XPL

Solitario Exploration & Royalty Corp. - 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Solitario Exploration & Royalty Corp. for the period ended September 30, 2010. Solitario is an exploration-stage company focused on acquiring precious and base metal properties and royalty interests in Latin America (Peru, Bolivia, Mexico, Brazil) and the United States. The company holds a significant investment in Kinross Gold Corporation common stock, which serves as a primary source of liquidity.

Key Financial Metrics (Nine Months Ended Sept 30, 2010)

Note: Revenue consists primarily of delay rental payments. The company recorded a significant non-cash gain on the deconsolidation of a subsidiary ($724,000) and a gain on the sale of marketable securities ($553,000).

Material Changes vs. Prior Period

• Net Loss Improvement: Net loss attributable to shareholders decreased to $(2.19) million for the nine months ended Sept 30, 2010, compared to $(2.44) million in the same period of 2009. This improvement was driven by a $724,000 gain on the deconsolidation of the Pedra Branca Mineracao, Ltd. (PBM) subsidiary and a reduction in exploration expenses.
• Deconsolidation of PBM: On July 21, 2010, Anglo Platinum Limited earned a controlling 51% interest in PBM. Solitario deconsolidated PBM, resulting in a cash decrease of $1.083 million and the recognition of a $724,000 gain.
• Exploration Expenses: Decreased to $2.312 million (2010) from $2.596 million (2009), largely due to the cessation of consolidated drilling programs at Pedra Branca and Chonta.
• Stock Compensation: Shifted from a benefit of $335,000 in 2009 to an expense of $851,000 in 2010 due to new option grants and fair value adjustments.
• Debt: The company incurred $1.5 million in short-term margin debt (secured by Kinross stock) during the period, compared to zero in the prior year.

Outlook, Risks, and Management Commentary

• Liquidity Strategy: Management intends to fund operations through the sale of Kinross Gold shares and short-term borrowing against those shares to defer U.S. income taxes. They anticipate adequate funds through the end of 2011.
• New Joint Venture: In August 2010, Solitario signed a Letter of Intent (LOI) with Ely Gold & Minerals to earn up to an 80% interest in the Mt. Hamilton gold project in Nevada. This requires staged investments totaling up to $5 million in cash and stock over several years.
• Derivative Instruments: The company maintains a "Kinross Collar" on 100,000 shares of Kinross stock, providing downside protection with a floor price of $13.69 and a cap of $27.50. Fluctuations in Kinross stock price materially impact liquidity.
• Risks: Key risks include the high concentration of assets in Kinross stock, the speculative nature of exploration-stage properties, and the requirement to fund future earn-in commitments for the Mt. Hamilton project.

Investor Verification Checklist

• Kinross Exposure: Verify the current market price of Kinross Gold Corporation stock, as Solitario's liquidity and asset value are heavily dependent on this single holding.
• Debt Covenants: Review the terms of the UBS Bank credit line and RBC margin loan, specifically the minimum equity value percentages (40% and 35% respectively) required to avoid forced liquidation of Kinross shares.
• Mt. Hamilton Commitments: Confirm the status of the LOI with Ely Gold and the company's ability to fund the required $300,000 initial LLC investment and subsequent earn-in expenditures.
• Exploration Budget: Assess the $4.7 million 2010 exploration budget against actual spending and the impact of the PBM deconsolidation on future consolidated costs.
• Stock Option Liability: Monitor the fair value of outstanding stock options, which are classified as liabilities and can cause significant volatility in reported net income/loss.