation (28) Solitario Resources Corporation Legal Counsel Solomon, Pearl, Blum Heymann & Stich, LLP Denver, Colorado Fogler, Rubinoff Toronto, Ontario Auditors Deloitte & Touche LLP Denver, Colorado Transfer Agents Computershare Toronto, Ontario 800-663-9097 Corporate Offices 4251 Kipling Street Suite 390 Investor Relations Officers and Directors Questions and requests for information Christopher E. Herald should be directed to Debbie W. Mino, Chief Executive Officer Vice President-Investor Relations at 800-229-6827 or via email at dwmino@solitarioresources.com Internet Visit our website at www.solitarioresources.com Walter H. Hunt President – South American Operations James R. Maronick Chief Financial Officer Debbie W. Mino Vice President – Investor Relations Notice of Annual Meeting Mark E. Jones, III The Annual Meeting of Shareholders Chairman will be at 10 a.m. MDT on June 20, 2002 at the Company’s offices. Stock Exchange Listing Toronto: SLR Common Stock Data John Hainey Director Leonard Harris Director Dan Leonard Wheat Ridge, Colorado 80033 The Company’s common stock has Director Telephone: 303-534-1030 been listed and traded in Canada on Fax: 303-534-1809 The Toronto Stock Exchange since July 19, 1994 under the symbol SLR. Concept & Design by Pite Creative Photography by Walter H. Hunt Solitario Resources Corporation (29) Solitario Resources Solitario Resources Corporation 4251 Kipling Street, Suite 390 Wheat Ridge, Colorado 80033 Telephone: 303-534-1030 Fax: 303-534-1809 www.solitarioresources.com Toronto Stock Exchange: SLR RLS 

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