SOLITARIO
E x p l o r at i o n
& r o ya lt y
Solitario Exploration & Royalty (NYSE Amex: XPL; TSX: SLR) engages
in the acquisition and exploration of mineral properties located in Peru,
Brazil and Mexico. The Company’s focus is on gold and silver, and has
advanced projects with platinum, palladium, zinc and lead.
2009 Annual Report
For a company the size of Solitario, we have an amazingly diversified commodity mix
with important projects containing gold, silver, platinum, palladium, zinc, lead and
indium. In addition to the diversity of our commodity portfolio, our projects range
from early-stage exploration properties to advanced exploration projects on the cusp
of development. In this year’s annual report, we present our advanced projects first,
Bongará and Pedra Branca, and then our exploration projects are presented by
commodity type: gold-silver, base metal-polymetallic and royalty properties.
1Solitario Exploration & Royalty
Solitario Exploration & Royalty | Projects
Advanced Projects
Bongará: Zinc-Lead-Silver, Peru | page 6
n 2010 activities: 23 km of road construction, 700 meters of underground workings,
metallurgy and 10,000 meters of drilling
n 30%-carried interest, 100%-financed by Votorantim Metais
n Exceptional drilling results from 2006 to 2009
Pedra Branca: Platinum-Palladium, Brazil | page 8
n Advanced open-pitable platinum-palladium project
n 35%-carried interest, nearly 100%-financed by Anglo Platinum
n Solid 2004-2009 drilling results
Gold-Silver Exploration Projects
Pachuca Real: Silver-Gold, Mexico | page 10
n 38 high-quality, silver-gold targets that are ready to drill
n Close to signing an agreement with a new joint venture partner
Cajatambo: Gold-Silver, Peru | page 10
n 100%-owned, subject to the Newmont Peru Alliance agreement
n Huge gold and silver anomaly (3.5 km by 1.5 km) in rocks/soils
n Initial drilling scheduled for 2010
Base Metal & Polymetallic Exploration Projects
La Promesa: Silver-Zinc-Lead-Indium, Peru | page 12
n 100%-owned, subject to the Newmont Peru Alliance agreement
n Exceptional high-grade surface channel samples
n Initial drilling scheduled for 2010
Chambara: Zinc-Lead-Silver, Peru | page 12
n Regional zinc project in Peru
n 30%-carried interest, 100%-financed by Votorantim Metais
n Additional work planned on several high-grade zinc prospects in 2010
La Noria: Copper-Oxide, Mexico | page 12
n 100%-owned
n Copper oxide target averaging 0.32% copper oxide at surface
n Initial drilling recently completed
Royalty Properties
Yanacocha: Gold-Silver-Copper, Peru | page 13
n 200 square mile property adjacent to largest gold district in South America
Mercurio: Gold, Brazil | page 13
n New royalty agreement signed in 2010
Solitario Exploration & Royalty
2009 Annual Report | 2X
2009 Annual Report | 2X
Substantial Progress on All Fronts | Letter to Shareholders
In 2009, we saw
substantial progress
on
our
both
advanced joint ven-
tured properties and
100%-owned
our
exploration projects.
Based upon 2009
work, Votorantim
Metais, our
joint
venture partner on
our Bongará high-
grade zinc project, will conduct new groundbreaking
activities consisting of access road construction, under-
ground development and metallurgy, as well as an
expanded 2010 drilling program. Equally important, we
were able to significantly upgrade our pipeline of new
exploration targets on 100%-owned properties. Finally,
we were successful in signing a new Net Smelter Return
Royalty on our Mercurio gold property in Brazil and are
close to signing a joint venture agreement on our high-
potential Pachuca Real silver-gold project in Mexico.
Even though 2009 remained in the wake of the financial
crisis that started in 2008, Solitario maintained its strong
financial underpinning. We began 2009 with approxi-
mately $20 million in cash and securities, and ended the
year with essentially the same capital position, while,
once again, not issuing any new equity. Contributing to
the maintenance of our balance sheet for the year was the
receipt of approximately $2.4 million in revenue from
property payments and the break-up fee from our
attempted Metallic Ventures acquisition.
Our Business Model Continues to Deliver Value
We are building a different kind of exploration and royalty
company – one that lowers financial risks, while substan-
tially preserving returns. Our joint ventures are structured
similarly to Net Profit Interest Royalties, or NPI royalties, in
which we are essentially financed through production to
cash flow. This strategy provides a greatly expanded fund-
ing platform for our activities versus Solitario independently
funding all of its projects to production.
Solitario has important agreements with Newmont Mining
(second largest gold producer in the world), Votorantim
Metais (third largest zinc producer in the world) and
Anglo Platinum (largest platinum producer in the world).
In addition, we hope to add a quality new partner for our
Pachuca Real project before mid-year. For 2010, we
estimate approximately $10 million will be spent on Soli-
tario projects by our various joint venture partners.
Most royalty companies are based upon acquiring Net
Smelter Return (“NSR”) royalties. NSR royalties gener-
ate revenues by being paid a small percentage (typically
1-5%) of the gross value of the products. Favorable
attributes of an NSR royalty are no capital or operational
cost deductions and no environmental or closure costs.
Negative aspects include high acquisition costs and con-
sequently a low return on investment.
Net Profit Interest ("NPI") royalties generate revenues by
participating in a significant percentage (typically 20-
40%) of the net profits. Favorable attributes include
insulation from equity dilution for feasibility-construc-
tion costs and significantly higher revenues and earnings
than a NSR royalty for the same producing asset. Nega-
tive aspects include exposure to operational costs and the
obligation to pay back construction costs from profits.
NPI royalties are not common in other royalty companies
– here’s why. To create an NPI royalty, the underlying
potential of a property must be revealed. Identifying new
properties with exceptional potential and advancing such
projects to the point that others can see their economic
value is our strong suit. That is why we have multiple
NPI royalty structured joint venture arrangements, and
others do not. We believe greater value can be delivered
to shareholders following our model than the traditional
NSR royalty route. In addition, we have the opportunity
to discover a really major deposit along the way – which
is a game-changer for our shareholders.
2010 is indeed shaping up to be a transformational year
for Solitario with the recent announcement of develop-
ment-related activities at Bongará, significant new drilling
on our Pedra Branca platinum-palladium project, our
strongest ever line up of exploration activities in Mexico
and Peru, and the potential signing of an important new
joint venture on our Pachuca Real silver-gold project.
Sincerely,
Christopher E. Herald
President & Chief Executive Officer
13 | Solitario Exploration & Royalty
Top Ten Reasons 2010 Will be a Transformational Year for Solitario
1. Initiation of a 23-kilometer access road to our high-grade Bongará zinc project
2. 700 meters of underground workings and metallurgical testing at Bongará
3. 10,000 meters of drilling at Bongará
4. Potential for an important new joint venture on our Pachuca Real silver-gold project
5. 3,500 meters of drilling at Pedra Branca as part of a $1.5 million exploration program
6. 1,200 meters of drilling (pending permitting) at our high-grade polymetallic La Promesa project
7. 1,200 meters of drilling at our gold-silver Cajatambo project
8. 1,000 meters of drilling at our Mercurio royalty property
9. 1,500 meters of drilling at our La Noria copper-oxide project
10. Expanded exploration program on our regional Chambara zinc project
2009 Annual Report | 4
2009 Annual Report | 4X
The Bongará Agreement with Votorantim Metais
Votorantim Metais has completed approximately $16.0 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
on a feasibility study and spending a minimum of $18.0 million on exploration and development.
Upon Votorantim committing 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.
Detail of Mineralized Area
15 | Solitario Exploration & Royalty
Bongará Project
Planned Development Work
A Transformational Year from Exploration to Development
With four years of outstanding drilling results at the Bon-
gará project in Peru, Solitario’s partner and project
manager, Votorantim Metais (“Votorantim”), made a
major decision to significantly expand exploration and
development activities for 2010. Highlights include road
construction to the project area, initiation of underground
access to the San Jorge mineralized zone, metallurgical
testing and an aggressive continuation of surface drilling
to further define mineralization. The proposed work plan
is a major milestone in the advancement of the project.
These activities are critical to the potential development
of the project and will form a significant component of
the detailed feasibility study currently scheduled to
begin in 2011.
The planned road construction encompasses approxi-
mately 23 kilometers of new road alignment to the
deposit. To date, access to the deposit has occurred via
helicopter and foot trails. The initiation of underground
access to mineralization is also scheduled for this field
season, with approximately 700 meters of planned under-
ground workings. Initially, the underground work will be
supported by helicopter transportation of personnel and
materials until road access is completed. Construction of
additional infrastructure near the underground portal site
is planned for personnel and underground operations.
Advanced metallurgical testing will also be conducted on
mineralized rock to further evaluate metallurgical recovery
and ore characterization. Completion of this work is antic-
ipated in the first half of 2010. Finally, Votorantim has
scheduled a 10,000-meter, helicopter-assisted core drilling
program to further define and extend mineralization.
Timing of many of the aforementioned activities is sub-
stantially contingent upon obtaining permits required by
the Peruvian government. In order to fast-track the proj-
ect, Votorantim is updating its social impact study in
parallel with archeological clearance activities, as well as
other permit requirements. Approvals are expected
sometime in the second quarter of 2010, coinciding with
the cessation of the rainy season.
Advanced Projects | Bongará, Peru
date our belief that the Bongará zinc project could ulti-
mately be developed into one of the world’s most important
new zinc mines, with significant silver and lead credits.
Thirteen core holes totaling 3,611 meters were completed,
eleven in the San Jorge Zone and two in the Karen-Mila-
gros zone. The program was managed and entirely funded
by Votorantim Metais. All 13 holes intersected significant
mineralization. The 10 best intercepts were:
Drill Hole Intercept*
(meters)
Number
V-168
2.0
51.6
V-169
6.3
V-171
9.0
V-172
V-173
4.0
13.7
V-173
2.7
V-177
5.1
V-178
5.2
V-178
3.0
V-178
Zinc
%
27.5
7.1
20.0
20.5
14.1
9.8
11.0
8.6
10.2
30.0
Lead
%
1.8
0.7
2.0
1.5
0.3
4.9
1.8
1.3
1.1
7.3
Zinc+Lead
%
29.3
7.8
22.0
22.0
14.4
14.7
12.7
9.9
11.4
37.4
* True thickness has not been estimated for each individual intercept,
but in most cases is thought to represent at least 85% of true thickness.
All mineralization discovered to date on our Bongará proj-
ect is referred to as the Florida Canyon zinc deposit.
High-grade zinc mineralization has now been intersected
over a four-square kilometer area. The deposit remains
open to expansion in all directions. 2009 drilling results
continued to demonstrate excellent zinc grades and thick-
nesses with good internal continuity of mineralization.
Within the south-central part of Florida Canyon deposit
(San Jorge zone), mineralization has been extended a fur-
ther 400 meters north towards the Karen-Milagros zone,
indicating that the two may be interconnected.
About Votorantim Metais
Votorantim Metais belongs to a privately held Brazilian
industrial conglomerate that is a leader in every market seg-
ment in which it operates, including cement, pulp and
paper, metals, chemicals, orange juice and finance. In
2008, Votorantim Group’s revenues amounted to US$19.1
billion. The metal business division accounted for approxi-
mately 30% of revenues and produces zinc, nickel, steel and
aluminum. Votorantim Metais is the world’s third largest
primary zinc producer with three operating zinc smelters,
two operating zinc mines and other zinc processing facili-
Drilling conducted in 2009 once again did not disappoint –
ties in the USA and China. It owns the recently expanded
producing some of the best drilling results we have ever
Cajamarquilla zinc smelter and is a major shareholder of
generated on the project. These results continue to vali-
Peruvian zinc producer – Milpo, both located in Peru.
2009 Annual Report | 6X
Pedra Branca Project
Magnetometry & Drill Holes
17 | Solitario Exploration & Royalty
Advanced Projects | Pedra Branca, Brazil
Progress in Defining Platinum-Palladium Resources
In March 2010, Anglo Platinum informed us that they
The Pedra Branca Agreement with Anglo Platinum
The property is owned through our jointly held Brazilian
would fund our proposed $1.5 million exploration pro-
subsidiary, Pedra Branca Mineração (“PBM”). Anglo
gram for 2010 at our Pedra Branca platinum-palladium
Platinum, the largest platinum producer in the world, has
funded approximately $5.5 million for exploration since
signing the initial Letter Agreement in January 2003 and
has earned a 30% interest in PBM.
Upon completion of the $1.5 million program in 2010
(total of $7 million), Anglo Platinum will have earned a
51% intereset in PBM. Anglo Platinum can earn an
additional 9% interest (for a total of 60%) by funding a
further $10.0 million on exploration or development.
After Anglo Platinum has spent $17 million, we would
fund our 40% share of feasibility expenses. Anglo Plat-
inum has the option to earn an additional 5% interest (for
a total of 65%) by arranging for 100% financing to put
the project into commercial production.
project in northern Brazil.
In 2009, forty-eight core holes totaling 3,675 meters were
completed on seven different prospects. This $1.5 million
exploration program was managed by Solitario, but entirely
funded by our joint venture partner, Anglo Platinum Ltd.
The Pedra Branca project hosts eight separate deposits of
near-surface platinum-palladium mineralization. The
Curiu deposit has continued to deliver higher grade min-
eralization and 2009 drilling expanded this zone of
mineralization. We believe that there is potential for fur-
ther expansion at Curiu, as is the case at the recently
drilled Trapia I, Trapia II and Cedro prospects. The 10
best intercepts for 2009 drilling are provided below.
Our 2010 exploration program includes about 3,500
meters of drilling, potentially an airborne geophysical ori-
entation survey, and scoping level studies that may
include a new resource estimation. Drilling plans include
further definition of mineralization at several of the Cedro
deposits and drill testing of two exciting new targets that
were identified in 2009 – Galante East and Curiu North.
Both of these targets have significant magnetic signatures,
that, if well mineralized, could add significantly to the
value of this project. Drilling is anticipated to begin
before the end of the second quarter.
Prospect
Name
Curiu
Drill Hole
Number
CU-28
Intercept*
(meters)
5.6
Platinum
grams/t
1.65
Palladium
grams/t
2.58
Gold
grams/t
0.02
PGE + Gold
grams/t
4.25
CU-34
CU-35
CU-36
CU-37
and
CU-38
CU-40
CD-66
CD-67
Cedro I
11.0
11.3
8.0
11.1
10.2
6.6
10.4
11.5
12.5
0.75
1.76
0.42
1.82
0.60
1.78
0.73
0.27
0.65
1.80
2.06
1.46
2.04
1.59
3.41
1.32
1.46
1.30
* True thicknesses have not been determined for these intervals.
0.09
0.09
0.17
0.09
0.22
0.10
0.07
0.02
0.07
2.64
3.90
2.05
3.95
2.41
5.30
2.12
1.75
2.02
2009 Annual Report | 8X
Cajatambo Project
Au Equivalent Map with IP
19 | Solitario Exploration & Royalty
Gold-Silver Exploration Projects | Pachuca Real, Mexico & Cajatambo, Peru
Pachuca Real – Ready to Drill with the Right Partner
The Pachuca-Real del Monte silver-gold district is one
of the most prolific precious metals mining camps ever
discovered in the world. With over 1.4 billion ounces of
historic silver production, and 7.0 million ounces of gold,
we believe outstanding potential exists to make signifi-
cant new discoveries, particularly in the “North District,”
where most of our exploration to date has focused.
Work conducted by Solitario and its previous joint ven-
ture partner, Newmont Mining, identified at least 38
high-quality drill targets within our vast 31,000-hectare
claim block. The targets at Pachuca Real consist of
high-grade, silver-gold veins that are distributed over a
geographic area measuring 20 kilometers long and ten
kilometers wide. Veins in the historic district were
very continuous over long distances along strike and
down dip.
One interesting development during 2009 was our
research of previously unavailable old records of the
district documenting early exploration on land that now
belongs to Solitario. This investigation uncovered a
number of drill hole intercepts generated during explo-
ration in the 1930’s that appear to have never been
followed up. Some of the more interesting intercepts
include:
Intercept 1
Intercept 2
Intercept 3
Meters
2.44
1.53
0.20
Silver
grams/t
1374
1420
490
Gold
grams/t
10
8
2
Armed with our vast new data base generated by New-
mont and our newly discovered “old” data, we are very
close to signing an agreement with a new joint venture
partner. Although closing the aforementioned agree-
ment is not a certainty, we are hopeful that such an
agreement will be signed sometime in the second quar-
ter of 2010.
Cajatambo – Exceptionally Large Zone of
Gold-Silver Mineralization
Two years ago we drilled a small portion of our large
9,000-hectare Cajatambo property in central Peru.
Results were disappointing and we came close to drop-
ping the project, but decided to follow up a couple of
isolated gold anomalies that were located about nine
kilometers north of the previously drilled tested area.
That decision subsequently proved to have been very
wise with the discovery of a large new area of gold-silver
mineralization that we now call the Cochas zone.
A substantial amount of work was completed on the Cochas
zone in 2009. This included collecting nearly 2,000 rock
and soil samples and completing approximately 10 kilo-
meters of Induced Polarization (“IP”) geophysical survey.
Based upon the geochemical sampling program, an area
measuring 3.5 kilometers long and 1.5 kilometers of very
anomalous gold and silver has been defined. The IP geo-
physical survey indicates that gold-silver mineralization
occurs along the margin of a strong IP-chargeability anom-
aly. This anomaly reflects high concentrations of
metal-sulfide minerals in the underlying bedrock.
We have initiated permitting to allow us to drill test the
Cochas zone in 2010. We anticipate drilling to begin
before the end of the second quarter with approximately
1,200 meters initially planned. The Cajatambo property
is 100%-owned by Solitario, but subject to the Newmont
Strategic Alliance as described below.
The Peru Alliance Agreement with Newmont Mining
In 2005 we signed a Strategic Alliance Agreement (the
“Alliance Agreement”) with various subsidiaries of New-
mont Mining (“Newmont”) to explore for gold in South
America. At the same time, Newmont purchased 2.7
million shares of Solitario (9.9% equity interest) for
approximately $3.8 million. As part of the Alliance
Agreement we spent $3.8 million on gold exploration in
regions that were mutually agreed upon by Newmont and
Solitario. Five properties are subject to the Alliance
Agreement. Currently we own 100% of each of these
properties, but Newmont has the right to joint venture
these properties and earn up to a 75% interest by taking
the project through feasibility and financing Solitario’s
retained 25% interest into production. Newmont may
elect to earn a lesser interest or no interest at all, in which
case it would retain a 2% net smelter return royalty.
2009 Annual Report | 10X
1.2 Meters
2.8 Meters
133 opt silver equivalent
67 opt silver equivalent
La Promesa Project
Ag Equivalent Map
111 | Solitario Exploration & Royalty
Base Metal & Polymetallic Exploration Projects | La Promesa, Chambara & La Noria
La Promesa – Exceptional High Grade Veins
The 2,000-hectare La Promesa property in Peru is a new
Chambara Zinc Project – A Large-Scale Regional Program
The Chambara zinc project in northern Peru is centered
Solitario discovery. At surface, we have traced two veins
in what we consider to be one of the best under-explored
for at least 400 meters along strike, and we have strong
zinc terrains in the world. In 2008 we signed a joint ven-
indications that at least five other veins may be present.
ture arrangement with Votorantim Metais that established
Solitario currently owns 100% of the La Promesa property,
a huge area of interest that is approximately 200 kilome-
subject to the provisions of the Peru Alliance Agreement
ters long and 85 kilometers wide – about the size of New
with Newmont Mining as discussed on page 10.
What sets La Promesa apart from other properties are the
exceptionally high surface grades in silver, zinc, lead and
indium. Although our sampling on the project to date is
limited, it is very encouraging. For instance, on the west-
ern vein, two channel samples were collected 300 meters
apart with true widths of 2.8 and 1.2 meters that graded
760 gpt silver, 15.6% zinc, 7.2% lead and 153 ppm
indium, and 1,981 gpt silver, 33.1% zinc, 5.6% lead and
430 ppm indium, respectively. On the eastern vein,
located about 600 meters east of the western vein, a 0.9
meter (true width) channel sample graded 678 gpt silver,
15.0% zinc, 4.5% lead and 12 ppm indium. There
appears to be a systematic trend towards greater vein
thickness with depth, as the widest observed vein in out-
crop occurs at the lowest elevation sampled to date.
Work conducted in late 2009 revealed a very anomalous
stream sediment sample (6.7 ppm silver and 0.63% zinc)
draining an area that visually displays a large zone of
altered rocks – similar in appearance to the mineralized
zone that has yielded such spectacular surface geo-
chemistry. However, because of weather, we were unable
to access this very interesting zone of alteration and the
apparent source of the exceptionally strong geochemical
anomaly. Our plans call for completing all permitting
activities necessary to conduct additional surface work
and to further define drill targets. Assuming permits are
received in a timely fashion, drilling is anticipated to
occur during the third quarter of 2010. We anticipate an
initial eight-hole, 1,200 meter drilling program.
Jersey. Any acquisition of properties within this area of
interest by Votorantim is subject to this joint venture.
Consequently, we will participate in all new projects that
Votorantim generates in the future. As with our other
agreements with major mining company partners, this
agreement is a NPI royalty structured joint venture.
To date, four high-quality zinc prospects have been iden-
tified within our vast 175,000-hectare land position.
Surface work has demonstrated sizable areas of high-
grade zinc in rock outcrops. Additional surface work is
required before drill targets can be firmly established.
However, we are optimistic that significant new zinc dis-
coveries, similar in size to Florida Canyon, will be made
within our area of interest. Votorantim is planning
approximately 2,000 meters of drilling on this project,
pending receipt of permit approvals.
La Noria – Drilling a New Copper Oxide Discovery
La Noria is a 100%-owned, 10,000-hectare property
located in northern Mexico. Late in 2009 we received
the results of 100 channel samples collected from a min-
eralized zone measuring about 700 meters long and 150
meters wide. We were pleasantly surprised at the aver-
age copper grade of these samples - 0.32% copper, and
moved quickly to drill test the property.
In the first quarter of 2010 we completed a 11-hole,
1,571 meter reverse circulation drilling program.
Drilling confirmed the presence of copper oxide miner-
alization in the subsurface. Drill hole LN-01 had the
best mineralized intercept grading 0.22% copper from
the surface down to 106 meters, including 46 meters
grading 0.35% copper from 60-106 meters in depth, and
totally within the oxide zone. We are currently evaluat-
ing the results of the drilling program to determine if a
(photos opposite page, top left are color enhanced)
second round of drilling is warranted.
2009 Annual Report | 12X
Royalty Properties | Yanacocha, Mercurio & La Tola
Besides our NPI royalty structured joint ventures, Solitario
has three net smelter return (“NSR”) royalty properties.
Yanacocha – Largest Gold District in South America
We consider our Yanacocha property in Peru our most
important NSR royalty property. The Yanacocha royalty
covers a strategically located 61,000-hectare (approxi-
mately 200 square miles) property position adjacent to
the largest gold producing district in South America – the
Yanacocha district. There are significant mining opera-
tions to the south and north of our property and
development projects to both the east and west. Solitario
currently receives no income from this royalty; however,
Minera Yanacocha (51%-owned by Newmont Mining Cor-
poration and 44%-owned by Buenaventura), manager of
Solitario’s royalty property, continues to conduct district-
wide exploration, including important new geologic and
geophysical work on our property. We are hopeful that
Newmont’s focused efforts will lead to the establishment
of resources and eventually production on our property.
Mercurio – Our Newest NSR Property
In March of 2010, we successfully optioned the Mercurio
gold project in Brazil to Regent Holding Ltd, a private
company. Regent has the option to purchase the prop-
erty for $1.0 million in cash payable in escalating annual
payments over a four-year period and drilling a minimum
of 8,000 meters over a three-year period, with a firm
1,000 meter commitment the first year, subject to due
diligence. Upon completion of the cash payments and
work commitments, Solitario would retain a 1.5% NSR
royalty for the first two million ounces of production, and
a 2% NSR royalty for all production thereafter. The 2%
NSR royalty could be reduced to 1.5% by a one-time
cash payment of $1.0 million to Solitario.
