Solitario
Resources
Corporation
2 0 0 7 A N N U A L R E P O R T
Exceptional Leverage to
Exploration Success
Solitario Resources Corporation
Letter to Shareholders
C H R I S T O P H E R E . H E R A L D |
P R E S I D E N T & C E O
With Solitario’s continued success in the execution of its unique business model, we
believe a new corporate name is in order to more fully reflect who we are and what
we do. With shareholder approval, Solitario will have a new name that symbolizes
a new chapter in our corporate evolution:
S O L I T A R I O E X P L O R A T I O N & R O Y A L T Y C O R P.
Our shareholders and the investment community have long recognized Solitario’s
success in the exploration arena with the premium quality of our asset base. But
what is becoming increasingly important is the exceptional structure of our joint-
venture arrangements with our senior mining company partners. All our joint
ventures are similarly structured to Net Profit Interest Royalties, or NPI Royalties.
This has created a unique company that retains significant interests, ranging from
25-35%, in five outstanding exploration/development projects for which we are
essentially financed through production to cash flow. We know of no other company
with such an array of NPI royalty-structured joint ventures.
Our business model is designed to lower risk and enhance financial returns relative
to royalty-only companies or self-financing exploration companies that develop their
own projects independently. This strategy has allowed us to: (1) preserve a low
number of shares outstanding, (2) assemble a very effective exploration group con-
sisting of 14 full-time geologists working in three countries, and (3) maintain a strong
balance sheet with approximately $30 million in cash and securities, and no debt.
Solitario Exploration&Royalty Corp. is committed to the following three guiding principles:
(cid:1) Remain highly focused on exploration, leaving feasibility, development and
mining operations to global mining companies
(cid:1) Preserve our ability to make market-impacting, 100%-owned blockbuster
exploration discoveries for our shareholders
(cid:1) Minimize financial risk and shareholder dilution through our NPI royalty-
structured joint ventures
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
$1,200
1000
800
600
400
200
0
Assumes Initial Investment of $100
SOLITARIO RESOURCES CORPORATION
2002
2003
2004
2005
2006
2007
AMEX COMPOSITE
S&P/GOLD & PREC
PEER GROUP
2 0 0 7 : A Y E A R O F A C H I E V E M E N T W I T H A N E V E N
M O R E P R O M I S I N G F U T U R E
During the past several years we continued to enhance the breadth and quality
of Solitario’s asset base and financial strength. Today we have five financed joint
venture arrangements:
(cid:1) Bongará - advanced high-grade zinc project in Peru, Solitario’s 30% interest
funded through production by Votorantim Metais
(cid:1) Pedra Branca - advanced PGM project in Brazil, Solitario’s 35% interest
substantially funded through production by Anglo Platinum
(cid:1) Pachuca Real - silver-gold project in Mexico, Solitario’s 30% interest
funded through production by Newmont Mining
(cid:1) Chambara - regional zinc project in Peru, Solitario’s 30% interest funded
through production by Votorantim Metais
(cid:1) Peru Alliance - regional gold project in Peru, Solitario’s 25% interest
funded through production by Newmont Mining
In total, our partners estimate they will spend over $10 million on these projects in
2008, with at least $5 million on Bongará alone.
On our 100%-owned projects, we have an aggressive independent exploration pro-
gram planned for 2008 in all three countries in which we operate: Mexico, Peru and
Brazil. Perhaps the most intriguing of these is our new Purica copper-molybdenum
project in northern Mexico that is strategically situated between two world-class
copper-molybdenum deposits, Cananea and La Rica.
As of March 15, 2008, our Kinross share position was worth approximately $28
million and we had about $2 million in cash.
During 2007 and early 2008 we reported:
(cid:1) Exceptionally good drill hole assay results on our Bongará zinc project
(cid:1) A dramatic 400% expansion in our Pedra Branca land holdings to 178,500
hectares
(cid:1) A good start on our Pachuca Real initial drilling program
(cid:1) An exciting new regional zinc project in northern Peru – Chambara
(cid:1) Three new projects in our Peru Alliance - Cajatambo, Excelsior and
Twin Lakes
(cid:1) Impressive drill widths of polymetallic mineralization on our Triunfo project
As impressive as 2007 was for Solitario, we fully believe that our 2008 results will be even
more meaningful – and that’s saying something! Before presenting 2007 project results,
we will expand more on the royalty aspects of Solitario’s joint ventures and how that sets
us apart from our peers.
Sincerely,
Christopher E. Herald
President & Chief Executive Officer
2007 Annual Report
About Royalties
Traditional mineral royalty companies are built upon NSR-Royalties (“Net
Smelter Return”). Solitario is choosing a different path by building NPI-
Royalties (“Net Profit Interest”) that we believe provide our shareholders
with higher financial returns than a traditional NSR-Royalty company and a much
lower risk profile than a junior exploration company that independently tries to de-
velop and fund its own exploration projects through to production.
We are able to do this because of our demonstrated success in acquiring new
projects with outstanding potential to host major deposits and our ability to create
favorable NPI-Royalty structured joint ventures with high-quality major mining
companies. This royalty section provides you with some basic information concerning
royalties in general, and Solitario's royalty strategy in particular.
N S R R O Y A L T I E S :
N P I R O Y A L T I E S :
Generate revenues by being paid a small per-
centage (typically 1-4%) of the gross value of
the products. This is the most common royalty.
Generate revenues by participating in a sig-
nificant percentage (typically 20-40%) of the
net profits.
Favorable Attributes
(cid:1) No capital or operational cost deductions
(cid:1) No environmental or closure costs
(cid:1) Limited management time administering
asset
Favorable Attributes
(cid:1) Insulated from equity dilution for feasibility-
construction costs
(cid:1) Significantly higher revenues and earnings
than a NSR-royalty for the same producing
asset
(cid:1) Limited management time administering
asset
Negative Aspects
(cid:1) High acquisition costs
(cid:1) Difficult to acquire earnings impacting royalty
(cid:1) No influence on production decisions
Negative Aspects
(cid:1) Exposure to operational costs
(cid:1) Must repay construction costs from profits
(cid:1) Exposure to operator capabilities
C O M P A R I N G R E V E N U E S T R E A M S
Exploration/Acquisition Costs
Feasibility Costs
Construction Costs
Risk Capital Before Revenue
Operating Costs (LOM) 3
Finance Costs (LOM-Libor+4%)
Total Costs (LOM)
Total Revenues (LOM)
Pre-tax Total Profit
Risk
Average Annual Earnings
Per Share Over 10 Years
3.0% NSR
$27
0
0
27
0
8
35
45
9
low
33.3% NPI
$3
0
0
3
100%-Owned
Interest
$15
25
200
240 1
283 2
91
377
500
123
low
780
83
1,103
1,500
397
high
$0.03
$0.41
$132
All numbers are millions of US$’s except earnings per share. 1 Assumes 100% debt paid back over seven
years. 2 Includes sustaining capital, closure costs and 3% management fee. 3 LOM = Life of Mine
F I N A N C I A L R E T U R N V S . R I S K
High
Financial
Return
NSR-
Royalty
Low
Low
Solitario’s
NPI-Royalty
Structured JV
100% Owned
Interest
Risk
High
2 | Solitario Resources Corporation
SOLITARIO'S NPI-ROYALTY STRUCTURED JOINT VENTURES
2007 Annual Report | 3
Solitario’s Costs
Bongará
$ 0.5
Pedra
Branca
$ 5.0
Pachuca
Real
$ 0.2
Chambara
$ 0.1
Partner’s Est. Past Costs
20.0
7.0
4.8
1.5
10.5
6.0
6.3
Peru
Alliance
$ 2.2
0.0
3.0
14.0
61%
Partner’s Future Costs
for Initial Interest
Partner’s Initial
Interest Earned
Partner Feasibility
and Construction
Financing Required
Future Solitario
Cash Contributions
to Reach Production
Solitario’s Interest
Upon Cash Flow
Solitario’s Partners’
Global Production
Ranking
51%
51%
49%
51%
Yes
Yes *
Yes
Yes
Yes
$ 0.0
$ 6.0
$ 0.0
$ 0.0
$ 1.5
30%
35%
30%
30%
25%
Votorantim Anglo Plat.
3rd largest
Zn
largest
PGM
Newmont
2nd largest
Au
Votorantim Newmont
3rd largest 2nd largest
Zn
Au
All dollar figures are millions of US$’s.
* After partner spends $17 million, we contribute 49% funding for feasibility, but not construction.
With the brief foregoing presentation on mineral royalties, we believe it is easy to see
why including Royalty in our corporate name is appropriate. Our joint ventures are
all NPI-Royalty structured joint ventures. In many ways, our joint venture structures
are better than NPI-Royalties in that we have influence over production decisions
as members of a Board of Directors that manages the asset. Another more favor-
able attribute with all of our joint ventures compared to a pure NPI-Royalty is that
we receive a percentage of cash flow from project profits upon the commencement
of production. Generally, a NPI-Royalty does not generate any cash flow until all
capital is paid back.
In the preceding tables, three lines strike us as exceptionally important in under-
standing why Solitario Exploration and Royalty Corp. is a breed apart. These are:
(cid:1) The Risk Capital Before Revenue line in the "Comparing Revenue
Streams" chart clearly shows that our business model has a significantly lower
amount of upfront capital risk than a typical NSR-Royalty acquisition or a
full-participation, independently financed project. This results in considerably
less upfront risk.
(cid:1) The second line that is very telling is the Average Annual Earnings
Per Share Over 10 Years in the "Comparing Revenue Streams" chart.
Our business model produces a much more robust financial return on a per
share basis than a traditional NSR-Royalty investment. Although our model
results in a lower financial return on an absolute basis, compared to a
100%-owned interest, our return on equity would be superior with much
less upfront financial risk.
(cid:1) Perhaps the most remarkable numbers are found within the Future Solitario
Cash Contributions to Reach Production line in the “Solitario's NPI-
Royalty Structured Joint Ventures” chart. The total investment that Solitario
has to contribute to achieve cash flow in its five NPI-Royalty structured joint
ventures is approximately $7.5 million. That is truly a low-risk profile.
4 | Solitario Resources Corporation
Bongará
O N T H E B R I N K O F D E V E L O P M E N T
Drilling on our high-grade Bongará zinc project located in northern Peru continues to
intersect outstanding zinc-lead-silver mineralization. Highlights of the 2007 32-hole,
11,443 meter drilling program, include drill hole V-21 that cut 92.0 meters grading
5.50% zinc and 1.74% lead, the thickest mineralized interval ever intersected on the
project, and V-40 that intersected 6.0 meters grading 23.65% zinc and 5.38% lead,
one of the highest grade intercepts over 5-meters in thickness. The program was man-
aged and funded by Solitario's joint venture partner Votorantim Metais ("Votorantim").
Before reviewing last year's outstanding exploration results, it is important to state
that we believe 2008 will be a year of transition from exploration to development for
the project. Besides Votorantim's aggressive $5.0 million exploration program,
pre-feasibility studies, including resource estimation, metallurgy, access, infra-
structure and socio-economic studies, will all be proceeding to an advanced stage.
This transition will hopefully lead to a production decision within the next 18 months.
Since September of 2006, work conducted by Votorantim has demonstrated that
high-grade zinc mineralization is widespread as both stratigraphically controlled
deposits and also as thicker structurally controlled breakout zones. Mineralization
measuring about 1,000 meters by 600 meters in size has now been relatively well
defined by Votorantim's drilling, but more widely spaced drill holes surrounding this
area of detailed drilling strongly indicate that similar mineralization is present over
an area of at least 2.0 kilometers by 2.0 kilometers. These impressive drilling
results confirm the excellent size potential of this high-grade zinc deposit, leading
us to believe that Florida Canyon represents one of the best undeveloped zinc
deposits in the world. Moreover, the deposit is open to expansion in all directions.
Highlights of the 2007 drilling program include the following drill hole intercepts:
Drill Hole
Number
V-10
V-15
V-18
V-21
including
including
V-23A
and
and
V-33
and
V-35A
V-36
V-39A
V-40
and
V-41
V-43
Intercept
(meters)
3.4
5.0
2.9
92.0
10.2
11.0
3.0
3.0
12.0
12.9
3.0
2.0
2.0
3.0
6.0
2.0
12.8
5.3
Zinc
%
7.42
15.14
7.05
5.50
12.38
15.38
5.09
9.32
6.72
5.44
9.57
18.73
15.53
24.63
23.65
12.17
6.58
10.41
Lead
%
0.42
4.75
1.04
1.74
8.90
4.02
0.59
0.03
1.12
0.73
0.97
0.15
7.58
3.61
5.38
0.01
0.14
0.18
Zinc+Lead
%
7.82
19.89
8.09
7.24
21.28
19.40
5.68
9.35
7.85
6.17
10.54
18.88
23.24
28.24
29.03
12.18
6.72
10.59
Silver
g/t
3.92
30.82
15.96
12.61
51.48
29.45
4.87
17.83
14.35
9.71
11.87
3.34
99.60
31.13
36.75
19.11
10.15
3.58
Besides the stratigraphic mineralization, three separate "breakout zones" have now
been identified in drill holes. These zones display relatively high-grade mineralized
bodies extending vertically across thick intervals of stratigraphy where collapse breccias
have been replaced by ore minerals. Evidence for these breakout zones is provided
by the following drill holes from various locations on the property:
Breakout
Zone Name
Sam
Karen
North Zone
Drill Hole
Number
GC-17
FC-23
A-1
V-21
Intercepts
(meters)
58.8
81.5
36.2
92.0
Zinc
%
12.0
4.8
12.8
5.5
Lead
%
2.8
0.8
2.7
1.7
Zinc+Lead
%
14.8
5.6
15.5
7.2
A B O U T V O T O R A N T I M M E T A I S
Votorantim Metais belongs to a privately held Brazilian business conglomerate that is
a leader in every market segment in which it operates, including cement, pulp and
paper, metals, chemicals, orange juice, and finance. In 2006, Votorantim Group’s
revenues amounted to US$13.0 billion. The metals business division accounted for
30% of revenues from production of zinc, nickel, steel and aluminum. Votorantim
Metais is the world's third largest primary zinc producer with three operating zinc
smelters and two operating zinc mines. It owns the Cajamarquilla zinc smelter and is
a major shareholder of Milpo, both located in Peru. Votorantim Metais also acquired
US Zinc, a zinc recycling company based in the USA with a plant located in China.
The Bongará Agreement with
Votorantim Metais
Votorantim Metais has completed approximately US$4.0 million in
exploration expenditures since signing the initial Letter Agreement in
August 2006. Solitario is entitled to cash payments of $200,000 per
year until Votorantim makes a production decision. Votorantim has
the option to earn up to a 70% interest in the project by committing to
place the project into production based upon a feasibility study and
spending a minimum of $18.0 million on exploration and development.
Once Votorantim has spent $18.0 million on exploration and
development, and committed to place the project into production, it
has further agreed to finance Solitario's 30% participating interest for
construction. Solitario will repay the loan facility through 50% of its
cash flow distributions.
The bottom line:
Solitario is carried to production.
2007 Annual Report | 5
Pedra Branca
W E Q U A D R U P L E D O U R L A N D H O L D I N G S I N 2 0 0 7
- A N G L O P L A T I N U M F U N D S 2 0 0 8
With encouraging exploration results and a land rush to acquire mineral rights in the
region by some of the largest mining companies in the world, Solitario quadrupled
its land holdings from 45,365 to 178,514 hectares.
As background, during 2007 we noticed an increase in competitor exploration
activity within the region. We stepped up our exploration efforts surrounding our
existing claim block to identify new areas with potential to host PGM and nickel
mineralization. We were aided by satellite images and also a new Brazilian
geochemical report indicating areas of high chrome concentrations in stream sediments
(chrome is often associated with PGM mineralization). With this information, and
previous information we had gathered during the past eight years, we acquired vast
new concession areas in virtually all directions from our original claim block.
When the dust settled on this staking rush, our joint venture controlled substantial
new tracts of mineral rights extending over an area 100 kilometers long in a north-
south direction and 25 kilometers in an east-west direction. Our new neighbors
include Vale (formerly CVRD), Xtrata and Votorantim Metais, all top-tier, global
mining companies.
A total of 3,251 meters of core drilling was completed in 35 drill holes at Pedra
Branca during 2007. Sixteen different prospect areas were drilled with four return-
ing favorable results. These successful tests were at three Cedro area prospects
and an extension of mineralization at Trapia West. All of these successes were in
the central core of the project area. Drilling highlights were as follows:
Hole
CD-24
Area
Cedro
CD-25
CD-26
CD-30
CD-31
TW-12
Cedro
Cedro
Cedro
Cedro
Trapia
From/To
(meters)
1.35 – 26.2
37.5 – 49.0
40.5 – 40.9
19.4 – 21.0
21.9 – 52.6
14.3 – 28.9
11.6 – 30.9
Interval
(meters)
24.85
11.50
0.40
1.60
30.75
14.55
19.31
Pt
g/t
0.54
0.58
1.36
1.51
0.45
0.43
0.70
Pd
g/t
1.04
1.57
1.91
1.64
0.65
0.96
0.72
PGM+Au
g/t
1.64
2.15
3.26
3.16
1.21
1.39
1.47
Ni
%
0.26
0.31
0.17
0.13
0.31
0.24
0.19
With platinum selling for around $2,000 per ounce and palladium over $450 per
ounce, it is easy to see why we are excited about the near-surface mineralization
we have delineated thus far on our Pedra Branca project. Nearly 250 holes have
now been completed on the project. We believe discovery of another new PGM-
deposit could put us over the top in moving the project from advanced exploration
to pre-feasibility. That is another reason why we're so enthusiastic about the vast
new mineral rights we acquired in 2007.
6 | Solitario Resources Corporation
2007 Annual Report | 7
Although we have not yet conducted much follow-up surface exploration work on our
new concessions, what little work we have done has borne fruit with the discovery
of a new chromitite boulder field where our only sample of the boulder field yielded
an assay of 8.6 gpt platinum and 6.4 gpt palladium. In addition, we have discov-
ered an area with nickel mineralization where our only sample of subcropping
boulders yielded 0.98% Ni. With this excellent start, we are optimistic about the
potential of our new land holdings.
Anglo Platinum has once again agreed to fund our exploration program with a $1.5
million budget. Work will focus on regional reconnaissance exploration over our
new property position and about 2,000 meters of core drilling offsetting areas of
new mineralization discovered in 2007.
The Pedra Branca Agreement
with Anglo Platinum
Anglo Platinum has spent approximately $2.5 million on exploration
since signing the initial Letter Agreement in January 2003 and has
earned a 15% interest in the project. Anglo Platinum has the option
to incrementally earn up to a 51% interest in the project by spending
an additional $4.5 million (total of $7.0 million) on exploration at Pedra
Branca by June 30, 2010. Anglo Platinum can earn an additional 9%
interest (for a total of 60%) by completing either (i) a bankable
feasibility study or (ii) spending an additional $10.0 million on
exploration and development, whichever occurs first. Anglo Platinum
can also earn an additional 5% interest (for a total of 65%) by arranging
for 100% financing to put the project into commercial production.
The bottom line:
Solitario is substantially carried to
production; after Anglo Platinum
spends $17 million, Solitario
would contribute 49% of the
funding to reach feasibility;
Anglo Platinum then funds all
construction costs.
8 | Solitario Resources Corporation
Pachuca Real
5 , 0 0 0 M E T E R S O F D R I L L I N G P L A N N E D F O R 2 0 0 8
Newmont completed nine core holes totaling 3,368 meters on Solitario's Pachuca
Real project in central Mexico during 2007. Two of the holes intersected significant
silver-gold mineralization, while anomalous mineralization was intersected in the
other seven holes. The target at Pachuca Real consists of high-grade silver-gold
mineralization in veins. All nine holes were widely spaced on nine separate
prospects within a large district. Holes PAC-08 and PAC-09 are very encourag-
ing as they showed the best mineralization and are strategically situated in the
central part of the large 46,350-hectare Pachuca Real claim block. Both holes
targeted hidden veins beneath broad surface areas of high-level clay alteration.
Significant results in the last two holes are as follows:
Drill Hole
PAC-08
PAC-09
From/To (m)
176.7 – 177.0
210.4 – 212.9
266.4 – 267.3
275.9 – 276.2
129.3 – 129.9
245.0 – 245.5
300.4 – 301.4
323.3 – 323.8
380.3 – 380.6
Interval (m)
0.3
2.55
0.9
0.3
0.6
0.5
1.0
0.5
0.3
Au (g/t)
0.31
0.17
2.03
0.43
0.19
0.75
0.09
0.26
0.32
Ag (g/t)
89.0
37.0
754.0
79.0
144.0
468.0
63.8
163.0
109.0
The historic Pachuca mining district was one of the most prolific silver districts in the
world with substantial gold production. Past production totals at least 1.4 billion
ounces of silver and just over 7.0 million ounces of gold. Solitario's property
encompasses about 30 percent of the historic district, but more importantly, covers
over 95% of the potential extensions of the district to the north (“Pachuca Norte”),
a large area situated about 10 kilometers north of the historical district. The
Pachuca Norte area was essentially dormant for the past 80 years because its
previous owners focused on mining the historic district and just held this property
The historic Pachuca mining
district was one of the most prolific
silver districts in the world with
substantial gold production.
without conducting any serious exploration. Fortunately, we were able to stake the
property the day after the previous owners let the mineral rights lapse. Newmont's
drilling program was the first modern day exploration to test the Pachuca Norte
district; consequently, Solitario believes these results to be very significant.
Besides Newmont's initial drilling program in 2007, a comprehensive surface
exploration program was completed over about 75% of the prospective terrain in the
Pachuca Norte area. Thirty-two named prospect areas have thus far been geologically
mapped and sampled by Newmont. At least 13 kilometers of strong surface vein
trends have been mapped by Newmont in detail. The mineralization defined by
Newmont is very similar, if not identical, to that found in the historic district.
A 5,000 meter two-rig core drilling program resumed in early March 2008 and is ex-
pected to continue into May 2008. Twelve deep drill holes are currently planned.
Newmont is also slated to complete its detailed surface mapping and sampling
program by mid-year. We remain very excited about the potential of the Pachuca
Real project and believe it could be a market impacting project for our shareholders.
The Pachuca Real Agreement
with Newmont Mining
Newmont has spent nearly $2.0 million on exploration since the
venture agreement was signed in September 2006. The Agreement
calls for optional annual work commitments totaling $12.0 million over
a 4.5 year period for Newmont to earn a 51% interest in the project.
Newmont will then have the right to earn an additional 14% (total 65%)
by spending at least $5.0 million annually until such time as a positive
feasibility study is completed for the project. Solitario has the right to
require Newmont to fund its share of construction costs; if we exercise
this right, Solitario will retain a 30% interest in the property.
