XPL

SOLITARIO RESOURCES CORP. - 10-Q Summary

Business Context and Reporting Period

Company: Solitario Exploration & Royalty Corp. (formerly Solitario Resources Corporation)

Reporting Period: Quarterly period ended September 30, 2008 (Nine months ended September 30, 2008)

Business Overview: An exploration-stage company focused on acquiring precious and base metal properties in Latin America (Peru, Bolivia, Mexico, Brazil) for future sale or joint venture. The company does not anticipate developing properties on its own. A significant portion of its assets consists of marketable equity securities, primarily shares of Kinross Gold Corporation.

Key Financial Metrics

Note: Financial figures are in thousands of U.S. dollars unless otherwise noted.

Material Changes vs. Prior Period

• Profitability Shift: The company reported a net income of $2.15 million for the quarter ended September 30, 2008, compared to a net loss of $0.91 million in the same period of 2007. This turnaround was primarily driven by a $4.7 million unrealized gain on derivative instruments (Kinross Collar) and a $0.99 million gain on the sale of marketable equity securities.
• Exploration Costs: Exploration expenses increased significantly to $1.27 million for the quarter (up from $0.85 million in 2007) and $3.31 million for the nine-month period (up from $1.90 million in 2007). This increase is attributed to the consolidation of Pedra Branca project expenses and new activities in Peru and Mexico.
• Derivative Gains: The company recorded an unrealized gain of $4.7 million on the Kinross Collar for the quarter and $2.0 million for the nine months, reflecting changes in the fair value of the derivative instrument due to Kinross stock price fluctuations. No such gains were recorded in 2007.
• Asset Base: Total assets decreased from $30.4 million at December 31, 2007, to $25.4 million at September 30, 2008, largely due to unrealized losses on marketable equity securities recorded in other comprehensive income.

Guidance, Outlook, and Risks

• Liquidity Strategy: Management intends to liquidate a portion of its Kinross Gold holdings over the next three years to fund exploration and reduce exposure to a single asset. No additional Kinross sales are anticipated for the remainder of 2008.
• Exploration Budget: The company budgeted approximately $4.3 million for net exploration expenditures for the full year of 2008. Management is currently evaluating 2009 budgets in light of declining commodity prices in late 2008.
• Joint Ventures:
  • Pedra Branca (Brazil): Anglo Platinum is expected to earn a 30% interest by December 31, 2008, having funded approximately $1.3 million of the required $1.5 million.
  • Minera Chambara (Peru): Solitario's equity-method investment in this joint venture with Votorantim was reduced to zero due to negative net equity resulting from exploration activities.
• Risks:
  • Market Risk: Significant exposure to the market price of Kinross Gold stock. A 10% decrease in Kinross stock price would decrease the value of the Kinross Collar asset and increase net loss.
  • Exploration Risk: As an exploration-stage company, there is no assurance that mineral properties will be developed or that reserves will be established.
  • Political Risk: Operations in Bolivia, Peru, Mexico, and Brazil are subject to political and regulatory changes.

Investor Verification Checklist

• Kinross Holdings: Verify the current market price of Kinross Gold Corporation stock and its impact on Solitario's $18.5 million investment and the $264,000 Kinross Collar asset.
• Exploration Spend: Confirm if the $4.3 million 2008 exploration budget was met and review the status of the Pedra Branca and Minera Chambara joint ventures.
• Derivative Valuation: Review the fair value assumptions (Black-Scholes model inputs) used for the Kinross Collar, as unrealized gains/losses significantly impact reported earnings.
• Cash Runway: Assess the $3.1 million cash balance against the remaining 2008 exploration commitments and 2009 budget requirements.
• Deferred Taxes: Note the $5.9 million deferred tax liability primarily related to unrealized gains on Kinross stock, which may become payable upon future sales.