XPL

Solitario Exploration & Royalty Corp. 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2008. Solitario Exploration & Royalty Corp. (formerly Solitario Resources Corporation) is an exploration-stage company focused on acquiring precious and base metal properties in Latin America (Peru, Mexico, Brazil, Bolivia) 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 (Six Months Ended June 30, 2008)

Note: The company reported no revenue. Operations are funded by the sale of marketable securities and joint venture contributions.

Material Changes vs. Prior Period

• Net Loss Increase: Net loss for the six months ended June 30, 2008, was $3.19 million, compared to $0.73 million in the same period in 2007. The increase was driven primarily by a $2.73 million unrealized loss on the Kinross Collar derivative instrument and higher exploration expenses.
• Exploration Expenses: Increased to $2.05 million (6 months 2008) from $1.05 million (6 months 2007). This reflects increased activity on new projects (Cajatambo, Chonta) and the consolidation of Pedra Branca exploration costs previously reimbursed by joint venture partners.
• Derivative Liability: A new liability of $4.43 million was recorded for the fair value of the Kinross Collar, compared to $1.70 million at year-end 2007. This resulted in a $2.73 million unrealized loss on the income statement.
• Gain on Sale of Securities: The company recorded a $2.58 million gain from the sale of 142,920 Kinross shares, partially offsetting operating losses.

Outlook, Risks, and Management Commentary

• Liquidity Strategy: Management intends to liquidate portions of its Kinross Gold holdings to fund exploration and working capital. They forecast selling 300,000 shares in 2008 for expected proceeds of $6.4 million. Cash on hand ($1.86 million) plus liquid securities is deemed adequate for the next year.
• Joint Ventures:
  • Minera Chambara: Entered a joint venture with Votorantim in Peru. Solitario holds an 85% interest but recorded a negative equity value for the quarter, reducing the investment to zero via a non-cash charge.
  • Pedra Branca: Anglo Platinum holds a 15% interest and is funding 2008 exploration activities.
  • Newmont Alliance: Committed to spending $3.77 million over four years on gold exploration; $2.24 million has been spent as of June 30, 2008.
• Risks:
  • Market Risk: Liquidity is heavily dependent on the market price of Kinross Gold shares. A 10% decrease in Kinross stock price would increase the derivative liability and net loss significantly.
  • Exploration Risk: As an exploration-stage company, there is no assurance that mineral properties will yield economic reserves.
  • Political Risk: Operations in Bolivia and Peru are subject to political and regulatory changes.

Investor Verification Checklist

• Kinross Collar Valuation: Verify the fair value assumptions and the impact of the $4.43 million derivative liability on future earnings volatility.
• Exploration Budget Adherence: Confirm if the company can meet its $4.2 million 2008 exploration budget without further dilution or asset sales.
• Joint Venture Funding: Monitor the ability of partners (Votorantim, Anglo Platinum, Newmont) to meet their funding commitments, which are critical for Solitario's cash flow.
• Deferred Tax Liabilities: Review the $7.76 million deferred tax liability related to unrealized gains on Kinross stock and the potential cash tax impact upon future sales.
• Stock Option Dilution: Note that 2.22 million potential shares were excluded from diluted EPS calculations due to anti-dilutive effects; monitor future option exercises.