The Mercurio Gold Property, located in Para State in
northern Brazil, consists of three concessions totaling
8,476 hectares. Regent will be responsible for making
all payments to the underlying claim and surface rights
holder that total $512,000 over the next two years.
Thirty-six drill holes totaling 4,621 meters have thus far
tested three principal target areas: the Colonia, Patoa
and Tucanaré prospects. Mineralization remains open at
all three prospects and numerous additional geochemi-
cal targets remain untested.
La Tola – An Early Stage Property
In August 2007 we signed a Letter of Intent with Cana-
dian Shield Resources (“CSR”) allowing CSR to earn a
100%-interest in our 1,000 hectare La Tola property in
southern Peru. We will retain a 2% NSR royalty. To earn
its interest, CSR is required to spend $2.0 million in
exploration by December 31, 2011. CSR has the right to
purchase the 2% NSR royalty for $1.5 million anytime
before commercial production is reached.
Yanacocha Royalty Property
113 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | of Financial Condition & Results of Operations
As discussed in Note 11 to the consolidated financial statements, the
financial statements as of and for the years ended December 31,
2008 and 2007 have been restated to reflect certain payments as de-
ferred noncontrolling shareholder payments. The following manage-
ment’s discussion and analysis of financial condition and results of
operations gives effect to the restatement.
The following discussion should be read in conjunction with the
information contained in the consolidated financial statements and
notes thereto included below. Our financial condition and results
of operations are not necessarily indicative of what may be ex-
pected 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 re-
serves. 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 may also evaluate
mineral properties to potentially buy a royalty.
Solitario was incorporated in the state of Colorado on November 15,
1984 as a wholly owned subsidiary of Crown. We have been ac-
tively involved in this business since 1993. We recorded revenues
from joint venture delay rental payments of $200,000, $200,000
and $100,000, respectively, related to our Bongará Project during
2009, 2008 and 2007. Previously, our last significant revenues were
recorded in 2000 upon the sale of our Yanacocha property for
$6,000,000. We expect that future revenues from joint venture pay-
ments or the sale of properties, if any, would also occur on an infre-
quent basis. At December 31, 2009 we had 15 exploration
properties in Peru, Bolivia, Mexico and Brazil, and two royalty prop-
erties in Peru. We are conducting exploration activities in all of
those countries.
Our principal expertise is in identifying mineral properties with
promising mineral potential, acquiring these mineral properties
and exploring them to enable us to sell, joint venture or create a
royalty on these properties prior to the establishment of proven and
probable reserves. Currently we have no mineral properties in de-
velopment and we do not anticipate developing any currently
owned properties on our own in the future. We currently own 15
mineral properties under exploration and we own our Yanacocha
and La Tola royalty interests. Our goal is to discover economic de-
posits 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 things, the completion
of a feasibility study, the identification of proven and probable re-
serves, 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, pursue their development
through a joint venture with a partner that has expertise in mining
operations or create a royalty with a third party that continues to ad-
vance the property.
In analyzing our activities, the most significant aspect relates to re-
sults of our exploration activities and those of our joint venture part-
ners on a property-by-property basis. When our exploration
activities, including drilling, sampling and geologic testing indi-
cate 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 in-
creases, however, it also becomes more difficult and expensive to
locate and acquire new gold-bearing mineral properties with po-
tential to have economic deposits.
The potential sale, joint venture or development through a joint ven-
ture of our mineral properties will occur, if at all, on an 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 delay rental pay-
ments of $200,000, $200,000 and $100,000, respectively, received
during 2009, 2008 and 2007 on our Bongará property; (iii) sale of our
investment in Kinross; 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 August 24, 2009, we entered into a definitive arrangement agree-
ment (“Agreement”) with Metallic Ventures Gold Inc. (“Metallic Ven-
tures”) whereby we would acquire, through a friendly statutory plan
of arrangement under Canadian Law, all outstanding shares of Metal-
lic Ventures, subject to certain conditions. On October 13, 2009, we
entered into an amendment to the Agreement (the “Amendment”),
whereby we increased our bid to acquire all outstanding shares of
Metallic Ventures. The Agreement, as amended, provided that we
would issue 19.5 million shares of Solitario common stock and would
pay cash consideration of $18 million for all of the outstanding shares
of Metallic Ventures. The Agreement, as amended, also provided for
a termination deadline of February 28, 2010 and that Metallic Ven-
tures would pay a termination fee of $2.2 million under certain cir-
cumstances, including if Metallic Ventures accepted a superior offer,
as defined in the Agreement, as amended. The Agreement, as
amended, was subject to shareholder and regulatory approval. In
order to offer Metallic Ventures’ shareholders the increased number
of shares, we entered into agreements with certain of our Officers,
Directors and employees to voluntarily cancel 1,935,000 previously
granted options concurrently with the signing of the Amendment.
On October 29, 2009, Metallic Ventures announced that they had de-
termined that an offer from International Minerals Corporation consti-
tuted a superior offer as defined, in the Agreement, as amended. On
November 2, 2009, Metallic Ventures terminated the Agreement, as
amended, and paid us a termination fee of $2.2 million.
2009 Annual Report | 14X
Management’s Discussion & Analysis | continued
tax expense to $996,000 during 2009 compared to an income tax ex-
pense of $2,128,000 during 2008. Each of these items is discussed
in greater detail below.
Our most important activity is the exploration on our mineral prop-
erties and reconnaissance exploration to locate mineral properties
to acquire and to advance or delineate deposits to enable us to sell
or joint venture the mineral property. During 2009, we decreased
our exploration effort in Peru and reduced our exploration activities
in Brazil related to our Pedra Branca project, which is 30% owned
by Anglo as of December 31, 2009. Anglo is providing all of the
funding for the Pedra Branca project with all payments recorded as
deferred noncontrolling shareholder payments until such time as
Anglo earns its incremental interest in PBM. As can be seen in the
table below, our exploration expense decreased to $3,579,000 dur-
ing 2009 compared to $4,589,000 in 2008. This reduction is pri-
marily the result of our decision to limit our exploration in Brazil to
only the Pedra Branca project, and because of delays in being able
to begin drilling on two exploration projects in Peru. These delays
were a result of increased permitting requirements and ongoing eval-
uations of exploration results from sampling, geochemistry and geo-
physical work. In addition although we reduced our reconnaissance
work in both Peru and Brazil during 2009, we increased this effort
in Mexico, which resulted in the addition of one property during the
year, the Palmira project, the drilling of our Purica and La Noria
projects and the planned drilling of our Palmira project in Mexico
during the first half of 2010.
During 2009 we added the Palmira project with the capitalization
of initial acquisition costs of $5,000. We added significantly less
new properties in 2009 than in 2008 when we added several prop-
erties as a result of our reconnaissance exploration during 2007
and 2008. These were the Cajatambo, Excelsior, Chonta, Paria
Cruz and La Promesa exploration projects in Peru, our La Noria
and Purica exploration projects in Mexico and our Espanola explo-
ration project in Bolivia. We capitalized $111,000 to mineral prop-
erties during 2008 for the initial staking or lease payments on these
properties during 2008.
Our 2010 exploration expenditure budget is approximately
$4,705,000 which includes approximately $1,306,000 for drilling of
exploration projects. This budget also includes approximately
$1,428,000 for the Pedra Branca project, which is budgeted to be
funded by capital contributions from Anglo. The primary factors in
our decision to increase exploration expenditures in 2010 relate to an
increase in gold commodity prices and an increase in equity prices
for mineral exploration companies. However we believe we will be
able to modify our planned exploration activities for changes in joint
venture funding, commodity prices, and access to capital.
We have a significant investment in Kinross of $19,320,000 at De-
cember 31, 2009, which consists of 1,050,000 shares of Kinross com-
mon stock. Of these shares, 550,000 are not subject to the Kinross
Collar, discussed below under Liquidity and Capital Resources -
Hedge of the Investment in Kinross. As of February, 10, 2010, Soli-
tario’s 550,000 shares have a value of approximately $9.7 million
based upon the market price of $17.55 per Kinross share. During
2009, 2008 and 2007 Solitario sold 100,000, 192,920, and 400,000
shares, respectively, of Kinross common stock for net proceeds of
$1,852,000, $4,430,000 and $5,548,000. Any significant fluctuation
in the market value of Kinross common shares could have a material
impact on Solitario’s liquidity and capital resources.
As of December 31, 2009, 500,000 shares of Kinross common stock
are subject to the Kinross Collar discussed below as follows: (i)
400,000 shares due on April 13, 2010 for a lower threshold price of
no less than $13.69 per share (the “Floor Price”) and an upper
threshold price of no more than $24.34 per share; and (ii) 100,000
shares due on April 12, 2011 for no less than the Floor Price and an
upper threshold price of no more than $27.50 per share. On April
14, 2009, a tranche of the Kinross Collar due on that date expired and
400,000 shares under the Kinross Collar were released. No shares
were delivered to UBS under the Kinross Collar and no cash was
paid or received upon the termination of that tranche of the Kinross
Collar. As of February 10, 2010, 500,000 shares of Kinross stock are
subject to the Kinross Collar. We also sold several covered calls re-
lated to our unhedged shares of Kinross common stock and as of De-
cember 31, 2009, we have sold a covered call covering 40,000 shares
of Kinross common stock as discussed below under Hedge of the In-
vestment in Kinross.
During the twelve months ended December 31, 2009, we capitalized
a total of $5,000 related to initial staking and lease costs on the
Palmira project in Mexico. All exploration costs on our properties,
including any additional costs incurred for subsequent lease pay-
ments or exploration activities related to our projects are expensed
as incurred.
(c). Results of Operations
Comparison of the year ended December 31, 2009 to the
year ended December 31, 2008
We had a net loss of $1,786,000 or $0.06 per basic and diluted share
for the year ended December 31, 2009 compared to a net loss of
$617,000 or $0.02 per basic and diluted share for the year ended
December 31, 2008. As explained in more detail below, the primary
reasons for the increase in net loss during 2009 compared to the net
loss during 2008 were (i) a reduction in the gain on sale of Kinross
common stock to $1,409,000 during 2009, compared to a gain of
$3,576,000 during 2008; (ii) a reduction in our stock option benefit
to $269,000 during 2009 compared to a stock option benefit of
$3,255,000 during 2008; (iii) a reduction in our gain on derivative in-
struments to $694,000 during 2009 compared to a gain on derivative
instruments of $1,177,000 during 2008. Partially offsetting these
items were (i) a reduction in exploration expense during 2009 to
$3,579,000 compared to exploration expense of $4,589,000 during
2008; (ii) the receipt of a break fee of $2,200,000 on our attempted
acquisition of Metallic Ventures; and (iii) a reduction in our income
115 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
Exploration expense (in thousands) by property consisted of the fol-
lowing:
Property Name
Pedra Branca
Chonta
Cajatambo
Newmont Alliance
Pachuca
La Promesa
La Noria
Cerro Azul
Mercurio
Bongará
La Purica
Palmira
Espanola
Paria Cruz
Excelsior
Santiago
Triunfo
Chambara
Titicayo
Reconnaissance
Total exploration expense
2009
2008
$ 1,196
524
413
120
111
74
71
65
65
35
32
32
10
7
3
3
5
-
-
813
$ 3,579
$ 1,422
435
685
79
9
64
-
59
452
4
390
-
4
44
2
-
9
40
25
866
$ 4,589
We recorded a credit (reduction of expense) of $419,000, $227,000
and $17,000, respectively, during 2009, 2008 and 2007, for Anglo’s
noncontrolling interest in the losses of the consolidated subsidiary,
PBM, during the year. On September 30, 2007, Anglo earned its
initial 15% interest in PBM and on December 23, 2008, Anglo
earned an additional 15% interest in PBM, for a total of 30% pur-
suant to the Shareholders’ Agreement between Solitario and Anglo,
as discussed above. During 2009 we recorded management fees of
$65,000, to PBM, which are eliminated in consolidation, net of
$19,000 of noncontrolling interest. During 2008 we recorded man-
agement fees of $75,000, to PBM, which are eliminated in consoli-
dation, net of $11,000 of noncontrolling interest. We anticipate the
noncontrolling interest credit will be similar in 2010 based upon our
budgeted expenditures at PBM.
We believe a discussion of our general and administrative costs
should be viewed without the non-cash stock option compensation
expense or benefit which is discussed below. Excluding these costs,
general and administrative costs were $2,348,000 during 2009 com-
pared to $2,319,000 in 2008. We incurred salary and benefits ex-
pense of $1,187,000 during 2009 compared to $1,193,000 in 2008,
which decreased due to reduced bonuses paid during 2009 com-
pared to 2008. We recorded no consulting expense during 2009 com-
pared to $53,000 during 2008 which was related to the Mark Jones
consulting contract that expired in 2008 as discussed below under re-
lated party transactions. In addition, other general and administra-
tive costs including rent, travel, and insurance decreased to
$332,000 during 2009 compared to $467,000 in 2008 primarily re-
lated to a reduction in non-exploration general administrative cost
and activities to reduce expenses, which included lower rent costs,
reduced telephone and internet expenses and lower freight office and
postage. Although some of these costs were shifted to our exploration
staff and field offices, and a portion were related to reduced explo-
ration activity, a significant portion represented reduced costs which
we intend to continue in the future. We also recorded a gain on cur-
rency and exchange rates during 2009 of $35,000, compared to a
loss of $62,000 in 2008. We also recorded a reduction in our share-
holder relations costs which decreased to $223,000 during 2009
compared to $267,000 during 2008 as a result of lower costs for ex-
change fees and lower costs to produce our annual report. Offsetting
these reductions in costs was an increase in our legal and account-
ing costs to $637,000 during 2009 from $275,000 in 2008, due to the
legal and accounting work associated with our attempted acquisition
of Metallic Ventures, discussed above and work associated with the
restatement of our 2007 financial statements. We anticipate general
and administrative costs will decrease in the future as a result of our
continued effort to reduce costs and consolidate exploration and ad-
ministrative duties. We have forecast 2010 general and administra-
tive costs to be approximately $1,643,000, excluding non-cash stock
option compensation.
On January 1, 2006, we adopted ASC 718, Compensation – Stock
Compensation, and we have classified our stock options as liabilities
as they are priced in Canadian dollars and our functional currency
is United States dollars. We record the fair value of the vested por-
tion of our outstanding options as a liability and record changes in the
fair value as stock option compensation expense in the statement of
operations in the period of the change. Upon exercise, the fair value
of the options on the date of exercise, which is equal to the intrinsic
value, is credited to additional paid-in capital. We estimate the fair
values of the options granted using a Black-Scholes option pricing
model. During the year ended December 31, 2009, we recognized
$269,000 of non-cash stock-based compensation benefit as part of
general and administrative expense for the decrease in the fair value
of our stock option liability during 2009 compared to non-cash stock
option compensation benefit of $3,255,000 during 2008. Our stock
option compensation expense changes as a result of changes in the
fair value of the vested portion of our outstanding stock options. This
fair value is primarily affected by the effect of increases or decreases
in the price of our common stock, changes in the Canadian dollar
and United States dollar exchange rate and by increases in the vest-
ing of outstanding options from period to period. In addition we can-
celled options for 1,935,000 shares under the 2006 Plan as discussed
above under Metallic Ventures, which reduced the number of op-
tions outstanding in calculating the fair value of outstanding options
at December 31, 2009. The price of Solitario’s stock as quoted on the
TSX increased to Cdn$2.40 at December 31, 2009 from Cdn$1.82
at December 31, 2008. Generally as the price of our common stock
increases our stock option liability and our stock option compensa-
tion expense increases and the converse is true as well. See Em-
ployee stock compensation plans in Note 1 to the consolidated
financial statements for an analysis of the changes in the fair value
of our outstanding stock options and the components that are used to
determine the fair value.
The following amounts are included in loss (gain) on derivative in-
struments in the consolidated statement of operations for the years
ended December 31, 2009 and 2008:
2009 Annual Report | 16X
Management’s Discussion & Analysis | continued
(in thousands)
Loss (gain) on derivatives not designated
as hedging instruments under ASC 815
Kinross Collar
February 09 Kinross Call
April 09 Kinross Call
August 09 Kinross Call
November 09 Kinross Call
May 10 Kinross Call
Total (gain) loss
Year ended
December 31, 2009 (1)
Year ended
December 31, 2008 (1)
Realized
Unrealized
Realized
Unrealized
$
$
-
(116)
(21)
80
(81)
-
(138)
$
$
(522)
-
-
-
-
(34)
(556)
$
$
-
-
-
-
-
-
-
$
$
(1,189)
12
-
-
-
-
(1,177)
(1) Gains and losses on derivative instruments are realized upon expiration or repurchase. Cash received for the derivative instrument may
occur in a different period.
The business purpose of selling covered calls is to provide additional
income on a limited portion of shares of Kinross that Solitario may
sell in the near term, which is generally defined as less than one year.
In exchange for receiving the additional income from the sale of the
covered call option, we have given up the potential upside on the
shares covered by the call option sold in excess of the strike price. We
intend to continue to sell a limited number of covered calls in the fu-
ture to provide income on a portion of our Kinross common stock.
We have not designated the Kinross Collar or the Kinross Calls as
hedging instruments as described in ASC 815 and any changes in the
fair market value of the Kinross Collar and the Kinross Calls are rec-
ognized in the statement of operations in the period of the change.
The quoted market price of a share of Kinross common stock was
$18.40 on December 31, 2009 compared to $18.42 on December
31, 2008. The business purpose of the Kinross Collar was to provide
price protection against a significant decline in the market value of
900,000 shares of our Kinross stock, which has been reduced to
500,000 shares as a result of the expiration of the portion of the Kin-
ross Collar covering 400,000 shares during 2009, for which we lim-
ited the potential price appreciation on the shares covered by the
Kinross Collar. We do not actively manage or attempt to anticipate
the fair value of the Kinross Collar.
We had $91,000 of depreciation and amortization expense during
2009 compared to $98,000 in 2008 primarily as a result of a reduc-
tion in the amount of undepreciated furniture and fixtures during
2009 compared to 2008. We amortize these assets over a three-year
period. We anticipate our 2010 depreciation and amortization costs
will be similar to our 2009 amount.
During 2008, we recognized an asset impairment of $107,000 for an
other-than-temporary decline in the value of our TNR stock. The
loss was previously included in unrecognized gain on marketable eq-
uity securities in other comprehensive income. No similar loss was
recognized in 2009 and we do not anticipate recognizing any other-
than-temporary declines in 2010.
During 2009, we recorded interest and dividend income of $106,000
compared to $157,000 during the same period in 2008. During
2009, we recorded dividend income of $104,000 compared to
$95,000 during 2008 from dividends on our Kinross stock. The pri-
mary reason for the decrease in interest and dividend income during
2009 related to a reduction in interest income which was reduced as
a result of lower interest rates and lower outstanding cash balances
during 2009 compared to 2008. The interest income recorded dur-
ing 2009 and 2008 consisted of payments on cash and cash equiva-
lent deposit accounts. We anticipate our interest and dividend
income will decrease in 2010 as a result of our budget for planned
sales of approximately 250,000 shares of Kinross and continued low
rates of interest earned on our cash balances in 2010.
During 2009, we sold 100,000 shares of Kinross stock for proceeds
of $1,852,000 and recorded a gain on sale of $1,409,000 compared
to the sale of 192,920 shares of Kinross for proceeds of $4,430,000
and a gain on sale of $3,576,000 during 2008. We anticipate we will
continue to liquidate our holdings of Kinross to fund our exploration
activities and our 2010 budget anticipates the sale of 250,000 shares
of Kinross for assumed proceeds of $4,600,000 during 2010. These
proceeds are significantly dependent on the quoted market price of
Kinross on the date of sale and may be at prices significantly below
our projected price.
During 2009, we recorded income tax expense of $996,000 com-
pared to $2,128,000 during 2008. Our tax expense decreased dur-
ing 2009 primarily as a result of the decrease in deferred taxes from
the reduction in taxes associated with the reduction in the gain on
sale of marketable equity securities to $1,409,000 during 2009 from
the sale of 100,000 shares of Kinross stock compared to a gain of
$3,576,000 from the sale of 192,920 shares of Kinross stock during
2008. In addition our deferred tax expense was reduced related to
the reduction in the stock option compensation benefit to $269,000
during 2009 compared to the stock option compensation benefit of
$3,255,000 during 2008. These reductions in taxable items were
partially offset by taxes due on the $2,200,000 break fee we received
in connection with our attempted acquisition of Metallic Ventures
discussed above. In addition we provide a valuation allowance for
our foreign net operating losses, which are primarily related to our ex-
ploration activities in Peru, Mexico, Bolivia and Brazil. We antici-
pate 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.
117 | Solitario Exploration & Royalty
17 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
We regularly perform evaluations of our mineral property assets to as-
sess 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 po-
tential of early stage mineral property and its related value for future
sale, joint venture or development by us or others. During 2009 we
recorded $51,000 of mineral property impairments related to our
Purica and Chonta properties, discussed below, compared to 2008,
when we recorded no property impairments.
Comparison of the year ended December 31, 2008 to the
year ended December 31, 2007
We had a net loss of $617,000 or $0.02 per basic and diluted share
for the year ended December 31, 2008 compared to a net loss of
$5,440,000 or $0.18 per basic and diluted share for the year ended
December 31, 2007. As explained in more detail below, the primary
reasons for the decrease in net loss during 2008 compared to the net
loss during 2007 were (i) a decrease in our stock option compensa-
tion to a benefit of $3,255,000 during 2008 compared to stock option
compensation expense of $1,991,000 during 2007, and (ii) an unre-
alized gain on our derivative instruments of $1,177,000 during 2008
compared to an unrealized loss on derivative instruments of
$1,702,000 during 2007. Partially mitigating these items was an in-
crease in exploration expense, a decrease in the gain on sale on our
sale of Kinross stock and an increase in our tax expense in 2008
compared to 2007.
During 2008, we increased our exploration effort in Mexico and Peru
and reduced our exploration activities during the year in Brazil to
primarily our Pedra Branca project, which is 30% owned by Anglo
as of December 31, 2008. Anglo is providing all of the funding for
the Pedra Branca project. As can be seen in the table below, our ex-
ploration expense increased to $4,589,000 during 2008 compared
to $4,155,000 in 2007. Part of the increase in our net exploration
cost relates to the way Anglo is funding the Pedra Branca project.
The increase in exploration on our Cajatambo, and Chonta properties
in Peru along with our La Purica property in Mexico, all of which
were drilled during 2008, more than offset the decrease in explo-
ration at our Pedra Branca project in Brazil in 2008.
We added several properties during 2008 as a result of our reconnais-
sance exploration during 2007 and 2008. These were the Cajatambo,
Excelsior, Chonta, Paria Cruz and La Promesa exploration projects in
Peru, our La Noria and Purica exploration projects in Mexico and our
Espanola exploration project in Bolivia. We capitalized $111,000 to
mineral properties during 2008 for the initial staking or lease payments
on these properties during 2008. We increased our surface sampling
and evaluation programs during 2008 compared to 2007 including re-
connaissance activities related to our Strategic Alliance projects in
Peru and increased our Mexico exploration program during 2008 after
establishing a field office in Hermosillo, Mexico in 2007. In addition
to the increase in surface exploration activities, we increased our
drilling expenditures, including assay and geochemical expenditures,
to $1,223,000 at our Pedra Branca, our Cajatambo and our Purica proj-
ects, compared to expenditures of $1,016,000 during 2007.