The bottom line:
Solitario is carried to production.
2007 Annual Report | 9
Peru Alliance
T H R E E N E W P R O J E C T S P R O V I D E P L E N T Y
O F E X P L O R A T I O N U P S I D E
During 2007 and early 2008, work on our Peru Alliance area (Alliance Partner -
Newmont Mining) resulted in the acquisition of three new projects: Cajatambo,
Excelsior and Twin Lakes. All three properties are 100% owned and are situated
within the central Peru mineral belt that is proximal to the giant Cerro de Pasco
silver-base metal district. During the first half of 2008 we plan additional surface
work to potentially define drill targets on all three properties.
The Cajatambo property consists of nine concessions totaling 9,000 hectares. The
geology of the property is dominated by of Tertiary volcanics that have been signif-
icantly altered by silicification, quartz-alunite and argillic alteration. The alteration
system can be traced over an area eight kilometers long by two kilometers wide. It
is considered to be a high-sulfidation epithermal gold system that is geologically
similar in character to many of the large gold deposits situated throughout the
Andean Mountains of Peru. Our work to date consists mainly of stream sediment
sampling, rock chip channel sampling and reconnaissance geologic mapping. The
best channel sample is 51 meters of 0.93 grams per tonne gold.
The Excelsior property consists of two concessions totaling 2,000 hectares. The
geology of the property is comprised of a sequence of metamorphosed Ordovician
sedimentary formations. Mineralization consists of gold-bearing massive and stock-
work quartz-iron replacements associated with an intrusive dike in phyllites. The
quartz replacements can be traced intermittently over a length of eight kilometers
and a width of up to one kilometer. Mineralization is also associated with regional
faulting along the hinge of an anticline. Although gold concentrations are not
exceptionally high at surface, the remarkable size and consistency of anomalous
gold is what makes this prospect intriguing.
During 2007 and early 2008, work
in our Peru Alliance area resulted in
the acquisition of three new projects:
Cajatambo, Excelsior and Twin Lakes.
10 | Solitario Resources Corporation
2007 Annual Report | 11
The Twin Lakes property consists of one concession totaling 1,000 hectares. The
geology of the property is composed of Tertiary volcanics cut by a system of parallel
quartz veins. Veins are up to two meters wide and can be traced along strike up to
1.2 kilometers. The veins are polymetallic in character, within a low-sulfidation envi-
ronment. Assay results are moderately high at surface and we believe the potential
for a system of high-grade veins exists at depth.
We are particularly encouraged with the exploration results that we continue to
generate in central Peru and anticipate additional acquistions in 2008.
The Peru Alliance Agreement
with Newmont Mining
In January 2005, we signed a Strategic Alliance Agreement (the
“Peru Alliance”) and a Stock Purchase Agreement with various
subsidiaries of Newmont Mining ("Newmont") to explore for gold in
South America. Newmont purchased 2.7 million shares of Solitario
(at the time, a 9.9% equity interest) for approximately $3.8 million.
As part of the agreement, Solitario is committed to spend $3.8 mil-
lion over the four-year period on gold exploration in regions (“Alliance
Projects Areas”) that are mutually agreed upon by Newmont Explo-
ration and Solitario.
If Solitario acquires properties within Alliance
Projects Areas and meets certain minimum exploration expenditures,
Newmont Exploration will have the right to joint venture acquired
properties and earn up to a 75% interest by taking the project
through feasibility and financing Solitario’s retained 25% interest into
production. Newmont Exploration may elect to earn a lesser interest
or no interest at all, in which case it would retain a 2% net smelter
return royalty and Solitario would own a 100% interest in the property.
The bottom line:
Solitario is carried to production
if a major discovery is made.
12 | Solitario Resources Corporation
Chambara Zinc Project
A L A R G E - S C A L E R E G I O N A L P R O G R A M
With the outstanding success Solitario and Votorantim Metais (“Votorantim”) have
enjoyed at Bongará, it made sense to team up again to make new zinc discoveries
in what we consider to be one of the best under-explored zinc terrains in the world.
In March of 2008, we signed an exciting new joint venture arrangement with
Votorantim on our regional Chambara zinc project. As with all our other agreements
with major mining company partners, this agreement is a NPI-Royalty structured
joint venture.
Under this innovative arrangement, Solitario contributed 9,300 hectares of mineral
rights that included four prospects with significant high-grade zinc mineralization at
surface and a vast regional geologic and geochemical data base covering much of
the Area of Interest (“AOI”) measuring 200 kilometers in a north-south direction and
85 kilometers in an east-west direction. Votorantim contributed 51,000 hectares of
mineral rights within the AOI to the Chambara project. All assets of this newly
formed venture are held by a new private Peruvian company, Minera Chambara,
that is 85%-owned by Solitario and 15%-owned by Votorantim.
Votorantim will be the operator of all exploration and development within the AOI.
Any new properties acquired by Votorantim during its exploration program will
become an asset of Minera Chambara.
The Chambara Agreement
with Votorantim Metais
Votorantim has the option to earn a 49% interest in Minera Chambara by
spending a total of $6.25 million on exploration over the next seven years.
Votorantim will then have the right to earn an additional 21% (total 70%)
by funding a feasibility study and arranging construction financing for
Solitario's 30%-interest at LIBOR+3.5%. Solitario will repay the loan facility
through 80% of its cash flow distributions.
The bottom line:
Solitario is carried to production.
2007 Annual Report | 13
Management’s Discussion & Analysis
O F F I N A N C I A L C O N D I T I O N & R E S U L T S O F O P E R A T I O N S
The following discussion should be read in conjunction with the
information contained in the consolidated financial statements and
notes thereto. Our financial condition and results of operations are
not necessarily indicative of what may be expected in future years.
(a). Business Overview and Summary
We are an exploration stage company with a focus on the
acquisition of precious and base metal properties with exploration
potential. We acquire and hold a portfolio of exploration properties
for future sale or joint venture prior to the establishment of proven
and probable reserves. Although our mineral properties may be
developed in the future through a joint venture, we have never
developed a mineral property and we do not anticipate developing
any currently owned mineral properties on our own in the future.
We were incorporated in the state of Colorado on November 15,
1984 as a wholly owned subsidiary of Crown. We have been
actively involved in this business since 1993. We recorded
revenues from joint venture payments of $100,000 related to our
in July 2007. Previously, our last significant
Bongará Project
revenues were recorded in 2000 upon the sale of our Yanacocha
property for $6,000,000. We expect that future revenues from joint
venture payments or the sale of properties, if any, would also occur
on an infrequent basis. At December 31, 2007 we had eight
exploration properties in Peru, Bolivia, Mexico and Brazil, and two
royalty properties in Peru. During January 2008, we acquired two
additional properties in Peru as part of our Strategic Alliance with
Newmont and as of March 6, 2008 we have 10 exploration
properties. We are conducting exploration activities in all of those
countries. On July 26, 2004, Crown completed a spin-off of its
holdings of our shares to its shareholders, whereby each Crown
shareholder received 0.2169 shares of our common stock for each
Crown share they owned. Crown was acquired by Kinross upon the
completion of the Crown – Kinross merger and Kinross currently
owns less than one percent of our outstanding common stock.
Our principal expertise is in identifying mineral properties with
promising mineral potential, acquiring these mineral properties and
exploring them to enable us to sell or joint venture these properties
prior to the establishment of proven and probable reserves.
Currently we have no mineral properties in development and we do
not anticipate developing any currently owned properties on our
own in the future. We currently own eight mineral properties under
exploration and we own our Yanacocha and La Tola royalty
interests. Our goal is to discover economic deposits on our mineral
properties and advance these deposits, either on our own or
through joint ventures, up to the development stage (development
activities include, among other
the completion of a
feasibility study, the identification of proven and probable reserves,
as well as permitting and preparing a deposit for mining). At that
point, or sometime prior to that point, we would attempt to either
sell our mineral properties or pursue their development through a
joint venture with a partner that has expertise in mining operations.
things,
In analyzing our activities, the most significant aspect relates to
results of our exploration activities and those of our joint venture
partners on a property-by-property basis. When our exploration
activities, including drilling, sampling and geologic testing indicate
a project may not be economic or contain sufficient geologic or
economic potential we may impair or completely write-off the
property. Another significant factor in the success or failure of our
activities is the price of commodities. For example, when the price
of gold is up,
the value of gold-bearing mineral properties
increases, however, it also becomes more difficult and expensive
to locate and acquire new gold-bearing mineral properties with
potential to have economic deposits.
The potential sale, joint venture or development through a joint
if at all, on an
venture of our mineral properties will occur,
infrequent basis. Accordingly, while we conduct exploration
activities, we need to maintain and replenish our capital resources.
We have met our need for capital in the past through (i) the sale
of properties, which last occurred in 2000 with the sale of our
Yanacocha property for $6,000,000; (ii) joint venture payments,
including a payment of $100,000 received in July 2007 on our
Bongará property and previous payments which occurred during
the years from 1996 through 2000; (iii) sale of our investment in
Kinross (previously Crown); and (iv) issuance of common stock,
including exercise of options, and through private placements,
most recently as part of a strategic alliance with a major mining
company. We have reduced our exposure to the costs of our
exploration activities through the use of
joint ventures. We
anticipate these practices will continue for the foreseeable future
although we expect that our primary funds will come from the sale
of our investment in Kinross.
(b). Recent Developments
On October 12, 2007, Solitario entered into a Zero-Premium
Equity Collar
to a Master
(the "Kinross Collar") pursuant
Agreement
for Equity Collars and a Pledge and Security
Agreement between Solitario and UBS AG, London, England, an
Affiliate of UBS Securities LLC (collectively "UBS") whereby
Solitario pledged 900,000 shares of Kinross Gold Corporation
("Kinross") common shares to be sold (or delivered back to
Solitario with any differences settled in cash) in the amounts of (i)
400,000 shares on April 14, 2009 for a lower threshold price of no
less than $13.81 per share (the "Floor Price") and an upper
threshold price of no more than $21.77 per share (Cap Price One);
(ii) 400,000 shares on April 13, 2010 for a lower threshold of the
Floor Price and an upper threshold price of no more than $24.46
per share ("Cap Price Two"); and (iii) 100,000 shares on April 12,
2011 for no less than the Floor Price and an upper threshold price
of no more than $27.62 per share ("Cap Price Three"). Kinross'
quoted closing price was $16.37 per share on October 12, 2007,
the date of the initiation of the Kinross Collar.
for
On April 24, 2007, Solitario signed the definitive agreement, the
Shareholders Agreement relating to the Pedra Branca Project in
Brazil, (the "Shareholders Agreement") pursuant to the previously
signed Pedra Branca Letter Agreement with Anglo Platinum, Ltd.,
("Anglo Platinum")
the exploration and development of
Solitario's Pedra Branca Project. Solitario's and Anglo Platinum's
property interests are held through the ownership of shares in a
joint operating company Pedra Branca do Brazil Mineração, S.A.,
("PBM) that holds a 100% interest in the mineral rights and other
project assets. As part of the agreement, Anglo Platinum earned
a 15% interest in PBM as of September 30, 2007, as a result of
spending a total of $2.25 million on exploration at Pedra Branca.
Anglo Platinum is not required to make any future funding of
exploration expenditures. However, future cash contributions by
Anglo Platinum will be recorded as additions to minority interest
and a decrease in additional paid-in-capital. Additionally, Anglo
Platinum may earn a 51% interest in PBM by spending a total of
$7 million on exploration ($4.75 million in addition to the $2.25
million spent as of September 30, 2007) at Pedra Branca by
February 28, 2010. Anglo Platinum can earn an additional 9%
interest in PBM (for a total of 60%) by completing either (i) a
bankable feasibility study or (ii) spending an additional $10.0
million on exploration or development. Anglo Platinum can also
earn an additional 5% interest in PBM (for a total of 65%) by
arranging for 100% financing to put the project into commercial
production. As of December 31, 2007 Solitario retains an 85%
interest in PBM. Since earning its 15% interest in PBM, Anglo has
made capital contributions of $90,000 to fund ongoing exploration,
recorded as an increase in paid-in-capital. Solitario has recorded
a minority interest in PBM of $388,000, equal to Anglo Platinum's
15% interest in the book value of PBM during the year ended
December 31, 2007. Solitario recorded a credit of $17,000 for
Anglo Platninum's 15% interest
in the loss of PBM since
September 30, 2007 in the statement of operations.
for
On March 24, 2007, Solitario signed a definitive agreement, the
the Exploration and Potential
Framework Agreement
Development of Mining Properties, (the "Framework Agreement")
pursuant to the previously signed Bongará Letter Agreement with
Votorantim Metais ("Votorantim") on Solitario's Bongará zinc
project in Peru. Solitario's and Votorantim's property interests will
be held through the ownership of shares in a joint operating
company that will hold a 100% interest in the mineral rights and
other project assets. Votorantim can earn up to a 70% interest in
the joint operating company by funding an initial $1.0 million
exploration program, which they have completed as of December
31, 2007, by completing future annual exploration and
development expenditures, and by making cash payments of
$100,000 on August 15, 2007. This cash payment was made
during the third quarter of 2007 and has been recorded as joint
venture property payment revenue. Per the Framework Agreement
a payment of $200,000 will be due on all subsequent annual
anniversaries of that date until a production decision is made or the
Framework Agreement is terminated. The option to earn the 70%
interest can be exercised by Votorantim any time after the first year
commitment by committing to place the project into production
based upon a feasibility study. Additionally, Votorantim, in its sole
discretion, may elect to terminate the option to earn the 70%
interest at any time.
The Framework Agreement calls for
Votorantim to have minimum annual exploration and development
expenditures of $1.5 million in each of years two and three, and
$2.5 million in all subsequent years until a minimum of $18.0
million has been expended by Votorantim. Votorantim will act as
project operator. Once Votorantim has fully funded its $18.0 million
work commitment, and committed to place the project
into
production based upon a feasibility study, it has further agreed to
finance Solitario's 30% participating interest through production.
Solitario will repay the loan facility through 50% of its joint operating
cash flow distributions. During the year ended December 31, 2007
Solitario recorded $100,000 as joint venture property payment
revenue in the statement of operations related to the payment
received from Votorantim on the Bongará project.
Solitario made the decision to drop its interest in the La Purisima
and the Corazon (Conception del Oro) projects in Mexico, and the
Titicayo project in Bolivia, as a result of ongoing geologic and
exploration activities including drilling, during the year ended
December 31, 2007. Solitario recorded property abandonment
and impairment expense of $10,000 during the year ended
December 31, 2007 related to the write-off of the capitalized costs
on the Corazon and La Purisima properties and recorded property
abandonment and impairment expense of $10,000 for the Titicayo
property during the year ended December 31, 2007.
On May 1, 2006 the government of Bolivia effectively nationalized
its oil and gas production, by reducing the share of production a
foreign owner of such assets may receive to 18%, and by ordering
the Bolivian armed forces to forcibly occupy the country's largest
gas fields. Solitario has a small mineral exploration program in
Bolivia, now covering only one property with total capital costs of
approximately $20,000.
the government effectively
In 2007,
increased corporate taxes on mining companies from 25% to
37.5% of profits. More recently, the government has proposed
sweeping changes in the mining law concerning the amount
private companies may own of mining rights, and the potential for
the Bolivian government to effectively become a carried 50%
partner in mining operations.
If enacted, these new laws would
have an adverse effect upon our projects in Bolivia. Solitario will
continue to monitor the actions of the Bolivian government for any
future impact or potential impairment.
ended December 31, 2006. As explained in more detail below, the
primary reason for the increase in net loss during 2007 compared
to the net loss during 2006 was an increase in exploration expense
to $3,112,000 in 2007 from $2,942,000 in 2006, a non-cash charge
of $1,702,000 in loss on derivative instrument during 2007 related
to the Kinross Collar entered into in October 2007, plus an
increase in other general and administrative costs to $2,966,000 in
2007 compared to $2,010,000 during 2006, which included a non-
cash charge of $1,018,000 for stock-based compensation expense
during 2007 compared to $955,000 in 2006. We recorded an
increase in income tax expense to $303,000 during 2007
compared to $54,000 in 2006, primarily related to the gain on sale
of Kinross stock. These differences in income and expenses were
mitigated by an increase in the gain on sale of marketable equity
securities $4,085,000 during 2007 compared to a gain of
$2,121,000 during 2006 on the sale of Kinross stock during 2006
and the elimination of the management services agreement in
August of 2006.
Our net exploration expense increased to $3,112,000 during 2007
compared to $2,942,000 in 2006. During 2007 we further
expanded our exploration efforts in Peru, Brazil and Mexico,
portions of which led to the addition of certain exploration projects.
We increased our surface sampling and evaluation programs
during 2007 compared to 2006 including reconnaissance activities
related to our Strategic Alliance projects and fully staffing our
Mexico exploration program, including establishing a field office in
Hermosillo, Mexico. We also increased our exploration expense at
our Pedra Branca property in Brazil. Our gross exploration costs
on all projects increased to $4,154,000 in 2007 from $3,207,000 in
2006. The exploration expenses were offset by joint venture
reimbursements by Anglo Platinum on our Pedra Branca project of
$1,042,000 during 2007 and $265,000 during 2006. In addition to
the increase in surface exploration activities, we increased our
direct drilling expenditures to $771,000 at our Mercurio, Triunfo and
Titicayo projects during 2007 compared to direct drilling exploration
expenditures at our Mercurio and Pau d'Arco projects of $590,000
during 2006.
As a result of our exploration and evaluation
activities we decided to drop or reduce our interests in three
properties during 2007; Corazon, La Purisima and Titicayo,
resulting in $20,000 in mineral property write-downs. We acquired
three new projects during 2007 and we anticipate continuing to
acquire mineral properties, either through staking, joint venture or
lease, in Latin America during 2008. Our 2008 net exploration
expenditure budget is approximately $4,327,000. The primary
factors in our decision to increase exploration expenditures in 2008
relate to more exploration on reconnaissance projects and an
increase in drill targets on our existing non-joint venture projects.
Exploration expense (in thousands) by property consisted of the
following:
Property Name
Newmont Alliance
Bongará
Pedra Branca, net
Mercurio
Pau d’Arco
Pachuca
Conception del Oro
Purisima
Pozos
Zinda
Titicayo
Triunfo
Chambara
Santiago
Libertad
Reconnaissance
Total exploration expense
2007
647
22
26
667
19
13
21
2
1
6
257
197
8
51
-
1,175
3,112
$
$
2006
470
129
(13)
629
495
189
30
19
18
15
34
15
-
-
144
768
2,942
$
$
(c). Results of Operations
Comparison of the year ended December 31, 2007 to the
year ended December 31, 2006
We had a net loss of $3,911,000 or $0.13 per basic and diluted
share for the year ended December 31, 2007 compared to net loss
of $3,183,000 or $0.11 per basic and diluted share for the year
10 | Solitario Resources Corporation
We recorded a credit (reduction of expense) of $17,000 during
2007, for Anglo Platinum's 15% interest in the losses at our 85%
owned PBM subsidiary. Anglo Platinum earned its 15% interest
pursuant to the Shareholders Agreement between Solitario and
Anglo Platinum as of September 30, 2007 as discussed above.
14 | Solitario Resources Corporation
The $17,000 represents Anglo Platinum's share of PBM losses
since September 30, 2007, the date Anglo Platinum earned its
15% interest. There were no similar items in 2006.
General and administrative costs were $2,966,000 during 2007
compared to $2,010,000 in 2006. The largest change in general
and administrative costs related to a full year of costs, previously
paid by Crown as part of the management services agreement
being paid during 2007 compared to four months during 2006 as
well as related to an increase in the non-cash charge of
$1,018,000 during 2007 compared to $955,000 during 2006 for
stock-based compensation expense discussed below. We
incurred salary and benefits expense of $966,000 during 2007
compared to $367,000 subsequent to August 31, 2006 as a result
of the termination of the Crown management services agreement
and the addition of our employees who previous to August 31,
2006 were paid by Crown. We recorded consulting expense of
$110,000 during 2007 compared to $27,000 during 2006, of which
$30,000 related to an executive recruiting fee during 2007 and
$80,000 and $27,000, during 2007 and 2006, respectively, related
to an agreement entered into in 2006 with Mark Jones, discussed
below under related party transactions. In addition, other general
and administrative costs including rent, travel, insurance and gain
and loss on currencies,
increased to $426,000 during 2007
compared to $239,000 in 2006 primarily related to costs which had
previously been allocated between Crown and Solitario. These
increases in general and administrative costs were partially
mitigated by decreases in shareholder relations costs, including
corporate and exchange fees to $220,000 in 2007 compared to
$239,000 in 2006, the decrease was primarily related to the one-
time payment during 2006 of $75,000 for listing fees on the AMEX.
In addition our legal and accounting costs decreased during 2007
to $226,000 compared to $239,000 primarily related to the
completion of an SEC review of our financial statements and the
application to list on the AMEX during 2006, which did not occur
during 2007. We anticipate general and administrative costs will
increase slightly in the future as a result of planned increased
exploration activities as well as expected increases in costs to
operate in Peru, Brazil and Mexico and we have forecast 2008
general and administrative costs to be approximately $3,000,000.
On January 1, 2006, we adopted SFAS 123R. SFAS 123R
requires the expensing of the grant date fair value of options over
the term of their vesting. On September 7, 2007, the Board of
Directors granted options for 502,000 shares with a fair value of
$976,000, on June 14, 2007 the Board of Directors granted
100,000 shares with a fair value of $223,000, on February 8, 2007
the Board of Directors granted 10,000 options with a fair value of
$17,000 and on June 27, 2006 the Board of Directors granted
1,655,000 options with a fair value of $2,536,000 under the 2006
Plan. We estimated the fair values of the options granted using a
Black-Scholes option pricing model. During the year ended
December 31, 2007, we recognized $1,018,000 of stock-based
compensation expense as part of general and administrative
expense for the vesting of the options pursuant to the 2006 Plan
compared to $955,000 recognized during the year ended
December, 2006, which included $1,000 of stock option
compensation expense related to options previously granted
pursuant to the 1994 Plan which had not vested as of January 1,
2006. See Employee stock compensation plans in Note 1 to the
consolidated financial statements.
We had $85,000 of depreciation and amortization expense during
2007 compared to $49,000 in 2006 primarily as a result of the
addition of
furniture and fixtures of $176,000 and $119,000,
respectively, which were added during 2007 and 2006. We
amortize these assets over a three year period. We anticipate our
2008 depreciation and amortization costs will be similar to our
2007 amount.
