XPL

Solitario Exploration & Royalty Corp. 10-Q Summary

Business Context and Reporting Period

Company: Solitario Exploration & Royalty Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2011
Business Overview: Solitario is an exploration-stage company focused on acquiring precious and base metal properties and royalty interests. Key assets include the Mt. Hamilton gold project in Nevada (joint venture with Ely Gold & Minerals) and various exploration properties in Latin America. The company holds a significant investment in Kinross Gold Corporation common stock.

Key Financial Metrics (Nine Months Ended Sept 30, 2011)

Note: Revenue is minimal as the company is in the exploration stage. The primary source of liquidity is the sale of marketable securities and equity financing.

Material Changes vs. Prior Period

• Equity Financing: In April/May 2011, the company completed an underwritten public offering of 3,910,000 shares, raising net proceeds of $8,937,000. This significantly increased cash balances from $478,000 (Dec 31, 2010) to $3,320,000 (Sept 30, 2011).
• Exploration Expenses: Increased to $3,486,000 for the nine months ended Sept 30, 2011, compared to $2,312,000 in the prior year. This was driven by $2,045,000 in spending on the Mt. Hamilton project (feasibility study and drilling).
• Investment Sales: Recorded a gain of $1,870,000 on the sale of 125,000 shares of Kinross Gold Corporation, compared to a gain of $553,000 in the prior year period.
• Accounting Change: Adopted ASU 2010-13 on Jan 1, 2011, reclassifying stock options from liability to equity. This reduced stock option liability by $2,775,000 and increased additional paid-in capital by $1,240,000.
• Debt Repayment: Repaid $1,915,000 of short-term margin loans to RBC Capital Markets using offering proceeds. Currently holds a $2,000,000 margin loan with UBS Bank.

Guidance, Outlook, and Risks

• Outlook: Management anticipates completing a bankable feasibility study for the Mt. Hamilton project by the end of 2011. Full-year 2011 exploration budget is approximately $6,383,000.
• Liquidity Strategy: The company plans to fund operations through the recent offering proceeds, continued sales of Kinross shares (budgeted to sell 171,000 shares over the next year), and short-term margin loans against Kinross holdings.
• Risks:
  • Market Volatility: Liquidity is heavily dependent on the market value of Kinross Gold shares; significant fluctuations could materially impact capital resources.
  • Financing Needs: Development of Mt. Hamilton will require additional funds beyond current resources. There is no assurance that future equity or debt financing will be available on favorable terms.
  • Regulatory/Permitting: Project development is contingent on receiving environmental and regulatory permits, which cannot be guaranteed.
  • Derivative Exposure: The company holds warrants (Ely, ILC) and has sold covered call options (Kinross), exposing it to unrealized gains/losses based on underlying stock volatility.

Investor Verification Checklist

• Kinross Holdings: Verify the current market value of the 855,000 Kinross shares held, as this is the primary collateral for debt and source of liquidity.
• Mt. Hamilton Feasibility: Confirm the timeline and cost estimates for the bankable feasibility study, as this is critical for the earn-in to 80% ownership.
• Debt Covenants: Review the UBS Bank credit line agreement regarding the 40% minimum equity value maintenance requirement and potential forced liquidation triggers.
• Exploration Budget Adherence: Monitor actual exploration spend against the $6.38M budget, particularly the $3.29M allocated to Mt. Hamilton.
• Derivative Valuation: Assess the fair value of Ely warrants and the impact of the Kinross covered call option on future upside potential.