Exploration expense (in thousands) by property consisted of the fol-
lowing:
Property Name
2008
2007
Pedra Branca
Mercurio
Cajatambo
Chonta
La Purica
Newmont Alliance
La Promesa
Cerro Azul (formerly Twin Lakes)
Paria Cruz
Chambara
Titicayo
Triunfo
Pachuca
Espanola
Bongará
Excelsior
Santiago
Conception del Oro
Pau d’Arco
Zinda
Purisima
Pozos
Reconnaissance
Total exploration expense
$ 1,422
452
685
435
390
79
64
59
44
40
25
9
9
4
4
2
-
-
-
-
-
-
866
$ 4,589
$ 1,069
667
-
-
-
647
-
-
-
8
257
197
13
-
22
-
51
21
19
6
2
1
1,175
$ 4,155
We recorded a credit (reduction of expense) of $227,000 and $17,000
during 2008 and 2007, for Anglo’s 15% noncontrolling interest in
the losses of the consolidated subsidiary, PBM, during the year. On
September 30, 2007, Anglo earned a 15% interest in PBM and on
December 23, 2008, Anglo earned an additional 15% interest in
PBM, for a total of a 30% interest, pursuant to the Shareholders’
Agreement between Solitario and Anglo, as discussed above. Dur-
ing 2008 we recorded management fees of $75,000, to PBM, which
are eliminated in consolidation, net of $11,000 of noncontrolling in-
terest. During 2007 we recorded $52,000 of management fees.
Excluding stock option benefit and expense, general and administra-
tive costs were $2,319,000 during 2008 compared to $1,948,000 in
2007. We incurred salary and benefits expense of $1,193,000 dur-
ing 2008 compared to $966,000 in 2007, which increased in 2008
due to additional administrative personnel to support our expanded
exploration effort and increased salaries. We recorded consulting
expense of $53,000 during 2008 compared to $110,000 during 2007,
of which $30,000 related to an executive recruiting fee during 2007.
The remaining costs, $53,000 during 2008 and $80,000 during
2007, 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, insur-
ance and gain and loss on currencies, increased to $530,000 during
2008 compared to $426,000 in 2007 primarily related to increased
administrative costs in support of exploration, such as travel which
increased to $126,000 in 2008 compared to $98,000 in 2007 and
loss on exchange rates which increased to $62,000 in 2008 com-
2009 Annual Report | 18X
Management’s Discussion & Analysis | continued
pared to a loss of $8,000 in 2007. Our legal and accounting costs in-
creased to $275,000 during 2008 from $225,000 in 2007; these costs
increased due to additional legal work associated with expansion of
our exploration efforts and additional accounting costs associated
with Sarbanes-Oxley compliance and increases in audit fees. We
also had increases in our shareholder relations costs to $267,000 in
2008 compared to $220,000 in 2007. These shareholder relations
costs include corporate and exchange related costs and primarily in-
creased due to increased efforts to promote our company in the min-
ing exploration industry by attending additional trade shows in 2008.
During the year ended December 31, 2008, we recognized
$3,255,000 of non-cash stock-based compensation benefit as part of
general and administrative expense for the decrease in the fair value
of our stock option liability during 2008 compared to non-cash stock
option compensation expense of $1,991,000 during 2007. Our stock
option compensation expense changes as a result of changes in the
fair value of the vested portion of our outstanding stock options. This
fair value is primarily affected by the effect of increases or decreases
in the price of our common stock, changes in the Canadian dollar
and United States dollar exchange rate and by increases in the vest-
ing of outstanding options from period to period. The price of Soli-
tario’s stock as quoted on the TSX decreased to Cdn$1.82 at
December 31, 2008 from Cdn$5.30 at December 31, 2007. Gener-
ally as the price of our common stock decreases our stock option li-
ability and our stock option compensation expense decreases.
We recorded an unrealized gain on derivative instruments of
$1,177,000 during 2008 of which $1,189,000 related to a gain on
the change in the fair value of the Kinross Collar and $12,000 related
to a loss on the change in the fair value of the Kinross Calls, dis-
cussed above under Recent Developments. Our unrealized loss on
derivative instruments of $1,702,000 during 2007 related to a change
in the fair value of the Kinross Collar. We do not actively manage or
attempt to anticipate the fair value of the Kinross Collar.
We had $98,000 of depreciation and amortization expense during
2008 compared to $85,000 in 2007 primarily as a result of the addi-
tion of furniture and fixtures of $46,000 and $176,000, respectively,
which were added during 2008 and 2007. We amortize these assets
over a three-year period.
During 2008, we recognized an asset impairment of $107,000 for an
other-than-temporary decline in the value of our TNR stock. The
loss was previously included in unrecognized gain on marketable eq-
uity securities in other comprehensive income.
During 2008, we recorded interest and dividend income of $157,000
compared to interest income of $76,000 during the same period in
2007. During 2008, we recorded dividend income of $95,000 from
dividends on our Kinross stock, which accounted for the increase.
The interest income recorded during 2008 and 2007 consisted of
payments on cash and cash equivalent deposit accounts.
During 2008, we sold 192,920 shares of Kinross stock for proceeds
of $4,430,000 and recorded a gain on sale of $3,576,000 compared
to the sale of 400,000 shares of Kinross for proceeds of $5,548,000
and a gain on sale of $4,085,000 during 2007.
During 2008, we recorded income tax expense of $2,128,000 com-
pared to an income tax benefit of $184,000 during 2007. Our tax ex-
pense increased during 2008 primarily as a result of our stock option
compensation benefit during 2008 of $3,255,000, compared to the
stock option compensation expense of $1,991,000 recorded in 2007,
discussed above, as a timing difference in determining tax expense.
This increase in net tax expense was partially mitigated by the de-
crease in deferred taxes from the reduction in taxes associated with
the reduction on the gain on sale of marketable equity securities to
$3,576,000 during 2008 from the sale of 192,920 shares of Kinross
stock compared to a gain of $4,085,000 from the sale of 400,000
shares of Kinross stock during 2007. In addition we provide a valu-
ation allowance for our foreign net operating losses, which are prima-
rily related to our exploration activities in Peru, Mexico, Bolivia and
Brazil.
During 2008, we recorded no property impairments, compared to
$20,000 of property impairments, related to our Corazon, Purisima
and Titicayo projects in Mexico and Bolivia during 2007.
(d). Liquidity and Capital Resources
Due to the nature of the mining business, the acquisition and explo-
ration 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 our securities and most recently from
the sale of our marketable equity security investment in Kinross. We
received $200,000, $200,000 and $100,000, respectively, from joint
venture payments during 2009, 2008 and 2007 related to delay rental
payments on 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
delay rental 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 fu-
ture revenues from joint venture payments and from the sale of prop-
erties, 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 fi-
nancing 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, 2009 and 2008, we
owned 1,050,000 and 1,150,000 shares of Kinross common stock, re-
spectively. The Kinross shares are recorded at their fair market value
of $19,320,000 and $21,183,000 at December 31, 2009 and Decem-
ber 31, 2008, respectively. Of these, 500,000 Kinross shares are
subject to the Kinross Collar and another 40,000 shares are subject
to the May 10 Kinross Call, discussed below. In addition we own
other marketable equity securities with a fair value of $286,000 and
$33,000 as of December 31, 2009 and December 31, 2008, respec-
tively. At December 31, 2009, we have classified $15,006,000 of
our marketable equity securities as a long-term asset. Changes in the
119 | Solitario Exploration & Royalty
19 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
fair value of marketable equity securities are recorded as gains and
losses in other comprehensive income in shareholders’ equity. Dur-
ing the year ended December 31, 2009, we recorded a gain in other
comprehensive income on marketable equity securities of $242,000,
less related deferred tax expense of $90,000.
During the year ended December 31, 2009, we sold 100,000 shares
of Kinross stock for proceeds of $1,852,000 resulting in a gain of
$1,409,000 which was transferred, less related deferred tax expense
of $526,000, from previously unrealized gain on marketable equity
securities in other comprehensive income. 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 $286,000. Dur-
ing 2008, Solitario recognized an asset impairment of $107,000, net
of deferred taxes of $40,000, representing the difference between the
cost basis and the fair value at December 31, 2008, for an other-
than-temporary decline in the value of its investment in TNR Gold,
which was previously included as an unrealized loss 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 of Kinross common
stock could have a material impact on our liquidity and capital re-
sources. The price of shares of Kinross common stock has varied
from a high of $23.91 per share to a low of $8.41 per share during the
year ended December 31, 2009.
Hedge of the Investment in Kinross
Kinross Collar
On October 12, 2007 we entered into a Zero-Premium Equity Col-
lar (the “Kinross Collar”) pursuant to a Master Agreement for Eq-
uity Collars and a Pledge and Security Agreement with UBS whereby
we pledged 900,000 shares of Kinross common shares to be sold (or
delivered back to us with any differences settled in cash). On April
14, 2009, 400,000 shares under the Kinross Collar were released
upon the expiration of the tranche of the Kinross Collar due on that
date. No shares were delivered to UBS under the Kinross Collar and
no cash was paid or received upon the termination of that tranche of
the Kinross Collar.
The business purpose of the Kinross Collar is to provide downside
price protection of the Floor Price on approximately 500,000 shares
of the total shares we currently own, in the event Kinross stock were
to drop significantly from the price on the date we entered the Kin-
ross Collar. In consideration for obtaining this price protection, we
have given up the upside appreciation above the upper threshold
price 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 pro-
portion of total assets, where economically feasible. Our Board con-
sidered 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. The use of the Kinross Collar meets a long-term need for
price protection to reduce the potential of paying significant taxes
on a near term sale of the entire 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 gen-
eration 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.
The Kinross Collar is subject to counterparty risk in the event the
price of Kinross stock falls below the Floor Price and UBS, the
counterparty to the Kinross Collar, defaults on its obligation. If we
liquidate some or all of our 500,000 shares of Kinross currently
subject to the Kinross Collar on or after termination of one or more
of the Kinross Collar contracts, we may receive a price below the
Floor Price.
The Kinross Collar is structured as a European-style synthetic hedge,
which allows for the close of the position of each tranche (the “Ter-
mination”) of the Kinross Collar only on the specific dates for each
tranche, 18, 30 and 42 months from the date of entering into the Kin-
ross 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 Termina-
tion date, the cash settlement amount will be determined in the fol-
lowing 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 upper threshold 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 upper threshold price. If the Reference Price is nei-
ther 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 rel-
evant upper threshold 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 upper threshold 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 un-
derlying 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.
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 of
the underlying Kinross shares such as an extraordinary dividend, re-
capitalization, merger, consolidation or similar reorganization.
We have not designated the Kinross Collar as a hedging instrument
as described in ASC 815 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. As of December 31, 2009, we have
2009 Annual Report | 20X
Management’s Discussion & Analysis | continued
recorded a derivative instrument asset of $20,000 for fair market
value of the tranche of the Kinross Collar for 100,000 shares which
expires in April 2011. We have recorded liability of $11,000 for
the fair market value of the tranche of the Kinross Collar for 400,000
shares which expires in April 2010. As of December 31, 2008 we
have recorded a derivative instrument liability of $513,000 for the
fair market value of the Kinross Collar. As of February 10, 2010, we
are restricted from selling the 500,000 shares under the Kinross Col-
lar prior to the Termination dates discussed above.
Kinross Calls
On December 10, 2008 we sold two covered call options covering
50,000 shares of Kinross each (the “February 09 Kinross Calls”).
The first call option had a strike price of $20.00 per share and ex-
pired unexercised on February 21, 2009. We sold the option for
$65,000 cash and had a fair market value of $76,000 recorded as
derivative instrument liability on December 31, 2008. The second
call option had a strike price of $22.50 per share and expired unex-
ercised on February 21, 2009. We sold the option for $39,000 cash
and had a fair market value of $40,000 recorded as derivative in-
strument liability on December 31, 2008. We recorded an unrealized
loss of $12,000 related to the February 09 Kinross Calls in unreal-
ized gain (loss) on derivative instrument in the statement of opera-
tions during 2008. We recorded a gain in unrealized gain (loss) on
derivative instruments of $116,000 during 2009 upon the expiration
of the February 09 Kinross Calls.
On March 31, 2009 we sold a covered call option covering 50,000
shares of Kinross (the “April 09 Kinross Call”) for $21,000. The call
option had a strike price of $20.00 per share and expired unexer-
cised on April 21, 2009. We recorded a gain on derivative instru-
ments of $21,000 on the April 09 Kinross call during the year ended
December 31, 2009.
On April 16, 2009 we sold a covered call option covering 40,000
shares of Kinross (the “August 09 Kinross Call”) for net proceeds of
$45,000. The option had a strike price of $17.50 per share and an ex-
piration date of August 19, 2009. On July 21, 2009, we repurchased
the August 09 Kinross Call for cash of $125,000 and recorded a loss
on derivative instrument during the year ended December 31, 2009
of $80,000. On July 21, 2009, concurrently with the purchase of the
August 09 Kinross Call, we sold a covered call option covering 40,000
shares of Kinross with a strike price of $17.50 expiring on November
21, 2009 (the “November 09 Kinross Call”) for $157,000. On Novem-
ber 13, 2009 we repurchased the November 09 Kinross Call for
$76,000 and recorded a gain on derivative instruments of $81,000
during the year ended December 31, 2009. On November 13, 2009,
concurrently with the purchase of the November 09 Kinross Call, we
sold a covered call option covering 40,000 shares of Kinross with a
strike price of $22.00 expiring on May 22, 2010 (the “May 10 Kinross
Call”) for $76,000. As of December 31, 2009 we recorded a liability
for the May 10 Kinross Call of $42,000 and have recorded a gain in
gain (loss) on derivative instrument of $34,000 during the year ended
December 31, 2009 related to the May 10 Kinross Call.
Income Taxes
We have estimated that we will pay approximately $385,000 in in-
come taxes during the first quarter of 2010 as a result of the taxes due
on our gain on sale of $1,409,000 from the sale of Kinross common
stock and from the $2,200,000 break fee associated with our at-
tempted acquisition of Metallic Ventures. See Note 4 to the consol-
idated financial statements.
Working Capital
We had working capital of $4,318,000 at December 31, 2009 com-
pared to working capital of $3,415,000 as of December 31, 2008.
Our working capital at December 31, 2009 consists of our cash and
equivalents and marketable equity securities, primarily consisting
of the current portion of our investment in 1,050,000 shares of Kin-
ross common stock of $4,600,000, less related current deferred taxes
of $1,567,000. 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 consider-
ation our cash and liquidity requirements, tax implications, the mar-
ket price of gold and the market price of Kinross stock. We have
budgeted the anticipated sale of 250,000 shares of Kinross stock for
assumed proceeds of $4,750,000. We intend to use funds received
from the sale of Kinross shares and from Metallic Ventures termina-
tion fee primarily to fund exploration on our existing properties, for
the acquisition and exploration of new properties and general work-
ing capital.
Cash and cash equivalents were $1,946,000 as of December 31, 2009
compared to $1,942,000 at December 31, 2008. As of December 31,
2009, our cash balances along with our investment in marketable eq-
uity securities not subject to the Kinross Collar are considered ade-
quate to fund our expected expenditures over the next year.
The nature of the mining exploration business requires significant
sources of capital to fund exploration, development and operation of
mining projects. We will need additional resources if we choose to
develop on our own any mineral deposits we have. We anticipate
that we would finance these activities through the use of joint venture
arrangements, the issuance of debt or equity, the sale of interests in
our properties or the sale of our shares of Kinross common stock.
There can be no assurance that such sources of funds will be avail-
able on terms acceptable to us, if at all.
Stock-based Compensation Plans
On June 27, 2006 Solitario’s shareholders approved the 2006 Stock
Option Incentive Plan (the “2006 Plan”). During 2009, no options
were exercised from the 2006 Plan. During 2009, we granted
519,000 options from the 2006 Plan. The options have a five year
term, vest 25% on date of grant and 25% on each of the next three
anniversary dates and have an exercise price of Cdn$1.55 per share.
In order to offer Metallic Ventures’ shareholders the increased num-
ber of shares called for by the amendment, certain of our Officers, Di-
rectors and employees agreed with us to voluntarily cancel 1,935,000
previously granted options concurrently with the signing of the
Amendment.
See Note 1 to the consolidated financial statements for a summary of
the activity for stock options outstanding under the 1994 Plan and the
2006 Plan as of December 31, 2009. We do not expect that any of
our remaining vested options from the 2006 Plan will be exercised
in the next year.
121 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
The stock option liabilities of $262,000 and $531,000, respectively,
as of December 31, 2009 and 2008 do not affect working capital or
require the use of cash for settlement. Any increase or decrease in
the fair value of our stock option liability is charged or credited to
stock option compensation expense, including forfeitures and expi-
rations. Upon exercise of any option, the fair value on the date of
exercise is transferred to additional paid-in capital.
Deferred Noncontrolling Shareholder Payments
We record any proceeds from parties earning an interest in sub-
sidiaries as deferred noncontrolling shareholder payments until the
party earns an interest in the subsidiary. Upon earning an initial or
subsequent interest in the subsidiary, we record noncontrolling inter-
est equal to the earned percentage interest in the net book value of
the subsidiary and any difference between the proceeds and the non-
controlling interest as additional paid-in-capital. In the event the
parties do not earn either an initial interest or a subsequent interest
in the subsidiary, we record any payments remaining in deferred non-
controlling shareholder payments to the statement of operations. On
September 30, 2007, Anglo earned its initial 15% interest in PBM
and we recorded $392,000 of noncontrolling interest for Anglo’s 15%
interest in PBM and recorded an increase in paid-in-capital of
$1,886,000 for the balance of the payments in deferred noncontrol-
ling shareholder interest on that date. On December 23, 2008, Anglo
earned an additional 15% interest in PBM, for a total of a 30% in-
terest, and we transferred $685,000 to noncontrolling interest to
equal 30% of the net book value of PBM on that date and recorded
an increase of $1,105,000 in additional paid-in-capital for the bal-
ance of the payments in deferred noncontrolling interest on Decem-
ber 23, 2008. During 2009, Anglo paid $1,286,000 for capital
contributions to PBM to fund 2009 exploration that were recorded to
deferred noncontrolling shareholder payments. Any additional funds
from Anglo will be recorded as deferred noncontrolling shareholder
payments until such time as Anglo earns any additional interest in
PBM. See Joint Ventures, Royalty and Strategic Alliance below.
Off-balance Sheet Arrangements
As of December 31, 2009 and 2008, we have no off-balance sheet
arrangements.
(e). Cash Flows
Net cash used in operations during the year ended December 31,
2009 decreased to $3,213,000 compared to $6,533,000 for 2008 pri-
marily as a result of (i) reduced exploration expenses of $3,579,000
in 2009 compared to $4,589,000 in 2008; (ii) the receipt of a
$2,200,000 break fee associated with our attempted acquisition of
Metallic Ventures, discussed above; (iii) a decrease in prepaid ex-
penses and other current assets of $96,000 during 2009 compared to
an increase in prepaid expenses and other current assets of $90,000
during 2008; (iv) a decrease in accounts payable and other current
liabilities of $112,000 during 2009 compared to a decrease in ac-
counts payable and other current liabilities of $78,000 during 2008.
The remaining uses of cash for operations were comparable in 2009
and 2008.
Net cash provided from investing activities decreased to $1,931,000
during 2009 compared to $4,377,000 during the year ended Decem-
ber 31, 2008 primarily related to the $1,852,000 proceeds from the
sale of Kinross stock during 2009 compared with $4,430,000 pro-
ceeds from the sale of Kinross stock in 2008. During 2009 we sold
100,000 shares of Kinross at an average price of $18.52 compared
to the sale of 192,920 shares of Kinross during 2008 at an average
price of $22.96. The remaining uses of cash from investing activi-
ties were comparable in 2009 and 2008.
Net cash provided from financing activities was $1,286,000 during
the year ended December 31, 2009 compared to $1,848,000 during
2008. The primary reason for the decrease in cash provided from fi-
nancing activities in 2009 consisted of a reduction in the contribu-
tion of Anglo to deferred noncontrolling interest related to PBM
during the year to $1,286,000 compared to $1,700,000 during 2008.
In addition, no options were exercised during the year ended De-
cember 31, 2009 compared to the exercise of options for 130,750
shares of our common stock for proceeds of $148,000 during 2008.
(f). Exploration Activities, Environmental
Compliance and Contractual Obligations
Exploration Activities
A significant part of our business involves the review of potential
property acquisitions and continuing review and analysis of proper-
ties in which we have an interest, to determine the exploration and
development potential of the properties. In analyzing expected lev-
els 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 prop-
erty 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 2009 mineral and surface property rental
and option payments were approximately $258,000. In 2010 we es-
timate property rentals and option payments for properties we own or
operate to be approximately $390,000, assuming that our joint ven-
tures continue in their current status and that we do not appreciably
change our property positions on existing properties. Approximately
$95,000 of these annual payments are reimbursable to us by our joint
venture partners. In addition, we may be required to make further
payments in the future if we elect to exercise our options under those
agreements.
In July of 2009 we completed our expenditure commitment under
the Newmont Alliance Agreement of $3,773,000, discussed below
under Joint Ventures, Royalty and the Strategic Alliance properties.
As part of the terms of the Alliance Agreement, Newmont has sub-
sequently been granted a 2% Net Smelter Return Royalty on five ex-
isting projects within previously established Alliance Project Areas.
Environmental Compliance
We are subject to various federal, state and local environmental laws
and regulations in the countries where we operate. We are required
to obtain permits in advance of completing certain of our exploration
activities, to monitor and report on certain activities to appropriate
authorities, and to perform remediation of environmental disturbance
as a result of certain of our activities. However the nature of our ac-
2009 Annual Report | 22X
Management’s Discussion & Analysis | continued
tivities of review, acquisition and exploration of properties prior to the
establishment of reserves, which may include mapping, sampling,
geochemistry and geophysical studies, as well as some limited explo-
ration drilling, has not resulted in significant environmental impacts
in the past. We have historically carried on our required environmen-
tal remediation expenditures and activities, if any, concurrently with
our exploration activities and expenditures. The expenditures to com-
ply with our environmental obligations are included in our exploration
expenditures in the statement of operations and have not been mate-
rial to our capital or exploration expenditures, and have not had a ma-
terial effect on our competitive position. For the years ended
December 31, 2009 and 2008, we have not capitalized any costs re-
lated to environmental control facilities. We do not anticipate our cur-
rent or planned exploration activities will result in any material new
or additional environmental expenditures or liabilities in the future.
Wheat Ridge, Colorado, we have no outstanding long-term debt, cap-
ital or operating leases or other purchase obligations. We estimate
our facility lease costs will be approximately $38,000 per year, re-
lated to the Wheat Ridge, Colorado office.
As of December 31, 2009 we have a current tax liability of $385,000
primarily related to the taxes due from the $2,200,000 break fee from
our attempted acquisition of Metallic Ventures, discussed above, our
$1,409,000 gain on the sale of Kinross stock, less current United
States expenses and the use of available net operating losses. Addi-
tionally, deferred tax liabilities of $7,122,000 have been recorded as
of December 31, 2009, which primarily relate to our unrealized hold-
ing gains on our Kinross shares. We expect that a portion of these de-
ferred tax liabilities may become currently payable as we sell the
Kinross shares.
Contractual Obligations
As of December 31, 2009, with the exception of our office lease in
We have recorded an asset of $20,000 and a current liability of $11,000
for the fair value of the Kinross Collar as of December 31, 2009.
(in thousands)
As of December 31, 2009
Payments due by period
1–3 years
Less than 1 year
Total
3–5 years More than 5 years
Operating Lease Obligations
Land Holding Costs (1)
Kinross call option
Fair Value of the
Kinross Collar (2)
$
$
107
295
42
11
455
$
$
38
295
42
11
386
$
$
69
-
-
69
$
$
-
-
-
-
$
$
-
-
-
Our land holding contractual obligations, which are generally cancelable at our option, include all required payments for the next 12
months to maintain our existing mineral properties. As of December 31, 2009 we have no minimum or required land holding contrac-
tual obligations beyond one year.
The obligations under the Kinross Collar allow, but do not require cash payment upon settlement. See a description of the Kinross Col-
lar under “Derivative Instruments.” The total excludes the fair market value of the tranche of the Kinross Collar due in April 2011,
which is an asset of $20,000 as of December 31, 2009.