We had no management fee expense during 2007 compared to
$232,000 in 2006. The decrease in management fees during 2007
was related to the termination of the agreement on August 31,
2006. Under the modified management agreement Solitario paid
Crown for services by payment at 25% of Crown's corporate
administrative costs for executive and technical salaries, benefits
2007 Annual Report | 15
and expenses, 50% of Crown's corporate administrative costs for
financial management and reporting salaries, benefits and
expenses and 75% of Crown's corporate administrative costs for
investor relations salaries, benefits and expenses.
In addition,
prior
the management agreement, we
reimbursed Crown for direct out-of-pocket expenses.
to the expiration of
During 2007, we recorded interest income of $76,000 compared to
interest income of $26,000 during the same period in 2006. The
interest income recorded during 2007 and 2006 consisted of
payments on cash and cash equivalent deposit accounts. Our
average cash balances were larger during 2007 compared to
2006, which led to the increase in interest income.
During 2007, we recorded income tax expense of $303,000
compared to an income tax expense of $54,000 during 2006. The
increase in net tax expense is related to gain on sale of marketable
equity securities of $4,085,000 during 2007 from the sale of
400,000 shares of Kinross stock compared to a gain of $2,121,000
from the sale of 200,000 shares of Kinross stock during 2006.
These gains were offset by the increase in general and
administrative expenses during 2007 compared to 2006 discussed
above, which are included in the United States taxable income. We
provide a valuation allowance for our foreign net operating losses,
which are primarily related to our exploration activities in Peru,
Mexico, Bolivia and Brazil. We anticipate we will continue to
provide a valuation allowance for these net operating losses until
we are in a net tax liability position with regards to those countries
where we operate or until it is more likely than not that we will be
able to realize those net operating losses in the future. During the
year ended December 31, 2007,
in computing its estimated
deferred tax expense and related liability, Solitario reduced its
estimated tax rate by 1.7%,
the estimated
deductibility of state taxes against United States federal taxes. This
change in estimate had the effect of reducing Solitario's deferred
tax rate to 37.3% from the previous estimated rate of 39%.
to account
for
We regularly perform evaluations of our mineral property assets to
assess the recoverability of our investments in these assets. All
long-lived assets are reviewed for impairment whenever events or
circumstances change which indicate the carrying amount of an
asset may not be recoverable utilizing guidelines based upon future
net cash flows from the asset as well as our estimates of the
geologic potential of early stage mineral property and its related
value for future sale, joint venture or development by us or others.
During 2007, we recorded $20,000 of property impairments, related
to our Corazon, La Purisima and Titicayo projects in Mexico and
Bolivia, compared to $35,000 of property impairments related to our
Libertad and Pillune projects in Peru, our Pozos and Zinda projects
in Mexico, and the Pau d'Arco project in Brazil during 2006.
Comparison of the year ended December 31, 2006 to the
year ended December 31, 2005
We had a net loss of $3,183,000 or $0.11 per basic and diluted
share for the year ended December 31, 2006 compared to net loss
of $2,080,000 or $0.08 per basic and diluted share for the year
ended December 31, 2005. As explained in more detail below, the
primary reason for the increase in net loss during 2006 compared to
the net loss during 2005 was an increase in exploration expense to
$2,942,000 in 2006 from $2,072,000 in 2005, non-cash charge of
$955,000 for stock-based compensation expense, of which
$951,000 related to stock-based compensation from the grant of
options during 2006, plus an increase in other general and
administrative costs including increases as a result of the termination
of the management services agreement with Crown and the receipt
of other income during 2005 in the form of a dividend from Crown of
$1,275,000. These differences in income and expenses were
mitigated by gain of $2,121,000 on the sale of Kinross stock during
2006 and a reduction in the management service agreement fee to
$232,000 in 2006 compared to $423,000 during 2005.
Our net exploration expense increased to $2,942,000 during 2006
compared to $2,072,000 in 2005. During 2006 we further
expanded our exploration efforts in Peru, Brazil and Mexico,
portions of which led to the addition of certain exploration projects.
We increased our surface sampling and evaluation programs
2006 Annual Report | 11
16 | Solitario Resources Corporation
during 2006 compared to 2005 including reconnaissance activities
related to our Strategic Alliance projects and at our Pachuca
property in Mexico prior to signing of our Pachuca-Real agreement
with Newmont, discussed above. We also increased our
exploration expense at our Pedra Branca property in Brazil. Our
gross exploration costs increased to $3,207,000 in 2006 from
$2,172,000 in 2005. The exploration expenses were offset by joint
venture reimbursements by Anglo Platinum on our Pedra Branca
project of $265,000 during 2006 and $100,000 during 2005.
In
addition to the increase in surface exploration activities, we
increased our direct drilling expenditures to $590,000 at our Pau
d'Arco, Mercurio, Libertad and Pillune projects during 2006
compared to direct drilling exploration expenditures at our Pedra
.
Branca, Mercurio and La Tola projects of $264,000 during 2005.
Exploration expense (in thousands) by property consisted of the
following:
Property Name
Newmont Alliance
Bongará
Pedra Branca, net
Mercurio
Pau d’Arco
Pachuca
Libertad
Conception del Oro
Purisima
Pozos
Zinda
Titicayo
Triunfo
Windy Peak
Odin
Reconnaissance
Total exploration expense
2007
470
129
(13)
629
495
189
144
30
19
18
15
34
15
-
-
768
2,942
$
$
2006
296
69
34
559
-
6
-
6
-
21
8
-
17
105
131
820
2,072
$
$
General and administrative costs were $2,010,000 during 2006
compared to $576,000 in 2005. The largest change in general and
administrative costs related to a non-cash charge of $955,000
during 2006 for stock-based compensation expense discussed
In addition we incurred salary expense of $248,000
below.
subsequent to August 31, 2006 as a result of the termination of the
Crown management services agreement and the addition of our
employees who previously were paid by Crown. We also had
increases in costs during 2006 compared to 2005 for shareholder
relations including corporate and exchange fees of $103,000,
primarily related to $75,000 for listing fees on the AMEX during
2006. We also incurred increased in legal and accounting costs
totaling $75,000, which primarily related to an SEC review of our
financial statements and the application to list on the AMEX. We
recorded consulting expense of $27,000 during 2006 related to an
agreement entered into in 2006 with Mark Jones, discussed below
under related party transactions.
In addition, other general and
administrative costs (net) increased approximately $29,000 in
2006 compared to 2005 primarily related to costs which had
previously been allocated between Crown and Solitario.
On January 1, 2006, we adopted SFAS 123R. SFAS 123R
requires the expensing of the grant date fair value of options over
the term of their vesting. On June 27, 2006 the Board of Directors
granted 1,655,000 options under the 2006 Plan. We determined
the fair value of $2,536,000 for the 2006 Plan options granted on
June 27, 2006 using a Black-Scholes option pricing model. We
immediately recognized $634,000 of stock-based compensation
expense as part of general and administrative expense for the 25%
vesting on the date of grant and we have elected cliff-vesting to
recognize the fair value of the option grant over the vesting period
of three years on a straight line basis. Accordingly, we have
recognized an additional $317,000 during 2006 of option
compensation expense for the portion vested of the remaining
75% of the fair value as of the date of the grant, which is being
recognized over the three years from the date of grant. There were
no similar grants in the prior year, and prior to adopting SFAS
123R, we did not recognize stock-option compensation expense in
the statement of operations. See Employee stock based
12 | Solitario Resources Corporation
compensation plans in Note 1 to the condensed consolidated
financial statements.
We had $49,000 of depreciation and amortization expense during
2006 compared to $29,000 in 2005 primarily as a result of the
furniture and fixtures of $119,000 and $126,000,
addition of
respectively, which were added during 2006 and 2005. We
amortize these assets over a three year period.
Management fee expense decreased to $232,000 during 2006
compared to $423,000 in 2005. Although there were no changes
in the management agreement, the decrease in management fees
during 2006 was related to the termination of the agreement on
August 31, 2006. Under the modified management agreement
Solitario paid Crown for services by payment at 25% of Crown's
corporate administrative costs for executive and technical salaries,
benefits and expenses, 50% of Crown's corporate administrative
costs for financial management and reporting salaries, benefits
and expenses and 75% of Crown's corporate administrative costs
for investor relations salaries, benefits and expenses. In addition,
we reimbursed Crown for direct out-of-pocket expenses.
On July 28, 2004, we exchanged 500,000 shares of TNR common
stock for 500,000 shares of TNR common stock that were not
available to be publicly traded in Canada until November 28, 2004
and a warrant to purchase an additional 500,000 shares of TNR
common stock for Cdn$0.16 per share for a period of two years.
The transaction has been accounted for as a sale of our previously
owned TNR shares and an acquisition of the new TNR shares and
warrants. We exercised our remaining 500,000 TNR warrants on
July 24, 2006 by paying $70,000 in cash and transferred our
existing warrant valuation of $12,000 on the date of exercise to
marketable equity securities and as a result recorded no gain or
loss on derivative instruments related to our holdings of TNR
warrants during the second half of 2006. The TNR shares were
classified as marketable equity securities and the TNR warrants
were recorded at fair value based on quoted prices and classified
as derivative instruments and changes in the fair value of the
warrants are included in gain/loss on derivative instruments in the
consolidated statement of operations. We recorded a decrease in
the value of our TNR warrants through the date of exercise of
$5,000 compared to a decrease in value for the year ended
December 31, 2005 of $20,000 to loss on derivative instruments in
the consolidated statement of operations. We do not anticipate
recognizing any future gains or losses in our TNR derivative
instruments as we no longer own any TNR warrants.
During 2006 we recorded interest income of $26,000 compared to
interest income of $52,000 during the same period in 2005. The
interest income recorded during 2006 and 2005 consisted of
payments on cash and cash equivalent deposit accounts. Our
average cash balances were larger during 2005 compared to
2006, which led to the decline in interest income.
On September 15, 2006, we sold 100,000 shares of Kinross
common stock for net proceeds of $1,206,000 and recorded a gain
of $1,046,000 on the sale. On October 24, 2006, we sold an
additional 100,000 shares of Kinross common stock for net
proceeds of $1,236,000 and recorded a gain of $1,076,000 on the
sale. There were no similar sales of marketable equity securities
during 2005. During 2005 Crown paid a one-time special dividend
and we received $1,275,000 on our holdings of Crown stock, which
was recorded as other income. There were no similar items in
2006 and we do not anticipate receiving any dividends on our
holdings of marketable equity securities in Kinross or TNR in the
foreseeable future.
During 2006, we recorded income tax expense of $54,000
compared to an income tax expense of $257,000 during 2005.
The decrease in net tax expense is related to the increase in
general and administrative expenses during 2006 discussed
above, which are included in the United States taxable income
which was offset by the gains on sale of Kinross stock during 2006
discussed above. This increase in other income compared to the
$1,275,000 Crown dividend during 2005, described above. We
provide a valuation allowance for our foreign net operating losses,
which are primarily related to our exploration activities in Peru,
Mexico, Bolivia and Brazil. We anticipate we will continue to
provide a valuation allowance for these net operating losses until
we are in a net tax liability position with regards to those countries
where we operate or until it is more likely than not that we will be
able to realize those net operating losses in the future.
We regularly perform evaluations of our assets to assess the
recoverability of our investments in these assets. All long-lived
assets are reviewed for
impairment whenever events or
circumstances change which indicate the carrying amount of an
asset may not be recoverable utilizing guidelines based upon
future net cash flows from the asset as well as our estimates of the
geologic potential of early stage mineral property and its related
value for future sale, joint venture or development by us or others.
During 2006 we recorded $35,000 of property impairments,
related to our Libertad and Pillune projects in Peru, our Pozos and
Zinda projects in Mexico, and the Pau d'Arco project in Brazil,
compared to $30,000 of property impairments during 2005, related
to our La Pampa, Windy Peak and Odin projects.
(d). Liquidity and Capital Resources
Due to the nature of the mining business, the acquisition, and
exploration of mineral properties requires significant expenditures
prior to the commencement of development and production. In the
past, we have financed our activities through the sale of our
properties, joint venture arrangements, the sale of our securities
and most recently from the sale of our marketable equity security
investment in Kinross. We received $100,000 in receipts from joint
venture payments during 2007 related to our Bongará project,
discussed above. Receipts from joint venture payments previously
occurred during the years from 1996 through 2000 and the sale of
properties last occurred in 2000 upon the sale of our Yanacocha
property for $6,000,000. Our current agreement with Votorantim
on our Bongará project calls for annual payments of $200,000 until
Votorantim makes a decision to place the project in production or
decides to drop the project. However, other than the potential
Votorantim payment, we expect future revenues from joint venture
payments and from the sale of properties, if any, would occur on
an infrequent basis. To the extent necessary, we expect
to
continue to use similar financing techniques to those discussed
above; however, there is no assurance that such financing will be
available to us on acceptable terms, if at all.
Investment in Marketable Equity Securities
Our marketable equity securities are classified as available-for-sale
and are carried at fair value, which is based upon market quotes of
the underlying securities. At December 31, 2007 and 2006, we
owned 1,342,920 and 1,742,920 shares of Kinross common stock,
respectively. The Kinross shares are recorded at their fair market
value of $24,710,000 and $20,706,000 at December 31, 2007 and
December 31, 2006, respectively.
In addition we own other
marketable equity securities with a fair value of $316,000 and
$198,000 as of December 31, 2007 and December 31, 2006,
respectively. At December 31, 2007, we have classified $19,506,000
of our marketable equity securities as a long-term asset. Changes
in the fair value of marketable equity securities are recorded as gains
and losses in other comprehensive income in stockholders’ equity.
During the year ended December 31, 2007, we recorded a gain in
other comprehensive income on marketable equity securities of
$9,669,000, less related deferred tax expense of $3,317,000.
In
addition during the year ended December 31, 2007, we sold
400,000 shares of Kinross stock for proceeds of $5,548,000
resulting in a gain of $4,085,000 which was transferred, less related
deferred tax expense of $1,524,000, from previously unrealized gain
on marketable equity securities in other comprehensive income.
See marketable equity securities in Note 1 to the consolidated
financial statements. Any change in the market value of the shares
impact on our
of Kinross common stock could have a material
liquidity and capital resources. The price of shares of Kinross
common stock has varied from a high of $20.84 per share to a low
of $10.84 per share during the year ended December 31, 2007.
Kinross Collar
On October 12, 2007 we entered into the Kinross Collar pursuant
to a Master Agreement for Equity Collars and a Pledge and
Security Agreement between us and UBS whereby we pledged
900,000 shares of Kinross Gold Corporation ("Kinross") common
shares to be sold (or delivered back to us with any differences
settled in cash) in the amounts of (i) 400,000 shares on April 14,
2009 for a lower threshold price of no less than $13.81 per share
(the "Floor Price") and an upper threshold price of no more than
$21.77 per share (Cap Price One); (ii) 400,000 shares on April 13,
2010 for a lower threshold of
the Floor Price and an upper
threshold price of no more than $24.46 per share ("Cap Price
Two"); and (iii) 100,000 shares on April 12, 2011 for no less than
the Floor Price and an upper threshold price of no more than
$27.62 per share ("Cap Price Three"). Kinross' quoted closing
price was $16.37 per share on October 12, 2007, the date of the
initiation of the Kinross Collar.
The business purpose of the Kinross Collar is to provide downside
price protection of the Floor Price on approximately 900,000 shares
of the 1,242,920 shares we currently own, in the event Kinross
stock were to drop significantly from the price on the date we
entered the Kinross Collar. In consideration for obtaining this price
protection, we have given up the upside appreciation above the Cap
Prices discussed above during the term of the respective tranches.
Our risk management policy related to the Kinross Collar is to
reduce the potential price risk on assets which represent a
significant proportion of total assets, where economically feasible.
Our Board considered several alternatives prior to entering the
Kinross Collar to meet
this risk management policy. These
alternatives included the use of listed options, use of covered calls
and an outright sale of the investment. However we determined that
we had a long-term need for price protection to reduce the potential
the entire
of paying significant
investment in Kinross shares based upon both (i) the projected
future needs for the use of funds from any sales of the investment
in Kinross shares and (ii) the potential generation of future United
States net operating losses which could be used to offset any
taxable gains on future sale of the investment in Kinross shares.
taxes on a near term sale of
The Kinross Collar is structured as a European-style synthetic
hedge, which allows for the close of the position of each tranche
(the "Termination") of the Kinross Collar only on the specific dates
for each tranche, 18, 30 and 42 months from the date of entering
into the Kinross Collar. UBS will keep any ordinary cash dividends
declared by Kinross on any of the shares subject to the Kinross
Collar during the term of the Kinross Collar. Solitario has the
option to satisfy its obligations under the Kinross Collar upon
Termination of each tranche in either cash or Kinross shares. The
settlement price on the Termination date of each tranche will be the
volume weighted-average price of Kinross shares on such date
(the “Reference Price”).
If the Kinross Collar is to be settled in cash on the relevant
Termination date, the cash settlement amount will be determined
in the following manner: (a) if, on the Termination date,
the
Reference Price is less than the Floor Price, UBS will pay to us a
cash settlement amount equal to the product of (x) the number of
underlying shares multiplied by (y) the excess of the Floor Price
over the Reference Price, and (b) if, on the Termination date, the
Reference Price is greater than the relevant Cap Price, we will pay
to UBS a cash settlement amount equal to the product of (x) the
number of underlying shares multiplied by (y) the excess of the
Reference Price over the relevant Cap Price. If the Reference Price
is neither greater than the Cap Price nor less than the Floor Price,
the cash settlement amount shall be zero.
If the Kinross Collar is to be settled in Kinross shares on the
relevant Termination date, the settlement will be structured as
follows: (a) if, on the Termination date, the Reference Price is
greater than the relevant Cap Price, (i) UBS will pay to us a dollar
amount equal to the product of (x) the number of underlying shares
and (y) the relevant Cap Price and (ii) we will deliver to UBS the
underlying shares, and (b) if, on the Termination date,
the
Reference Price is less than the Floor Price, (i) we will deliver to
UBS the underlying shares and (ii) UBS will pay to us a dollar
amount equal to the product of (x) the number of underlying shares
and (y) the Floor Price.
2006 Annual Report | 13
2007 Annual Report | 17
Pursuant to the Master Agreement for Equity Collars, appropriate
adjustments may be made if during the life of the collar if any event
shall occur that has a dilutive or concentrative effect on the value
the underlying Kinross shares such as an extraordinary
of
recapitalization, merger, consolidation or similar
dividend,
reorganization.
We have not designated the Kinross Collar as a hedging
instrument (as described in Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities") and any changes in the fair market value of the
Kinross Collar are recognized in the statement of operations in the
period of the change. We recorded a loss on derivative instrument
and related liability of $1,702,000 for the change in the fair market
value of the Kinross Collar from its inception to December 31,
2007. As of March 6, 2008, we are restricted from selling the
900,000 shares under the Kinross Collar prior to the Termination
dates discussed above.
Working Capital
We had working capital of $6,245,000 at December 31, 2007
compared to working capital of $4,555,000 as of December 31,
2006. Our working capital at December 31, 2007 consists of our
cash and equivalents and marketable equity securities, primarily
consisting of the current portion of our investment in 1,342,920
less related
shares of Kinross common stock of $5,520,000,
current deferred taxes of $1,515,000. We intend to liquidate a
portion of our Kinross shares over the next three years, subject to
the Kinross Collar discussed above, to reduce our exposure to a
single asset,
taking into consideration our cash and liquidity
requirements, tax implications, the market price of gold and the
market price of Kinross stock and have forecasted the sale of
300,000 shares of Kinross during 2008 for expected proceeds of
$6,230,000. In January of 2008, we sold 100,000 of those shares
for net proceeds of $2,229,000. Any funds received from the sale
of Kinross shares would be used primarily to fund exploration on
our existing properties, for the acquisition and exploration of new
properties and general working capital.
Stock-Based Compensation Plans
On June 27, 2006 our shareholders approved the 2006 Stock
Option Incentive Plan (the “2006 plan”). On March 4, 1994 our
Board of Directors aopted the 1994 Stock Option Plan (the “1994
Plan”). During 2007, holders exercised options from the 1994 Plan
for 917,000 shares at an exercise price of Cdn$0.73 per share for
proceeds of $572,000 and exercised options from the 2006 Plan
for 12,500 shares at an exercise price of Cdn$2.77 for proceeds of
$35,000. During 2006 holders exercised options for 1,230,500
shares for proceeds of $994,000.
The following table summarizes the activity for stock options
outstanding under the 1994 Plan and the 2006 Plan as of
December 31, 2007, with exercise prices equal to the fair market
value, as defined, on the date of grant and no restrictions on
exercisability after vesting:
Shares Issuable
on Outstanding
Options
Weighted Average
Exercise Price
(Cdn$)
Weighted Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value (1)
1994 Plan:
Outstanding, beginning of year
Exercised
Outstanding at December 31, 2007
Exercisable at December 31, 2007
2006 Plan
Outstanding, beginning of year
Granted
Forfeited
Exercised
Outstanding at December 31, 2007
Exercisable at December 31, 2007
1,027,000
(917,000)
110,000
110,000
1,637,500
612,000
(52,500)
(12,500)
2,184,500
933,000
$
$
$
$
$
$
$
$
$
$
0.74
0.73
0.81
0.81
2.77
4.62
2.77
2.77
3.29
3.07
0.6
0.6
3.8
3.7
$
$
503,000
503,000
$ 4,476,000
$ 2,121,000
(1) The intrinsic value at December 31, 2007 based upon the quoted market price of Cdn$5.30 per share for our common stock on the
Toronto Stock Exchange and an exchange ratio of 1.0194 Canadian dollars per United States dollar.
As a result of the options from the 1994 Plan being significantly "in
the money" as of December 31, 2007, we anticipate that all
110,000 unexercised options currently outstanding from our 1994
Plan will be exercised prior to their expiration date of August 14,
2008 for estimated proceeds of approximately $91,000, based
upon the above exchange ratio, assuming there is no significant
decline in the quoted market price for a share of our common stock
on the Toronto Stock Exchange. We would not expect that a
significant number of our other remaining vested options, from the
2006 Plan will be exercised in the next year.
(e). Cash Flows
Net cash used in operations during the year ended December 31,
2007 increased to $4,712,000 compared to $4,483,000 for 2006
primarily as a result of
(i) increased exploration expenses of
$3,112,000 in 2007 compared to $2,942,000 in 2006 and (ii)
increased general and administrative costs of $2,966,000 in 2007
compared to $2,010,000 in 2006. These increases in cash uses
were partially mitigated by (i) the elimination of the costs under the
management services agreement in 2007 from $232,000 in 2006,
(ii) the reduction in prepaid expenses and other current assets of
$158,000 during 2007 compared to a use of cash from an increase
in these accounts of $164,000 during 2006, and (iii) the provision
of cash from increases in accounts payable and other current
14 | Solitario Resources Corporation
liabilities of options for $15,000 during 2007 compared to a use of
cash from decreases in accounts payable and other current
liabilities of $71,000 during 2006. The remaining uses of cash for
operations were comparable in 2007 and 2006.