Total
(1)
(2)
Our deferred noncontrolling shareholder payments of $1,286,000
represent payments received from Anglo related to the funding re-
quirement to earn their interest in PBM discussed above. Upon
Anglo earning an incremental interest in PBM, the deferred noncon-
trolling interest will be transferred to noncontrolling interest and ad-
ditional paid in capital in the equity section of our balance sheet.
Under no circumstance will any portion of the payments included in
noncontrolling shareholder payments be refunded to Anglo or paid
in cash. In the event Anglo does not earn any additional interest in
PBM, the amounts included in noncontrolling interest will be cred-
ited in the statement of operations.
(g). Joint Ventures, Royalty and the Strategic
Alliance Properties
Bongará
The Bongará project is an advanced-stage project in which we are ex-
ploring for primarily zinc, with lesser amounts of lead and silver. Our
joint venture partner, Votorantim Metais (“Votorantim”), is funding
and managing all work conducted on the project. 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 miner-
alization has been encountered in drill holes over an area approxi-
mately 2.0 kilometers by 2.0 kilometers in dimension. On March
24, 2007, we signed a definitive agreement, the Framework Agree-
ment pursuant to and replacing, the previously signed Bongará Let-
ter Agreement with Votorantim. Solitario’s and Votorantim’s property
interests will be held through the ownership of shares in a joint op-
erating company that holds a 100% interest in the mineral rights and
other project assets.
Votorantim can earn up to a 70% interest in the joint operating com-
pany by funding an initial $1.0 million exploration program (com-
pleted), by completing future annual exploration and development
123 | Solitario Exploration & Royalty
23 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
expenditures. The option to earn the 70% interest can be exercised
by Votorantim any time after the first year commitment by commit-
ting 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 agree-
ment calls for Votorantim to have minimum annual exploration and
development expenditures of $1.5 million in each of years two and
three, which Votorantim has met as of December 31, 2009, and $2.5
million in all subsequent years until a minimum of $18.0 million has
been expended by Votorantim. Votorantim is the project operator.
In addition, Votorantim was required to make delay rental payments
to Solitario of $100,000, $200,000 and $200,000, by August 15 of
2007, 2008 and 2009, respectively, and all of which were made, and
recorded as joint venture property payment revenue, and to make fu-
ture delay rental 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. Once Votorantim has fully funded
its $18.0 million work commitment and committed to place the proj-
ect 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 distri-
butions that we receive from the joint operating company.
Pedra Branca
The Pedra Branca project is an advanced-stage project in which we
are exploring for platinum and palladium in Brazil. Our joint ven-
ture partner, Anglo Platinum (“Anglo”), is funding, through PBM, all
work conducted on the project. Currently, we manage all explo-
ration activities. On January 28, 2003, we entered into a Letter
Agreement with Anglo on our 100%-owned Pedra Branca project.
The Letter Agreement was amended four times between July 2004
and April 2006, generally to extend various work commitment dead-
lines mandated in the Letter Agreement. On July 14, 2006, we
signed the Pedra Branca Framework Agreement with Anglo that
specified actions we and Anglo 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’s contin-
ued funding of Pedra Branca exploration. On April 24, 2007, we
signed the Shareholders’ Agreement relating to the Pedra Branca
Project in Brazil with Anglo for the exploration and development of
the Pedra Branca Project. Solitario’s and Anglo’s property interests
are held through the ownership of shares in PBM. Anglo has earned
a 30% interest in PBM as of December 31, 2009, as a result of fund-
ing a total of $4.0 million on exploration at Pedra Branca. Addition-
ally, the Shareholders’ Agreement, as amended, provides that Anglo
may incrementally earn up to a 51% interest in PBM by funding a
total of $7 million on exploration at Pedra Branca by December 31,
2010. As of December 31, 2009, Anglo had funded $5.5 million of
the $7 million required to earn a 51% interest, of which $1,286,000
of those payments were recorded as deferred noncontrolling share-
holder payments. Anglo is not required to make any future funding
of exploration expenditures. However future cash payments by
Anglo will be recorded as deferred noncontrolling shareholder pay-
ments until such time as Anglo earns its next interest in PBM, when
any accumulated payments included in deferred noncontrolling
shareholder payments will be reclassified as noncontrolling interest
for Anglo’s share of the net book value of PBM and an increase to
additional paid-in capital for any excess over the noncontrolling in-
terest. Should Anglo earn a controlling interest in PBM, we will de-
consolidate our interest in PBM, and record a gain or loss in the
statement of operations for any difference between the fair value of
PBM on the date Anglo earns its controlling interest in PBM and
our recorded interest in PBM, less Anglo’s noncontrolling interest.
Solitario would account for its noncontrolling interest from that date
as an equity-method investment. Anglo can earn an additional 9%
interest in PBM (for a total of 60%) by either (i) completing a bank-
able feasibility study or (ii) spending an additional $10.0 million on
exploration or development. Anglo can also earn an additional 5%
interest in PBM (for a total of 65%) by arranging 100% financing to
put the project into commercial production. Should Anglo choose
not to earn any additional interest in PBM, any balance in deferred
noncontrolling shareholder payments would be credited to the state-
ment of operations.
We recorded a noncontrolling interest in PBM of $414,000, $833,000
and $375,000, respectively, as of December 31, 2009, 2008 and
2007 equal to Anglo’s 30% and 15% interest in the book value of
PBM. During 2009, 2008 and 2007 we recorded $414,000,
$227,000, and $17,000, respectively, for Anglo’s noncontrolling in-
terest in the loss of PBM. Anglo contributed $1,286,000, $1,700,000
and $1,133,000, respectively, of deferred noncontrolling interest pay-
ments pursuant to the Shareholders’ Agreement to fund PBM explo-
ration activities. When Anglo earned its 15% interest on December
23, 2008, for a total of a 30% interest, we reclassified $685,000 and
$1,105,000, respectively, to noncontrolling interest and additional
paid-in-capital from deferred noncontrolling shareholder payments.
During 2010 we have budgeted approximately $1,500,000 for explo-
ration that will focus on delineation drilling of our most prospective
targets and various scoping level studies to help assess the economic
viability of the project. Land payments to the government to keep the
claims in good standing at Pedra Branca are projected to be approx-
imately $75,000. Anglo is in the process of evaluating the proposed
program and has not yet made a decision on whether or not to fund
it. If Anglo decides not to fund the program, we will probably re-
duce the 2010 expenditures significantly. Anglo would subsequently
forfeit its right to earn any more than its currently held 30% interest
in PBM.
As part of the Shareholders’ Agreement, we also entered into a Serv-
ices Agreement with Anglo whereby Solitario (and/or our sub-
sidiaries) would act as an independent contractor directing the
exploration and administrative activities for PBM and its sharehold-
ers. Under the Services Agreement, Solitario receives a 5% man-
agement fee based upon total expenditures. During 2009 and 2008
we recorded management fees of $65,000 and $75,000, respectively,
which are eliminated in consolidation, net of $19,000 and $11,000,
respectively, of noncontrolling interest, as discussed above under
Results of Operations.
Newmont Alliance
On January 18, 2005, we signed a Strategic Alliance Agreement (the
“Alliance Agreement”) with Newmont Overseas Exploration Lim-
ited (“Newmont”), to explore for gold in South America (the “Strate-
gic Alliance”). Prior to the definitive agreement, we had signed a
2009 Annual Report | 24X
Management’s Discussion & Analysis | continued
Letter of Intent on November 17, 2004, with Newmont. Concurrent
with the signing of the Alliance Agreement, Newmont Mining Cor-
poration of Canada purchased 2.7 million shares of Solitario (approx-
imately 9.9% equity interest) for Cdn$4,590,000. As part of the
Alliance Agreement we were committed to spend $3,773,000 over
the four years, which was subsequently extended by mutual agree-
ment to five years, from the date of the Alliance Agreement on gold
exploration in regions (“Alliance Projects Areas”) that were mutually
agreed upon by Newmont and us. In late July 2009 we completed the
required expenditure commitment and informed Newmont. In De-
cember 2009 we granted Newmont a 2% net smelter royalty on five
properties (“Strategic Alliance Properties”) that fall within Strategic
Alliance areas. If we meet certain minimum exploration expendi-
tures on Strategic Alliance Properties, Newmont 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 re-
tained 25% interest into production. Newmont may elect to earn a
lesser interest or no interest at all, in which case it would retain a
2% net smelter return royalty. As of December 31, 2009, Newmont
also has a right of first offer on our Santiago and Espanola properties,
which are non-alliance Solitario properties in South America, ac-
quired after the signing of the Alliance Agreement, and prior to our
completion of the expenditure requirement completed this year that
we may elect to sell an interest in, or joint venture with a third party.
As of December 31, 2009 we have established five property posi-
tions that fall within the currently defined Strategic Alliance areas
and are subject to the provisions of the Newmont Alliance as dis-
cussed above. These include the La Promesa, Paria Cruz, Ca-
jatambo, Excelsior and Cerro Azul (formerly Twin Lakes) properties.
The Cerro Azul property was staked in 2007; the La Promesa, Paria
Cruz, Cajatambo and Excelsior properties were staked in early 2008.
All five properties are 100%-owned by Solitario, subject to the Al-
liance Agreement, and are situated within the central Peru mineral
belt that is proximal to the giant Cerro de Pasco silver-base metal
district. During 2010, additional surface work is planned on the
Cerro Azul, Paria Cruz and Excelsior properties to potentially define
drill targets, while drilling is planned on the Cajatambo and La
Promesa properties.
1. La Promesa
We are exploring for high-grade silver-zinc-lead-indium veins on the
early-stage La Promesa project in Peru. The La Promesa property,
acquired in 2008, consists of three concessions totaling 2,600
hectares. No payments are due to third parties so the only holding
costs for the mineral rights are annual payments of three dollars per
hectare to the Peruvian government during the first six years that the
claims are held. A priority for 2010 is to secure a land agreement
with the local community to allow for exploration drilling. Additional
surface work to further define drill targets followed by an initial 10-
hole, 1,200 meter drilling program are scheduled for the second and
third quarters of 2010, pending regulatory permit approvals.
2. Cajatambo
The Cajatambo property in Peru, acquired in 2008 and 2009, con-
sists of 11 concessions totaling 10,500 hectares. No payments are
due to third parties so the only holding costs for the mineral rights are
annual payments of three dollars per hectare to the Peruvian govern-
ment during the first six years that the claims are held. Solitario cur-
rently has a land agreement with the local community that allows us
to conduct exploration activities, including drilling.
In 2009 our exploration work defined a very large area, a 3.5 by 1.5
kilometer zone, of significant gold and silver mineralization in rocks
and soils. Based upon this work, Solitario has filed for drilling per-
mits with the appropriate Peruvian regulatory agency. Drilling is ex-
pected to commence sometime towards the end of the second quarter
of 2010. The initial plan is for an eight-hole reverse circulation
drilling campaign totaling approximately 1,500 meters.
3. Paria Cruz, Excelsior and Cerro Azul
The Paria Cruz property in Peru consists of three concessions total-
ing 3,000 hectares staked in the first half of 2008. We capitalized
$10,000 in mineral property payments for initial acquisition costs
during the second quarter of 2008. The Excelsior property, also in
Peru, consists of two concessions totaling 2,000 hectares. The Cerro
Azul property (formerly named Twin Lakes) consists of one conces-
sion totaling 1,000 hectares. During 2007, Solitario capitalized
$3,000 in lease acquisition costs related to this concession. We are
planning to conduct additional surface work on the Excelsior and
Cerro Azul properties in 2010 to determine if drilling is warranted for
2011. We plan to keep the Paria Cruz property in good standing for
2010, but no work is currently planned.
Yanacocha Royalty Property
Concurrent with the signing of the Strategic Alliance Letter of In-
tent, 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 amend-
ing the NSR royalty schedule, the Letter Agreement committed New-
mont 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 Yana-
cocha Royalty amendment and work commitment Letter of Intent
was subsequently replaced by a definitive agreement with the same
terms. Newmont continues to conduct annual exploration work on
our royalty property, and we see this work continuing for the foresee-
able future.
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 fea-
sibility study and by arranging 100% project financing. On June 22,
2005, Newmont Peru informed Solitario that it had elected to termi-
nate its option to earn an interest in the La Tola project and Solitario
recorded an $18,000 impairment related to the La Tola project. Soli-
tario retains one claim covering 1,000 hectares. In 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
125 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
2% net smelter return royalty (“NSR”) to our benefit. To earn its in-
terest, CSR is required to spend $2.0 million in exploration by De-
cember 31, 2011. CSR has the right to purchase the 2% NSR for
$1.5 million anytime before commercial production is reached. Be-
cause the Letter of Intent with CSR provides that our ending inter-
est 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.
Chambara
The Chambara project is an early-stage project in which we are ex-
ploring for primarily zinc, with lesser amounts of lead and silver. Our
joint venture partner, Votorantim, is funding and managing all work
conducted on the project. 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 formerly held 300 hectares in the project since 1997. We capi-
talized $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. At December 31, 2007, the
Chambara project consisted of six widely spaced areas where previ-
ous sampling had identified high-grade zinc mineralization at surface
similar to that found at Florida Canyon, discussed above under our
Bongará zinc property. The land holdings consisted of 13 conces-
sions totaling 9,600 hectares,
On April 4, 2008 we signed the Minera Chambara shareholders’
agreement with a wholly owned subsidiary of Votorantim Metais (“Vo-
torantim”) for the exploration of a large area of interest in northern
Peru measuring approximately 200 by 85 kilometers. Votorantim
contributed titled mineral properties within the area of interest total-
ing approximately 52,000 hectares for a 15% interest in Minera
Chambara. We contributed 9,600 hectares of mineral claims and cer-
tain exploration data in our possession for an 85% interest in Min-
era Chambara. Existing and future properties subject to the terms of
the joint venture will be held by Minera Chambara. As of Decem-
ber 31, 2009, Minera Chambara’s only assets are the properties and
Minera Chambara has no debt. Votorantim has increased its land
holding within the Area of Interest of the joint venture and will trans-
fer the claims subject to the agreement to Minera Chambara, increas-
ing the total holdings to approximately 175,000 hectares subject to
their decision to hold all of the claims acquired. Votorantim may in-
crease its shareholding interest to 49% by expending $6,250,000
over seven years and may increase its interest to 70% by funding a
feasibility study and providing for construction financing for our in-
terest. If Votorantim provides such construction financing, we would
repay such financing, including interest from 80% of Solitario’s por-
tion of the project cash flow. We determined Votorantim controls
Minera Chambara, and accordingly, we record our investment in
Minera Chambara using the equity-method of accounting. During
the second quarter of 2008, we transferred our interest in the claims
of $30,000 from mineral properties, net to equity method investment.
During 2008, we reduced our equity method investment in Minera
Chambara to zero, through a non-cash charge to exploration expense.
Solitario does not anticipate it will record an increase in the book
value of its 85% equity-method investment in the shares of Minera
Chambara in the foreseeable future, if at all.
Votorantim is planning to conduct additional surface exploration
work, as well as drilling, for 2010. The timing of any drilling is de-
pendent upon the receipt or permit approvals.
(h). Wholly-owned Exploration Properties
Pachuca Real
We are exploring for silver and gold on the early-staged Pachuca
Real project in central Mexico. The approximately 31,000 hectare
Pachuca Real property was acquired by staking in late 2005 and
early 2006. Part of the property, the approximately 6,200 hectare El
Cura claim, is held under an option agreement with a private Mexi-
can party. The option agreement completed in October 2005, origi-
nally provided for payments of $500,000 over four years. Payments
totaling $90,000 have been made through December 31, 2009. In
May 2009 we amended the option agreement. Under the revised
terms, Solitario is required to pay $15,000 every six months, starting
in May of 2009 (of which May and November 2009 payments have
been paid), to the underlying owner to keep the option in good stand-
ing. By May of 2012, Solitario must either exercise the option to ac-
quire 100% interest in the concession by paying the underlying
owner $500,000, or the option will terminate. Claims fees to be paid
to the government of Mexico for all of the Pachuca Real claims total
approximately $77,000 in 2010.
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 Cor-
poration. The Venture Agreement called for a work commitment by
Newmont of $12.0 million over 54 months to earn a 51% interest
in the property. Newmont had the right to earn an additional 19%
interest (70% total) by completing a feasibility study and by financ-
ing Solitario’s 30% interest in construction costs. In December
2008 Newmont terminated its right to earn an interest in the
Pachuca Real property. Solitario retains a 100% interest in the
Pachuca Real property. Newmont transferred its extensive tech-
nical data base to Solitario in the first quarter of 2009, including the
assay results from 19 drill holes. Several companies have ex-
pressed an interest in possibly joint venturing the Pachuca Real
property. After reviewing all Newmont data in detail, we may elect
to seek a joint venture partner.
We are currently negotiating with two third party mining companies
to joint venture the property. If negotiations are successful and an
agreement is reached, our new joint venture partner would be re-
sponsible for developing an exploration plan and managing opera-
tions on the property. If we are unable to reach an agreement, we are
considering a limited drilling program in the second half of 2010.
La Noria
The early-staged La Noria copper property was staked in the second
quarter of 2008 and is located in the state of Sonora in northern Mex-
ico. It consists of one exploration concession totaling approximately
10,000 hectares. It is 100% owned by Solitario with no underlying
property owners. We completed a surface access agreement with the
surface owner in early 2009 that allowed for access to the property
and the approval to conduct exploration. Claim fees payable to the
government in 2010 are approximately $12,000.
2009 Annual Report | 26X
Management’s Discussion & Analysis | continued
A mineralized bedrock zone has been delineated over an area that
is at least 700 meters long and 100 to 200 meters wide at surface.
The grade of this zone based upon 100 rock chip channel sample av-
eraged 0.32 copper. The mineralized zone is covered by a thin ve-
neer of outwash gravels on three sides. The depth of oxidation is
currently unknown.
An Induced Polarization/resistivity geophysical survey consisting of
seven lines totaling 8.9 kilometers was completed in late 2009. The
interpretive results of this survey suggest that mineralization could be
approximately one-kilometer square in size and at least 200 meters
deep. We expect to complete a six-hole, 1,500 meter reverse circu-
lation drilling program before the end of the first quarter of 2010. In
addition, we are planning to conduct acid leach metallurgical testing
to see if the copper mineralization is amenable to SX/EW process-
ing techniques, if drill results indicate significant oxide copper con-
centrations down-hole. If results warrant, a second round of drilling
is anticipated for 2010.
Palmira
We optioned the Palmira property in the state of Zacatecas in No-
vember 2009 from a private Mexican individual. The Palmira prop-
erty is 2,600 hectares in size and situated 20 kilometers south of the
historic state capital city of Zacatecas. We can acquire 100% inter-
est in the property by making scheduled payments over a five year
term totaling $1.0 million to the underlying owner. The initial option
payment of $5,000 has been made. The next payment of $10,000 is
due on May 20, 2010. To date, Solitario has conducted reconnais-
sance-stage geologic mapping and geochemical sampling. We are
planning to conduct more detailed mapping and geochemical sam-
pling, followed by geophysical surveys over prioritized areas. Based
upon this work we anticipate an initial drilling program could com-
mence early in the third quarter of 2010.
Mercurio
We are exploring for gold on the early-staged Mercurio property in the
state of Para, Brazil. The property consists of three exploration con-
cessions totaling 8,476 hectares. An agreement dated March 14,
2005 with the underlying claim and surface rights holder provides for
transfer of a 100% interest of the mineral estate to Solitario and pay-
ment by Solitario of approximately $350,000 over a period of 60
months. The owner retains a 1.5% net smelter return that is subject
to purchase by Solitario for approximately $1,200,000. All payments
are made in local currency and the amounts in U.S. currency will
fluctuate with exchange rates. On completion of all payments we
will receive title to 1,500 hectares of surface rights. In 2009 we
amended the terms of the contract that provided for a one-year sus-
pension of the annual land payments. During 2009, 2008, 2007
and 2006, $19,000, $82,000, $55,000 and $25,000, respectively,
were paid under the terms of the contract. 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 four years and
three rounds of core drilling of 36 holes. The third round of core
drilling was completed in the first quarter of 2008. We are currently
seeking a joint venture partner to advance this project. However,
there can be no assurance that a joint venture partner can be se-
cured. A payment of approximately $7,000 to the government of
Brazil during 2010 will be required to keep the Mercurio claims in
good standing.
Triunfo
We are exploring for gold-silver-zinc-lead on the 256-hectare Triunfo
polymetallic early-stage exploration property in Bolivia. In June of
2008 we amended the contract with the option holder for the Triunfo
property that suspends the payments agreed to under the contract.
For the right to suspend payments we are required to pay $5,000 per
year until such time as we decide to continue exploration drilling.
The first payment of the “stand-by” period was made on signing of
the amendment and such suspension shall continue for so long as
we pay $5,000 on the anniversary of the signing of the amendment.
Three holes were drilled in the first half of 2007. The results of these
three holes were encouraging, but we are monitoring the political sit-
uation in Bolivia before committing to a second round of drilling.
Claim fees of approximately $400 to the Bolivian government are
due in 2010.
Espanola
We optioned the Espanola gold-copper property in western Bolivia in
July 2008. The initial option payment was $5,000, with annual pay-
ments of $10,000 until drilling commences, at which time another
$10,000 payment is due followed by a $55,000 payment on the an-
niversary date of drilling. We have the right to earn an 85% interest
in the property from a private Bolivian party with completion of pay-
ments totaling $1.0 million over a period of four years beginning 10
months after the initiation of drilling. For 2010, we are evaluating the
possibility of drilling several holes. Our decision on whether or not
to drill is mainly dependent upon geopolitical considerations, prior-
itization with other projects and personnel, and the availability of a
drill rig. Claim fees payable to the government in 2010 are approx-
imately $5,000.
(i). Discontinued Projects
During the fourth quarter of 2009 we abandoned the Chonta property
and recorded a mineral property write down of $42,000. The Chonta
property was optioned in 2008 from a private Peruvian party. Sur-
face work was conducted throughout the remainder of 2008 and
drilling was conducted in mid-2009. Drilling results were not con-
sidered to be of economic interest and the decision was made to ter-
minate our option to earn an interest in the property.
During the first quarter of 2009 we terminated any additional work
on the Purica copper property and recorded a mineral property write
down of $9,000. The property was originally acquired in 2008
through an option agreement with an underlying private Mexican
party and through our own staking. We conducted geologic mapping,
geochemical sampling and a geophysical survey. Based upon the re-
sults of this work, a six-hole reverse circulation drilling program to-
taling 1,255 meters was completed in the third quarter of 2008. Low
grade copper was intersected in three of six holes with the other three
holes essentially barren. After reviewing the drilling results, in con-
junction with the previously generated surface exploration work, we
elected to abandon the property.
During 2008 we did not abandon any properties.
127 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
(j). Critical Accounting Estimates
Mineral Properties, net
We classify our interest in mineral properties as Mineral Properties,
net (tangible assets) pursuant to ASC 930. Prior to adoption of ASC
930 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 ASC 930, 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 ASC 930.
Impairment
We regularly perform evaluations of our investment in mineral prop-
erties to assess the recoverability and/or the residual value of its in-
vestments in these assets. All long-lived assets are reviewed for
impairment whenever events or circumstances change, such as neg-
ative drilling results or termination of a joint venture, which indicate
the carrying amount of an asset may not be recoverable, utilizing es-
tablished 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 mineraliza-
tion as a result of our analysis of exploration activities including sur-
veys, sampling and drilling. We recorded $51,000 of mineral
property impairments during 2009 related to our Chonta and Purica
properties discussed above under Discontinued Projects. We
recorded no impairments related to our mineral properties during
2008. We may record future impairment if certain events occur, in-
cluding loss of a venture partner, reduced commodity prices or un-
favorable geologic results from sampling assaying surveying or
drilling, among others.
Fair Value
Effective January 1, 2008, we adopted ASC 820, “Fair Value Meas-
urements.” ASC 820, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value measure-
ments. ASC 820 clarifies that fair value is an exit price, represent-
ing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market partici-
pants. ASC 820 also requires disclosure about how fair value is de-
termined for assets and liabilities and establishes a hierarchy for
which these assets and liabilities must be grouped, based on signif-
icant levels of inputs as follows:
Level 1: Quoted prices in active markets for identical assets or li-
abilities;
Level 2: Quoted prices in active markets for similar assets and li-
abilities and inputs that are observable for the asset or liability; or
Level 3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions.
The determination of where assets and liabilities fall within this hi-
erarchy is based upon the lowest level of input that is significant to
the fair value measurement.
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 com-
prehensive income within shareholders’ 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 op-
erations. At December 31, 2009 and December 31, 2008, we have
recorded unrealized holding gains of $18,571,000 and $19,738,000,
respectively, net of deferred taxes of $6,849,000 and $7,284,000, re-
spectively, related to our marketable equity securities.
During 2008, we recognized an asset impairment of $107,000 for an
other-than-temporary decline in the value of our TNR stock. The
loss was previously included in unrecognized gain on marketable eq-
uity securities in other comprehensive income.
Derivative Instruments
We account for our derivative instruments in accordance with ASC
815, “Accounting for Derivative Instruments and Hedging Activi-
ties.” Pursuant to ASC 815, we have not designated the Kinross Col-
lar or the Kinross Calls as hedging instruments and any changes in
the fair market value of the Kinross Collar or the Kinross Calls are
recognized in the statement of operations in the period of the change.
See results of operations above for the gain (loss) on derivative instru-
ment related to the Kinross Collar and the Kinross Calls during 2009,
2008 and 2007.
Revenue Recognition
We record any proceeds from parties earning an interest in sub-
sidiaries as deferred noncontrolling shareholder payments until the
party earns an interest in the subsidiary. Upon earning an initial or
subsequent interest in the subsidiary, we record noncontrolling inter-
est equal to the earned percentage interest in the net book value of
the subsidiary and any difference between the recorded deferred non-
controlling shareholder payments as additional paid-in-capital. In
the event the parties do not earn either an initial interest or a subse-
quent interest in the subsidiary, we record any payments included in
noncontrolling shareholder payments to the statement of operations.
We recorded deferred noncontrolling shareholder payments from
Anglo of $1,286,000 as of December 31, 2009. We record delay
rental payments as revenue in the period received. We recorded
$200,000, $200,000 and $100,000, respectively, of joint venture and
property payments for delay rental payments on our Bongará joint
venture agreement during 2009, 2008 and 2007. Any payments re-
ceived for the sale of property interests are recorded as a reduction
of the related property’s capitalized cost. Proceeds which exceed the
capitalized cost of the property are recognized as revenue.
Stock-based Compensation
We account for our stock options under the provisions of ASC 718
Compensation – Stock Compensation. Pursuant to ASC 718 we clas-
2009 Annual Report | 28X
Management’s Discussion & Analysis | continued
sify our stock options as liabilities as they are priced in Canadian
dollars and our functional currency is United States dollars. We
record a liability for the fair value of the vested portion of outstand-
ing options based on a Black-Scholes option pricing model. This
model requires the input of subjective assumptions, including a risk
free interest rate, the contractual term, the exchange rate between
the US Dollar and the Canadian Dollar, a zero dividend yield, a zero
forfeiture rate, and an expected volatility equal to the historical
volatility based upon the daily quoted price of our common stock on
the Toronto Stock Exchange (the “TSX”) over the period correspon-
ding to the expected life of the options. These estimates involve in-
herent uncertainties and the application of management judgment.
As a result, if other assumptions had been used, our recorded and
stock-based compensation expense could have been materially dif-
ferent from that reported.
Income Taxes
We account for income taxes in accordance with ASC 740, “Account-
ing for Income Taxes.” Under ASC 740, income taxes are provided
for the tax effects of transactions reported in the financial statements
and consist of taxes currently due plus deferred taxes related to cer-
tain income and expenses recognized in different periods for finan-
cial and income tax reporting purposes. Deferred tax assets and
liabilities represent the future tax return consequences of those dif-
ferences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes also are rec-
ognized for operating losses and tax credits that are available to off-
set 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 securi-
ties we own. If these values are not realized, we may record addi-
tional valuation allowances in the future.
Accounting for Uncertainty in Income Taxes
We adopted ASC 740, “Accounting for Uncertainty in Income
Taxes,” as of January 1, 2007. ASC 740-10 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. ASC 740-10 also provides guidance on dere-
cognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. ASC 740-10 provides that a com-
pany’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 po-
sition in the future. The adoption of ASC 740-10 had no effect on
our financial position or results of operations.
(k). Related Party Transactions
Mark Jones Consulting Agreement
On September 1, 2006, we entered into a two-year consulting agree-
ment with Mark E. Jones, III, a director and vice-chairman of our
Board of Directors. The consulting agreement terminated on August
31, 2008. Under the agreement, Mr. Jones advised us on matters of
strategic direction, planning, and identification of corporate oppor-
tunities, when and as requested by us. In consideration for the serv-
ices to be performed, Mr. Jones was paid a one time lump sum pay-
ment of $160,000, plus he was entitled to receive pre-approved,
documented expenses incurred in performance of the consulting
services. We incurred $53,000 and $80,000, respectively, for con-
sulting expense related to the agreement in general and administra-
tive expense, for the years ended December 31, 2008 and 2007.
TNR Gold Corp.
As of December 31, 2009, we own 1,000,000 shares of TNR that are
classified as marketable equity securities available-for-sale and are
recorded at their fair market value of $286,000 and $33,000 at De-
cember 31, 2009 and 2008, respectively. During 2008, we recog-
nized an asset impairment of $107,000 for an other-than-temporary
decline in the value of our TNR stock. The loss was previously in-
cluded in unrecognized gain on marketable equity securities in other
comprehensive income. Christopher E. Herald, our CEO, was a
member of the Board of Directors of TNR until June 3, 2009.
(l). Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”)
issued FASB Accounting Standards Codification (“ASC”) 105,
“Generally Accepted Accounting Principles,” which establishes
the FASB ASC as the sole source of authoritative generally ac-
cepted accounting principles (“GAAP”). Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under
authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The ASC supersedes all non-SEC ac-
counting and reporting standards. Pursuant to the provisions of
FASB ASC 105, we have updated the references to GAAP in our fi-
nancial statements issued for the period ended December 31, 2009.
The adoption of FASB ASC 105 did not impact our financial posi-
tion or results of operations.
In December 2007, the Financial Accounting Standards Board
(“FASB”) issued ASC 810-10-65. ASC 810-10-65 establishes ac-
counting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary and amends
certain consolidation procedures of ASC 810-10-10 for consistency
with the requirements of ASC 810. ASC 810-10-65 is effective for
fiscal years beginning on or after December 15, 2008 and early adop-
tion was prohibited. We adopted ASC 810-10-65 on January 1, 2009
and as a result have retrospectively reported the equity related to our
shareholders and the noncontrolling interest held by Anglo Gold in
our Pedra Branca Mineracao, Ltda. subsidiary in the equity section
of the consolidated balance sheet, as well as reporting the noncon-
trolling interest in the consolidated statement of operations included
with this report.
In December 2007, the FASB issued ASC 805-10-65, “Business
Combinations (revised 2007).” ASC 805-10-65 establishes princi-
ples and requirements for how an acquirer in a business combina-
tion recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-
controlling 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 fi-
nancial statements to evaluate the nature and financial effects of
129 | Solitario Exploration & Royalty
Management’s Discussion & Analysis | continued
the business combination. ASC 805-10-65 is to be applied prospec-
tively 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 adopted ASC 805-10-65 on January 1,
2009 and it did not have any impact on our financial position, results
of operations or cash flows.
In February 2008, the FASB issued ASC 820-10-15, “Effective Date
of ASC 820-10-05.” ASC 820-10-15 delayed the effective date of
ASC 820-10-05 for non-financial assets and non-financial liabilities
that are recognized or disclosed at fair value in the financial state-
ments on a nonrecurring basis. Solitario adopted the provisions of
ASC 820-10-15 on January 1, 2009 and it did not have any impact
on its financial position, results of operations or cash flows.
In March 2008, the FASB issued ASC 815-10-65, “Disclosures
about Derivative Instruments and Hedging Activities,” an amend-
ment of ASC 815-10-05. ASC 815-10-65 requires enhanced disclo-
sures about derivative instruments and hedged items that are
accounted for under 815-10-05 and related interpretations. ASC
815-10-65 will be effective for all interim and annual financial state-
ments for periods beginning after November 15, 2008, with early
adoption permitted. We adopted ASC 815-10-65 on January 1, 2009
and have included the required disclosures in our consolidated finan-
cial statements.
In May 2009, the FASB issued ASC 855-10-05, “Subsequent
Events.” ASC 855-10-05 establishes accounting and reporting stan-
dards for events that occur after the balance sheet date but before fi-
nancial statements are issued or are available to be issued. The
statement sets forth (i) the period after the balance sheet date during
which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in
the financial statements, (ii) the circumstances under which an en-
tity should recognize events or transactions occurring after the bal-
ance sheet in its financial statements, and (iii) the disclosures that an
entity should make about events or transactions occurring after the
balance sheet date in its financial statements. We adopted the pro-
visions of ASC 855-10-05 on June 30, 2009. We have evaluated
events subsequent to December 31, 2009 through February 12, 2010
which is the issuance date of this report. This report reflects all ma-
terial events noted in the subsequent period that would have im-
pacted the results reported herein or in our results going forward.
The adoption of ASC 855-10-05 had no impact on our consolidated
financial position, results of operations or cash flows.
Quantitative and Qualitative Disclosures About
Market Risk
(a.) Equity Price Risks
(1) Solitario’s investment in Kinross is subject to equity market
risk.
As of December 31, 2009, a hypothetical increase of ten percent in
the price of Kinross common stock would increase the value of our
holdings of Kinross by $1,932,000 and increase other comprehensive
income and total shareholders’ equity by the same amount, net of de-
ferred taxes of $720,000. Additionally our working capital would
also be increased by $460,000 from a hypothetical increase of ten
percent in the price of Kinross common stock, net of deferred taxes
of $172,000. This increase is based upon all of our 1,050,000 Kin-
ross common shares as of December 31, 2009, and is subject to the
Kinross Collar discussed above.
A hypothetical decrease of ten percent in the price of Kinross com-
mon stock would have the opposite effect of the increase discussed
above. This decrease is based upon all of our 1,050,000 Kinross
common shares as of December 31, 2009, and is subject to the Kin-
ross 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, 2009 a hypothetical increase of ten percent in the
price of Kinross common stock would increase the value of our lia-
bility under the Kinross Collar by $152,000, net of deferred taxes of
$57,000 and increase our net loss in the statement of operations by
$95,000. We have also estimated that as of December 31, 2009 a hy-
pothetical decrease of ten percent in the price of Kinross common
stock would decrease the value of our liability under the Kinross Col-
lar by $135,000, net of deferred taxes of $50,000 and would decrease
our net loss in the statement of operations by $85,000.
(3) Solitario’s stock option liability is subject to equity market risk
for changes in the price of our own stock.
We have estimated, using a Black-Scholes option pricing model that
as of December 31, 2009 a hypothetical increase of ten percent in the
price of our common stock as traded on the TSX would increase our
stock option liability by $38,000, net of deferred taxes of $14,000
and increase our net loss in the statement of operations by $24,000.
We have also estimated that as of December 31, 2009 a hypothetical
decrease of ten percent in the price of our common stock as traded
on the TSX would decrease our stock option liability by $38,000, net
of deferred taxes of $14,000 and would decrease our net loss in the
statement of operations by $24,000.
(b.) Interest Rate Risks
We have no material interest rate risks at December 31, 2009 as we
have no interest bearing debt and our interest bearing cash deposits
do not generate a material amount of interest income. Additionally,
a change in the risk free interest rate would not materially change the
determination of our Kinross Collar or our stock option liability at
December 31, 2009.
(c.) Exchange Rate Risks
Our stock option liability is subject to exchange rate risk.
We have estimated, using a Black-Scholes option pricing model that
as of December 31, 2009 a hypothetical increase of ten percent in the
relative value of the Canadian dollar compared to the United States
dollar would increase our stock option liability by $26,000, net of
deferred taxes of $10,000 and increase our net loss in the statement
of operations by $16,000. We have also estimated that as of Decem-
ber 31, 2009 a hypothetical decrease of ten percent in the relative
value of the Canadian dollar compared to the United States dollar
would decrease our stock option liability and our net loss in the state-
ment of operations by the opposite amount.
The portion of our cash that is denominated in foreign currency is
subject to exchange rate risk.
2009 Annual Report | 30X
Management’s Discussion & Analysis | continued
Solitario’s cash accounts in foreign subsidiaries not denominated in
United States dollars represent the only significant foreign currency
denominated assets. Foreign currency denominated cash accounts
totaled $280,000 and $326,000, respectively, at December 31, 2009
and 2008. We have estimated that as of December 31, 2009 an in-
crease in the value of the Brazilian Real to the United States Dollar
of 10% would decrease our cash on hand by $25,000, net of deferred
taxes of $9,000 and increase our net loss in the statement of opera-
tions by $16,000. A decrease in the value of the Brazilian Real to
the United States Dollar of 10% would increase the value of our cash
and reduce our loss in the statement of operations by the opposite
amount. We have no other material exchange rate risks as of De-
cember 31, 2009, as our other foreign denominated cash accounts are
not significant to our total assets, liabilities or operating results.
Our other operating assets and liabilities are generally dominated in
United States Dollars and do not have material exchange rate risks.
Comparison of Five-Year Cumulative Total Return
(Assumes initial investment of $100 to December 2009)
Solitario
S&P 500 Gold Index
Amex Composite Index
Peer Group
2004
100.00
100.00
100.00
100.00
2005
262.98
121.38
126.19
151.87
2006
292.82
103.48
151.27
157.93
2007
292.82
112.96
181.82
174.50
2008
100.55
95.02
108.32
59.94
2009
137.02
111.47
146.69
143.11
Our peer group consists of the following Companies: International Royalty Corporation, Great Basin Gold Corporation, New Gold
Inc., Atna Resources Ltd. and Pacific Rim Corporation.
131 | Solitario Exploration & Royalty
Report | of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Solitario Exploration & Royalty Corp.
Wheat Ridge, Colorado
We have audited the accompanying consolidated balance sheets of Solitario Exploration & Royalty Corp. (the “Company”) as of December
31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive loss and
cash flows for each of the years in the three-year period ended December 31, 2009. We also have audited the Company’s internal control
over financial reporting as of December 31, 2009, 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 con-
solidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Report-
ing included in Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Com-
pany’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those stan-
dards 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 au-
dits 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 financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and oper-
ating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we consid-
ered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of fi-
nancial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally ac-
cepted in the United States. A company’s internal control over financial reporting includes those policies and 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 Com-
pany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accor-
dance 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 de-
tection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
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 Soli-
tario Exploration & Royalty Corp. as of December 31, 2009 and 2008 (restated), and the results of its operations and its cash flows for the
years ended December 31, 2009, December 31, 2008 (restated) and December 31, 2007 (restated) in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 11 of the consolidated financial statements, the Company has restated its consolidated financial statements as of De-
cember 31, 2008 and for each of the years in the two-year period ended December 31, 2008 to classify and record payments received by its
subsidiary from a non-controlling shareholder as deferred non-controlling shareholder payments instead of as a reimbursement for explo-
ration expenditures incurred on behalf of the Company.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reason-
able possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a
timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a
material weakness in its internal control over its interpretation of generally accepted accounting principles related to the restatements dis-
cussed above and in Note 11 of the consolidated financial statements. This material weakness was considered in determining the nature,
timing, and extent of the audit tests applied in our audit of the December 31, 2009 financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria,
Solitario Exploration & Royalty Corp. has not maintained effective internal control over financial reporting as of December 31, 2009, based
on the COSO criteria.
Ehrhardt Keefe Steiner & Hottman PC
February 12, 2010
Denver, Colorado
2009 Annual Report | 32X
Consolidated Balance Sheets | in thousands except share & per share amounts
December 31,
2009
December 31,
2008
(as restated)
$
$
$
$
1,942
2,763
292
4,997
2,785
18,453
228
26,463
291
393
-
884
14
1,582
236
6,063
531
-
-
297
35,611
(31,144)
12,454
17,218
833
18,051
26,463
$
$
$
Assets
Current assets:
Cash and cash equivalents
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 Shareholders’ Equity
Current liabilities:
Accounts payable
Derivative instruments fair value
Current taxes payable
Deferred income taxes
Other
Total current liabilities
Derivative instrument fair value
Deferred income taxes
Stock option liability
Deferred noncontrolling shareholder payments
Commitments and contingencies (Notes 2 and 7)
Equity:
Solitario shareholders’ equity
Preferred stock, $0.01 par value, authorized 10,000,000
shares (none issued and outstanding at December 31, 2009
and 2008
Common stock, $0.01 par value, authorized, 50,000,000
shares (29,750,242 shares issued and outstanding at
December 31, 2009 and 2008)
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total Solitario shareholders’ equity
Noncontrolling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
1,946
4,600
196
6,742
2,739
15,006
154
24,641
269
53
385
1,567
150
2,424
-
5,555
262
1,286
-
297
35,611
(32,930)
11,722
14,700
414
15,114
24,641
On behalf of the Board:
Christopher E. Herald
Director
John Hainey
Director
See Notes to Consolidated Financial Statements.
133 | Solitario Exploration & Royalty
Consolidated Statements of Operations | in thousands except per share amounts
Property and joint venture revenue
Joint venture property payments
Costs, expenses and other:
Exploration expense
Depreciation and amortization
General and administrative (benefit)
Loss (gain) on derivative instruments
Property abandonment and impairment
(Gain) loss on sale of assets
Interest and dividend income
Total costs, expenses and other
Other income - break fee on attempted acquisition
Other income - gain on sale of marketable equity securities
Income (loss) before income tax
Income tax (expense) benefit
Net loss
Less net loss attributable to noncontrolling interest
Net loss attributable to Solitario shareholders
$
For the year ended December 31,
2008
2009
2007
(as restated)
$
200
$
200
$
100
3,579
91
2,079
(694)
51
18
(106)
5,018
2,200
1,409
(1,209)
(996)
(2,205)
419
(1,786)
4,589
98
(936)
(1,177)
107
(32)
(157)
2,492
-
3,576
1,284
(2,128)
(844)
227
(617)
$
4,155
85
3,939
1,702
20
1
(76)
9,826
-
4,085
(5,641)
184
(5,457)
17
(5,440)
$
Loss per common share attributable to Solitario
shareholders:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
$
(0.06)
$
(0.02)
$
(0.18)
29,750
29,691
29,467
See Notes to Consolidated Financial Statements.
2009 Annual Report | 34X
Consolidated Statements of Shareholders’ Equity | in thousands except share amounts
For the years ended December 31, 2009, 2008 and 2007
Solitario Shareholders’
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Total
Other Solitario
Non-
Accumulated Comprehensive Shareholders’ Controlling
Deficit
Income
Equity
Interest
28,689,992
$ 287
$ 28,470
$ (25,087)
$ 10,451
$ 14,121
$
Balance at
12/31/2006
(as restated)
Shares issued:
Option exercise
Noncontrolling interest
equity contribution
Comprehensive income:
Net loss
Net unrealized gain on
marketable equity
securities (net of
tax of $1,794)
Comprehensive loss
Balance at
12/31/2007
(as restated)
Shares issued:
Option exercise
Noncontrolling interest
equity contribution
Comprehensive income:
Net loss
Net unrealized loss on
marketable equity
securities (net of
tax of $1,063)
Comprehensive loss
Balance at
12/31/2008
(as restated)
Comprehensive income:
Net loss
Net unrealized loss on
marketable equity
securities (net of
tax of $435)
Comprehensive loss
Balance at
12/31/2009
Total
Shareholders’
Equity
$ 14,121
3,535
2,278
3,790
(1,667)
18,267
625
1,790
-
-
392
-
-
-
929,500
-
-
-
-
9
-
-
-
-
3,526
1,886
-
-
-
-
-
(5,440)
-
-
-
3,535
1,886
-
-
3,790
-
3,790
-
29,619,492
296
33,882
(30,527)
14,241
17,892
375
(5,440)
(17)
(5,457)
130,750
-
-
-
-
1
-
-
-
-
624
1,105
-
-
-
-
-
(617)
-
-
-
625
1,105
685
(617)
(227)
(844)
-
-
(1,787)
-
(1,787)
-
-
-
(1,787)
(2,631)
29,750,242
297
35,611
(31,144)
12,454
17,218
833
18,051
-
-
-
-
-
-
-
-
-
(1,786)
-
(1,786)
(419)
(2,205)
-
-
(732)
-
(732)
-
-
-
(732)
(2,937)
29,750,242
$ 297
$ 35,611
$ (32,930)
$ 11,722
$ 14,700
$
414
$ 15,114
See Notes to Consolidated Financial Statements.
135 | Solitario Exploration & Royalty
29 | Solitario Exploration & Royalty
Consolidated Statements of Cash Flows | in thousands
For the year ended December 31,
2008
2009
2007
(as restated)
$
(1,786)
$ (617)
$
(5,440)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in
operating activities:
(Gain) loss on derivative instruments
Depreciation and amortization
Loss on equity method investment
Asset write down
Employee stock option expense (benefit)
Deferred income taxes
Gain on asset and equity security sales
Noncontrolling interest in loss of consolidated subsidiary
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Accounts payable and other current liabilities
Current income taxes payable
Net cash used in operating activities
Investing activities:
Additions to mineral properties
Additions to other assets
Sale of derivative instrument, net
Proceeds from sale of marketable equity securities
Net cash provided by investing activities
Financing activities:
Deferred noncontrolling shareholder payments
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:
Reclassification of stock option liability to additional
paid-in capital upon exercise of stock options
Reclassification of deferred noncontrolling shareholder
payments to additional paid-in-capital
Reclassification of deferred noncontrolling shareholder
payments to noncontrolling interest
$
$
$
$
(694)
91
-
51
(269)
611
(1,391)
(419)
96
112
385
(3,213)
(5)
(15)
99
1,852
1,931
1,286
-
1,286
4
1,942
1,946
-
-
-
(1,177)
98
30
107
(3,255)
2,128
(3,608)
(227)
(90)
78
-
(6,533)
(111)
(46)
104
4,430
4,377
1,700
148
1,848
(308)
2,250
1,942
$
$
477
$
1,105
$
685
1,702
85
-
20
1,991
(184)
(4,085)
(17)
158
15
-
(5,755)
(37)
(150)
-
5,548
5,361
1,133
607
1,740
1,346
904
2,250
2,928
1,886
392
$
$
$
$
See Notes to Consolidated Financial Statements.
2009 Annual Report | 36X
Notes | to Consolidated Financial Statements
For the years ended December 31, 2009, 2008 and 2007
1. Business and Summary of Significant
Accounting Policies:
Business and company formation
Solitario Exploration & Royalty Corp. (“Solitario”) is an exploration stage
company with a focus on the acquisition of precious and base metal prop-
erties with exploration potential and the development or purchase of roy-
alty interests. Solitario acquires and holds a portfolio of exploration
properties for future sale, joint venture or to create a royalty prior to the
establishment of proven and probable reserves. Although its mineral
properties may be developed in the future through a joint venture, Soli-
tario has never developed a mineral property and Solitario does not an-
ticipate 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 delay rental pay-
ments of $200,000, $200,000 and $100,000, respectively, related to its
Bongará project during 2009, 2008 and 2007. Previously, Solitario’s last
significant revenues were recorded in 2000 upon the sale of the Yana-
cocha property for $6,000,000. Future revenues from joint venture pay-
ments or the sale of properties, if any, would also occur on an infrequent
basis. At December 31, 2009 Solitario had 15 mineral exploration prop-
erties in Peru, Bolivia, Mexico and Brazil and its Yanacocha and La Tola
royalty properties in Peru. 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”).