Net cash provided from investing activities increased to
$5,361,000 during 2007 compared to $2,273,000 during the year
ended December 31, 2006 primarily related to the $5,548,000
proceeds from the sale of Kinross stock during 2007 compared
with $2,442,000 proceeds from the sale of Kinross stock in 2006.
The remaining uses of cash from investing activities were
comparable in 2007 and 2006.
Net cash provided from financing activities was $697,000 during
the year ended December 31, 2007 compared to $994,000 during
2006. The cash provided from financing activities in 2007
consisted of $607,000 from the exercise of options for 917,000
shares of our common stock compared to $994,000 in proceeds
from the exercise of options for 1,230,500 shares of our common
stock during 2006.
In addition we received $90,000 during 2007
from Anglo related to their payment of exploration expenses,
pursuant to the terms of the Shareholders Agreement, discussed
above, which was credited to additional-paid-in-capital.
18 | Solitario Resources Corporation
2007 Annual Report | 19
the properties.
(f). Exploration Activities and Contractual
Obligations
A significant part of our business involves the review of potential
property acquisitions and continuing review and analysis of
properties in which we have an interest,
to determine the
In
exploration and development potential of
analyzing expected levels of expenditures for work commitments
and property payments, our obligations to make such payments
fluctuate greatly depending on whether, among other things, we
make a decision to sell a property interest, convey a property
interest to a joint venture, or allow our interest in a property to lapse
by not making the work commitment or payment required.
In
acquiring our interests in mining claims and leases, we have
entered into agreements, which generally may be canceled at our
option. We are required to make minimum rental and option
payments in order to maintain our interest in certain claims and
leases. Our net 2007 mineral and surface property rental and
option payments were approximately $404,000.
In 2008 we
estimate property rentals and option payments to be approximately
$340,000. Approximately $190,000 of these annual payments are
reimbursable to us by our joint venture partners.
We may be required to make further payments in the future if we
elect to exercise our options under those agreements. As part of
the Alliance Agreement we are committed to spend $3,773,000
over the four years from the date of the Alliance Agreement on gold
exploration in regions (“Alliance Projects Areas”) that are mutually
agreed upon by Newmont Exploration and us. As of December 31,
2007, we have spent approximately $1,616,000 of
this
commitment.
As of December 31, 2007, we have no outstanding long-term debt,
capital or operating leases or other purchase obligations. We
estimate our facility lease costs will be approximately $38,000 per
year, related to the Wheat Ridge, Colorado office.
We currently have deferred tax liabilities recorded in the amount of
$6,808,000. These deferred tax liabilities primarily relate to our
unrealized holding gains on our Kinross shares. We expect that a
portion of these deferred tax liabilities may become currently
payable as we sell the Kinross shares.
(g). Joint Ventures, Royalty and the Strategic
Alliance Properties
Bongará
On August 15, 2006 we signed a Letter Agreement with Votorantim
on our 100%-owned Bongará zinc project in northern Peru. The
Bongará project hosts the Florida Canyon zinc deposit, where
high-grade zinc mineralization has been encountered in drill holes
over an area approximately 2.0 kilometers by 2.0 kilometers in
dimension. On March 24, 2007, we signed a definitive agreement,
the Framework Agreement pursuant
the
previously signed Bongará Letter Agreement with Votorantim.
Solitario's and Votorantim's property interests will be held through
the ownership of shares in a joint operating company that holds a
100% interest in the mineral rights and other project assets.
to and replacing,
Votorantim can earn up to a 70% interest in the joint operating
company by funding an initial $1.0 million exploration program
(completed), by completing future annual exploration and
development expenditures, and by making a cash payment of
$100,000 by August 15, 2007, which was made during the third
quarter of 2007 and recorded as joint venture property payment
revenue, and by making cash payments to Solitario of $200,000 on
all subsequent annual anniversaries of that date until a production
decision is made or the agreement is terminated. The option to
earn the 70% interest can be exercised by Votorantim any time
after the first year commitment by committing to place the project
into production based upon a feasibility study. Additionally,
Votorantim, in its sole discretion, may elect to terminate the option
to earn the 70% interest at any time. The agreement calls for
Votorantim to have minimum annual exploration and development
expenditures of $1.5 million in each of years two and three, and
$2.5 million in all subsequent years until a minimum of $18.0
million has been expended by Votorantim. Votorantim will act as
project operator. Once Votorantim has fully funded its $18.0 million
work commitment and committed to place the project
into
production based upon a feasibility study, it has further agreed to
finance our 30% participating interest through production. We will
repay the loan facility through 50% of the cash flow distributions
that we receive from the joint operating company.
Pachuca Real
On September 25, 2006 we signed a definitive venture agreement
(the “Venture Agreement”) with Newmont de Mexico, S.A. de C.V.
("Newmont"), a wholly owned subsidiary of Newmont Mining
Corporation, on our Pachuca Real silver-gold project in central
Mexico. The Venture Agreement calls for a firm work commitment
by Newmont of $2.0 million over the first 18 months of
the
agreement. Work commitments over the 4.5 years from the date
of the Venture Agreement total $12.0 million.
Exploration
Expenditures
and Due Dates
18 months from signing –
Amount
Aggregate
Amount
firm commitment
$ 2,000,000
$ 2,000,000
30 months from signing –
optional commitment
42 months from signing –
optional commitment
54 months from signing –
optional commitment
$ 2,300,000
$ 4,300,000
$ 3,500,000
$ 7,800,000
$ 4,200,000
$ 12,000,000
Newmont's initial firm work commitment includes a minimum of
7,500 meters of drilling, however Newmont will have 24 months to
complete such drilling and any costs beyond the initial 18 month
period to complete that drilling, if necessary, will be in addition to
the $2.0 million work commitment above. Upon the completion of
$12.0 million in expenditures, Newmont will have earned a 51%
interest in the project. Newmont will have the right to earn an
additional 14% (total 65%) by completing a positive feasibility study
for the project. After Newmont has spent $12.0 million and has
elected to complete a feasibility study (the "Feasibility Stage"),
Newmont is required to spend a minimum of $5.0 million annually
until such time as the positive feasibility study is completed.
Newmont is also obligated to make payments on our behalf to
keep the property in good standing. Newmont has the right to
terminate the agreement at any time following its firm initial work
commitment. Upon completion of the feasibility study, we will have
the option to self-finance our 35%-participating interest in the
project, or to have Newmont fund our portion of construction costs
at Libor + 3.5%. Such post-feasibility funding plus interest shall be
paid from 80% of the distributions of future earnings or dividends
from the venture that we receive. If we elect to have Newmont fund
all our venture costs, including our portion of construction costs,
then our participating interest will be 30% and Newmont's interest
will be 70%.
The 47,300 hectare Pachuca Real silver-gold property in central
Mexico was acquired by staking in late 2005 and early 2006. Part
of the property, the 13,600 hectare El Cura claim, is held under an
option agreement with a private Mexican party. The option
agreement provides for payments of $500,000 over four years.
Payments totaling $45,000 are due to the underlying owner in
2008. Claims fees to be paid to the government of Mexico totaling
$42,000 are due in 2007. As discussed above, all payments to
maintain the Pachuca Real property are the responsibility of
Newmont as long as they remain in the Venture Agreement.
Pedra Branca
On January 28, 2003, we entered into a Letter Agreement with
Anglo Platinum, Ltd. on our 100%-owned Pedra Branca project in
Brazil. The Letter Agreement was amended four times between
July 2004 and April 2006, generally to extend various work
commitment deadlines mandated in the Letter Agreement. On
July 14, 2006, we signed the Pedra Branca Framework Agreement
with Anglo Platinum that specified actions we and Anglo Platinum
would take to establish and govern PBM, the corporate entity that
now holds 100% title to all the assets of the Pedra Branca project,
and the mechanics for Anglo Platinum's continued funding of
Pedra Branca exploration. On April 24, 2007, we signed the
2006 Annual Report | 15
20 | Solitario Resources Corporation
Shareholders Agreement relating to the Pedra Branca Project in
Brazil with Anglo Platinum for the exploration and development of
the Pedra Branca Project. Solitario's and Anglo Platinum's
property interests are held through the ownership of shares in
PBM. To the date of the signing of the Shareholders Agreement,
Anglo Platinum had funded approximately $1.25 million in
exploration expenditures. As part of
the agreement, Anglo
Platinum earned a 15% interest in PBM, as of September 30,
2007, as a result of spending a total of $2.25 million on exploration
at Pedra Branca. Anglo Platinum is not required to make any
future funding of exploration expenditures. However future cash
contributions by Anglo Platinum will be recorded as additions to
minority interest and a decrease in our additional paid-in-capital.
Additionally, Anglo Platinum may incrementally earn up to a 51%
interest in PBM by spending a total of $7 million on exploration
($4.75 million in addition to the $2.25 million spent as of
September 30, 2007) at Pedra Branca by June 30, 2010. Anglo
Platinum can earn an additional 9% interest in PBM (for a total of
60%) by either (i) completing a bankable feasibility study or (ii)
spending an additional $10.0 million on exploration or
development. Anglo Platinum can also earn an additional 5%
interest in PBM (for a total of 65%) by arranging 100% financing to
into commercial production. However, Anglo
put
Platinum is not
required to fund any future exploration
expenditures. We have recorded a receivable of $4,000 at
December 31, 2007 from Anglo Platinum for the reimbursement of
costs incurred through December 31, 2007. As of December 31,
2007 we retain an 85% interest in PBM. We recorded a minority
interest in PBM of $388,000, equal to Anglo Platinum's 15%
interest in the book value of PBM during the year ended December
31, 2007 as a reduction to additional paid in capital.
the project
As part of the Shareholders Agreement, we also entered into a
Services Agreement with Anglo Platinum whereby Solitario (and/or
our subsidiaries) would act as an independent contractor directing
the exploration and administrative activities for PBM and its
shareholders. Under the Services Agreement, Solitario receives a
5% management fee based upon total expenditures. During 2007
we received $52,000 of management
fees included as joint
venture reimbursements discussed above under exploration
expense in “Results of Operations.”
Newmont Alliance
On January 18, 2005, we signed a Strategic Alliance Agreement
(the "Alliance Agreement") with Newmont Overseas Exploration
Limited (“Newmont Exploration”), to explore for gold in South
to the definitive
America (the "Strategic Alliance"). Prior
agreement, we had signed a Letter of Intent on November 17,
2004, with Newmont Exploration. Concurrent with the signing of
the Alliance Agreement, Newmont Mining Corporation of Canada
(“Newmont Canada”) purchased 2.7 million shares of Solitario
(approximately 9.9% equity interest) for Cdn$4,590,000. As part of
the Alliance Agreement we are committed to spend $3,773,000
over the four years from the date of the Alliance Agreement on gold
exploration in regions (“Alliance Projects Areas”) that are mutually
agreed upon by Newmont Exploration and us. As of December 31,
this
2007, we have spent approximately $1,616,000 of
commitment. If we have not spent the $3,773,000, by January 18,
2009, Newmont may elect to extend the four-year expenditure
period for such additional time necessary to enable Solitario to
spend the full $3,773,000 on qualified exploration expenditures.
Newmont may also elect to become the manager of the Alliance
Agreement and direct and spend any remaining funds up to the
$3,773,000 on qualified exploration expenditures.
If we acquire
properties within Alliance Projects Areas and meet certain
minimum exploration expenditures, Newmont Exploration will have
the right to joint venture acquired properties and earn up to a 75%
interest by taking the project through feasibility and financing
Solitario’s retained 25% interest
into production. Newmont
Exploration may elect to earn a lesser interest or no interest at all,
in which case it would retain a 2% net smelter return royalty.
Newmont Exploration also has a right of first offer on any non-
alliance Solitario property in South America, acquired after the
signing of the Alliance Agreement, that we may elect to sell an
interest in, or joint venture with a third party.
16 | Solitario Resources Corporation
Yanacocha Royalty Property
Concurrent with the signing of the Strategic Alliance Letter of
Intent, was the signing of a second Letter of Intent by us and
Newmont Peru, Ltd. (“Newmont Peru”), to amend our net smelter
return (“NSR”) royalty on a 61,000-hectare property located
immediately north of the Newmont Mining-Buenaventura’s Minera
Yanacocha Mine, the largest gold mine in South America.
In
addition to amending the NSR royalty schedule,
the Letter
Agreement committed Newmont Peru to a long-term US$4.0
million work commitment on our royalty property and provides us
access to Newmont Peru's future exploration results on an annual
basis. In January 2005, the Yanacocha royalty amendment and
work commitment Letter of Intent was subsequently replaced by a
definitive agreement with the same terms.
La Tola Royalty Property
In October 2003, we acquired the La Tola project in southern Peru
to explore for gold and possibly silver. The project is located in
southern Peru. In April 2004, we signed a Letter Agreement with
Newmont Peru, whereby Newmont Peru could earn a 51%-interest
in the La Tola property by completing $7.0 million of exploration
over four years and an additional 14% interest by completing a
feasibility study and by arranging 100% project financing. On June
22, 2005, Newmont Peru informed Solitario that it had elected to
terminate its option to earn an interest in the La Tola project and
Solitario recorded an $18,000 impairment related to the La Tola
In
project. Solitario retains one claim covering 1,000 hectares.
August 2007 we signed a Letter of Intent with Canadian Shield
Resources ("CSR") allowing CSR to earn a 100%-interest in the
property, subject to a 2% net smelter return royalty ("NSR") to our
benefit. To earn its interest, CSR is required to spend $2.0 million
in exploration by December 31, 2011. CSM has the right to
purchase the 2% NSR for $1.5 million anytime before commercial
production is reached. Because the Letter of Intent with CSR
provides that our ending interest in La Tola will be a 2% net smelter
royalty, rather than a working interest, we currently classify the La
Tola gold property as a royalty property interest.
(h). Wholly Owned Exploration Properties
Santiago
In February of 2007, we acquired 5,600 hectares of 100%-owned
mineral rights through concessions for our Santiago property in
southern Peru. We capitalized $17,000 during the year ended
December 31, 2007 in lease acquisition costs related to these
concessions. The Santiago project consists of two claim blocks
where previous surface sampling of rocks identified anomalous
concentrations of gold in altered Tertiary volcanic rocks. We are
currently conducting additional surface sampling and geological
mapping to determine if the project warrants drill testing.
Chambara
In September of 2006, we acquired 3,700 hectares of 100%-
owned mineral rights through concessions for our Chambara
(formerly called Amazonas) property in northern Peru. We
formally held 300 hectares in the project since 1997. We
capitalized $17,000 during the year ended December 31, 2007 in
lease acquisition costs related to new concessions covering an
additional 5,600 hectares at the Chambara project. The Chambara
project consists of six widely spaced areas where previous
sampling has identified high-grade zinc mineralization at surface
similar to that found at Florida Canyon, discussed above under our
Bongará zinc property above. Solitario is in discussions to
potentially joint venture the property with a third party. However,
we can provide no assurance that a joint venture agreement will be
signed on the property.
Mercurio
In September 2005, we completed an option agreement for the
purchase of 100% of the mineral rights over the 8,550-hectare
Mercurio property in the state of Para, Brazil. An initial payment of
20,000 Brazilian Reais (approximately $7,000) was paid on signing
of
the agreement and the next payment of 36,000 Reais
(approximately $12,000) was made in 2005 on signing of a
the existing washing
definitive agreement upon conversion of
claims to exploration claims. Further payments were required upon
the conversion of garimpeiro licenses to exploration claims which
occurred in the third quarter of 2006. During 2007 payments totaled
approximately $55,471. To purchase the property, an escalating
scale of payments totaling 780,000 Reais (approximately $350,000)
are required over a sixty month period. A net smelter return of 1.5%
is retained by the owner. This NSR can be extinguished with a
payment of 2,300,000 Reais (approximately $1,350,000). All
payments are indexed to inflation as of
the
agreement. The owner of the mineral rights also owns the surface
rights, the use of which is included in the exploration of the property.
On completion of all payments we will receive title to 1,500 hectares
of surface rights. We may terminate the agreement at any time at
our sole discretion. We have conducted extensive soil sampling
and auger testing of soils over a large portion of the property during
the past three years and two rounds of core drilling of 23 holes
totaling 4,031 meters during 2005 and 2006. A third round of core
drilling is currently underway and is expected to be completed by
the end of the first quarter of 2008.
the signing of
Triunfo
The 256-hectare Triunfo poly-metallic exploration property in
Bolivia was acquired in 2003. Lease obligations were renegotiated
in 2006 providing for a payment of $12,000, which was paid in July
of 2006, a payment of $35,000, which was paid in June 2007 and
a payment of $45,000 due in 2008 in order to keep the agreement
in good standing. An option to purchase the property for
$1,000,000 must be exercised by September 2009. A geophysical
survey has been completed on the property and three holes were
drilled in the first half of 2007. The results of these three holes
were highly encouraging, but we are monitoring the political
situation in Bolivia before committing to a second round of drilling.
(i) Discontinued Projects
During 2007 we abandoned the following projects:
Corazon / Conception del Oro
In September 2005, we signed an agreement with a private
Mexican mineral concession holder allowing us to enter into lease
options on four separate properties located throughout central
Mexico, which included the Corazon gold property (formerly called
the Concepcion del Oro property), located in the Conception del
Oro mining district near the city of Mazapil
in the state of
Zacatecas. The Corazon property consists of 35 concessions
totaling approximately 1,420 hectares. The agreement called for
us to make an initial payment of $15,000 on signing and provided
that we would conduct surface exploration on the four properties
over a six-month period. We elected to sign definitive option
agreements on the Corazon and the La Purisima properties. The
other two properties were dropped. As a result of ongoing geologic
and exploration activities including mapping and sampling, we
made the decision to drop our interest in the Corazon property. We
recorded property abandonment and impairment expense of
$5,000 related to the write-off of the capitalized costs on this
property during 2007. We have no additional work or payment
obligations and no further work is planned for the Corazon
property.
La Purisima
The La Purisima gold property is located near the city of Tepic in
the state of Navarit in Mexico and consists of six concessions
totaling 600 hectares. The La Purisima property was acquired as
part of
the four property agreement discussed above under
Corazon. The La Purisima property required payments to the
concession holder of $10,000 in 2006, which has been paid, and
$35,000 in 2007 to maintain the option agreements in good
standing. As a result of ongoing geologic and exploration activities
during the first three months of 2007, we made the decision to drop
our interest in the La Purisima project. We recorded property
abandonment and impairment expense of $5,000 related to the
write-off of the capitalized costs on this property during 2007. We
have no additional work or payment obligations and no further
work is planned for the La Purisima property.
Titicayo
On March 31, 2006, we signed a lease agreement with a private
Bolivian company to lease certain concessions covering
approximately 1,300 hectares, which comprise the Titicayo silver
project in Bolivia. We capitalized our initial payment under the
lease of $10,000. The lease calls for additional escalating lease
payments over a six year period totaling $990,000, after which we
will own a 99% participating interest in the concessions.
An
amendment to the Titicayo Agreement was signed in November of
lease payment until June
2006 that delayed the first additional
2007 with a corresponding adjustment to the rest of the payment
schedule. A one time payment of $10,000 was made to the claim
holders in consideration for this amended schedule.
In 2007 we completed a five-hole 1,031-meter core drilling
program to test silver bearing vein observed at surface at deeper
levels. Although all five drill holes intersected anomalous silver
concentrations, we do not believe further exploration would
enhance our
results. Consequently, we recorded property
abandonment and impairment expense of $10,000 related to the
write-off of the capitalized costs on this property during 2007. We
have no additional work or payment obligations and no further
work is planned for the Titicayo property.
(j). Critical Accounting Estimates
Mineral Properties, net
We classify our interest in mineral properties as Mineral Properties,
net (tangible assets) pursuant to EITF 04-2. Prior to adoption of
EITF 04-2 in April 2004, we classified our interests in mineral
properties as intangible assets, Mineral Interests, net. Our mineral
properties represent mineral use rights for parcels of land we do not
own. All of our mineral properties relate to exploration stage
properties and the value of these assets is primarily driven by the
nature and amount of economic minerals believed to be contained,
or potentially contained, in such properties. Prior to the adoption of
EITF 04-2, we amortized the excess cost of our mineral interests
over their estimated residual value over the lesser of (i) the term of
any mineral interest option or lease or (ii) the estimated life of the
mineral interest, which was our estimated exploration cycle. We
amortized our mineral interests over a three-to-eight year period
based upon facts and circumstances for each mineral interest on a
property-by-property basis. We no longer amortize our mineral
properties pursuant to the adoption of EITF 04-2.
Impairment
We regularly perform evaluations of our investment in mineral
properties to assess the recoverability and/or the residual value of
its investments in these assets. All long-lived assets are reviewed
for impairment whenever events or circumstances change, such as
negative drilling results or termination of a joint venture, which
indicate the carrying amount of an asset may not be recoverable,
utilizing established guidelines based upon discounted future net
cash flows from the asset or upon the determination that certain
exploration properties do not have sufficient potential for economic
mineralization as a result of our analysis of exploration activities
including surveys, sampling and drilling. We recorded a $20,000
and $35,000 write-down of our mineral properties during the years
ended December 31, 2007 and 2006, respectively. We may record
if certain events occur,
future impairment
including loss of a
venture partner,
reduced commodity prices or unfavorable
geologic results from sampling, assaying, surveying or drilling,
among others.
Marketable Equity Securities
Our investments in marketable equity securities are classified as
available-for-sale and are carried at fair value, which is based upon
quoted prices of the securities owned. The cost of marketable
equity securities sold is determined by the specific identification
method. Changes in market value are recorded in accumulated
other comprehensive income within stockholders' equity, unless a
decline in market value is considered other than temporary, in
which case the decline is recognized as a loss in the consolidated
statement of operations. At December 31, 2007 and December
31, 2006, we have recorded unrealized holding gains of
$22,588,000 and $17,004,000, respectively, net of deferred taxes
of $8,347,000 and $6,553,000,
related to our
marketable equity securities.
respectively,
Derivative Instruments
Solitario accounts for its derivative instruments in accordance with
2006 Annual Report | 17
2007 Annual Report | 21
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." On October 12, 2007 we entered into a Zero-
Premium Equity Collar (the "Kinross Collar") pursuant to a Master
Agreement
for Equity Collars and a Pledge and Security
Agreement between us and UBS AG, London, England, an
Affiliate of UBS Securities LLC (collectively "UBS") whereby we
pledged 900,000 shares of Kinross Gold Corporation ("Kinross")
common shares. The business purpose of the Kinross Collar is to
provide downside price protection of the Floor Price on 900,000
shares of the 1,342,920 shares we own as of December 31, 2007,
in the event Kinross stock were to drop significantly from the price
on the date we entered into the Kinross Collar. Pursuant to SFAS
133, we have not designated the Kinross Collar as a hedging
instrument and any changes in the fair market value of the Kinross
Collar are recognized in the statement of operations in the period
of the change. We recorded a loss on derivative instrument and
related liability of $1,702,000 for the change in the fair market value
of the Kinross Collar from its inception to December 31, 2007.