In July 1994, Solitario became a publicly traded company on the Toronto
Stock Exchange (the “TSX”) through its Initial Public Offering. On June 12,
2008, the shareholders of Solitario approved an amendment to the Articles
of Incorporation of Solitario to change the name of the corporation to Soli-
tario Exploration & Royalty Corp. from Solitario Resources Corporation.
Investment in Kinross
Solitario has a significant investment in Kinross at December 31, 2009,
which consists of 1,050,000 shares of Kinross common stock. During
2009, Solitario sold 100,000 shares of Kinross common stock for pro-
ceeds of $1,852,000 and during 2008 Solitario sold 192,920 Kinross
common shares for net proceeds of $4,430,000. As of February 10, 2010,
Solitario owns 1,050,000 shares of Kinross common stock. Solitario’s in-
vestment in Kinross common stock represents a significant concentration
of risk and any significant fluctuation in the market value of Kinross com-
mon shares could have a material impact on Solitario’s liquidity and cap-
ital resources. In October 2007, Solitario entered into a collar that
limited the proceeds on 900,000 shares of Solitario’s investment in Kin-
ross common shares. On April 14, 2009, a tranche of the Kinross Col-
lar due on that date expired, and 400,000 shares under the Kinross Collar
were released. No shares were delivered to UBS under the Kinross Col-
lar and no cash was paid or received upon the termination of that tranche
of the Kinross Collar. In December 2008 Solitario sold two call options
covering 100,000 shares of Kinross, which expired in February 2009.
In March 2009, Solitario sold a covered call option covering 50,000
shares of Kinross, which expired in April 2009. In April 2009, Solitario
sold a covered call option covering 40,000 shares on Kinross, which was
repurchased in August 2009 concurrently with the sale of a covered call
option covering 40,000 shares of Kinross, which was repurchased in No-
vember 2009 concurrently with the sale of a covered call option that ex-
pires in May 2010. Both the Kinross Collar and the call options are
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 consoli-
dated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“gener-
ally accepted accounting principles”), and are expressed in US dollars.
In performing its activities, Solitario has incurred certain costs for min-
eral properties. The recovery of these costs is ultimately dependent upon
the sale of mineral property interests or the development of economically
recoverable ore reserves, the ability of Solitario to obtain the necessary
permits and financing to successfully place the properties into produc-
tion, and upon future profitable operations, none of which is assured.
Certain headings and descriptions from prior years have been changed
to conform to current year presentation.
Revenue recognition
Solitario records any proceeds from parties earning an interest in sub-
sidiaries as deferred noncontrolling shareholder payments until the party
earns an interest in the subsidiary. Upon earning an initial or subsequent
interest in the subsidiary by the other party, Solitario records noncontrol-
ling interest equal to the earned percentage interest in the net book value
of the subsidiary and any difference between the proceeds recorded in de-
ferred noncontrolling interest is recorded as additional paid-in-capital. In
the event the parties do not earn either an initial interest or a subsequent
interest in the subsidiary, Solitario records any payments included in de-
ferred noncontrolling shareholder payments to the statement of operations.
Solitario recorded deferred noncontrolling shareholder payments from
Anglo of $1,286,000 as of December 31, 2009. Solitario records delay
rental payments as revenue in the period received. Solitario recorded
$200,000, $200,000 and $100,000, respectively, of delay rental payments
on its Bongará joint venture agreement during 2009, 2008 and 2007. Any
payments received for the sale of property interests are recorded as a re-
duction of the related property’s capitalized cost. Proceeds which exceed
the capitalized cost of the property are recognized as revenue.
Noncontrolling interest
Solitario records noncontrolling interest for the portion of its assets and
net loss in any subsidiaries which are less than 100% owned. During
2008, Solitario’s share of its investment in its subsidiary Pedra Branca
Mineracao, Ltda. (“PBM”) was reduced to 70% from 85% as a result of
Anglo earning an additional 15% interest in PBM on December 23,
2008, in accordance with the terms of PBM’s Shareholder Agreement.
Solitario recorded a noncontrolling interest in the equity section of its
balance sheet of $414,000 and $833,000, respectively, as of December
31, 2009 and 2008 and recorded a credit of $419,000, $227,000 and
$17,000, respectively, in its statements of operations for the noncontrol-
ling interest in the loss of PBM during 2009, 2008 and 2007.
Use of estimates
The preparation of financial statements in conformity with generally ac-
cepted 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 finan-
cial statements and the reported amounts of revenues and expenses dur-
ing 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 Solitario’s stock option liability and related changes recorded as
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 se-
curities, the fair value of the call options on Kinross stock as of Decem-
ber 31, 2009 and the fair value of Solitario’s Zero Premium Equity Collar
with respect to its holdings of Kinross, discussed below.
Cash equivalents
Cash equivalents include investments in highly liquid money-market se-
curities with original maturities of three months or less when purchased.
As of December 31, 2009 and 2008, 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.
137 | Solitario Exploration & Royalty
Notes | to Consolidated Financial Statements continued
Mineral properties
Solitario expenses all exploration costs incurred on its mineral properties
prior to the establishment of proven and probable reserves. Initial acqui-
sition costs of its mineral properties are capitalized. Solitario regularly
performs evaluations of its investment in mineral properties to assess the
recoverability and/or the residual value of its investments in these as-
sets. 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 dis-
counted 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 year ended December 31, 2009
Solitario recorded an impairment of $51,000 on its mineral properties.
During the year ended December 31, 2008 Solitario did not impair any
of its mineral properties. During the year ended December 31, 2007,
Solitario recorded an impairment of $20,000 on its mineral properties.
Solitario’s net capitalized mineral properties of $2,739,000 and
$2,785,000 at December 31, 2009 and 2008, respectively, related to
gross land, leasehold and acquisition costs of $3,762,000 and $3,808,000
at December 31, 2009 and 2008, respectively, less accumulated amor-
tization of $1,023,000 at December 31, 2009 and 2008. 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 de-
pendent on successful identification of proven and probable reserves.
Derivative instruments
Solitario accounts for its derivative instruments in accordance with ASC
815, “Accounting for Derivative Instruments and Hedging Activities.”
On October 12, 2007 Solitario entered into a Zero-Premium Equity Col-
lar (the “Kinross Collar”) pursuant to a Master Agreement for Equity
Collars and a Pledge and Security Agreement with UBS whereby Solitario
pledged 900,000 shares of Kinross common shares to be sold (or deliv-
ered back to us with any differences settled in cash).
Beginning in December 2008, Solitario has sold covered calls covering its
shares of Kinross common stock. Solitario sold three covered calls cov-
ering 130,000 shares of Kinross common stock during 2009. Fifty thou-
sand of these call options expired unexercised in April 2009, 40,000 were
repurchased in July 2009 and 40,000 were repurchased in November
2009. As of December 31, 2009, Solitario has sold the May 10 Kinross
Call, covering 40,000 shares of Kinross common stock, with a strike price
of $22.00. During 2008 Solitario sold two covered calls covering 50,000
shares for cash proceeds of $104,000, which expired in February 2009.
Solitario has not designated its Kinross Collar or its covered calls as hedg-
ing instruments as described in ASC 815 and any changes in the fair
market value of the Kinross Collar or the Kinross covered calls are rec-
ognized in the statement of operations in the period of the change. See
Note 5, Derivative instruments below.
Metallic Ventures
On August 24, 2009 Solitario and Metallic Ventures Gold Inc. (“Metallic
Ventures”) entered into a definitive arrangement agreement (“Agreement”)
whereby Solitario would acquire, through a friendly statutory plan of arrange-
ment under Canadian Law, all outstanding shares of Metallic Ventures, sub-
ject to certain conditions. On October 13, 2009, Solitario and Metallic
Ventures entered into an amendment to the Agreement (the “Amendment”),
whereby Solitario increased its bid to acquire all outstanding shares of
Metallic Ventures. The Agreement, as amended, provided that Solitario
would issue 19.5 million shares of Solitario common stock and would pay
cash consideration of $18 million for all of the outstanding shares of Metal-
lic Ventures. The Agreement, as amended, also provided for a termination
deadline of February 28, 2010 and that Metallic Ventures would pay a ter-
mination fee of $2.2 million under certain circumstances, including if Metal-
lic Ventures accepted a superior offer, as defined in the Agreement, as
amended. The Agreement, as amended, was subject to shareholder and
regulatory approval. In order to offer Metallic Ventures’ shareholders the in-
creased number of shares, Solitario and certain of its Officers, Directors and
employees agreed to voluntarily cancel 1,935,000 previously granted op-
tions concurrently with the signing of the Amendment.
On October 29, 2009 Metallic Ventures announced that they had deter-
mined that an offer from International Minerals Corporation constituted a
superior offer as defined in the Agreement, as amended. On November 2,
2009, Metallic Ventures terminated the Agreement, as amended, and paid
Solitario a termination fee of $2.2 million, which is included in other in-
come in the statement of operations for the year ended December 31, 2009.
Fair Value
Effective January 1, 2008, Solitario adopted ASC 820, “Fair Value Meas-
urements.” ASC 820 establishes a framework for measuring fair value
and requires enhanced disclosures about fair value measurements. ASC
820 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an or-
derly transaction between market participants. For certain of Solitario’s
financial instruments, including cash and cash equivalents, and accounts
payable, the carrying amounts approximate fair value due to their short-
term maturities. Solitario’s marketable equity securities and the Kinross
Calls are carried at their estimated fair value based on quoted market
prices. See Note 6 to the consolidated financial statements.
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. Changes in mar-
ket value are recorded in accumulated other comprehensive income
within shareholders’ 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 eq-
uity securities with fair values of $19,606,000 and $21,216,000, respec-
tively, and cost of $1,035,000 and $1,478,000, respectively, at December
31, 2009 and 2008. Solitario has accumulated other comprehensive in-
come for unrealized holding gains of $18,571,000 and $19,738,000, re-
spectively, net of deferred taxes of $6,849,000 and $7,284,000,
respectively, at December 31, 2009 and 2008 related to our marketable
equity securities. Solitario sold 100,000 and 192,920 shares, respec-
tively, of its Kinross common stock during 2009 and 2008 for gross pro-
ceeds of $1,852,000 and $4,430,000, respectively. Solitario has classified
$4,600,000 and $2,763,000, respectively, of marketable equity securi-
ties as current, as of December 31, 2009 and December 31, 2008, which
represents Solitario’s estimate of what portion of marketable equity secu-
rities will be liquidated within one year. During 2008, Solitario recog-
nized an asset impairment of $107,000, net of deferred taxes of $40,000,
representing the difference between the cost basis and the fair value at De-
cember 31, 2008, for an other-than-temporary decline in the value of its
investment in TNR Gold, which was previously included as an unreal-
ized loss on marketable equity securities in other comprehensive income.
The following table represents changes in marketable equity securities:
2009
(in thousands)
$ 1,852
Gross cash proceeds
Cost
443
Gross gain on sale
2008
$ 4,430
854
2007
$ 5,548
1,463
included in earnings
during the period
Unrealized holding gain
arising during the
period included in
other comprehensive
income, net of tax of
$90, $231 and and $3,317
Reclassification adjustment
for net losses (gains)
included in earnings
during the period, net
of tax of $526, $1,334
and $1,523
1,409
3,576
4,085
152
389
6,352
(884)
(2,242)
(2,562)
2009 Annual Report | 38X
Notes to Consolidated Financial Statements | continued
Notes | to Consolidated Financial Statements continued
Foreign exchange
The United States dollar is the functional currency for all of Solitario’s for-
eign 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 agree-
ments of Solitario are denominated in United States dollars. Solitario ex-
pects 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 re-
sults of operations in the period in which they occur. During 2009, 2008
and 2007, Solitario recorded foreign exchange gain (loss) of $35,000,
($62,000) and ($8,000), respectively. Solitario’s cash accounts in for-
eign subsidiaries not denominated in United States dollars represent the
only significant foreign currency denominated assets. Foreign currency
denominated cash accounts totaled $280,000 and $326,000, respec-
tively, at December 31, 2009 and 2008.
Income taxes
Solitario accounts for income taxes in accordance with ASC 740, “Ac-
counting for Income Taxes.” Under ASC 740, income taxes are pro-
vided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related
to certain income and expenses recognized in different periods for finan-
cial and income tax reporting purposes. Deferred tax assets and liabil-
ities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabili-
ties are recovered or settled. Deferred taxes are also recognized for op-
erating losses and tax credits that are available to offset future taxable
income and income taxes, respectively. A valuation allowance is pro-
vided 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 ASC 740, “Accounting for Uncertainty in Income
Taxes,” as of January 1, 2007. ASC 740 clarifies the accounting for un-
certainty in income taxes recognized in a company’s financial statements.
ASC 740 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. ASC 740 also provides
guidance on derecognition, classification, interest and penalties, account-
ing in interim periods, disclosure, and transition. ASC 740 provides that
a company’s tax position will be considered settled if the taxing author-
ity has completed its examination, the company does not plan to appeal,
and it is remote that the taxing authority would reexamine the tax posi-
tion in the future. The adoption of ASC 740 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, 2009, 2008 and 2007. Potentially dilutive shares
related to outstanding common stock options of 519,000, 2,135,000, and
2,294,500 for the years ended December 31, 2009, 2008 and 2007, re-
spectively, were excluded from the calculation of diluted loss per share
because the effects were anti-dilutive.
Employee stock compensation plans
Solitario accounts for its stock options under the provisions of ASC 718
Compensation – Stock Compensation. Pursuant to ASC 718 Solitario
classifies its stock options as liabilities as they are priced in Canadian
dollars and Solitario’s functional currency is United States dollars. Soli-
tario records a liability for the fair value of the vested portion of outstand-
ing options based upon a Black-Scholes option pricing model. This
model requires the input of subjective assumptions, including a risk free
interest rate, the contractual term, the exchange rate between the United
States dollar and the Canadian dollar, a zero dividend yield, a zero for-
feiture rate, and an expected volatility based upon the historical volatil-
ity of Solitario’s common stock on the Toronto Stock Exchange (the
“TSX”) over the period corresponding to the expected life of the options.
These estimates involve inherent uncertainties and the application of
management judgment. As a result, if other assumptions had been used,
Solitario’s recorded and stock-based compensation expense could have
been materially different from that reported.
Solitario’s outstanding options on the date of grant have a five year term, and
vest 25% on date of grant and 25% on each anniversary date. Solitario rec-
ognizes stock option compensation expense (benefit) for the change in fair
value of vested options. Solitario records stock option liability for the vested
fair value of each option grant on the measurement date by multiplying the
estimated fair value determined using the Black-Scholes model by a vest-
ing percentage, with 25% recognized immediately, and the remaining 75%
recognized over three years on a straight line basis.
Segment reporting
Solitario operates in one business segment, minerals exploration. At De-
cember 31, 2009, all of Solitario’s operations are located in Peru, Bo-
livia, Brazil and Mexico as further described in Note 2 to these
consolidated financial statements.
Included in the consolidated balance sheet at December 31, 2009 and
2008 are total assets of $3,310,000 and $3,751,000, respectively, related
to Solitario’s foreign operations, located in Bolivia, Brazil, Peru and Mex-
ico. Included in mineral properties, net in the consolidated balance sheet
at December 31, 2009 and 2008 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 June 2009, the Financial Accounting Standards Board (“FASB”) is-
sued FASB Accounting Standards Codification (“ASC”) 105, “Generally
Accepted Accounting Principles,” which establishes the FASB ASC as
the sole source of authoritative generally accepted accounting principles
(“GAAP”). Rules and interpretive releases of the Securities and Ex-
change Commission (“SEC”) under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The ASC
supersedes all non-SEC accounting and reporting standards. Pursuant
to the provisions of FASB ASC 105, Solitario has updated the references
to GAAP in its financial statements issued for the year ended December
31, 2009. The adoption of FASB ASC 105 did not impact Solitario’s fi-
nancial position or results of operations.
In December 2007, the Financial Accounting Standards Board (“FASB”)
issued ASC 810-10-65, “Noncontrolling Interests in Consolidated Finan-
cial Statements,” an Amendment of ASC 810-10-10. ASC 810-10-65 es-
tablishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary and
amends certain consolidation procedures of ASC 810-10-10 for consis-
tency with the requirements of ASC 810. ASC 810-10-65 is effective for
fiscal years beginning on or after December 15, 2008 and early adoption
is prohibited. Solitario adopted 810-10-65 on January 1, 2009 and as a
result has retrospectively reported its equity related to Solitario share-
holders and the noncontrolling interest held by Anglo Gold of Solitario’s
Pedra Branca Mineracao, Ltda. subsidiary in the equity section of the con-
solidated balance sheet, as well as reporting the noncontrolling interest in
the consolidated statement of operations included with this report.
In December 2007, the FASB issued ASC 805-10-65, “Business Com-
binations (revised 2007).” ASC 805-10-65 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 finan-
cial effects of the business combination. ASC 805-10-65 is to be applied
prospectively to business combinations for which the acquisition date is
139 | Solitario Exploration & Royalty
33 | Solitario Exploration & Royalty
Notes | to Consolidated Financial Statements continued
on or after the beginning of an entity’s fiscal year that begins on or after
December 15, 2008. Solitario adopted ASC 805-10-65 on January 1,
2009 and it did not have any impact on its financial position, results of
operations or cash flows.
In February 2008, the FASB issued ASC 820-10-15, “Effective Date of
ASC 820-10-05.” ASC 820-10-15 delayed the effective date of ASC
820-10-05 for non-financial assets and non-financial liabilities that are
recognized or disclosed at fair value in the financial statements on a non-
recurring basis. Solitario adopted the provisions of ASC 820-10-15 on
January 1, 2009 and it did not have any impact on its financial position,
results of operations or cash flows.
In March 2008, the FASB issued ASC 815-10-65, “Disclosures about
Derivative Instruments and Hedging Activities,” an amendment of ASC
815-10-05. ASC 815-10-65 requires enhanced disclosures about de-
rivative instruments and hedged items that are accounted for under 815-
10-05 and related interpretations. ASC 815-10-65 was effective for all
interim and annual financial statements for periods beginning after No-
vember 15, 2008, with early adoption permitted. Solitario adopted ASC
815-10-65 on January 1, 2009 and has included the required disclosures
in its consolidated financial statements.
In May 2009, the FASB issued ASC 855-10-05, “Subsequent Events.”
ASC 855-10-05 establishes accounting and reporting standards for
events that occur after the balance sheet date but before financial state-
ments are issued or are available to be issued. The statement sets forth
(i) the period after the balance sheet date during which management of
a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, (ii) the
circumstances under which an entity should recognize events or trans-
actions occurring after the balance sheet in its financial statements, and
(iii) the disclosures that an entity should make about events or transac-
tions occurring after the balance sheet date in its financial statements.
Solitario adopted the provisions of ASC 855-10-05 for the interim pe-
riod ended June 30, 2009. Solitario’s management has evaluated events
subsequent to December 31, 2009 through February 12, 2010 which is
the issuance date of this report. This report reflects all material events
noted in the subsequent period that would have impacted the results re-
ported herein or in Solitario’s results going forward. The adoption of ASC
855-10-05 had no impact on Solitario’s consolidated 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 believed to be contained, or
potentially contained, in such 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 produc-
tion or development stage property. Solitario’s mineral use rights gen-
erally are enforceable regardless of whether proven and probable reserves
have been established.
The following represents Solitario’s investment in mineral properties:
(in thousands)
Mineral interests
Accumulated amortization
Net mineral interests
December 31,
2009
$ 3,762
2008
$ 3,808
(1,023)
(1,023)
$ 2,739
$ 2,785
Solitario classifies its interest in mineral properties as Mineral Properties,
net pursuant to authoritative literature. Prior to 2004, Solitario classified
its interests in mineral properties as intangible assets, Mineral Interests,
net and recorded amortization of the intangible asset. Solitario no longer
amortizes its interest in Mineral Properties, net.
Peru
Solitario holds exploration concessions or has filed applications for
concessions covering approximately 28,000 hectares in Peru excluding
properties held under joint ventures and operated by other parties. Ap-
plications to acquire mineral concessions in Peru are subject to for-
malized administrative review and approval. According to Peruvian
law, concessions may be held indefinitely, subject only to payment of
annual fees to the government. Each year a payment of $3.00 per
hectare (approximately 2.477 acres per hectare) must be made by the
last day of June to keep the claims in good standing. For concessions
that are more than six years old, there is a $6.00 surcharge per hectare,
if less than $100 per hectare is invested in exploration and develop-
ment of the claim. Approximately 2,200 hectares of Solitario’s conces-
sions are subject to the $6.00 per hectare surcharge. Peru also imposes
a sliding scale net smelter return royalty (NSR) on all precious and
base metal production. This NSR assesses a tax of 1% on all gross
proceeds from production up to $60,000,000, a 2% NSR on proceeds
between $60,000,000 and $120,000,000 and a 3% NSR on proceeds
in excess of $120,000,000.
(a) Bongará
Solitario acquired the initial Bongará exploration concessions in 1993.
Bongará mineral concessions now total 16 concessions covering approx-
imately 12,600 hectares in northern Peru. 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, 2007, Solitario signed a definitive agreement, the Framework
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 property interests are held through the own-
ership of shares in Minera Bongará, a joint operating company that holds
a 100% interest in the mineral rights and other project assets. At Decem-
ber 31, 2009, Solitario owns 100% of the shares in this company (Min-
era Bongará S.A.).
Votorantim can earn up to a 70% shareholder interest in the joint operat-
ing company by funding an initial $1.0 million exploration program (com-
pleted), by completing future annual exploration and development
expenditures until a production decision is made or the agreement is ter-
minated. The option to earn the 70% interest can be exercised by Votoran-
tim any time after the first year commitment by committing to place the
project into production based upon a feasibility study. The agreement calls
for Votorantim to have minimum annual exploration and development ex-
penditures of $1.5 million in each of years two and three, which commit-
ments have been met as of December 31, 2009, 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. Votorantim, in its sole
discretion, may elect to terminate the option to earn the 70% interest at any
time after the first year commitment. In addition Votorantim is required to
make annual delay rental payments of $100,000 by August 15, 2007 (com-
pleted), $200,000 by August 15, 2008 and 2009 (completed), and by mak-
ing further delay rental payments to Solitario of $200,000 on all subsequent
anniversaries until a production decision is made. 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. Soli-
tario will repay the loan facility through 50% of Solitario’s cash flow distri-
butions from the joint operating company.
Votorantim signed a new surface rights agreement with the local com-
munity in 2009, which controls the surface of the primary area of inter-
est of our Bongará joint venture. This agreement provides for an annual
2009 Annual Report | 40X
Notes | to Consolidated Financial Statements continued
payment of $31,250 and funding for mutually agreed social development
programs in return for the right to perform exploration work including
road building and drilling. From time to time Solitario enters into surface
rights agreements with individual landowners or communities to provide
access for exploration work. Generally, these are short term agreements.
Votorantim is responsible for all joint venture costs as part of the Frame-
work Agreement. Votorantim has conducted annual drilling programs at
Bongará for the years 2006-2009.
2009, Votorantim added and dropped various concessions. Minera Cham-
bara now controls 195 concessions totaling approximately 175,000 hectares
of mineral rights. Votorantim may increase its shareholding interest to 49%
by expending $6,250,000 over seven years and may increase its interest to
70% by funding a feasibility study and providing for construction financing
for Solitario’s interest. If Votorantim provides such construction financing,
Solitario would repay that financing, including interest, from 80% of Soli-
tario’s portion of the project cash flow.
(b) Yanacocha Royalty property
The Yanacocha Royalty property consists of 69 concessions totaling ap-
proximately 61,000 hectares in northern Peru, 25 kilometers north of the
city of Cajamarca. In January 2005, 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 Chaupi-
loma Dos de Cajamarca, S.R.L. (affiliates of Newmont Peru, Ltd., collec-
tively “Newmont Peru”) to modify the net smelter return (“NSR”) royalty
on the Yanacocha Royalty property located immediately north of the New-
mont 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% in the aggregate to the govern-
ment of Peru and Solitario when the gold price is greater than $500 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 three percent, depending on the mine’s an-
nual revenues. In addition to amending the NSR royalty schedule, the
Letter Agreement committed Newmont Peru to a long-term US$4.0 mil-
lion 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 Agree-
ments were subsequently replaced by a definitive agreement with the
same terms. Newmont has not reported reserves on the Yanacocha prop-
erty and Solitario has not received any royalty income from Newmont.