Revenue Recognition
We record any proceeds from the sale of property interests subject
to joint ventures or shareholder agreements as a reduction of the
related property's capitalized cost. Proceeds which exceed the
capitalized cost of the property are recognized as revenue. To the
extent such proceeds are made in connection with properties
subject to a joint venture or shareholder agreement where no
property interests are transferred, the proceeds are recorded as
revenue in accordance with the terms of the joint venture or
shareholder agreement.
Stock-based Compensation
We account for any share-based payments under the provisions of
SFAS No. 123(R), whereby we compute the fair value of each
option on the date of grant based upon the Black-Scholes option
pricing model. This model requires the input of subjective
assumptions, including the expected term based upon historical
data of past exercises of option awards and expected stock-price
volatility based upon the historical quoted market prices of Solitario
common stock as well as an estimate of
forfeitures. These
estimates involve inherent uncertainties and the application of
management judgment. As a result, if other assumptions had
been used, Solitario's recorded and pro-forma stock-based
compensation expense could have been materially different from
that reported.
During 2007, we determined the fair value of the 2006 Plan options
granted on September 7, 2007, June 14, 2007 and February 8,
2007, respectively, of $976,000, $223,000 and $17,000, using a
Black-Scholes option pricing model
resulting in a weighted
average fair value of $1.94, $2.23, and $1.71 respectively, per
share.
During 2006, we determined the fair value of the 2006 Plan options
granted on June 27, 2007 of $2,537,000 using a Black-Scholes
option pricing model resulting in a weighted average fair value of
$1.53 per share.
We utilized the following assumptions:
Grant Date
Options granted
Grant date fair value
Weighted average fair value
Risk-free interest rate
Expected Life (in years) (1)
Expected volatility (2)
Exchange rate (Cdn$ to US$) (3)
Intrinsic value per share
9/07/07
502,000
$ 976,000
1.94
$
4.7%
4
52%
0.94930
-
6/14/07
100,000
$ 223,000
2.23
$
5.2%
4
53%
0.93612
-
2/08/07
10,000
17,000
1.71
$
$
4.8%
4
56%
0.84551
-
6/27/06
1,655,000
$ 2,537,000
1.53
$
5.2%
4
76%
0.8939
-
(1) Based upon expected volatility and past historical exercise patterns.
(2) Expected volatility mirrors the historical volatility based upon the daily quoted stock price from the Toronto Stock Exchange over the
four years prior to the date of grant.
(3) The exchange rate on the date of grant.
We have elected to recognize the fair value of all option grants over
their vesting period, with 25% recognized immediately, and the
remaining 75% over
line basis,
recognizing as stock option compensation expense an amount at
least equal to the percentage of options vested at that date. We
have assumed a zero forfeiture rate and a zero dividend rate for all
grants, based upon historical experience.
three years on a straight
During 2007 and 2006 we have recognized $1,018,000 and
$955,000 in option compensation expense, respectively. During
2007, an employee resigned and forfeited unexercised an option
for 52,500 shares. The remaining unrecognized stock option
compensation expense of approximately $50,000 from these
forfeited options, originally granted on June 27, 2006, will not be
recognized over the remaining vesting period of the options. No
options were forfeited during 2006.
As of December 31, 2007, Solitario has recognized $1,969,000 of
option compensation expense for the vesting of the fair value as of
the date of the grant over the life of all option grants, as discussed
above under results of operations, which has been included in
general and administrative expense. Solitario will recognize the
balance of its unrecognized stock options compensation expense
of $1,734,000 for its existing stock option grants over the remaining
vesting periods at the rate of approximately $230,000 per quarter.
18 | Solitario Resources Corporation
Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of deferred taxes
22 | Solitario Resources Corporation
related to certain income and expenses recognized in different
periods for financial and income tax reporting purposes. Deferred
tax assets and liabilities represent
the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes also are recognized for operating losses and tax
credits that are available to offset future taxable income and
income taxes, respectively. A valuation allowance is provided if it is
more likely than not that some or all of the deferred tax assets will
not be realized. Currently we believe our deferred tax assets,
exclusive of our foreign net operating losses and our Yanacocha
royalty asset, are recoverable. Recovery of
these assets is
dependent upon our expected gains on the Kinross securities we
own.
If these values are not realized, we may record additional
valuation allowances in the future.
Accounting for Uncertainty in Income Taxes
We adopted FASB Interpretation No. 48,
“Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109” (“FIN 48”) as of January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes”. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. We also adopted FASB
2007 Annual Report | 23
Interpretation No.48” (“FSP FIN 48-1”) as of January 1, 2007. FSP
FIN 48-1 provides that a company’s tax position will be considered
settled if the taxing authority has completed its examination, the
company does not plan to appeal, and it is remote that the taxing
authority would reexamine the tax position in the future. The
adoption of FIN 48 and FSP FIN 48-1 had no effect on our financial
position or results of operations.
(k). Related Party Transactions
Crown Resources Corporation
Crown provided management and technical services to Solitario
under a management and technical services agreement originally
signed in April 1994 and modified in April 1999, December 2000
and July 2002. The agreement was terminated on August 31,
2006 upon the completion of the Crown – Kinross merger. Under
the modified agreement we were billed by Crown for services at
25% of Crown's corporate administrative costs for executive and
technical salaries, benefits and expenses, 50% of Crown's
corporate administrative costs for financial management and
reporting salaries, benefits, expenses and 75% of Crown's
corporate administrative costs for investor relations salaries,
benefits and expenses.
In addition, we reimbursed Crown for
direct out-of-pocket expenses. These allocations were based upon
the estimated time and expenses spent by Crown management
and employees on both Crown activities and Solitario activities.
Our management believed these allocations were reasonable and
the allocations were periodically reviewed by our management and
approved by independent Board members of both Crown and
Solitario. Management service fees were billed monthly, due on
receipt and are generally paid within thirty days. We did not incur
any management service fees during 2007. Our management
service fees were $232,000, and $423,000 for the years ended
December 31, 2006 and 2005, respectively.
On July 26, 2004, Crown completed a spin-off of our shares to its
shareholders, whereby each Crown shareholder received 0.2169
shares of our common stock for each Crown share they owned. As
part of the spin-off, Crown retained 998,306 of our shares for the
benefit of Crown’s warrant holders who would receive those shares
when the warrant holders exercise their warrants. Subsequent to
the spin-off, through August 31, 2006 when the Crown – Kinross
these
merger was completed, Crown distributed 995,229 of
retained shares upon exercise of its warrants and the remaining
3,077 shares of our stock became the property of Kinross which is
not a related party to Solitario.
Kinross Merger Agreement
We entered into a Voting Agreement dated as of April 15, 2002
among Zoloto Investors, LP ("Zoloto") and Crown. Zoloto and
Solitario were both shareholders of Crown (the "Signing
Shareholders"). Pursuant to the Voting Agreement, Zoloto and
Solitario agreed that each would vote its owned shares during the
term of the Voting Agreement for the election of three designees of
Zoloto and one designee of ours (the "Designee Directors") to the
Board of Directors of Crown. The Signing Shareholders agreed
that any shares received by either Signing Shareholder would be
subject to the Voting Agreement during its term and any successor,
assignee or transferee of shares from either Signing Shareholder
would be subject to the terms of the Voting Agreement during its
term. The Voting Agreement terminated on June 25, 2006.
Prior to the completion of the Crown – Kinross merger, we entered
into a stockholder and voting agreement with Kinross, along with
several Crown directors, Crown executive officers and entities
affiliated with these directors and officers (collectively the
“Signatories”), pursuant to which the Signatories voted all of the
shares of Crown common stock owned by them in favor of the
approval of the Crown – Kinross merger. On August 31, 2006, the
shareholders of Crown approved the Crown – Kinross merger and
all of Crown’s common shares were converted to Kinross shares
and the stockholder and voting agreement terminated.
Christopher E. Herald, and Mark E. Jones, III were directors of both
Crown and Solitario until August 31, 2006 when they resigned as
directors of Crown upon the completion of the Crown – Kinross
merger. Stephen Webster and Brian Labadie were directors of
both Crown and Solitario from June 27, 2006 to August 31, 2006,
when they resigned as directors of Crown upon the completion of
the Crown – Kinross merger. Christopher E. Herald, James R.
Maronick and Walter H. Hunt were officers of both Crown and
Solitario until August 31, 2006 when they resigned as officers of
Crown upon the completion of the Crown – Kinross merger.
Mark Jones Consulting Agreement
On September 1, 2006, we entered into a consulting agreement
with Mark E. Jones, III, a director and vice-chairman of our Board
of Directors. The consulting agreement has a two-year term.
Under the agreement, Mr. Jones will advise the Company on
matters of strategic direction, planning, and identification of
corporate opportunities, when and as requested by Solitario.
In
consideration for the services to be performed, Mr. Jones has been
paid a one time lump sum payment of $160,000, plus he is entitled
to receive pre-approved, documented expenses incurred in
performance of the consulting services. We have charged $80,000
for consulting expense, related to the agreement, included in
general and administrative expense for the year ended December
31, 2007 compared to $27,000 for the year ended December 31,
2006. We will amortize the remaining balance of prepaid
consulting fees of $53,000,
included in current assets as of
December 31, 2007, during 2008.
TNR Gold Corp.
On July 24, 2006, we exercised a warrant to purchase 500,000
shares of TNR Gold Corp. (“TNR”) common stock by paying
$70,000. We recorded the cash paid and the fair value of the
warrant on the date of exercise of $12,000 as marketable equity
securities. We received this warrant
in July 2004 when we
exchanged 500,000 shares of TNR Gold Corp ("TNR") common
stock for 500,000 shares of TNR common stock that were not
available to be publicly traded in Canada until November 28, 2004
and a warrant to purchase an additional 500,000 shares of TNR
common stock for Cdn$0.16 per share for a period of two years.
The 2004 transaction was accounted for as a sale of our previously
owned TNR shares and an acquisition of the new TNR shares and
warrants. The TNR shares are classified as marketable equity
securities held for sale. As of December 31, 2007, we own
1,000,000 shares of TNR that are classified as marketable equity
securities held for sale and are recorded at their fair market value
of $316,000 and included in marketable equity securities. As of
December 31, 2007 we do not own warrants for the purchase of
TNR shares. Previous to their exercise, the TNR warrants were
recorded at fair market value based upon quoted prices and
classified as derivative instruments. We recorded a loss on
derivative instruments of $5,000, and $20,000, for the decrease in
the value of its warrants during the years ended December 31,
2006 and 2005, respectively. Christopher E. Herald, our CEO, is a
member of the Board of Directors of TNR.
(l). Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No.
160,
"Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 151" ("SFAS No. 160").
SFAS No. 160 establishes accounting and reporting standards for
the noncontrolling interest
the
deconsolidation of a subsidiary and amends certain consolidation
procedures of Accounting Research Bulletin ("ARB") 151 for
consistency with the requirements of FASB statement No. 141.
SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008 and early adoption is prohibited. We have not
yet determined the impact of adopting SFAS No. 160 on our
financial position, results of operations or cash flows.
in a subsidiary and for
In December 2007,
the FASB issued Statement of Financial
Accounting Standard No. 141R, "Business Combinations (revised
2007)," (“SFAS No. 141R”). SFAS No. 141R establishes principles
and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling
interest; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the
2006 Annual Report | 19
24 | Solitario Resources Corporation
financial statements to evaluate the nature and financial effects of
the business combination. SFAS No. 141R is to be applied
prospectively to business combinations for which the acquisition
date is on or after the beginning of an entity's fiscal year that begins
on or after December 15, 2008. We have not yet determined the
impact, if any, of adopting SFAS No. 141R on our financial position,
results of operations or cash flows.
In February 2007,
the FASB issued Statement of Financial
Accounting Standard No. 159, "The Fair Value Option For Financial
Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure many financial instruments
and certain other items at fair value. The provisions of SFAS No.
159 are effective for Solitario as of January 1, 2008. We have not
yet determined the impact of adopting SFAS No. 159 on our
financial position, results of operations or cash flows.
In September 2006,
the FASB issued Statement of Financial
Accounting Standard No. 157 "Fair Value Measurements" ("SFAS
No. 157"). SFAS No. 157 clarifies that fair value is the price that
would be received to sell an asset or paid to transfer a liability in an
the
orderly transaction between market participants at
measurement date in the most advantageous market for the asset
or liability. SFAS No. 157 clarifies that the transaction to sell an
asset or transfer a liability is a hypothetical
transaction at a
measurement date, considered from the perspective of a market
participant that holds the asset or owes the liability. SFAS No. 157
states that fair value is a market-based measurement, not an entity
specific measurement and that market assumptions should be
based upon independent observations of the reporting entity about
market participant assumptions. SFAS No. 157 states that market
participant assumptions should include risk, restrictions on asset
sales, non-performance risk, but that quoted market prices for
financial
instruments should not be adjusted for the size of a
position relative to trading volume (block discounts). SFAS No. 157
expands disclosures about, among other things, the use of fair
value to measure assets and liabilities in interim and annual
periods, including the use of unobservable inputs, and the effect of
fair value on earnings and changes in net assets. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. We have not yet determined the impact of adopting SFAS
No. 157 on our financial position, results of operations or cash flows.
Market Risk
(a) Equity Price Risks
(1) Solitario's investment in Kinross is subject to equity market risk.
As of December 31, 2007 a hypothetical increase of ten percent in
the price of Kinross common stock would increase the value of our
holdings of Kinross by $2,471,000 and increase other
comprehensive income by and total stockholders’ equity by the
same amount, net of deferred taxes of $922,000. Additionally our
working capital would also be increased by $552,000 from a
hypothetical increase of ten percent in the price of Kinross common
stock, net of deferred taxes of $206,000. This increase is based
upon all of our 1,342,920 Kinross common shares as of December
31, 2007, and is subject to the Kinross Collar discussed above.
A hypothetical decrease of ten percent in the price of Kinross
common stock would have the opposite effect of the increase
discussed above.
This decrease is based upon all of our
1,342,920 Kinross common shares as of December 31, 2007, and
is subject to the Kinross Collar discussed above.
(2) Solitario's Kinross Collar derivative instrument is subject to
equity market risk.
We have estimated, using a Black-Scholes option pricing model
that as of December 31, 2007 a hypothetical
increase of ten
percent in the price of Kinross common stock would increase the
value of our liability under the Kinross Collar by $1,521,000, net of
deferred taxes of $567,000 and increase our net loss in the
statement of operations by $954,000. We have also estimated that
as of December 31, 2007 a hypothetical decrease of ten percent
in the price of Kinross common stock would decrease the value of
our liability under the Kinross Collar by $1,138,000, net of deferred
taxes of $424,000 and would decrease our net
loss in the
statement of operations by $714,000.
(b) Interest Rate Risks
Solitario's Kinross Collar derivative instrument fair market valuation
is subject to interest rate risk.
We have estimated, using a Black-Scholes option pricing model,
that as of December 31, 2007 a hypothetical
increase of ten
percent in the risk-free interest rate used to compute the fair
market value of our liability under the Kinross Collar would
increase the liability by $50,000, net of deferred taxes of $19,000
and increase our net
loss in the statement of operations by
$31,000. We have also estimated that as of December 31, 2007 a
hypothetical decrease of ten percent in the risk-free interest rate
used to compute the fair market value of our liability under the
Kinross Collar would decrease the liability by $64,000, net of
deferred taxes of $24,000 and would decrease our net loss in the
statement of operations by $40,000.
We have no other material
interest rate risks as we have no
interest bearing debt and our interest bearing cash deposits do not
generate a material amount of interest income.
14 | Solitario Resources Corporation
Report of Independent Registered Public Accounting Firm
T O T H E B O A R D O F D I R E C T O R S A N D S T O C K H O L D E R S O F
S O L I T A R I O R E S O U R C E S C O R P O R A T I O N
W H E A T R I D G E , C O L O R A D O
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Solitario Resources Corporation as of December 31, 2007 and
2006, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2007 in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, Solitario Resources
Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).
Ehrhardt Keefe Steiner & Hottman PC
March 6, 2008
Denver, Colorado
We have audited the accompanying consolidated balance sheets
of Solitario Resources Corporation (the “Company”) as of
December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive loss, changes in
stockholders’ equity and cash flows for each of the years in the
three-year period ended December 31, 2007. We also have
audited the Company’s internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”).
The Company’s management is responsible for these consolidated
financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of
internal control over
included in the
accompanying Management’s Report on Internal Control over
Financial Reporting included in Item 9A. Our responsibility is to
express an opinion on these consolidated financial statements and
an opinion on the Company’s internal control over financial
reporting based on our audits.
reporting,
financial
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in
all material respects. Our audits of
the consolidated financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall
internal
financial statement presentation. Our audit of
reporting included obtaining an
control over
understanding of
reporting,
internal control over
assessing the risk that a material weakness exists, and testing and
internal
evaluating the design and operating effectiveness of
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
financial
financial
financial
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States. A company’s internal
reporting includes those policies and
control over
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that
receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company;
and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of
the Company’s assets that could have a material effect on the
financial statements.
2006 Annual Report | 15
2007 Annual Report | 25
Consolidated Balance Sheets
I N T H O U S A N D S E X C E P T S H A R E A N D P E R S H A R E A M O U N T S
December 31,
2007
December 31,
2006
Assets
Current assets:
Cash and cash equivalents
Joint venture receivable
Investments in marketable equity securities, at fair value
Prepaid expenses and other
Total current assets
Mineral properties, net
Investments in marketable equity securities, at fair value
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Deferred income taxes
Other
Total current liabilities
Derivative instrument fair value
Deferred income taxes
Other
$
$
$
Commitments and contingencies (Notes 2 and 6)
Minority interest
Stockholders' equity:
Preferred stock, $0.01 par value, authorized 10,000,000
shares (none issued and outstanding at December 31,
2007 and 2006)
Common stock, $0.01 par value, authorized, 50,000,000
shares (29,619,492 and 28,689,992 shares issued and
outstanding at December 31, 2007 and 2006, respectively)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
$
2,250
4
5,520
198
7,972
2,704
19,506
248
30,430
195
1,515
17
1,727
1,702
5,293
14
388
-
296
30,836
(24,067)
14,241
21,306
30,430
$
$
$
$
904
88
5,176
219
6,387
2,687
15,728
236
25,038
163
1,652
17
1,832
-
4,131
31
-
-
287
28,462
(20,156)
10,451
19,044
25,038
On behalf of the Board:
Christopher E. Herald
Director
20 | Solitario Resources Corporation
John Hainey
Director
See Notes to Consolidated Financial Statements.
26 | Solitario Resources Corporation
2007 Annual Report | 27
Consolidated Statements of Operations
I N T H O U S A N D S E X C E P T P E R S H A R E A M O U N T S
For the year ended December 31,
2006
2005
2007
Property and joint venture revenue
Joint venture property payments
Costs, expenses and other:
Exploration expense, net
Depreciation and amortization
General and administrative
Management fees to Crown
Unrealized loss on derivative instruments
Asset write-downs
Loss on sale of assets
Interest and other, net
Total costs expenses and other
Other income - gain on sale of marketable
equity securities
Other income - Crown dividend payment
Loss before minority interest and income taxes
Minority interest in loss of consolidated subsidiary
Loss before income taxes
Income tax expense
Net loss
Basic and diluted loss per common share
Basic and diluted weighted average shares
outstanding
$
100
$
-
$-
3,112
85
2,966
-
1,702
20
1
(76)
7,810
4,085
-
(3,625)
17
(3,608)
(303)
(3,911)
(0.13)
$
$
2,942
49
2,010
232
5
35
3
(26)
5,250
2,121
-
(3,129)
-
(3,129)
(54)
(3,183)
(0.11)
$
$
2,072
29
576
423
20
30
-
(52)
3,098
-
1,275
(1,823)
-
(1,823)
(257)
(2,080)
(0.08)
$
$
29,467
28,422
27,311
See Notes to Consolidated Financial Statements.
2006 Annual Report | 21
28 | Solitario Resources Corporation
Consolidated Statements of Stockholders’ Equity
F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 7 , 2 0 0 6 A N D 2 0 0 5
I N T H O U S A N D S , E X C E P T S H A R E A M O U N T S
Common Stock
Shares
24,726,992
Amount
$
247
Additional
Paid-in
Capital
$ 22,132
Accumulated
Other
Accumulated Comprehensive
Deficit
$ (14,893)
Income
5,030
$
Total
$ 12,516
2,700,000
32,500
27
1
3,746
20
-
-
-
(2,080)
-
-
-
-
3,773
21
11
(2,080)
-
-
1,100
-
1,100
(980)
11
-
-
-
25,909
(16,973)
6,130
15,341
982
616
955
-
-
-
-
-
-
(3,183)
-
-
-
-
994
616
955
(3,183)
-
-
4,321
-
4,321
1,138
-
-
-
-
275
12
-
-
-
-
-
Balance at 12/31/2004
Shares issued:
Cash
Option exercise
Deferred taxes on
option exercises
Comprehensive loss:
Net loss
Net unrealized gain on
marketable equity
securities (net of tax
of $704)
Comprehensive loss
-
-
-
-
Balance at 12/31/2005
Shares issued:
27,459,492
Option exercise
1,230,500
Deferred taxes on
option exercises
Stock option expense
from vesting
Comprehensive income:
Net loss
Net unrealized gain
on marketable equity
securities (net of tax
of $2,763)
Comprehensive income
-
-
-
-
-
Balance at 12/31/2006
Shares issued:
28,689,992
287
28,462
(20,156)
10,451
19,044
Option exercise
929,500
9
598
Deferred taxes on
option exercises
Stock option expense
from vesting
Minority interest
Minority shareholder
equity contribution
Comprehensive income:
Net loss
Net unrealized gain on
marketable equity
securities (net of tax
of $1,794)
Comprehensive loss
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,072
1,018
(404)
90
-
-
-
-
-
-
-
-
(3,911)
-
-
-
-
-
-
607
1,072
1,018
(404)
90
(3,911)
-
-
3,790
-
3,790
(121)
Balance at 12/31/2007
29,619,492
$
296
$ 30,836
$ (24,067)
$ 14,241
$ 21,306
22 | Solitario Resources Corporation
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
I N T H O U S A N D S
Operating activities:
Net loss
Adjustments:
Unrealized loss on derivative instruments
Depreciation and amortization
Asset write-downs
Employee stock option expense from vesting
Deferred income taxes
Gain on asset and equity security sales
Minority interest in loss of consolidated subsidiary
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Accounts payable and other current liabilities
Due to Crown Resources Corporation
Net cash used in operating activities
Investing activities:
Additions to mineral interests and other
Other assets
Proceeds from sale of marketable equity securities
Net cash (used in) provided by investing activities
Financing activities:
Minority shareholder equity contribution
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:
Deferred taxes on stock option exercises charged
to additional paid-in capital
$
$
For the year ended December 31,
2006
2005
2007
$
(3,911)
$
(3,183)
$
(2,080)
1,702
85
20
1,018
303
(4,085)
(17)
158
15
-
(4,712)
(37)
(150)
5,548
5,361
90
607
697
1,346
904
2,250
1,072
5
49
35
955
54
(2,118)
-
(164)
(71)
(45)
(4,483)
(50)
(119)
2,442
2,273
-
994
994
(1,216)
2,120
904
616
$
$
20
29
30
-
257
-
-
279
(73)
(34)
(1,572)
(52)
(126)
-
(178)
-
3,794
3,794
2,044
76
2,120
11
$
$
See Notes to Consolidated Financial Statements.