(c) La Tola Royalty property
In October 2003, Solitario acquired the La Tola project in southern Peru
to explore for gold and possibly silver. Solitario retains one claim cover-
ing 1,000 hectares. In August 2007 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. CSR has the
right to purchase the 2% NSR for $1.5 million anytime before commer-
cial production is reached.
(d) Chambara
In September of 2006, Solitario acquired 3,700 hectares of 100%-owned
mineral rights through concessions for its Chambara property in north-
ern Peru. Solitario formerly held 300 hectares in the project since 1997.
Solitario capitalized $17,000 during the year ended December 31, 2007
in lease acquisition costs related to new concessions covering an addi-
tional 5,600 hectares at the Chambara project. At December 31, 2007,
the Chambara project consisted of six widely spaced areas consisting of
13 concessions totaling 9,600 hectares.
On April 4, 2008 Solitario signed the Minera Chambara shareholders’ agree-
ment with Votorantim Metais Cajamarquilla, S.A., a wholly owned sub-
sidiary of Votorantim Metais (both companies referred to as “Votorantim”)
for the exploration of a large area of interest in northern Peru measuring ap-
proximately 200 by 85 kilometers. Votorantim is the project manager, funds
and conducts all exploration on the project. Votorantim contributed 52 min-
eral concessions within the area of interest totaling 52,000 hectares to Min-
era Chambara for a 15% interest in Minera Chambara. Solitario contributed
9,600 hectares of mineral claims and certain exploration data in its posses-
sion for an 85% interest in Minera Chambara. Existing and future acquired
properties subject to the terms of the shareholders’ agreement will be held
by Minera Chambara. As of December 31, 2009, Minera Chambara’s only
assets are the properties and Minera Chambara has no debt. In 2008 and
Solitario determined that Votorantim controls Minera Chambara pursuant
to the terms of the shareholders’ agreement and accordingly, Solitario
has recorded its investment in Minera Chambara using the equity-method
of accounting. During the second quarter of 2008, Solitario transferred
its interest in the claims of $30,000 from mineral properties, net to eq-
uity method investment. During 2008, Solitario reduced its equity
method investment in Minera Chambara to zero, through a non-cash
charge to exploration expense. Solitario does not anticipate it will record
an increase in the book value of our 85% equity-method investment in
the shares of Minera Chambara in the foreseeable future, if at all.
(e) Newmont Strategic Alliance
On January 18, 2005, Solitario signed a Strategic Alliance Agreement
(the “Alliance Agreement”) with Newmont Overseas Exploration Limited
(“Newmont”), to explore for gold in South America (the “Strategic Al-
liance”). Prior to the definitive agreement, Solitario had signed a Letter
of Intent on November 17, 2004, with Newmont. Concurrent with the
signing of the Alliance Agreement, Newmont Mining Corporation of
Canada purchased 2.7 million shares of Solitario (approximately 9.9%
equity interest) for Cdn$4,590,000. Solitario was required to spend
$3,773,000 over the four years, which was subsequently extended by
mutual agreement to five years, from the date of the Alliance Agreement
on gold exploration in regions (“Alliance Projects Areas”) that were mu-
tually agreed upon by Newmont and Solitario. In late July 2009 Soli-
tario completed the required expenditure commitment and informed
Newmont. In December 2009 Solitario granted Newmont a 2% net
smelter royalty on five properties (“Strategic Alliance Properties”) that
fall within Strategic Alliance areas. If Solitario meets certain minimum
exploration expenditures on Strategic Alliance Properties, Newmont 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 may elect to earn a
lesser interest or no interest at all, in which case it would retain a 2% net
smelter return royalty. As of December 31, 2009, Newmont also has a
right of first offer on Solitario’s Santiago and Espanola properties, which
are non-alliance Solitario properties 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, 2009, Solitario has established five property posi-
tions that fall within the currently defined Strategic Alliance areas and
are subject to the provisions of the Newmont Alliance as discussed above.
These include the La Promesa, Paria Cruz, Cajatambo, Excelsior and
Cerro Azul (formerly Twin Lakes) properties. The Cerro Azul property
was staked in 2007; the La Promesa, Paria Cruz, Cajatambo and Excel-
sior properties were staked in early 2008. All five properties are 100%-
owned by Solitario, subject to the Alliance Agreement, and are situated
within the central Peru mineral belt that is proximal to the giant Cerro de
Pasco silver-base metal district.
The La Promesa property, acquired in 2008, consists of three conces-
sions totaling 2,600 hectares. No payments are due to third parties so the
only holding costs for the mineral rights are annual payments of three
dollars per hectare to the Peruvian government during the first six years
that the claims are held. The Cajatambo property in Peru, acquired in
2008 and 2009, consists of eleven concessions totaling 10,500 hectares.
No payments are due to third parties so the only holding costs for the
mineral rights are annual payments of three dollars per hectare to the
Peruvian government during the first six years that the claims are held.
141 | Solitario Exploration & Royalty
Notes | to Consolidated Financial Statements continued
Brazil
(a) Pedra Branca
In October 2000, Solitario recorded $3,627,000 in mineral interest ad-
ditions for the Pedra Branca project in connection with the acquisition of
Altoro Gold Corp. (“Altoro”). At December 31, 2009, the Pedra Branca
project consisted of 57 exploration concessions totaling approximately
70,000 hectares in Ceará State, Brazil. Solitario has applied to the Na-
tional Department of Mineral Production (“DNPM”) to convert five ex-
ploration concessions to mining concessions. These applications are
under review by the DNPM. Pedra Branca do Mineração S.A., a 70%-
owned subsidiary of Solitario incorporated in Brazil, holds 100%-inter-
est in all concessions. Eldorado Gold Corporation is entitled to a 2%
NSR royalty on 10 of the concessions totaling 10,000 hectares.
On January 28, 2003, Solitario entered into a Letter Agreement with
Anglo Platinum Ltd. (“Anglo”) whereby Anglo could earn various incre-
mental interests, in Pedra Branca do Mineração up to a 65% interest, by
making annually increasing exploration expenditures totaling $7.0 mil-
lion, 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 Agree-
ment with Anglo to establish and govern PBM, which holds 100% title
to all the assets of the Pedra Branca project, and the mechanics for
Anglo’s continued funding of Pedra Branca exploration.
On April 24, 2007, Solitario signed the definitive agreement, the Share-
holders’ Agreement, relating to the Pedra Branca Project in Brazil, (the
“Shareholders’ Agreement”) pursuant to the previously signed Pedra
Branca Letter Agreement with Anglo for the exploration and development
of the Pedra Branca Project. The Shareholders’ Agreement provides for
Solitario and Anglo property interests to be held through the ownership of
shares of PBM. As part of the agreement, Anglo earned a 15% interest
in PBM as of December 31, 2007 and an additional 15% interest during
2008 for a total of a 30% interest in PBM as of December 31, 2008, as a
result of spending a total of $4.0 million on exploration at Pedra Branca.
Additionally, the Shareholders’ Agreement provides that Anglo may incre-
mentally earn up to a 51% interest in PBM by spending a total of $7 mil-
lion on exploration ($3.0 million in addition to the $4.0 million spent as
of December 31, 2008) at Pedra Branca by June 30, 2010. However,
Anglo is not required to fund any future exploration expenditures. Anglo
can earn an additional 9% interest in PBM (for a total of 60%) by com-
pleting either (i) a bankable feasibility study or (ii) spending an additional
$10.0 million on exploration or development. Anglo can also earn an ad-
ditional 5% interest in PBM (for a total of 65%) by arranging for 100% fi-
nancing to put the project into commercial production.
As part of the Shareholders’ Agreement, Solitario entered into a Services
Agreement with Anglo whereby Solitario (and/or our subsidiaries) would
act as an independent contractor directing the exploration and adminis-
trative activities for PBM and its shareholders. Under the Services
Agreement, Solitario receives a 5% management fee based upon total
expenditures. During 2009 Solitario recorded management fees of
$65,000, to PBM, which are eliminated in consolidation, net of $20,000
of noncontrolling interest. During 2008 Solitario recorded $75,000 of
management fees included as joint venture reimbursements. Land pay-
ments to the government to keep the claims in good standing at Pedra
Branca are projected to be approximately $75,000 for 2010.
(b) Mercurio
In September 2005, Solitario completed an option agreement for the pur-
chase of 100% of the mineral rights over the 8,476-hectare Mercurio
property in the state of Para, Brazil. An initial payment of 20,000 Brazil-
ian Reals (approximately $7,000) was paid on signing of the agreement
and the next payment of 36,000 Reals (approximately $12,000) was made
in 2005 on signing of a definitive agreement upon conversion of the ex-
isting washing claims to exploration claims. Further payments are re-
quired upon the conversion of garimpeiro licenses to exploration claims
which occurred in the third quarter of 2006. During 2008 and 2007 pay-
ments totaled approximately $60,000 and $55,000, respectively. In 2009
Solitario amended the terms of the underlying agreement to suspend pay-
ments for one year. To purchase the property, an escalating scale of pay-
ments totaling 780,000 Reals (approximately $325,000) is 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 Reals
(approximately $1,958,000). 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 Solitario will receive title to
1,500 hectares of surface rights. Solitario may terminate the agreement
at any time at its sole discretion. During the past four years, Solitario has
conducted three rounds of core drilling totaling 36 holes. The third round
of core drilling was completed in the first quarter of 2008. A payment of
approximately $7,000 to the government of Brazil during 2010 will be re-
quired to keep the Mercurio claims in good standing.
Bolivia
(a) Triunfo
The 256-hectare Triunfo poly-metallic exploration property in Bolivia
was acquired in 2003. Lease obligations were renegotiated in 2006 pro-
viding for a payment of $12,000, which was paid in July of 2006, and a
payment of $35,000, which was paid in June 2007. In June of 2008 Soli-
tario amended the contract with the option holder for the Triunfo prop-
erty that suspends the payments schedule agreed to under the contract.
For the right to suspend payments Solitario is required to pay $5,000 per
year until such time as Solitario decides to continue exploration drilling.
The first payment of the “stand-by” period was made on signing of the
amendment and such suspension shall continue for so long as Solitario
pays $5,000 on the anniversary of the signing of the amendment. An
option to purchase the property for $1,000,000 would be due upon com-
pletion of the currently suspended payment schedule. Solitario may ter-
minate the contract at any time at its sole discretion.
(b) Espanola
Solitario optioned the Espanola gold-copper property in western Bolivia
in July 2008. The initial option payment was $5,000, with annual pay-
ments of $10,000 until drilling commences. Solitario must pay the min-
eral rights owner $65,000 prior to the end of the first year after which
drilling has commenced. Total payments of $1.0 million must be made
during a period of four years and 10 months after initiation of drilling to
purchase an 85% interest in the property.
Mexico
(a) Pachuca
The 30,700 hectare Pachuca Real silver-gold property in central Mexico
was acquired by staking in late 2005 and early 2006. Part of the prop-
erty, the approximately 6,200 hectare El Cura claim, is held under an
option agreement with a private Mexican party. The option agreement
was completed in October 2005 and provides for payments of $500,000
over four years, of which Solitario has made payments totaling $90,000
as of December 31, 2009. In May 2009 the option agreement was
amended. Under the revised terms, Solitario is required to pay $15,000
every six months, starting in May of 2009 (of which the payments due in
May 2009 and November 2009 have been paid), to the underlying owner
to keep the option in good standing. By May of 2012, Solitario must ei-
ther exercise the option to acquire 100% interest in the concession by
paying the underlying owner $500,000, or the option will terminate.
Claims fees to be paid to the government of Mexico totaling approxi-
mately $77,000 are due in 2010. 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 Corpora-
tion. The Venture Agreement called for a work commitment by New-
mont of $12.0 million over 54 months to earn a 51% interest in the
2009 Annual Report | 42X
Notes | to Consolidated Financial Statements continued
property. Newmont had the right to earn an additional 19% interest (70%
total) by completing a feasibility study and by financing Solitario’s 30%
interest in construction costs. In December 2008 Newmont terminated
its right to earn an interest in the Pachuca Real property. Solitario retains
100% interest in the Pachuca Real property. Newmont transferred its
extensive technical data base to Solitario in the first quarter of 2009, in-
cluding the assay results from 19 drill holes.
(b) La Noria
During the second quarter of 2008 Solitario staked 10,000 hectares in
Sonora State of Mexico comprising the La Noria project. It is 100%
owned by Solitario with no underlying property owners. Solitario com-
pleted a surface access agreement with the surface owner in early 2009
that allowed for access to the property and the approval to conduct ex-
ploration. Drilling is planned in the first quarter of 2010.
(c) Palmira
Solitario optioned the Palmira property in the state of Zacatecas in No-
vember 2010 from a private Mexican individual. The Palmira property
is 2,600 hectares in size and situated 20 kilometers south of the historic
state capital city of Zacatecas. Solitario can acquire 100% interest in the
property by making scheduled payments over a five year term totaling
$1.0 million to the underlying owner. The initial option payment of
$5,000 has been made. The next payment of $10,000 is due on May 20,
2010. To date, Solitario has conducted reconnaissance-stage geologic
mapping and geochemical sampling.
Discontinued projects
During the fourth quarter of 2009 Solitario abandoned the Chonta property
in Peru and recorded a mineral property write-down of $42,000. The Chonta
property was optioned in 2008 from a private Peruvian party. Surface work
was conducted in 2008 and drilling was conducted in 2009. Drilling results
were not considered to be of economic interest and the decision was made
to terminate Solitario’s option to earn an interest in the property.
During the first quarter of 2009 Solitario terminated work on the Purica
copper property in Mexico and recorded a mineral property write-down
of $9,000. The property was acquired in 2008 through an option agree-
ment with an underlying private Mexican party and through our own stak-
ing. Solitario conducted geologic mapping, geochemical sampling,
geophysical surveying and a six-hole reverse circulation drilling program
totaling 1,255 meters in 2008. Low grade copper was intersected in three
holes with the other three holes being barren. After reviewing all the ex-
ploration results, Solitario elected to abandon the property.
Exploration expense
The following items comprised exploration expense:
(in thousands)
Geologic, drilling and
assay
Field expenses
Administrative
Total exploration
expense
2009
2008
2007
$ 1,503
836
1,240
$ 1,669
1,394
1,526
$ 1,569
1,369
1,217
$ 3,579
$ 4,589
$ 4,155
3. Related Party Transactions:
Mark Jones Consulting Agreement
On September 1, 2006, Solitario entered into a two-year consulting agree-
ment with Mark E. Jones, III, a director and vice-chairman of our Board
of Directors. The consulting agreement terminated on August 31, 2008.
Under the agreement, Mr. Jones advised Solitario on matters of strategic
direction, planning, and identification of corporate opportunities, when
and as requested by Solitario. In consideration for the services to be per-
formed, Mr. Jones was paid a one time lump sum payment of $160,000,
plus he was entitled to receive pre-approved, documented expenses in-
curred in performance of the consulting services. Solitario incurred
$53,000 and $80,000, respectively, for consulting expense related to the
agreement, included in general and administrative expense for the years
ended December 31, 2008 and 2007.
TNR Gold Corp.
Solitario owns 1,000,000 shares of TNR that are classified as marketable
equity securities available-for-sale and are recorded at their fair market
value of $286,000 and $33,000 at December 31, 2009 and 2008, re-
spectively. During 2008, Solitario recognized an asset impairment of
$107,000 for an other-than-temporary decline in the value of its TNR
stock, less deferred taxes of $40,000. The loss was previously included
as a loss in other comprehensive income. Christopher E. Herald, our
CEO, was a member of the Board of Directors of TNR until June 3, 2009.
4. Income Taxes:
Solitario’s income tax expense (benefit) consists of the following as allo-
cated between foreign and United States components:
(in thousands)
Current:
United States
Foreign
Deferred:
United States
Foreign
Operating loss and
credit carryovers:
United States
Foreign
Income tax expense
(benefit)
2009
2008
2007
$
$
385
-
162
-
449
-
$
-
-
$
-
-
$ 1,362
-
$
(721)
86
766
-
537
(86)
$
996
$ 2,128
$
(184)
Consolidated income (loss) before income taxes includes losses from for-
eign operations of $3,894,000, $4,987,000 and $3,872,000, in 2009,
2008 and 2007, respectively.
During 2009, 2008 and 2007, Solitario recognized other comprehensive
income related to unrealized gains on marketable equity securities of
$242,000, $620,000, and $9,669,000, respectively. Other comprehen-
sive income has been charged $90,000, $231,000, and $3,317,000, re-
spectively, for the income tax expense associated with these gains.
During 2009, 2008 and 2007, Solitario transferred unrealized gain of
$1,409,000, $3,576,000 and $4,085,000, respectively, from other com-
prehensive income upon the sale of 100,000, 192,920 and 400,000
shares, respectively, of Kinross common stock, less income tax of
$526,000, $1,334,000 and $1,524,000, respectively, associated with
these unrealized gains. In addition, during 2008, Solitario recognized an
asset impairment of $107,000 for an other-than-temporary decline in the
value of its TNR stock, less deferred taxes of $40,000. The loss was pre-
viously included as a loss in other comprehensive income.
The net deferred tax assets/liabilities in the December 31, 2009 and
2008 consolidated balance sheets include the following components:
(in thousands)
Deferred tax assets:
Loss carryovers
Stock option compensation expense
Royalty
Derivative instruments
Severance
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
2009
2008
$ 8,480
98
1,492
-
47
25
(9,173)
969
$ 7,770
188
1,492
235
-
25
(7,968)
1,742
311
845
477
845
6,927
8
8,091
$ 7,122
7,362
5
8,689
$ 6,947
143 | Solitario Exploration & Royalty
Notes | to Consolidated Financial Statements continued
At December 31, 2009 and 2008, Solitario has classified $1,567,000
and $884,000, respectively, of its deferred tax liability as current, pri-
marily related to the current portion of its investment in Kinross com-
mon 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
Non-deductible foreign
stock compensation
expense
Foreign tax rate differences
State income tax
Change in enacted tax rates
Change in valuation
allowance
Permanent differences
and other
Income tax expense
(benefit)
2009
2008
2007
$
(411)
$
436
$ (1,947)
13
(9)
107
88
-
75
(60)
100
188
-
(12)
66
53
(2)
191
1,205
1,532
1,505
3
(143)
(38)
$ 996
$ 2,128
$ (184)
During 2009, 2008 and 2007, the valuation allowance was increased pri-
marily as a result of increases in Solitario foreign net operating loss car-
ryforwards, for which it was more likely than not that the deferred tax
benefit would not be realized.
At December 31, 2009, Solitario has no unused US Net Operating Loss
(“NOL”) carryovers. Solitario has foreign loss carryforwards for which
Solitario has provided a full valuation allowance and which expire over
various periods from five years to no expiration depending on the foreign
jurisdiction.
On January 1, 2007, Solitario adopted the provisions ASC 740-10, which
prescribes a recognition threshold and measurement attribute for the fi-
nancial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC 740-10 requires that Solitario
recognize in its 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 implemen-
tation of ASC 740-10, Solitario performed a comprehensive review of its
material tax positions in accordance with recognition and measurement
standards established by ASC 740-10. The provisions of ASC 740-10
had no effect on Solitario’s financial position, cash flows or results of op-
erations at January 1, 2007, December 31, 2007, December 31, 2008, or
December 31, 2009 as Solitario had no unrecognized tax benefits.
Solitario and its subsidiaries are subject to the following material tax-
ing 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 2006 through 2009.
The tax years that remain open to examination by the State of Colorado
are years 2005 through 2009. The tax years that remain open to exami-
nation by Mexico are years 2006 through 2009. All tax years remain
open to examination in Peru and Brazil. Solitario’s policy is to recog-
nize 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, December 31, 2007, De-
cember 31, 2008, or December 31, 2009.
Collars and a Pledge and Security Agreement with UBS whereby Solitario
pledged 900,000 shares of Kinross common shares to be sold (or deliv-
ered back to us with any differences settled in cash) . On April 14, 2009,
400,000 shares under the Kinross Collar were released upon the expira-
tion of the tranche of the Kinross Collar that expired on that date. No
shares were delivered to UBS under the Kinross Collar and no cash was
paid or received upon termination of that tranche of the Kinross Collar.
In accordance with the terms of the Kinross Collar, as the result of divi-
dends that Kinross paid on each of March 31, 2008 and September 30,
2008 of $0.04 per share, the prices under the Kinross Collar have been
reduced, by the $0.08 per share from the price originally set on October
12, 2007. As of December 31, 2009 the Kinross Collar pricing has been
adjusted to (i) 400,000 shares due on April 13, 2010 for a lower thresh-
old price of $13.69 per share (the “Floor Price”) and an upper threshold
price of $24.34 per share; and (ii) 100,000 shares due on April 12, 2011
for the Floor Price and an upper threshold price of $27.50 per share.
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 500,000 shares of the total shares Soli-
tario owns as of December 31, 2009, 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, Soli-
tario has given up the upside appreciation above the upper threshold
prices discussed above during the term of the respective tranches.
Solitario has not designated the Kinross Collar as a hedging instrument
as described in ASC 815 Derivatives and Hedging 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. As of December 31, 2009,
Solitario recorded $9,000 for the fair market value of the Kinross Collar,
of which $20,000 is recorded as other assets and $11,000 is recorded as
a derivative instrument in current liabilities. Solitario recorded the fair
market value of the Kinross Collar as a liability of $513,000 as of Decem-
ber 31, 2008 of which $393,000 is included in derivative instruments in
current liabilities. Solitario recorded an unrealized gain of $522,000
during 2009, an unrealized gain of $1,189,000 during 2008 and an un-
realized loss $1,702,000 during 2007 in gain (loss) on derivative instru-
ment for the change in the fair value of the Kinross Collar.
On December 10, 2008, Solitario sold two covered call options covering
50,000 shares of Kinross each (the “February 09 Kinross Calls”). The
first call option had a strike price of $20.00 per share and expired unex-
ercised on February 21, 2009. Solitario sold the option for $65,000 cash
and had a fair market value of $76,000 recorded as derivative instru-
ment liability on December 31, 2008. The second call option had a strike
price of $22.50 per share and expired unexercised on February 21, 2009.
Solitario sold the option for $39,000 cash and had a fair market value of
$40,000 recorded as derivative instrument liability on December 31,
2008. Solitario recorded an unrealized loss of $12,000 related to the
February 09 Kinross Calls in gain (loss) on derivative instrument in state-
ment of operations during 2008. Solitario recorded a gain in gain (loss)
on derivative instruments of $116,000 during 2009 upon the expiration
of the February 09 Kinross Calls.
On March 31, 2009, Solitario sold a covered call option covering 50,000
shares of Kinross (the “April 09 Kinross Call”) for $21,000. The call
option had a strike price of $20.00 per share and expired unexercised on
April 21, 2009. Solitario recorded a gain on derivative instruments of
$21,000 on the April 09 Kinross call during the year ended December
31, 2009.
5. Derivative Instruments:
Solitario accounts for its derivative instruments as in accordance with
ASC 815, “Accounting for Derivative Instruments and Hedging Activi-
ties.” On October 12, 2007 Solitario entered into a Zero-Premium Equity
Collar (the “Kinross Collar”) pursuant to a Master Agreement for Equity
On April 16, 2009, Solitario sold a covered call option covering 40,000
shares of Kinross (the “August 09 Kinross Call”) for net proceeds of
$45,000. The option had a strike price of $17.50 per share and an ex-
piration date of August 19, 2009. On July 21, 2009, Solitario repur-
chased the August 09 Kinross Call for cash of $125,000 and recorded a
2009 Annual Report | 44X
Notes | to Consolidated Financial Statements continued
loss on derivative instrument during the year ended December 31, 2009
of $80,000. On July 21, 2009, concurrently with the purchase of the Au-
gust 09 Kinross Call, Solitario sold a covered call option covering 40,000
shares of Kinross with a strike price of $17.50 expiring on November 21,
2009 (the “November 09 Kinross Call”) for $157,000. On November
13, 2009 Solitario repurchased the November 09 Kinross Call for
$76,000 and recorded a gain on derivative instruments of $81,000 dur-
ing the year ended December 31, 2009. On November 13, 2009, con-
currently with the purchase of the November 09 Kinross Call, Solitario
sold a covered call option covering 40,000 shares of Kinross with a strike
price of $22.00 expiring on May 22, 2010 (the “May 10 Kinross Call”)
for $76,000. As of December 31, 2009 Solitario recorded a liability for
the May 10 Kinross Call of $42,000 and has recorded a gain in gain (loss)
on derivative instrument of $34,000 during the year ended December
31, 2009 related to the May 10 Kinross Call.
The business purpose of selling covered calls is to provide additional in-
come on a limited portion of shares of Kinross that Solitario may sell in
the near term, which is generally defined as less than one year. In ex-
change for receiving the additional income from the sale of the covered
call option, Solitario has given up the potential upside on the shares cov-
ered by the call option sold in excess of the strike price. Solitario has not
designated its covered calls as hedging instruments as described in ASC
815 and any changes in the fair market value of its covered calls are rec-
ognized in the statement of operations in the period of the change.
Solitario does not use its Kinross Collar or its covered call derivative in-
struments as trading instruments and any cash received or paid related
to its derivative instruments are shown as investing activities in the con-
solidated statement of cash flows.
The following table provides a detail of the location and amount of the fair
values of Solitario’s derivative instruments presented in the consolidated
balance sheet as of December 31, 2009 and December 31, 2008:
(in thousands)
Derivatives not designated as hedging
instruments under ASC 815
Kinross Collar
Kinross Collar
Kinross Collar
May 10 Kinross Call
February 09 Kinross Call
Balance Sheet Location
Derivatives
December 31, 2009
December 31, 2008
Current liabilities
Long-term other assets
Long-term liabilities
Current liabilities
Current liabilities
$
11
20
-
42
-
$
277
-
236
-
116
The following amounts are included in loss (gain) on derivative instruments in the consolidated statement of operations for the years ended De-
cember 31, 2009 and 2008:
(in thousands)
Year ended
December 31, 2009 (1)
Year ended
December 31, 2008 (1)
Loss (gain) on derivatives not designated
as hedging instruments under ASC 815
Kinross Collar
February 09 Kinross Call
April 09 Kinross Call
August 09 Kinross Call
November 09 Kinross Call
May 10 Kinross Call
Total (gain) loss
Realized
-
(116)
(21)
80
(81)
-
(138)
$
$
Unrealized
$
(522)
-
-
-
-
(34)
(556)
$
Realized
-
-
-
-
-
-
-
$
$
Unrealized
(1,189)
12
-
-
-
-
(1,177)
$
$
(1) Gains and losses on derivative instruments are realized upon expiration or repurchase. Cash received for the derivative instrument may occur in
a different period.
Solitario is required to maintain its holdings of Kinross common stock as-
sociated with the Kinross Collar in a separate account at UBS, which is
held as collateral for the Kinross Collar. Solitario is not required to main-
tain any other collateral for its derivative instruments.
derly transaction between market participants. ASC 820 also requires
disclosure about how fair value is determined for assets and liabilities
and establishes a hierarchy for which these assets and liabilities must be
grouped, based on significant levels of inputs as follows:
6. Fair Value of Financial Instruments:
For certain of Solitario’s financial instruments, including cash and cash
equivalents and payables, the carrying amounts approximate fair value
due to their short maturities. Solitario’s marketable equity securities and
the Kinross Collar and the Kinross Calls are carried at their estimated fair
value based on quoted market prices.
Effective January 1, 2008, Solitario adopted ASC 820, “Fair Value Meas-
urements.” ASC 820 establishes a framework for measuring fair value
and requires enhanced disclosures about fair value measurements. ASC
820 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an or-
Level 1: Quoted prices in active markets for identical assets or liabil-
ities;
Level 2: Quoted prices in active markets for similar assets and liabil-
ities and inputs that are observable for the asset or liability; or
Level 3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions.
The determination of where assets and liabilities fall within this hierar-
chy is based upon the lowest level of input that is significant to the fair
value measurement.
The following is a listing of Solitario’s financial assets and liabilities re-
quired to be measured at fair value on a recurring basis and where they
are classified within the hierarchy as of December 31, 2009:
145 | Solitario Exploration & Royalty
39 | Solitario Exploration & Royalty
Notes | to Consolidated Financial Statements continued
(in thousands)
Assets
Marketable equity securities
Kinross Collar derivative instrument
Liabilities
Kinross Collar derivative instrument
Kinross Calls derivative instrument
Level 1
Level 2
Level 3
Level 4
$
19,606
-
$
-
42
-
20
11
-
$
-
-
-
-
$
19,606
20
11
42
The following is a listing of Solitario’s financial assets and liabilities required to be measured at fair value on a recurring basis and where they
are classified within the hierarchy as of December 31, 2008:
(in thousands)
Assets
Level 3
Level 2
Level 1
Level 4
Marketable equity securities
Liabilities
Kinross Calls derivative instrument
Kinross Collar derivative instrument
$
21,216
$
116
-
-
-
-
513
$
-
-
-
$
21,216
116
513
Marketable equity securities: At December 31, 2009 and 2008,
the fair value of Solitario’s marketable equity securities is based
upon quoted market prices.
Covered call options: The May 10 Kinross Calls at December
31, 2009 and the April 09 Kinross Call at December 31, 2008 are
exchange traded options and fair values are based upon quoted
market prices. See Derivative Instruments above.
Kinross Collar: The Kinross Collar between Solitario and UBS is a
contractual hedge that is not traded on any public exchange.
Solitario determines the fair value of the Kinross Collar using a
Black-Scholes model using inputs, including the price of a share of
Kinross common stock and volatility of Kinross common stock price
that are readily available from public markets, and discount rates
that include an assessment of performance risk; therefore, they are
classified as Level 2 inputs. See Derivative Instruments above.
7. Commitments and Contingencies:
In acquiring its interests in mineral claims and leases, Solitario has en-
tered into lease agreements, which may be canceled at its option with-
out 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 2010 mineral property rental and op-
tion payments to be approximately $390,000. If Solitario’s current joint
venture partners elect to continue funding their respective joint ventures
throughout the remainder of 2010, the joint venture partners will pay or
Solitario will be reimbursed for approximately $95,000 of those costs.
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 2009, 2008 and 2007 was approximately $60,000,
$36,000, and $42,000, respectively. In addition, Solitario leases office
space under a non-cancelable operating lease for the Wheat Ridge, Col-
orado office which provides for minimum annual rent payments through
October of 2012 of $38,000.
8. Stock Option Plans:
a.) 2006 Plan
On June 27, 2006 Solitario’s shareholders approved the 2006 Stock Op-
tion 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, of-
ficers and employees with exercise prices equal to the market price of
Solitario’s common stock at the date of grant. However, under the terms
of the 2006 Plan, the total number of outstanding options from all plans
may not exceed 2,800,000.
Solitario granted 519,000 options during 2009. The options were granted
on May 19, 2009, with a grant date fair value of $339,000, based upon
a Black-Scholes pricing model resulting in a weighted average grant date
fair value of $0.65 per share. There were no options granted in 2008.
The grant date fair value of the 2006 Plan options granted on September
7, 2007, June 14, 2007 and February 8, 2007, respectively, was
$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.
On October 13, 2009, concurrent with the signing of the Amendment to
the Agreement with Metallic Ventures, discussed above, certain holders
of 1,935,000 options agreed to voluntarily cancel the options listed below.
None of the cancelled options had any intrinsic value on the date of can-
cellation. The cancellations of the options were effected to allow Solitario
to have enough authorized and unissued shares of its common stock to
increase the share consideration offered to Metallic Ventures pursuant to
the Amendment. No consideration was paid or received for the cancel-
lation of the options.
Cdn $ 2.77 Cdn $ 4.38 Cdn $ 4.53 Cdn $ 5.12
Option Price
Option expiration
date
Cancelled options 1,388,000
6/27/2011 2/08/2012 9/07/2012 6/14/2012
100,000
442,000
5,000
There were no options exercised during 2009. Solitario options from the
2006 Plan for 20,750 and 12,500 shares, respectively, were exercised
during 2008 and 2007 for proceeds of $61,000 and $35,000, respec-
tively. The intrinsic value of the shares issued on the date of exercise
from the 2006 Plan during 2008 and 2007 was $48,000 and $27,000, re-
spectively. Options for 200,000, 28,750 and 52,500 shares, respectively,
were forfeited during 2009, 2008 and 2007.
At December 31, 2009 and 2008, the fair value of outstanding options
granted under the 2006 Plan was determined utilizing the following as-
sumptions and a Canadian dollar to United States dollar exchange rate
of 0.9529 and 0.8183, respectively.
Fair Value at December 31, 2009
Grant Date
Plan
Option price (Cdn$)
Options outstanding
Expected life
Expected volatility
Risk free interest rate
Weighted average fair value
Portion of vesting at measurement date
Fair value of outstanding vested options
5/19/09
2006 Plan
1.55
519,000
4.4 yrs
57%
2.2%
1.27
39.5%
262,000
$
$
$
2009 Annual Report | 46X
Notes | to Consolidated Financial Statements continued
Fair Value at December 31, 2008
Grant Date
Plan
Option price (Cdn$)
Options outstanding
Expected life
Expected volatility
Risk free interest rate
Weighted average fair value
Portion of vesting at measurement date
Fair value of outstanding vested options
6/27/06
2006 Plan
2.77
$
1,548,000
2.5 yrs
57%
0.8%
0.33
87.5%
$ 450,000
$
2/08/07
2006 Plan
$
$
$
4.38
5,000
3.1 yrs
54%
1.0%
0.20
72.9%
1,000
6/14/07
2006 Plan
5.12
$
100,000
3.5 yrs
54%
1.0%
0.19
63.5%
$ 12,000
$
9/07/07
2006 Plan
4.53
$
482,000
3.7 yrs
53%
1.3%
0.24
58.3%
68,000
$
$
During 2009 and 2008, Solitario recognized stock option benefit of
$269,000 and $3,255,000, respectively, net of deferred taxes of
$100,000 and $1,149,000, respectively. During 2007 Solitario
recognized stock option compensation expense of $1,991,000, net of
deferred taxes of $670,000.
b.) 1994 Plan
As of December 31, 2009 and 2008 there are no outstanding options
from the 1994 Stock Option Plan (the "1994 Plan") and the 1994 Plan
has been terminated and no additional options may be granted under the
1994 Plan. As of December 31, 2007, Solitario had vested and outstand-
ing 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 TSX on the date of grant.
There were no options exercised during 2009. Options from the 1994
Plan for 110,000 and 917,000 shares, respectively, were exercised dur-
ing the years ended December 31, 2008 and 2007 for proceeds of
$87,000 and $574,000, respectively. The intrinsic value of the shares is-
sued on the date of exercise from the 1994 Plan during 2008 and 2007
was $429,000 and $2,901,000. No options from the 1994 Plan were for-
feited during 2008 and 2007.
c.) Summary of stock-based compensation plans
The activity in the 1994 Plan and the 2006 Plan for the three years ended
December 31, 2009 is as follows:
2009
2008
2007
Weighted
Average
Exercise
Price (Cdn$)
Options
Weighted
Average
Exercise
Price (Cdn$)
1994 Plan
Outstanding,
beginning of year
Exercised
Outstanding,
end of year
Exercisable,
end of year
2006 Plan
Outstanding,
beginning of year
Granted
Forfeited
Cancelled
Exercised
Outstanding,
end of year
Exercisable,
end of year
-
-
-
-
2,135,000
519,000
(200,000)
(1,935,000)
-
519,000
129,750
$
$
$
$
$
$
Options
110,000
(110,000)
-
-
2,184,500
-
(28,750)
-
(20,750)
n/a
n/a
n/a
n/a
3.28
1.55
3.12
3.30
Options
1,027,000
(917,000)
110,000
110,000
1,637,500
612,000
(52,500)
-
(12,500)
0.81
0.81
n/a
n/a
3.29
4.13
2.96
$
$
$
$
$
$
$
Weighted
Average
Exercise
Price (Cdn$)
$
$
$
$
$
$
$
$
$
$
0.74
0.73
0.81
0.81
2.77
4.62
2.77
2.77
3.29
3.07
1.55
2,135,000
1.55
1,451,000
3.28
2,184,500
3.15
933,000
The following table summarizes Solitario’s stock options as of December 31, 2009:
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (in years)
4.4
Weighted
Average
Exercise
Price (Cdn$)
$ 1.55
Aggregate
Intrinsic
Value(1)
$ 420,000
Weighted
Average
Exercise
Number
Exercisable Price (Cdn$)
129,750
$ 1.55
Aggrregate
Intrinsic
Value(1)
$ 105,000
2006 Plan
Number
519,000
(1) The intrinsic value at December 31, 2009 based upon the quoted market price of Cdn$2.40 per share for our common stock on the TSX and an
exchange ratio of 0.9529 Canadian dollars per United States dollar.
147 | Solitario Exploration & Royalty
39 | Solitario Exploration & Royalty
Notes | to Consolidated Financial Statements continued
9. Shareholders’ Equity and Noncontrolling
Interest:
On December 23, 2008 Anglo earned a 30% interest in PBM, dis-
cussed above under Pedra Branca. Anglo had previously earned a 15%
interest in PBM as of September 30, 2007. Prior to earning its inter-
est in PBM, all payments from Anglo were recorded as deferred non-
controlling shareholder payments. Upon Anglo earning its initial 15%
interest in PBM, Solitario recorded $392,000 of noncontrolling inter-
est in the equity section of its balance sheet for Anglo’s noncontrolling
interest in PBM and recorded $1,886,000 as additional paid in capital
for the excess of Anglo’s payments over Anglo’s noncontrolling interest
in PBM from the inception of the Shareholder Agreement to the date of
Anglo earning its 15% interest in PBM. Upon Anglo earning its sub-
sequent 15% interest in PBM, Solitario recorded $685,000 of noncon-
trolling interest in the equity section of its balance sheet for Anglo’s
noncontrolling interest in PBM and recorded $1,105,000 as additional
paid in capital for the excess of Anglo’s payments over Anglo’s non-
controlling interest from September 30, 2007 to December 23, 2008,
the date Anglo earned its next 15% interest, for a total of a 30% inter-
est in PBM. As of December 31, 2009, Anglo had made payments of
$1,286,000 under the Shareholder Agreement which have been
recorded as deferred noncontrolling shareholder payments. All de-
ferred noncontrolling shareholder payments had been transferred to
noncontrolling interest and additional paid-in-capital as of December
31, 2008, as described above.
10. Selected Quarterly Financial Data (Unaudited):
(in thousands)
March 31, 2009
(1)(4)(5)
June 30, 2009
(1)(4)(5)
Sept. 30, 2009
(3)(4)(5)
Dec. 31, 2009
(1)(2)(4)(5)(6)
Revenue
Net income (loss)
Earnings (loss) per share: Basic and diluted
Weighted shares outstanding: Basic and diluted
$
$
$
-
(671)
(0.02)
29,750
$
$
$
-
(1,388)
(0.05)
29,750
$
$
$
200
(377)
(0.01)
29,750
$
$
$
-
650
0.02
29,750
(in thousands)
March 31, 2008
(7)(8)(10)(11)(12)
June 30, 2008
(7)(8)(10)(11)(12)
Sept. 30, 2008
(7)(8)(9)(10)(11)(12)
Dec. 31, 2008
(8)(10)(11)(12)
Revenue
Net income (loss)
Earnings (loss) per share: Basic and diluted
Weighted shares outstanding:
Basic
Diluted
$
$
$
-
(1,513)
(0.05)
29,628
29,628
$
$
$
-
(1,409)
(0.05)
29,642
29,642
$
$
$
200
3,193
0.11
29,744
30,049
$
$
$
-
(888)
(0.03)
29,750
29,750
(1) Solitario sold 40,000 shares of Kinross common stock in the second
quarter for proceeds of $667,000 and a gain of $490,000 and sold
60,000 shares of Kinross stock in the third quarter for proceeds of
$1,185,000 and a gain of $919,000. Solitario did not sell any Kinross
shares in the first or fourth quarters of 2009, which contributed to the
larger loss in the second quarter and the smaller loss in the third quar-
ter.
(2) In the fourth quarter Solitario received a break fee of $2,200,000 from
Metallic Ventures related to the Agreement. This contributed to the
net income in the fourth quarter of 2009.
(3) In the third quarter Solitario received a payment of $200,000 in joint
venture revenue on its Bongará project in Peru, which reduced the
loss in the third quarter.
(4) Exploration expense was $681,000, $797,000, $1,118,000 and
$983,000, respectively, in the first, second, third and fourth quarters
of 2009, which contributed to the fluctuation in the losses in the quar-
ters.
(5) Solitario recorded general and administrative costs (benefit),
$514,000, $1,410,000, ($472,000) and $627,000, respectively, in the
first second, third and fourth quarters of 2009. The fluctuation in gen-
eral and administrative costs were primarily caused by fluctuations
in stock option compensation costs (benefit) in each quarter of
($121,000), $868,000, ($1,082,000), and $214,000, respectively dur-
ing the first, second, third and fourth quarters of 2009.
(6) Fully diluted earnings per share during the fourth quarter is the same
as basic earnings per share.
(7) Solitario sold 100,000 shares of Kinross common stock in the first
quarter for proceeds of $2,229,000 and a gain of $1,787,000, sold
42,920 shares of Kinross common stock in the second quarter for pro-
ceeds of $986,000 and a gain of $796,000, and sold 50,000 shares of
Kinross common stock in the third quarter for proceeds of $1,214,000
and a gain of $993,000. The large gain in the first quarter contributed
to the net income in that quarter compared to the other three. Solitario
did not sell any Kinross shares in the fourth quarter, which contributed
to the loss in the fourth quarter.
(8) Exploration expense increased from $1,021,000 in the first quarter to
$1,026,000 in the second quarter to $1,265,000 in the third quarter
to $1,277,000 in the fourth quarter, contributing to the increasing loss
by quarter after consideration of the Kinross stock sales in the first,
second, and third quarters, discussed above.
(9) In the third quarter Solitario received a payment of $200,000 in joint
venture revenue on its Bongará project in Peru.
(10) In the first, second and fourth quarters, Solitario recognized
$1,867,000, $864,000 and $789,000 derivative loss on the Kinross
Collar; however in the third quarter Solitario recognized a $4,697,000
derivative gain which contributed to the lower loss in the quarter.
(11) Solitario recognized stock option compensation expense of $102,000
in the first quarter, and recognized stock option compensation bene-
fit of $85,000, $1,377,000 and $1,896,000 in the second, third and
fourth quarters.
(12) Solitario recognized income tax benefit of $213,000 and $130,000
during the first and second quarter, compared to an income tax ex-
pense of $2,347,000 and $124,000 during the third and fourth quar-
ters of 2008, which contributed to the variation in the quarter net
income and (loss).
2009 Annual Report | 48X
Notes | to Consolidated Financial Statements continued
11. Restatement:
In connection with the preparation of its consolidated financial
statements for the year ended December 31, 2009, Solitario identified
an error in its previously reported consolidated financial statements.
Solitario determined that it should credit payments received from Anglo
by its PBM subsidiary to deferred noncontrolling shareholder payments,
a deferred capital account, in the liability section of its consolidated
balance sheet. Previously, Solitario recorded the payments received
from Anglo after September 2007 as noncontrolling interest and
additional paid-in-capital in the equity section of its consolidated
balance sheet. Upon Anglo earning any additional interest in PBM,
Solitario is required to credit noncontrolling interest for the earned
percentage of the net book value of PBM on that date and credit
additional paid-in-capital for the difference between the payments
accumulated to that date in deferred noncontrolling shareholder
payments. The restatement included in the consolidated financial
statements reflects the recording of payments received from Anglo as
deferred noncontrolling shareholder payments until such time as Anglo
earned its percentage interest in PBM by increasing accumulated
deficit and additional paid-in-capital by $2,276,000 at December 31,
2008 as further described below.
The restatement of the consolidated financial statements contained
herein records payments of $2,276,000 received from Anglo from 2003
through September 30, 2007 as deferred noncontrolling shareholder
payments that were previously recorded as reductions (credits) to
exploration expense. Of these, payments of $1,043,000 were credited
to exploration expense during 2007. The restatement of the
consolidated financial statements contained herein records those
payments from 2003 through September 30, 2007 as deferred
noncontrolling shareholder payments, with $1,043,000 of those
payments being recorded as an increase in exploration expense during
2007 and $1,233,000 as an increase in accumulated deficit as of
January 1, 2007. The restatement also reflects the transfer of the
balance of that adjustment of $2,276,000 to additional paid in capital
from deferred noncontrolling shareholder payments as of the date
Anglo’s earned its percentage of the net book value of PBM on
September 30, 2007. Because Solitario had correctly recorded Anglo’s
noncontrolling interest as of that date, the restatement of the
consolidated financial statements contained herein had no effect on
previously reported noncontrolling interest.
Solitario has recorded an allowance for all tax benefits related to the
increase in foreign exploration expense related to the Anglo payments
from 2003 through September 2007 in accordance with Solitario’s tax
policies described in Note 4 above. Accordingly the gross and net of
tax effect of the increase to exploration expense from the restatement
included in the consolidated financial statements for the year ended
September 30, 2007 is $1,043,000.
The accompanying consolidated financial statements as of December
31, 2008 and for the year ended December 31, 2007 have been restated
from the amounts previously reported. A summary of the significant
effects of the restatement is as follows:
Balance Sheet Information
(in thousands)
As of 12/31/2008
As
As Previously
Shareholders’ equity:
Additional paid-in-capital
Accumulated deficit
Reported Restated(1)
33,335
(28,868)
35,611
(31,144)
(1) Beginning accumulated deficit on January 1, 2008 was previously
reported as $28,251 and was restated to $30,527 as a result of the
correction of the error discussed above. Beginning accumulated
deficit on January 1, 2007 was previously reported as $23,854 and
was restated to $25,087 as a result of the correction of the error
discussed above.
Statement of Operations
Information (in thousands,
except per share amounts)
Cost expenses and other:
Exploration expenses
Net loss
Basic and diluted loss per share
Year ended 12/31/2007
As Previously
Reported
As
Restated
$ 3,112
$ 4,397
0.15
$
$ 4,155
$ 5,440
0.18
$
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.
149 | Solitario Exploration & Royalty
39 | Solitario Exploration & Royalty
Corporate Offices
4251 Kipling Street, Suite 390
Wheat Ridge, Colorado 80033
Telephone: 303-534-1030
Fax: 303-534-1809
www.solitarioxr.com
Legal Counsel
Hensley Kim & Holzer, LLC
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
Notice of Annual Meeting of Shareholders
The Annual Meeting will be at 10 a.m. MDT on Tuesday,
June 15, 2010 at the Company’s corporate offices.
Company Information | Officers & Directors
Stock Exchange Listings
NYSE 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 NYSE
Amex (formerly the American Stock Exchange) since
August 11, 2006 under the symbol XPL.
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@slrxpl.com
Officers
Christopher E. Herald | President & CEO
James R. Maronick | Chief Financial Officer
Walter H. Hunt | Chief Operating Officer
Directors
Brian Labadie | Chairman of the Board
Mark E. Jones, III | Vice Chairman of the Board
John Hainey | Director
Leonard Harris | Director
Christopher E. Herald | Director
Design: PiteCreative.com
Photography: Walter H. Hunt
2009 Annual Report | 50X
Solitario Exploration & Royalty Corp.
4251 Kipling Street, Suite 390 | Wheat Ridge, Colorado 80033
T: 303.534.1030 | F: 303.534.1809
NYSE Amex: XPL | TSX: SLR
www.solitarioxr.com