2006 Annual Report | 23
2007 Annual Report | 29
Notes to Consolidated Financial Statements
F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 7 , 2 0 0 6 A N D 2 0 0 5
1. Business and Summary of Significant
Accounting Policies:
Business and company formation
Solitario is an exploration stage company with a focus on the
acquisition of precious and base metal properties with
exploration potential. Solitario acquires and holds a portfolio of
exploration properties for future sale or joint venture prior to the
establishment of proven and probable reserves. Although its
mineral properties may be developed in the future through a
joint venture, Solitario has never developed a mineral property
and Solitario does not anticipate developing any currently
owned mineral properties on its own in the future. Solitario has
been actively involved in this business since 1993. Solitario
recorded revenues from joint venture payments of $100,000
related to the Bongará Project during 2007.
Previously,
Solitario's last significant revenues were recorded in 2000 upon
the sale of the Yanacocha property for $6,000,000. Future
revenues from joint venture payments or the sale of properties,
if any, would also occur on an infrequent basis. At December
31, 2007 Solitario had eight exploration properties in Peru,
Bolivia, Mexico and Brazil. Solitario is conducting exploration
activities in all of those countries.
Solitario was incorporated in the state of Colorado on November
15, 1984 as a wholly owned subsidiary of Crown Resources
Corporation (“Crown”). On July 26, 2004, Crown completed a spin-
off of its holdings of our shares to its shareholders, whereby each
Crown shareholder received 0.2169 shares of our common stock
for each Crown share they owned. Solitario previously owned
6,071,626 shares of Crown common stock and as part of the spin-
off Solitario received 1,317,142 shares of its own common stock,
which were retired on August 11, 2004, and have the status of
authorized but unissued shares of common stock. Crown was
acquired by Kinross Gold Corporation of Toronto, Canada
("Kinross") on August 31, 2006 upon the completion of a merger
on August 31, 2006 whereby Kinross acquired all of
the
outstanding shares of Crown common stock for 0.32 shares of
Kinross common stock for each share of Crown common stock
(the “Crown – Kinross merger”). Kinross currently owns less than
one percent of Solitario outstanding common stock.
We have a significant investment in Kinross at December 31, 2007,
which consists of 1,342,920 shares of Kinross common stock.
Solitario received 1,942,920 shares in exchange for 6,071,626
shares of Crown common stock it owned on the date of the Crown
– Kinross merger. During 2007, Solitario sold 400,000 shares of
Kinross common stock for proceeds of $5,548,000 and during
2006 Solitario sold 200,000 Kinross common shares for net
proceeds of $2,442,000. As of March 6, 2008, Solitario owns
1,242,920 shares of Kinross common stock. Any significant
fluctuation in the market value of Kinross common shares could
have a material impact on Solitario's liquidity and capital resources.
In October 2006, we entered into a collar that limits the proceeds
on 900,000 shares of Solitario’s investment in Kinross common
shares, discussed below under “Derivative instruments.”
Financial reporting
The consolidated financial statements include the accounts of
Solitario and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting
principles"), and are expressed in US dollars.
24 | Solitario Resources Corporation
In performing its activities, Solitario has incurred certain costs for
mineral properties. The recovery of these costs is ultimately
dependent upon the sale of mineral property interests or the
30 | Solitario Resources Corporation
development of economically recoverable ore reserves, the ability
of Solitario to obtain the necessary permits and financing to
successfully place the properties into production, and upon future
profitable operations, none of which is assured.
Revenue recognition
Solitario records any proceeds from the sale of property interests
subject to joint ventures or shareholder agreements as a reduction
of the related property's capitalized cost. Proceeds which exceed
the capitalized cost of the property are recognized as revenue. To
the extent such proceeds are made in connection with properties
subject to a joint venture or shareholder agreement where no
property interests are transferred, the proceeds are recorded as
revenue in accordance with the terms of the joint venture or
shareholder agreement.
Minority interest
Solitario records minority interest for the portion of its assets and
net loss in any subsidiaries which are less than 100% owned.
During 2007, Solitario’s share of its investment in its subsidiary
Pedra Branca Mineracao, Ltda. (“PBM”) was reduced to 85% in
accordance with the terms of PBM’s Shareholder Agreement.
Solitario recorded a minority interest in its statement of financial
position of $388,000 as of December 31, 2007 and recorded a
credit of $17,000 in its statement of operations for the minority
interest in the loss of PBM.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Some of the more
significant estimates included in the preparation of Solitario's
financial statements pertain to the recoverability of mineral
properties and their future exploration potential, the estimate of the
fair value of stock option compensation included in the statement
of operations, the ability of Solitario to realize its deferred tax
assets, the current portion of Solitario’s investment in Kinross
shares included in marketable equity securities and the fair value
of Solitario's Zero Premium Equity Collar of its holdings of Kinross,
discussed below.
Cash equivalents
Cash equivalents include investments in highly-liquid money-
market securities with original maturities of three months or less
when purchased. As of December 31, 2007 and 2006, Solitario
had concentrations of cash and cash equivalents in excess of
federally insured amounts and cash in foreign banks for which
there was no US federal insurance.
Mineral properties
Solitario expenses all exploration costs incurred on its mineral
properties, other than acquisition costs, prior to the establishment
of proven and probable reserves. Solitario regularly performs
evaluations of its investment in mineral properties to assess the
recoverability and/or the residual value of its investments in these
assets. All long-lived assets are reviewed for impairment whenever
events or circumstances change which indicate the carrying
amount of an asset may not be recoverable, utilizing established
guidelines based upon discounted future net cash flows from the
asset or upon the determination that certain exploration properties
do not have sufficient potential for economic mineralization. During
the years ended December 31, 2007, 2006 and 2005, Solitario
recorded impairments of $20,000, $35,000 and $30,000 of its
mineral properties, respectively.
2007 Annual Report | 31
Solitario's net capitalized mineral properties of $2,704,000 and
$2,687,000 at December 31, 2007 and 2006, respectively, related
to gross land, leasehold and acquisition costs of $3,727,000 and
$3,710,000 at December 31, 2007 and 2006, respectively, less
accumulated amortization of $1,023,000 at December 31, 2007
and 2006. Solitario has not identified any proven and probable
reserves related to its mineral properties. The recoverability of
these costs is dependent on, among other things, the potential to
sell, joint venture or develop through a joint venture its interests in
the properties. These activities are ultimately dependent on
successful identification of proven and probable reserves.
Derivative instruments
Solitario accounts for its derivative instruments as provided in
Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities," (SFAS No. 133).
On October 12, 2007 Solitario entered into a Zero-Premium Equity
Collar (the "Kinross Collar") pursuant to a Master Agreement for
Equity Collars and a Pledge and Security Agreement between
Solitario and UBS AG, London, England, an Affiliate of UBS
Securities LLC (collectively "UBS") whereby Solitario pledged
900,000 shares of Kinross Gold Corporation ("Kinross") common
shares to be sold (or delivered back to Solitario with any
differences settled in cash) in the amounts of (i) 400,000 shares on
April 14, 2009 for a lower threshold price of no less than $13.81 per
share (the "Floor Price") and an upper threshold price of no more
than $21.77 per share (Cap Price One); (ii) 400,000 shares on
April 13, 2010 for a lower threshold of the Floor Price and an upper
threshold price of no more than $24.46 per share ("Cap Price
Two"); and (iii) 100,000 shares on April 12, 2011 for no less than
the Floor Price and an upper threshold price of no more than
$27.62 per share ("Cap Price Three"). Kinross' quoted closing
price was $16.37 per share on October 12, 2007, the date of the
initiation of the Kinross Collar.
The business purpose of the Kinross Collar is to provide downside
price protection of the Floor Price on 900,000 shares of the
1,342,920 shares Solitario currently owned, in the event Kinross
stock were to drop significantly from the price on the date Solitario
entered into the Kinross Collar. In consideration for obtaining this
price protection, Solitario has given up the upside appreciation
above the Cap Prices during the term of the respective tranches.
Solitario has not designated the Kinross Collar as a hedging
instrument as described in SFAS No. 133 and any changes in the
fair market value of the Kinross Collar are recognized in the
statement of operations in the period of the change. Solitario
recorded a loss on derivative instrument and related liability of
$1,702,000 for the change in the fair market value of the Kinross
Collar from its inception to December 31, 2007.
Marketable equity securities
Solitario's investments in marketable equity securities are
classified as available-for-sale and are carried at fair value, which
is based upon quoted prices of the securities owned. The cost of
marketable equity securities sold is determined by the specific
identification method. Unrealized changes in market value are
recorded in accumulated other comprehensive income within
stockholders' equity, unless a decline in market value is
considered other than temporary, in which case the decline is
recognized as a loss in the consolidated statement of operations.
Solitario had marketable equity securities with fair values of
respectively, and cost of
$25,026,000 and $20,904,000,
$2,438,000 and $3,900,000, respectively, at December 31, 2007
and 2006. Solitario has accumulated other comprehensive
income for unrealized holding gains of $22,588,000 and
$17,005,000, respectively, net of deferred taxes of $8,347,000
and $6,554,000, respectively, at December 31, 2007 and 2006
related to our marketable equity securities. Solitario sold 400,000
and 200,000 shares, respectively, of its Kinross common stock
during 2007 and 2006 for gross proceeds of $5,548,000 and
$2,442,000, respectively.
The following table represents changes in marketable equity
securities (000's):
Gross cash proceeds
Cost
Gross gain on sale
included in earnings
during the period
Gross loss on sale
included in earnings
during the period
Unrealized holding gain
arising during the
period included in
other comprehensive
income, net of tax of
$3,317, $3,590 and
$704
2007
$ 5,548
1,463
2006
$ 2,442
321
$
2005
-
-
4,085
2,121
-
-
-
-
6,352
5,615
1,100
Reclassification adjustment
for net losses (gains)
included in earnings
during the period,
net of tax of $1,524,
$827 and $0
(2,562)
(1,294)
-
Foreign exchange
The United States dollar is the functional currency for all of
Solitario's foreign subsidiaries. Although Solitario's exploration
activities have been conducted primarily in Brazil, Bolivia, Peru and
Mexico, a significant portion of the payments under the land,
leasehold, and exploration agreements of Solitario are
denominated in United States dollars. Solitario expects that a
significant portion of its required and discretionary expenditures in
the foreseeable future will also be denominated in United States
dollars. Foreign 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
reported in the financial statements and consist of deferred taxes
related to certain income and expenses recognized in different
periods for financial and income tax reporting purposes. Deferred
tax assets and liabilities represent
the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses and tax
credits that are available to offset future taxable income and
income taxes, respectively. 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 realized.
Accounting for uncertainty in income taxes
Solitario adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109” (“FIN 48”) as of January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes”. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. We also adopted FASB
Staff Position No. FIN 48-1, “Definition of Settlement
in FASB
Interpretation No.48” (“FSP FIN 48-1”) as of January 1, 2007. FSP
FIN 48-1 provides that a company’s tax position will be considered
settled if the taxing authority has completed its examination, the
company does not plan to appeal, and it is remote that the taxing
authority would reexamine the tax position in the future.The adoption
of FIN 48 and FSP FIN 48-1 had no effect on Solitario’s financial
position or results of operations. See Note 4—Income Taxes.
Earnings per share
The calculation of basic and diluted loss per share is based on the
weighted average number of common shares outstanding during
the years ended December 31, 2007, 2006 and 2005. Potentially
dilutive shares related to outstanding common stock options of
2006 Annual Report | 25
32 | Solitario Resources Corporation
2,294,500, 2,664,500, and 2,240,000 for
the years ended
December 31, 2007, 2006 and 2005, respectively, were excluded
from the calculation of diluted loss per share because the effects
were anti-dilutive.
Employee stock compensation plans
On January 1, 2006 Solitario adopted the revised Statement of
Financial Accounting Standard No. 123, “Share Based Payments”
(“SFAS No. 123R”). SFAS No. 123R requires public entities to
measure the cost of employee services received in exchange for an
award of equity instruments based upon the grant-date fair value of
the award and requires that the cost be recognized over the period
during which an employee is required to provide service in exchange
for the award, which is generally the vesting period. The grant-date
fair value of employee share options and similar instruments will be
measured using option-pricing models adjusted for any unique
characteristics of those instruments. Solitario computes the fair
value of each option on the date of grant based upon the Black-
Scholes option pricing model. This model requires the input of
subjective assumptions, including the expected term based upon
historical data of past exercises of option awards and expected
stock-price volatility based upon the historical quoted market prices
of Solitario common stock as well as an estimate of forfeitures.
These estimates involve inherent uncertainties and the application of
management judgment. As a result, if other assumptions had been
used, Solitario's recorded stock-based compensation expense could
have been materially different from that reported.
The 2006 Stock Option Incentive Plan
a.)
On June 27, 2006 Solitario's shareholders approved the 2006
Stock Option Incentive Plan (the "2006 Plan"). Under the terms of
the 2006 Plan, the Board of Directors may grant up to 2,800,000
options to Directors, officers and employees with exercise prices
equal to the market price of Solitario's common stock. However,
under the terms of the 2006 Plan, the total number of outstanding
options from all plans may not exceed 2,800,000. On June 14,
2007, Solitario's shareholders approved certain technical
modifications to the 2006 Plan, which among other things,
modified the definition of the market price of a grant of an option to
be equal to the closing market price in Canadian Dollars on the
Toronto Stock Exchange on the date of granting such option.
Previously under the 2006 Plan, the market price had been defined
as the volume weighted average trading price of such shares
traded on The Toronto Stock Exchange for the five trading days
immediately preceding the date of granting such option.
All options have a five-year contractual life and vest 25% on the date
of the grant and 25% on each anniversary date for the next three
years, and become fully vested three years from the date of grant.
During 2007, Solitario determined the fair value of the 2006 Plan
options granted on September 7, 2007, June 14, 2007 and
February 8, 2007,
respectively, of $976,000, $223,000 and
$17,000, using a Black-Scholes option pricing model resulting in a
weighted average fair value of $1.94, $2.23, and $1.71
respectively, per share.
During 2006, we determined the fair value of the 2006 Plan options
granted on June 27, 2007 of $2,537,000 using a Black-Scholes
option pricing model resulting in a weighted average fair value of
$1.53 per share.
Solitario utilized the following assumptions:
Solitario has elected to recognize the fair value of all option
grants over
their vesting period, with 25% recognized
immediately, and the remaining 75% over three years on a
straight line basis, recognizing as stock option compensation
expense an amount at least equal to the percentage of options
vested at that date. Solitario has assumed a zero forfeiture rate
and a zero dividend rate for all grants, based upon historical
experience.
During 2007 and 2006 Solitario has recognized $1,018,000 and
$955,000, respectively, in option compensation expense. This
option compensation expense is included in general and
administrative expense and Solitario has not capitalized any
compensation expense related to its options under the 2006
Plan.
Options for 12,500 and 17,500 shares, respectively, from the 2006
Plan were exercised during 2007 and 2006, respectively for
proceeds of $35,000 and $42,000, respectively. The intrinsic value
of the shares exercised during 2007 and 2006 on the date of
exercise of options from the 2006 Plan was $27,000 and $30,000,
respectively.
During 2007, an employee resigned and forfeited unexercised an
option for 52,500 shares. The remaining unrecognized stock
option compensation expense of approximately $50,000 from
these forfeited options, originally granted on June 27, 2006, will not
be recognized over the remaining vesting period of the options. No
options were forfeited during 2006.
As of December 31, 2007, Solitario has recognized $1,969,000
of option compensation expense for the vesting of the fair value
of all option grants which has been included in general and
administrative expense. Solitario will recognize the balance of its
unrecognized stock options
compensation expense of
$1,734,000 for its existing stock option grants over the remaining
the rate of approximately $230,000 per
vesting periods at
quarter.
The 1994 Stock Option Plan
b.)
Solitario adopted SFAS No. 123R using the modified
prospective transition method for
the Solitario Resources
Corporation Stock Incentive Plan (the "1994 Plan"). Under this
method, compensation cost recognized during the year ended
December 31, 2006 includes cost for option grants prior to, but
not yet vested as of January 1, 2006, based upon the grant-
date fair value, estimated in accordance with the original
provisions of SFAS No. 123. All options from the 1994 Plan
were vested as of December 31, 2006 and no compensation
expense was recorded for the 1994 plan during 2007. Solitario
recorded a charge of $4,000 as compensation expense, which
is included in general and administrative expense for the year
ended December 31, 2006, for options granted pursuant to the
1994 Plan prior to, but not yet vested as of January 1, 2006.
Options for 20,625 shares from the 1994 Plan vested during the
year ended December 31, 2006 and Solitario recognizes the
grant date fair value on a straight-line basis over the vesting
period. The results from prior periods have not been restated
and accordingly,
there was no stock option related
compensation expense recorded during the year ended
December 31, 2005.
Grant Date
Options granted
Option exercise price (Cdn$)
Grant date fair value
Weighted average fair value
Risk-free interest rate
Expected Life (1)
Expected volatility (2)
Exchange rate (Cdn$ to US$) (3)
Intrinsic value per share
9/07/07
502,000
$
4.53
$ 976,000
1.94
$
4.7%
4 yrs
52%
0.94930
-
6/14/07
100,000
$
4.38
$ 223,000
2.23
$
5.2%
4 yrs
53%
0.93612
-
2/08/07
10,000
$
5.12
$ 17,000
1.71
$
4.8%
4 yrs
56%
0.84551
-
6/27/06
1,655,000
$
2.77
$ 2,537,000
1.53
$
5.2%
4 yrs
76%
0.8939
-
(1) Based upon expected volatility and past historical exercise patterns.
(2) Expected volatility mirrors the historical volatility based upon the daily quoted stock price from the Toronto Stock Exchange over the
26 | Solitario Resources Corporation
four years prior to the date of grant.
(3) The exchange rate on the date of grant.
As of December 31, 2007, Solitario has vested and outstanding
options for 110,000 shares of its common stock under the 1994
Plan. Under the 1994 Plan, these options were granted at option
prices equal to the fair market value of the underlying common
stock as quoted on the Toronto Stock Exchange on the date of
grant. The 1994 Plan expired in 2004 and no additional shares
may be granted pursuant to the 1994 Plan.
As of December 31, 2007 Solitario had 110,000 exercisable at
Cdn$0.81 per share that expire August 14, 2008. Options from
the 1994 Plan for 917,000 shares were exercised during the year
ended December 31, 2007 for proceeds of $574,000. The
intrinsic value of the shares issued during 2007 on the date of
exercise of options from the 2004 Plan was $2,901,000. Options
from the 1994 Plan for 1,213,000 shares were exercised during
the year ended December 31, 2006 for proceeds of $952,000.
The intrinsic value of the shares issued during 2006 on the date
of exercise of options from the 2004 Plan was $1,549,000.
Options from the 1994 Plan for 32,500 shares were exercised
during the year ended December 31, 2005 for proceeds of
$21,000. The intrinsic value of the shares issued during 2005 on
the date of exercise of options from the 2004 Plan was $8,000.
As of December 31, 2007, Solitario has no remaining
unrecognized compensation expense, related to unvested stock
options granted pursuant to the 1994 Plan.
Prior to the adoption of SFAS No. 123R, Solitario accounted for
certain awards under
the 1994 Plan in accordance with
Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees”. The following table
illustrates the effect on net income and earnings per share if
Solitario had applied the fair value recognition provisions of SFAS
No. 123R to options granted under the 1994 Plan for the year
ended December 31, 2005:
(in 000s, except per share amounts) 2005
Net loss as reported
Deduct: total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects
Pro forma net income (loss)
Basic and diluted net loss per share
As reported
Pro forma
$(2,080)
(8)
$(2,088)
$ (0.08)
$ (0.08)
Summary of stock-based compensation plans
c.)
The following table summarizes the activity for stock options
outstanding under the 1994 Plan and the 2006 Plan as of
December 31, 2007, with exercise prices equal to the fair market
value, as defined, on the date of grant and no restrictions on
exercisability after vesting:
Segment reporting
Solitario operates in one business segment, minerals exploration.
At December 31, 2007, all of Solitario's operations are located in
Peru, Bolivia, Brazil and Mexico as further described in Note 2 to
these consolidated financial statements.
Included in the consolidated balance sheet at December 31, 2007
and 2006 are total assets of $3,407,000 and $2,854,000,
respectively, related to Solitario's foreign operations, located in
Bolivia, Brazil, Peru and Mexico.
Included in mineral properties,
net in the consolidated balance sheet at December 31, 2007 and
2006 are net capitalized costs related to the Pedra Branca
Property, located in Brazil, of $2,607,000. Solitario is not aware of
any foreign exchange restrictions on its subsidiaries located in
foreign countries.
Recent accounting pronouncements
In December 2007, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No.
160,
"Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 151" ("SFAS No. 160").
SFAS No. 160 establishes accounting and reporting standards for
the noncontrolling interest
the
deconsolidation of a subsidiary and amends certain consolidation
procedures of Accounting Research Bulletin ("ARB") 151 for
consistency with the requirements of FASB statement No. 141.
SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008 and early adoption is prohibited. Solitario has
not yet determined the impact of adopting SFAS No. 159 on its
financial position, results of operations or cash flows.
in a subsidiary and for
In December 2007,
the FASB issued Statement of Financial
Accounting Standard No. 141R, "Business Combinations (revised
2007)," ("SFAS No. 141R") SFAS No. 141R establishes principles
and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling
interest; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of
the business combination. SFAS No. 141R is to be applied
prospectively to business combinations for which the acquisition
date is on or after the beginning of an entity's fiscal year that begins
on or after December 15, 2008. Solitario has not yet determined
the impact, if any, of adopting SFAS No. 141R on its financial
position, results of operations or cash flows.
In February 2007,
the FASB issued Statement of Financial
Accounting Standard No. 159, "The Fair Value Option For Financial
Assets and Financial Liabilities" (SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial instruments
Shares
Issuable on
Outstanding
Options
Weighted
Average
Exercise Price
(Cdn$)
Weighted
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value (1)
1994 Plan:
Outstanding, beginning of year
Exercised
Outstanding at December 31, 2007
Exercisable at December 31, 2007
2006 Plan
Outstanding, beginning of year
Granted
Forfeited
Exercised
Outstanding at December 31, 2007
Exercisable at December 31, 2007
1,027,000
(917,000)
110,000
110,000
1,637,500
612,000
(52,500)
(12,500)
2,184,500
933,000
$
$
$
$
$
$
$
$
$
$
0.74
0.73
0.81
0.81
2.77
4.62
2.77
2.77
3.29
3.07
0.6
0.6
3.8
3.7
$
$
503,000
503,000
$ 4,476,000
$ 2,121,000
(1) The intrinsic value at December 31, 2007 based upon the quoted market price of Cdn$5.30 per share for our common stock on the
Toronto Stock Exchange and an exchange ratio of 1.01936 Canadian dollars per United States dollar.
2007 Annual Report | 33
and certain other items at fair value. The provisions of SFAS No.
159 are effective for Solitario as of January 1, 2008. Solitario has
not yet determined the impact of adopting SFAS No. 159 on its
financial position, results of operations or cash flows.
the FASB issued Statement of Financial
In September 2006,
Accounting Standard No. 157 "Fair Value Measurements" (SFAS No.
157"). SFAS No. 157 clarifies that fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date in
the most advantageous market for the asset or liability. SFAS No.
157 clarifies that the transaction to sell an asset or transfer a liability
is a hypothetical transaction at a measurement date, considered
from the perspective of a market participant that holds the asset or
owes the liability. SFAS No. 157 states that fair value is a market-
based measurement, not an entity specific measurement and that
market assumptions should be based upon independent
observations of
the reporting entity about market participant
assumptions. SFAS No. 157 states that market participant
assumptions should include risk, restrictions on asset sales, non-
that quoted market prices for financial
performance risk, but
instruments should not be adjusted for the size of a position relative
to trading volume (block discounts). SFAS No. 157 expands
disclosures about, among other things, the use of fair value to
measure assets and liabilities in interim and annual periods,
including the use of unobservable inputs, and the effect of fair value
on earnings and changes in net assets. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.
Solitario has not yet determined the impact of adopting SFAS No.
157 on its financial position, results of operations or cash flows.
2. Mineral Properties:
Solitario's mineral properties consist of use rights related to
exploration stage properties, and the value of such assets is
primarily driven by the nature and amount of economic mineral ore
in such
believed to be contained, or potentially contained,
properties. The amounts capitalized as mineral properties include
concession and lease or option acquisition costs. Capitalized
costs related to a mineral property represent its fair value at the
time it was acquired. Solitario has no production (operating) or
development stage mineral properties nor any interests in
properties that contain proven or probable reserves. Solitario's
exploration stage mineral properties represent
interests in
properties that Solitario believes have exploration potential that is
not associated with any other production or development stage
property. Solitario's mineral use rights generally are enforceable
regardless of whether proven and probable reserves have been
established.
The following represents Solitario's investment
properties:
in mineral
(in thousands)
Mineral interests
Accumulated amortization
Net mineral interests
December 31,
2007
$ 3,727
(1,023)
$ 2,704
2006
$ 3,710
(1,023)
$ 2,687
Solitario classifies its interest in mineral properties as Mineral
Properties, net (tangible assets) pursuant to Emerging Issues Task
Force No. 04-2 (“EITF No. 04-2”). Prior to adoption of EITF 04-2 in
April 2004, we classified our interests in mineral properties as
intangible assets, Mineral Interests, net and recorded amortization
of the intangible asset. Pursuant to EITF 04-2, we no longer
amortize our interest in Mineral Properties, net.
Peru
Solitario holds exploration concessions or has filed applications for
concessions covering approximately 15,000 hectares in Peru.
These applications are subject to normal administrative approvals
and the mineral interests are subject to an annual rental of $3.00
per hectare (approximately 2.477 acres per hectare) in June of
each year, with 2,200 hectares subject to an additional $6.00 per
hectare surcharge as the concessions are more than 10 years old.
28 | Solitario Resources Corporation
34 | Solitario Resources Corporation
(a) Bongará
Solitario acquired the initial Bongará exploration concessions in
1993. The current holdings consist of a 100% interest concessions
covering approximately 6,000 hectares in northern Peru (the
"Bongará project").
On August 15, 2006 Solitario signed a Letter Agreement with
Votorantim Metais Cajamarquilla, S.A., a wholly owned subsidiary
of Votorantim Metais (both companies referred to as "Votorantim"),
on Solitario's 100%-owned Bongará zinc project. On March 24,
the Framework
2007, Solitario signed a definitive agreement,
Agreement
for the Exploration and Potential Development of
Mining Properties, (the "Framework Agreement") pursuant to, and
replacing, the previously signed Bongará Letter Agreement with
Votorantim Metais ("Votorantim"). Solitario's and Votorantim's
property interests will be held through the ownership of shares in
a joint operating company that holds a 100% interest in the mineral
rights and other project assets. Solitario currently owns 100% of
the shares in this company (Minera Bongará S.A.).
Votorantim can earn up to a 70% shareholding interest in the joint
operating company by funding an initial $1.0 million exploration
program (completed), by completing future annual exploration and
development expenditures, by making a cash payment of
$100,000 on August 15, 2007 (completed) and further payments
to Solitario of $200,000 on all subsequent anniversaries until a
production decision is made or the agreement is terminated. The
option to earn the 70% interest can be exercised by Votorantim any
time after the first year commitment by committing to place the
project into production based upon a feasibility study. Additionally,
Votorantim, in its sole discretion, may elect to terminate the option
the first year
to earn the 70% interest at any time after
commitment. The agreement calls for Votorantim to have minimum
annual exploration and development expenditures of $1.5 million in
each of years two and three, and $2.5 million in all subsequent
years until a minimum of $18.0 million has been expended by
Votorantim. Votorantim will act as project operator. Once
Votorantim has fully funded its $18.0 million work commitment and
committed to place the project into production based upon a
feasibility study, it has further agreed to finance Solitario's 30%
participating interest through production. Solitario will repay the
loan facility through 50% of Solitario's cash flow distributions from
the joint operating company.
(b) Yanacocha royalty property
The Yanacocha royalty property consists of 69 concessions
totaling approximately 61,000 hectares in northern Peru 25
In January 2005,
kilometers north of the city of Cajamarca.
Solitario signed an Amended and Restated Royalty Grant with
Minera Los Tapados S.A., a subsidiary of Newmont Peru Limited,
Minera Yanacocha S.R.L., and Minera Chaupiloma Dos de
Cajamarca, S.R.L. (affiliates of Newmont Peru, Ltd., collectively
“Newmont Peru”) to modify the net smelter return (“NSR”) royalty
on the Yanacocha Royalty property located immediately north of
the Newmont Mining-Buenaventura’s Minera Yanacocha Mine, the
largest gold mine in South America. The amended royalty
provides for a sliding scale royalty which pays a maximum of
5.75% joint government of Peru plus Solitario royalty when the
gold price is greater than $400 per ounce. Solitario may receive
up to a 5% royalty, however that royalty to Solitario is reduced by
any royalty paid to the government of Peru, which is currently
between one and two percent. In addition to amending the NSR
royalty schedule, the Letter Agreement committed Newmont Peru
to a long-term US$4.0 million work commitment on Solitario’s
royalty property and provides Solitario access to Newmont Peru's
future exploration results on an annual basis. The Yanacocha
royalty amendment and work commitment Letter Agreements
were subsequently replaced by a definitive agreement with the
Newmont has not reported reserves on the
same terms.
Yanacocha property and Solitario has not received any royalty
income from Newmont.
(c) La Tola royalty property
in
In October 2003, Solitario acquired the La Tola project
southern Peru to explore for gold and possibly silver. Solitario
In August 2007
retained one claim covering 1,000 hectares.
2007 Annual Report | 35
Solitario signed a Letter of
Intent with Canadian Shield
Resources ("CSR") allowing CSR to earn a 100%-interest in the
property, subject to a 2% net smelter return royalty ("NSR") to
Solitario’s benefit. To earn its interest, CSR is required to spend
$2.0 million in exploration by December 31, 2011. CSM has the
right to purchase the 2% NSR for $1.5 million anytime before
commercial production is reached.
(d) Santiago
In February of 2007, Solitario acquired 5,600 hectares of 100%-
owned mineral rights through concessions for its Santiago property
in southern Peru. Solitario capitalized $17,000 during the year
ended December 31, 2007 in lease acquisition costs related to
these concessions. The Santiago project consists of a single
property block where previous surface sampling of rocks identified
anomalous concentrations of gold in altered Tertiary volcanic rocks.
Solitario is currently conducting additional surface sampling and
geological mapping to determine if the project warrants drill testing.
(e) Chambara
In September of 2006, Solitario acquired 5,200 hectares of 100%-
owned mineral rights through concessions for its Chambara
property (formerly called the Amazonas property) in northern Peru.
Solitario capitalized $17,000 during the year ended December 31,
2007 in lease acquisition costs related to new concessions
covering an additional 5,600 hectares at the Amazonas project.
The Amazonas project consists of six widely spaced areas where
previous sampling has identified high-grade zinc mineralization at
surface similar to that found at Florida Canyon, discussed above
under the Bongará zinc property above. We may seek a joint
venture partner for the property during 2008.
(f) Newmont Strategic Alliance
On January 18, 2005, Solitario signed a Strategic Alliance
Agreement (the "Alliance Agreement") with Newmont Overseas
Exploration Limited (“Newmont Exploration”), to explore for gold in
South America (the "Strategic Alliance"). Prior to the definitive
agreement, Solitario had signed a Letter of Intent on November 17,
2004, with Newmont Exploration. Concurrent with the signing of
the Alliance Agreement, Newmont Mining Corporation of Canada
(“Newmont Canada”) purchased 2.7 million shares of Solitario
(approximately 9.9% equity interest) for Cdn$4,590,000. As part of
the Alliance Agreement Solitario is committed to spend $3,773,000
over the four years from the date of the Alliance Agreement on gold
exploration in regions (“Alliance Projects Areas”) that are mutually
agreed upon by Newmont Exploration and Solitario. As of
December 31, 2007, Solitario has spent approximately $1,616,000
If Solitario has not spent the $3,773,000, by
of this commitment.
January 18, 2009, Newmont may elect to extend the four-year
expenditure period for such additional time necessary to enable
Solitario to spend the full $3,773,000 on qualified exploration
expenditures. Newmont may also elect to become the manager of
the Alliance Agreement and direct and spend up to the $3,773,000
qualified exploration expenditures using Solitario funds. If Solitario
acquires properties within Alliance Project Areas and meets
certain minimum exploration expenditures, Newmont Exploration
will have the right to joint venture acquired properties and earn up
to a 75% interest by taking the project through feasibility and
financing Solitario’s retained 25% interest
into production.
Newmont Exploration may elect to earn a lesser interest or no
interest at all, in which case it would retain a 2% net smelter return
royalty. Newmont Exploration also has a right of first offer on any
non-alliance Solitario property in South America, acquired after the
signing of the Alliance Agreement, that Solitario may elect to sell
an interest in, or joint venture with a third party.
As of December 31, 2007 Solitario has identified three property
positions that fall within the currently defined Strategic Alliance
area. These include the Cajatambo, Excelsior and Twin Lakes
properties. The Twin Lakes property was staked in 2007, while the
Cajatambo and Excelsior properties were staked in early 2008.
Solitario capitalized $3,000 during the year ended December 31,
2007 in lease acquisition costs related to the Twin Lakes property.
The Twin Lakes property consists of one concession totaling 1,000
the property consists of Tertiary
hectares.
The geology of
volcanics cut by a system of parallel quartz veins. Veins are up to
two meters wide and can be traced along strike up to 1.2
kilometers. The veins are polymetallic in character, within a low-
sulfidation environment.
Brazil
(a) Pedra Branca
In October 2000, Solitario recorded $3,627,000 in mineral interest
additions for the Pedra Branca project in connection with the
acquisition of Altoro Gold Corp. (“Altoro”). At December 31, 2007,
the Pedra Branca project consisted of 124 exploration concessions
totaling approximately 178,514 hectares in Ceará State, Brazil. We
have applied to the National Department of Mineral Production
("DNPM") to convert
five exploration concessions to mining
concessions. These applications are under review by the DNPM.
Pedra Branca do Mineração S.A., an 85%-owned subsidiary of
Solitario incorporated in Brazil, holds 100%-interest
in all
concessions. Eldorado Gold Corporation is entitled to a 2% NSR
royalty on 10 of the concessions totaling 10,000 hectares.
interests,
On January 28, 2003, Solitario entered into a Letter Agreement with
Anglo Platinum Ltd. ("Anglo Platinum") whereby Anglo Platinum
could earn various incremental
in Pedra Branca do
Mineração up to a 65% interest, by making annually increasing
exploration expenditures totaling $7.0 million, completing a bankable
feasibility study, or spending an additional $10 million on exploration
and development, whichever occurred first, and arranging financing
to put the project into commercial production. On July 14, 2006,
Solitario signed the Pedra Branca Framework Agreement with Anglo
Platinum to establish and govern Pedra Branca do Mineraçao S.A.,
("PBM") the corporate entity that now holds 100% title to all the
assets of the Pedra Branca project, and the mechanics for Anglo
Platinum's continued funding of Pedra Branca exploration.
On April 24, 2007, Solitario signed the definitive agreement, the
Shareholders Agreement, relating to the Pedra Branca Project in
Brazil, (the "Shareholders Agreement") pursuant to the previously
signed Pedra Branca Letter Agreement with Anglo Platinum for the
exploration and development of the Pedra Branca Project. The
Shareholders Agreement provides for Solitario and Anglo Platinum
property interests to be held through the ownership of shares PBM
that holds a 100% interest in the mineral rights and other project
assets. As part of the agreement, Anglo Platinum earned a 15%
interest in PBM as of September 30, 2007, as a result of spending a
total of $2.25 million on exploration at Pedra Branca. Additionally, the
Shareholders Agreement provides that Anglo Platinum may
incrementally earn up to a 51% interest in PBM by spending a total
of $7 million on exploration ($4.75 million in addition to the $2.25
million spent as of September 30, 2007) at Pedra Branca by June
30, 2010. However, Anglo Platinum is not required to fund any future
exploration expenditures. Anglo Platinum can earn an additional 9%
interest in PBM (for a total of 60%) by completing either (i) a
bankable feasibility study or (ii) spending an additional $10.0 million
on exploration or development. Anglo Platinum can also earn an
additional 5% interest in PBM (for a total of 65%) by arranging for
100% financing to put the project into commercial production.
As part of the Shareholders Agreement, Solitario entered into a
Services Agreement with Anglo Platinum whereby Solitario (and/or
our subsidiaries) would act as an independent contractor directing
the exploration and administrative activities for PBM and its
shareholders. Under the Services Agreement, Solitario receives a
5% management fee based upon total expenditures. During 2007
we received $52,000 of management fees included as joint venture
reimbursements discussed below under exploration expense.
During 2007, seventy-seven (77) new concessions were added
totaling 133,149 hectares. Land payments for 2008 are projected
to be approximately $186,000 including annual claim maintenance
payments and smaller surface rights payments to local
landowners. This amount may change due to the reduction or
addition of properties, or a change in the currency exchange rate.
(b) Mercurio
In September 2005, Solitario completed an option agreement for
the purchase of 100% of the mineral rights over the 8,550-hectare
2006 Annual Report | 29
36 | Solitario Resources Corporation
Mercurio property in the state of Para, Brazil. An initial payment of
20,000 Brazilian Reais (approximately $7,000) was paid on signing
of
the agreement and the next payment of 36,000 Reais
(approximately $12,000) was made in 2005 on signing of a
definitive agreement upon conversion of
the existing washing
claims to exploration claims. Further payments are required upon
the conversion of garimpeiro licenses to exploration claims which
occurred in the third quarter of 2006. During 2007 payments
totaled approximately $55,000. To purchase the property, an
escalating scale of payments
totaling 780,000 Reais
(approximately $350,000) are required over a sixty month period.
A net smelter return of 1.5% is retained by the owner. This NSR
can be extinguished with a payment of 2,300,000 Reais
(approximately $1,220,000). All payments are indexed to inflation
as of the signing of the agreement. The owner of the mineral rights
also owns the surface rights, the use of which is included in the
exploration of the property. On completion of all payments we will
receive title to 1,500 hectares of surface rights. Solitario may
terminate the agreement at any time at our sole discretion.
Solitario completed a second phase of extensive soil sampling and
auger testing of soils over selected portions of the property during
the first half of 2006 and core drilling of eleven holes totaling 1,596
meters during the third quarter of 2006 for which assay results
have been received and are under review. A third round of drilling
began in late 2007 and was completed by the end of February
2008 for which assays are pending.
Bolivia
Triunfo
The 256-hectare Triunfo poly-metallic exploration property in
Bolivia was acquired in 2003. Lease obligations were renegotiated
in 2006 providing for a payment of $12,000, which was paid in July
of 2006, a payment of $35,000, which was paid in June 2007 and
a payment of $45,000 due in 2008 in order to keep the agreement
in good standing. An option to purchase the property for
$1,000,000 must be exercised by September 2009. A geophysical
survey has been completed on the property and three holes were
drilled in the first half of 2007. Solitario is reviewing the results and
may plan another round of drilling during 2008.
Mexico
Pachuca
The Pachuca-Real property consists of approximately 47,300
hectares of mineral rights encompassing about 30% of the historic
Pachuca-Real del Monte silver-gold mining district of central
Mexico, but mainly areas situated to the north and northwest of the
historic district, termed the North District. Solitario owns 100% of
the property, except for the 13,600-hectare El Cura claim, that is
subject
to an Option to Purchase agreement with a private
Mexican party. The option requires payments of $500,000 over
four years for a 100% interest in the claim. Solitario may terminate
its option at anytime without any further costs.
On September 25, 2006 Solitario signed a definitive venture
agreement (the “Venture Agreement”) with Newmont de Mexico,
S.A. de C.V. ("Newmont"), a wholly owned subsidiary of Newmont
Mining Corporation. The Venture Agreement calls for a firm work
commitment by Newmont of $2.0 million over the next 18 months.
Work commitments over the first 4.5 years total $12.0 million.
Exploration
Expenditures
and Due Dates
18 months from signing –
Amount
Aggregate
Amount
firm commitment
$ 2,000,000
$ 2,000,000
30 months from signing –
optional commitment
42 months from signing –
optional commitment
54 months from signing –
optional commitment
$ 2,300,000
$ 4,300,000
$ 3,500,000
$ 7,800,000
$ 4,200,000
$ 12,000,000
30 | Solitario Resources Corporation
Newmont's initial firm work commitment includes a minimum of
7,500 meters of drilling, however, Newmont will have 24 months to
complete such drilling and any costs beyond the initial 18 month
period to complete that drilling, if necessary, will be in addition to
the $2.0 million work commitment above. Upon the completion of
$12.0 million in expenditures, Newmont will have earned a 51%
interest in the project. Newmont will have the right to earn an
additional 14% (total 65%) by completing a positive feasibility study
for the project. After Newmont has spent $12.0 million and has
elected to complete a feasibility study, Newmont is required to
spend a minimum of $5.0 million annually until such time as the
positive feasibility study is completed. Newmont has the right to
terminate the agreement at any time following its firm initial work
commitment. Upon completion of the feasibility study, we will have
the option to self-finance our 35%-participating interest in the
project, or to have Newmont fund our portion of construction costs
at Libor + 3.5%. Such post-feasibility funding plus interest shall be
paid from 80% of Solitario's distribution of future earnings or
If Solitario elects to have Newmont
dividends from the venture.
fund all
then Solitario's
participating interest will be immediately reduced to 30% and
Newmont's interest will be 70%.
its venture costs after
feasibility,
Discontinued Projects
(a) Corazon / Conception del Oro
In September 2005, Solitario signed an agreement with a private
Mexican mineral concession holder allowing Solitario to enter into
lease options on four separate properties located throughout
central Mexico, which included the Corazon gold property (formerly
called the Concepcion del Oro property), located in the Conception
del Oro mining district near the city of Mazapil
in the state of
Zacatecas. The Corazon property consists of 35 concessions
totaling approximately 1,420 hectares. As a result of ongoing
geologic and exploration activities including mapping and
sampling, Solitario made the decision to drop its interest in the
Corazon property. Solitario recorded property abandonment and
impairment expense of $5,000 related to the write-off of
the
capitalized costs on this property during 2007.
(b) La Purisima
The La Purisima gold property is located near the city of Tepic in
the state of Navarit in Mexico and consists of six concessions
totaling 600 hectares. As a result of ongoing geologic and
exploration activities during the first three months of 2007, Solitario
made the decision to drop its interest in the La Purisima project.
Solitario recorded property abandonment and impairment
expense of $5,000 related to the write-off of the capitalized costs
on this property during 2007.
(c) Titicayo
On March 31, 2006, Solitario signed a lease agreement with a
private Bolivian company to lease certain concessions covering
approximately 1,300 hectares, which comprise the Titicayo silver
project in Bolivia.
In 2007, Solitario completed a five-hole 1,031-
meter core drilling program to test silver bearing vein observed at
surface at deeper levels. Although all five drill holes intersected
anomalous silver concentrations, Solitario does not believe further
exploration would enhance its results. Consequently, Solitario
recorded property abandonment and impairment expense of
$10,000 related to the write-off of the capitalized costs on this
property during 2007.
Exploration Expense
The following items comprised exploration expense:
(in thousands)
Geologic, drilling and
assay
Field expenses
Administrative
Joint venture
reimbursement
Total exploration
expense
2007
2006
2005
$ 1,569
1,369
1,216
$ 1,370
995
842
$ 923
727
522
(1,042)
(265)
(100)
$ 3,112
$ 2,942
$ 2,072
On September 30, 2007, Anglo earned a 15% interest in PBM,
discussed above under Pedra Branca. As a result of earning this
minority interest, funding of PBM exploration expenses by Anglo
are no longer recorded as joint venture reimbursements but are
recorded as equity contributions to Solitario’s additional paid-in
capital for Solitario’s 85% of the funding by Anglo. Additionally, we
record minority interest in the statement of operations for Anglo’s
share of PBM income or loss. During 2007, subsequent
to
September 30, 2007, we received a cash payment for funding of
PBM exploration expenses from Anglo of $90,000 and we
recorded a credit of $17,000 in the statement of operations for
Anglo’s share of PBM’s loss from September 30, 2007 until
December 31, 2007.
3. Related Party Transactions:
Crown Resources Corporation
Crown provided management and technical services to Solitario
under a management and technical services agreement originally
signed in April 1994 and modified in April 1999, December 2000
and July 2002. The agreement was terminated on August 31,
2006 upon the completion of the Crown – Kinross merger. Under
the modified agreement Solitario was billed by Crown for services
at 25% of Crown's corporate administrative costs for executive and
technical salaries, benefits and expenses, 50% of Crown's
corporate administrative costs for financial management and
reporting salaries, benefits, expenses and 75% of Crown's
corporate administrative costs for investor relations salaries,
benefits and expenses. In addition, Solitario reimbursed Crown for
direct out-of-pocket expenses. These allocations were based upon
the estimated time and expenses spent by Crown management
and employees on both Crown activities and Solitario activities.
Solitario's management believed these allocations were
reasonable and the allocations were periodically reviewed by its
management and approved by independent Board members of
both Crown and Solitario. Management service fees were billed
monthly, due on receipt and were generally paid within thirty days.
Solitario did not incur any management service fees during 2007.
The management service fees were $232,000, and $423,000 for
the years ended December 31, 2006 and 2005, respectively.
Kinross Merger Agreement
Solitario entered into a Voting Agreement dated as of April 15,
2002 among Zoloto Investors, LP ("Zoloto") and Crown. Zoloto
and Solitario were both shareholders of Crown (the "Signing
Shareholders"). Pursuant to the Voting Agreement, Zoloto and
Solitario agreed that each would vote its owned shares during the
term of the Voting Agreement for the election of three designees of
Zoloto and one designee of ours (the "Designee Directors") to the
Board of Directors of Crown. The Signing Shareholders agreed
that any shares received by either Signing Shareholder would be
subject to the Voting Agreement during its term and any successor,
assignee or transferee of shares from either Signing Shareholder
would be subject to the terms of the Voting Agreement during its
term. The Voting Agreement terminated on June 25, 2006.
Prior to the completion of the Crown – Kinross merger, Solitario
entered into a stockholder and voting agreement with Kinross,
along with several Crown directors, Crown executive officers and
entities affiliated with these directors and officers (collectively the
“Signatories”), pursuant to which the Signatories voted all of the
shares of Crown common stock owned by them in favor of the
approval of the Crown – Kinross merger. On August 31, 2006, the
shareholders of Crown approved the Crown – Kinross merger and
all of Crown’s common shares were converted to Kinross shares
and the stockholder and voting agreement terminated.
Christopher E. Herald, and Mark E. Jones, III were directors of both
Crown and Solitario until August 31, 2006 when they resigned as
directors of Crown upon the completion of the Crown – Kinross
merger. Stephen Webster and Brian Labadie were directors of
both Crown and Solitario from June 27, 2006 to August 31, 2006,
when they resigned as directors of Crown upon the completion of
the Crown – Kinross merger. Christopher E. Herald, James R.
Maronick and Walter H. Hunt were officers of both Crown and
Solitario until August 31, 2006 when they resigned as officers of
Crown upon the completion of the Crown – Kinross merger.
Mark Jones Consulting Agreement
On September 1, 2006, Solitario entered into a consulting
agreement with Mark E. Jones, III, a director and vice-chairman of
our Board of Directors. The consulting agreement has a two-year
term. Under the agreement, Mr. Jones will advise the Company on
matters of strategic direction, planning, and identification of
corporate opportunities, when and as requested by the Solitario. In
consideration for the services to be performed, Mr. Jones has been
paid a one time lump sum payment of $160,000, plus he is entitled
to receive pre-approved, documented expenses incurred in
performance of the consulting services. Solitario has charged
$80,000 for consulting expense, related to the agreement, included
in general and administrative expense for
the year ended
December 31, 2007 compared to $27,000 for the year ended
December 31, 2006. Solitario will amortize the remaining balance
of prepaid consulting fees of $53,000, included in current assets as
of December 31, 2007, during 2008.
TNR Gold Corp.
On July 24, 2006, Solitario exercised a warrant
to purchase
500,000 shares of TNR Gold Corp. (“TNR”) common stock by
paying $70,000. Solitario recorded the cash paid and the fair value
of the warrant on the date of exercise of $12,000 as marketable
equity securities. Solitario received this warrant in July 2004 when
it exchanged 500,000 shares of TNR Gold Corp ("TNR") common
stock for 500,000 shares of TNR common stock that were not
available to be publicly traded in Canada until November 28, 2004
and a warrant to purchase an additional 500,000 shares of TNR
common stock for Cdn$0.16 per share for a period of two years.
The 2004 transaction was accounted for as a sale of Solitario's
previously owned TNR shares and an acquisition of the new TNR
shares and warrants.
The TNR shares are classified as
marketable equity securities held for sale. As of December 31,
2007, Solitario does not own warrants for the purchase of TNR
shares. Previous to their exercise,
the TNR warrants were
recorded at fair market value based upon quoted prices and
classified as derivative instruments. Solitario recorded a loss on
derivative instruments of $5,000, and $20,000, for the decrease in
the value of its warrants during the years ended December 31,
2006 and 2005, respectively. Christopher E. Herald, our CEO, is a
member of the Board of Directors of TNR.
Crown Spin-off
On July 26, 2004, Crown completed a spin-off of our shares to its
shareholders, whereby each Crown shareholder received 0.2169
shares of our common stock for each Crown share they owned. As
part of the spin-off, Crown retained 998,306 of our shares for the
benefit of Crown’s warrant holders who would receive those shares
when the warrant holders exercise their warrants. Subsequent to
the spin-off, through August 31, 2006 when the Crown – Kinross
merger was completed, Crown distributed 995,229 of
these
retained shares upon exercise of its warrants and the remaining
3,077 shares of our stock became the property of Kinross which is
not a related party to Solitario.
Income Taxes:
4.
Solitario's income tax expense consists of
allocated between foreign and United States components:
the following as
(in thousands)
Deferred:
United States
Foreign
Operating loss and
credit carryovers:
United States
Foreign
Income tax expense
2007
2006
2005
$(1,288)
86
$ (492)
-
$
31
-
1,591
(86)
303
$
546
-
54
$
226
-
$ 257
Consolidated income (loss) before income taxes includes losses
from foreign operations of $3,872,000 $3,286,000, and
$2,476,000, in 2007, 2006 and 2005, respectively. During 2007,
2006 and 2005, Solitario recognized income tax deductions of
$2,874,000, $1,579,000, and $28,000, respectively,
from the
exercise of nonqualified stock options. Stockholders’ equity has
been credited in the amount of $1,072,000, $616,000, and
2006 Annual Report | 31
$11,000,
these
deductions during 2007, 2006 and 2005.
the income tax benefit of
respectively,
for
2007 Annual Report | 37
During 2007, 2006 and 2005, Solitario recognized other
comprehensive income related to unrealized gains on marketable
equity securities of $9,669,000, $9,205,000, and $1,804,000,
respectively. Other comprehensive income has been charged
$3,317,000, $3,590,000, and $704,000, respectively,
the
income tax expense associated with these gains. During 2007 and
2006, Solitario transferred unrealized gain of $4,085,000 and
$2,121,000, respectively from other comprehensive income upon
the sale of 400,000 and 200,000 shares, respectively, of Kinross
common stock,
less income tax of $1,524,000 and 827,000,
respectively, associated with these unrealized gains.
for
The net deferred tax assets/liabilities in the December 31, 2007
and 2006 consolidated balance sheets include the following
components:
(in thousands)
Deferred tax assets:
Net operating loss (NOL) carryovers
Stock option compensation expense
Royalty
Derivative instruments
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Unrealized gain on derivative securities
Exploration costs
Unrealized gains on marketable
equity securities
Other
Total deferred tax liabilities
Net deferred tax liabilities
2007
2006
$ 7,032
556
1,492
635
24
(6,436)
3,303
835
845
8,425
6
10,111
$ 6,808
$ 6,543
373
1,560
-
50
(5,320)
3,206
1,467
870
6,632
20
8,989
$ 5,783
At December 31, 2007 and 2006, Solitario has classified $1,515,000
and $1,652,000, respectively, of its deferred tax liability as current,
related to the current portion of its investment in Kinross common stock.
A reconciliation of expected federal income taxes on income (loss)
from operations at statutory rates, with the expense (benefit) for
income taxes is as follows:
(in thousands)
Expected income tax
expense (benefit)
Non-deductible foreign
expenses
Foreign tax rate
differences
State income tax
Change in enacted
tax rates
Change in valuation
allowance
Permanent differences
and other
Income tax expense
2007
2006
2005
$ (1,227)
$ (1,064)
$ (620)
(12)
53
23
191
1,116
159
122
202
38
7
-
957
(6)
25
33
-
609
8
(benefit)
$
303
$
54
$
257
During 2007, 2006 and 2005,
the valuation allowance was
increased by $1,116,000, $957,000, and $609,000, respectively
increases in net operating loss
primarily as a result of
the
carryforwards,
deferred tax benefit would not be realized.
for which it was more likely than not
that
At December 31, 2007, Solitario has unused US Net Operating
Loss ("NOL") carryovers of $3,331,000 which begin to expire
commencing in 2012. Solitario also has foreign NOL carryovers at
December 31, 2007 of $17,708,000 that begin to expire four years
after the first year in which taxable income arises.
In connection
with the Bankruptcy of Crown and Solitario's acquisition of Altoro
Gold Corp., Solitario had a greater than fifty percent change in
ownership as defined in Section 382 of the Internal Revenue Code.
limitation on the
Pursuant to Section 382, the resulting annual
amount of future taxable income in the United States available to be
offset by Solitario's carryovers is approximately $614,000 per year.
32 | Solitario Resources Corporation
38 | Solitario Resources Corporation
On January 1, 2007, Solitario adopted the provisions of FIN 48,
which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN
48 requires that Solitario recognize in our consolidated financial
statements, only those tax positions that are “more-likely-than-not”
of being sustained as of the adoption date, based on the technical
merits of the position. As a result of the implementation of FIN 48,
Solitario performed a comprehensive review of our material tax
positions in accordance with recognition and measurement
standards established by FIN 48. The provisions of FIN 48 had no
effect on Solitario’s financial position, cash flows or results of
operations at either January 1, 2007 or December 31, 2007 as
Solitario had no unrecognized tax benefits.
Solitario and its subsidiaries are subject to the following material
taxing jurisdictions: United States Federal, State of Colorado,
Mexico, Peru and Brazil. The tax years that remain open to
examination by the United States Internal Revenue Service are
years 2004 through 2007. The tax years that remain open to
examination by the State of Colorado are years 2003 through 2007.
The tax years that remain open to examination by Mexico are years
2005 through 2007. All tax years remain open to examination in
Peru and Brazil. Solitario’s policy is to recognize interest and
penalties related to uncertain tax benefits in income tax expense.
Solitario has no accrued interest or penalties related to uncertain
tax positions as of January 1, 2007 or December 31, 2007.
5. Fair Value of Financial Instruments:
For certain of Solitario's financial instruments, including cash and
cash equivalents, the carrying amounts approximate fair value due
to their short maturities. Solitario's marketable equity securities are
carried at their estimated fair value based on quoted market prices.
The fair value of
the Kinross shares was $24,710,000 and
$20,706,000 at December 31, 2007 and 2006, respectively. The
fair value of the TNR shares was $316,000 and $198,000 at
December 31, 2007 and 2006, respectively.
The fair value of the Kinross Collar at December 31, 2007 was
$1,702,000, recorded as a liability and a loss on derivative
instrument of the same amount in the statement of operations
based upon a determination of Solitario using a Black-Scholes
option pricing model and an evaluation of what a willing buyer and
willing seller would exchange the Kinross Collar for in an arm's-
length transaction. Solitario used independent inputs to its Black-
Scholes option pricing model for the market price of a share of
Kinross common stock, the historical volatility of Kinross common
stock, the risk-free interest rate and the life of the collar for each of
the Floor Price and Cap Price in the Kinross Collar discussed
above in Note 1.
6. Commitments and Contingencies:
In acquiring its interests in mineral claims and leases, Solitario has
entered into lease agreements, which may be canceled at its
option without penalty. Solitario is required to make minimum
rental and option payments in order to maintain its interests in
certain claims and leases. See Note 2. Solitario estimates its 2008
mineral property rental and option payments to be approximately
$340,000.
If Solitario's current joint venture partners elect to
continue funding their respective joint ventures throughout the
remainder of 2008, Solitario would be reimbursed for
approximately $190,000 of those costs.
Solitario is required to spend $3,773,000 on Alliance Properties as
discussed above under “Newmont Alliance” over the four years
ended January 18, 2009 on gold exploration in regions that are
mutually agreed upon by Newmont Exploration and Solitario. As of
December 31, 2007, we have expended $1,616,000 of the total
commitment of $3,773,000.
the
$3,773,000, by January 18, 2009, Newmont may elect to extend the
four-year expenditure period for such additional time necessary to
enable Solitario to spend the full $3,773,000 on qualified exploration
expenditures. Newmont may also elect to become the manager of
the Alliance Agreement and direct and spend up to the $3,773,000
qualified exploration expenditures using Solitario funds.
If Solitario has not spent
2007 Annual Report | 39
Solitario has entered into certain month-to-month office
leases for its field offices in Peru, Mexico and Brazil. The total
rent expense for these offices during 2007, 2006 and 2005
was approximately $42,000, $28,000, and $36,000,
respectively. In addition, Solitario leases office space under a
the Wheat Ridge,
non-cancelable operating lease for
Colorado office which provides for minimum annual
rent
payments of $38,000 in 2008.
7. Stock Option Plans:
The activity in the 1994 Plan and the 2006 Plan for the three years ended December 31, 2007 is as follows:
2007
Weighted
Average
Exercise
Price (Cdn$)
Options
1994 Plan
Outstanding,
beginning of year
Exercised
Outstanding, end of year
Exercisable, end of year
1,027,000
(917,000)
110,000
110,000
2006 Plan
Outstanding,
beginning of year
Granted
Forfeited
Exercised
Outstanding, end of year
Exercisable, end of year
1,637,500
612,000
(52,500)
(12,500)
2,184,500
933,000
$
$
$
$
$
$
$
$
$
$
0.74
0.73
0.81
0.81
2.77
4.62
2.77
2.77
3.29
3.07
2006
Weighted
Average
Exercise
Price (Cdn$)
$
$
$
$
$
$
$
$
0.82
0.90
0.74
0.74
-
2.77
-
2.77
2.77
2.77
Options
2,240,000
(1,213,000)
1,027,000
1,027,000
-
1,655,000
-
(17,500)
1,637,500
396,250
The following table summarizes Solitario's stock options as of December 31, 2007:
2005
Weighted
Average
Exercise
Price (Cdn$)
$
$
$
$
0.82
0.75
0.82
0.83
Options
2,272,500
(32,500)
2,240,000
2,219,375
-
-
-
-
-
-
-
-
-
-
-
-
Exercise Price
1994 Plan
Cdn$0.81
2006 Plan
Cdn$2.77
Cdn$4.38
Cdn$5.12
Cdn$4.53
Number
110,000
1,572,500
10,000
100,000
502,000
2,184,500
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in years)
Weighted
Average
Exercise
Price (Cdn$)
Number
Exercisable
Weighted
Average
Exercise
Price (Cdn$)
.6
2.5
3.9
4.5
4.7
3.8
$
0.81
110,000
$ 0.81
$
$
$
$
$
2.77
4.38
5.12
4.53
3.29
780,000
2,500
25,000
125,500
933,000
$ 2.77
$ 4.38
$ 5.12
$ 4.53
$ 3.07
8. Stockholders' Equity:
During 2007 options for 929,500 shares of Solitario common stock
were exercised for proceeds of $607,000 and during 2006 options
for 1,230,500 shares of Solitario common stock were exercised for
proceeds of $994,000.
40 | Solitario Resources Corporation
9. Selected Quarterly Financial Data (Unaudited):
(in thousands)
Revenue
Net income (loss)
Earnings (loss) per share:
Basic and diluted
Weighted shares outstanding:
Basic
Diluted
(in thousands)
Net loss
Loss per share:
Basic and diluted
Weighted shares outstanding:
Basic and diluted
March 31,
(1) (2)
$
$
$
-
373
0.01
29,028
30,228
June 30,
(2)
-
$
$ (1,099)
$
(0.04)
29,607
29,607
2007
2006
March 31,
June 30,
$
$
(621)
(0.02)
$ (1,225)
$
(0.04)
Sept. 30,
(1) (2) (3)
$
$
$
100
(909)
(0.03)
29,607
29,607
Sept. 30,
(5)
$
$
(550)
(0.02)
Dec. 31,
(1) (2) (4)
-
$
$ (2,276)
$
(0.07)
29,617
29,617
Dec. 31,
(5) (6)
$
$
(787)
(0.03)
27,976
28,512
28,557
28,626
(1) Solitario sold 200,000 shares of Kinross common stock in the first quarter for proceeds of $2,645,000 and a gain of $2,068,000, sold
100,000 shares of Kinross common stock in the third quarter for proceeds of $1,332,000 and a gain of $889,000, and sold 100,000
shares of Kinross common stock in the fourth quarter for proceeds of $1,571,000 and a gain of $1,128,000.
(2) Exploration expense increased from $393,000 in the first quarter to $659,000 in the second quarter to $846,000 in the third quarter to
$1,214,000 in the fourth quarter, contributing to the increasing loss by quarter after consideration of the Kinross stock sales in the first,
third and fourth quarters discussed above.
In the third quarter Solitario received a payment of $100,000 in joint venture revenue on its Bongará project in Peru.
In the fourth quarter, we recognized $1,702,000 derivative loss on the Kinross Collar, which contributed to the increased loss in the
quarter.
(3)
(4)
(5) Solitario sold a total of 200,000 shares of Kinross common stock, 100,000 shares in the third quarter for proceeds of $1,206,000 and
a net gain of $1,046,000 and 100,000 shares in the fourth quarter for proceeds of $1,236,000 and a net gain of $1,076,000.
(6) General and administrative costs increased during the fourth quarter as a result of the termination of the Crown management
agreement and Solitario assuming all costs which were previously shared with Crown.
This publication includes certain "Forward-Looking Statements" within the meaning of section 21E of the United States Securities
Exchange Act of 1934, as amended. All statements, other than statements of historical fact, included herein, including without limitation,
statements regarding potential mineralization and reserves, exploration results and future plans and objectives of Solitario, are forward-
looking statements that involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate
and actual results and future events could differ materially from those anticipated in such statements. Development of Solitario’s properties
are subject to the success of exploration, completion and implementation of an economically viable mining plan, obtaining the necessary
permits and approvals from various regulatory authorities, compliance with operating parameters established by such authorities and
political risks such as higher tax and royalty rates, foreign ownership controls and our ability to finance in countries that may become
politically unstable. Important factors that could cause actual results to differ materially from Solitario’s expectations are disclosed under
the heading "Risk Factors" and elsewhere in Solitario’s documents filed from time to time with Canadian Securities Commissions, the
United States Securities and Exchange Commission and other regulatory authorities. This publication also contains information about
adjacent properties on which we have no right to explore or mine. We advise U.S. investors that the SEC's mining guidelines strictly prohibit
information of this type in documents filed with the SEC. U.S. investors are cautioned that mineral deposits on adjacent properties are not
indicative of mineral deposits on our properties.
Solitario Resources Corporation
C O R P O R A T E
Corporate Offices
4251 Kipling Street, Suite 390
Wheat Ridge, Colorado 80033
Telephone: 303-534-1030
Fax: 303-534-1809
www.solitarioresources.com
Legal Counsel
Solomon, Pearl, Blum Heymann & Stich, LLP
Denver, Colorado
Fogler, Rubinoff LLP
Toronto, Ontario
Auditors
Ernhardt Keefe Steiner and Hottman, PC
Denver, Colorado
Transfer Agent
Computershare Investor Services
100 University Avenue
Toronto, Ontario M5J2Y1 Canada
800-564-6253
Investor Relations
Questions and requests for information should be directed to Debbie Mino Austin,
Director-Investor Relations at 800-229-6827, or via email at
dwmino@solitarioresources.com
Notice of Annual Meeting
The Annual Meeting of Shareholders will be at 10 a.m. MDT on Thursday,
June 12, 2008 at the Company’s corporate offices.
Stock Exchange Listings
AMEX: XPL | TSX: SLR
The Company’s common stock has been listed and traded in Canada on the
Toronto Stock Exchange since July 19, 1994 under the symbol SLR and on the
American Stock Exchange in the U.S. since August 11, 2006 under the symbol XPL.
O F F I C E R S
| D I R E C T O R S
Christopher E. Herald
President, CEO & Director
Steven A. Webster
Chairman of the Board
James R. Maronick
Chief Financial Officer
Mark E. Jones, III
Vice Chairman of the Board
Walter H. Hunt
President – SA Operations
Designed & Produced by Pite Creative Services
www.PiteCreative.com | 720-304-9411
John Hainey
Director
Leonard Harris
Director
Brian Labadie
Director
2007 Annual Report
S O L I T A R I O R E S O U R C E S C O R P O R A T I O N
4251 Kipling Street, Suite 390
Wheat Ridge, Colorado 80033
telephone: 303-534-1030
fax: 303-534-1809
www.solitarioresources.com
AMEX: XPL | TSX: SLR
S I LV E R / G O L D
Pachuca Real, Mexico
Drilling | Early-Stage Exploration
Z I N C
Bongará, Peru
Drilling | Advanced Exploration
Chambara, Peru
Property Acq. | Early-Stage Exploration
N S R R O Y A L T I E S
Yanacocha, Peru
Drilling | Early-Stage Exploration
G O L D
Mercurio, Brazil
Drilling | Exploration
P L A T I N U M / P A L L A D I U M
Pedra Branca, Brazil
Drilling | Advanced Exploration
P E R U A L L I A N C E
Newmont Mining
Property Acq. | Early-Stage Exploration