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Derivative Instruments
 12 Months Ended
Dec. 31, 2011
Notes to Financial Statements  
Derivative Instruments

6. Derivative instruments:

 

Ely warrants

In connection with the equity investment in Ely on August 30, 2010 (the “First Ely Investment”), Solitario acquired warrants to purchase 833,333 shares of Ely common stock at Cdn$0.25 per share for a period of two years. The warrants had a four-month hold period from August 30, 2010 whereby any shares received upon exercise of the warrants could not be sold until after December 30, 2010. Solitario recognized a $147,000 loss on derivative instrument during 2011 and recognized a $117,000 gain on derivative instrument during 2010 for the change in the value of the warrants received in the First Ely Investment. Solitario has recorded $36,000 and $182,000, respectively, as of December 31, 2011 and 2010 for the fair value of the warrants received from the First Ely Investment, based upon a Black-Scholes option pricing model. These warrants are classified as other current assets as of December 31, 2011 and as a long-term other asset as of December 31, 2010 in the consolidated balance sheet.

 

On October 19, 2010, Solitario made an additional equity investment into Ely, (the Second Ely Investment”) and received warrants to purchase an additional 833,333 shares of Ely common stock at Cdn$0.25 per share for a period of two years. However because the underlying shares’ four-month hold period did not expire until February 2011, as of December 31, 2010 the warrants were not classified as derivative instruments. In accordance with ASC 815, at December 31, 2010 Solitario did not classify the warrants acquired on October 19, 2010 as derivative instruments until January 18, 2011, or 31 days prior to the underlying shares being readily convertible to cash. Prior to that time, any gains and losses on those warrants were recorded in other comprehensive income. At December 31, 2010, Solitario recorded $184,000 for the fair value of the warrants received in the Second Ely Investment in other current assets and recorded $114,000 unrealized gain in other comprehensive income. On January 18, 2011, Solitario transferred an unrecognized gain on derivative instrument of $114,000 for the warrants acquired on October 19, 2010 to gain on derivative instrument. Solitario recorded $38,000 for the fair value of the 833,333 warrants received from the Second Ely Investment based upon a Black-Scholes option pricing model as other current assets as of December 31, 2011. Solitario recorded a $146,000 unrealized loss on derivative instrument in the statement of operations for the net loss related to the 833,333 warrants received from the Second Ely Investment for the year ended December 31, 2011.

 

Kinross Collar

On October 12, 2007, Solitario entered into a Zero-Premium Equity Collar (the "Kinross Collar") pursuant to a Master Agreement for Equity Collars and a Pledge and Security Agreement with UBS AG, London, England, an Affiliate of UBS Securities LLC (collectively "UBS"). Under the terms of the Kinross Collar, Solitario pledged 900,000 shares of Kinross common shares to be sold (or delivered back to Solitario with any differences settled in cash). On April 12, 2011, the remaining 100,000 shares under the Kinross Collar were released upon the expiration of the tranche of the Kinross Collar on that date. No shares were delivered to UBS under the Kinross Collar and no cash was paid or received upon termination of the final tranche of the Kinross Collar.

 

Solitario had 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, 2011 and December 31, 2010, Solitario recorded no value and $2,000, respectively, for the fair market value of the Kinross Collar in other current assets. Solitario recorded an unrealized loss of $2,000 during the year ended December 31, 2011. Solitario recorded an unrealized loss of $7,000 and gain of $522,000, respectively, for the year ending December 31, 2010 and 2009 in gain on derivative instrument for the change in the fair market value of the Kinross Collar.

 

International Lithium Corp.

 

In May 2011 TNR Gold Corp. (“TNR”) completed a spin-out of a new entity, International Lithium Corp. (“ILC”). Solitario owned 1,000,000 shares of TNR at the time of the spin-out and received 250,000 shares of ILC and warrants to acquire 250,000 shares of ILC (the “ILC Warrants”) at a price of Cdn$0.375 per share for a period of two years. During the year ended December 31, 2011, Solitario recorded unrealized gain on derivative instruments of $2,000 on its ILC warrants.

 

Covered call options

 

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, Solitario has given up the potential upside on the shares covered 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 recognized in the statement of operations in the period of the change.

 

Beginning in December 2008, Solitario sold covered calls covering its shares of Kinross common stock. In September 2011 Solitario sold options covering 65,000 shares for proceeds of $57,000, which were repurchased in October 2011 for $15,000 and Solitario recorded a gain of $42,000 in gain/loss on derivative earnings. Solitario sold three covered calls covering 130,000 shares of Kinross common stock during 2009, of which 50,000 of these call options expired unexercised in April 2009, 40,000 were repurchased in July 2009 and 40,000 were repurchased in November 2009. In November 2009 Solitario sold an option for 40,000 shares which expired unexercised in May 2010, and Solitario recorded a gain of $42,000 in derivative instruments during 2010 for this call.

 

Solitario does not use its Kinross Collar or covered call derivative instruments as trading instruments; and any cash received or paid related to its derivative instruments is shown as investing activities in the consolidated statement of cash flows.

 

The following table provides the location and amount of the fair values of Solitario's derivative instruments presented in the consolidated balance sheet as of December 31, 2011 and December 31, 2010:

 

(in thousands)                               Derivatives                     
  Balance Sheet Location December 31, 2011 December 31, 2010

Derivatives not designated as hedging
instruments under ASC 815

      
Ely Investment warrants Current other assets $  74  $    -   
Ely Investment warrants Long-term other assets  -   182  
Kinross Collar Current other assets  -     2  
ILC warrants Current other assets    4    -   
       

The following amounts are included in loss (gain) on derivative instruments in the consolidated statement of operations for the years ended December 31, 2011, 2010 and 2009:

 

(in thousands) Year ended December 31,
  2011(1) 2010(1) 2009(1)
(Loss) gain on derivatives not designated as hedging instruments under ASC 815 Realized Unrealized Realized Unrealized Realized Unrealized
Ely warrants $ -    $(179) $ -    $ 117  $    -    $   -   
ILC warrants -    2   -    -    -    -   
Kinross Collar  (2) -     -    (7) -    522 
Kinross Calls 42  -    42  -    138  34 
    Total (gain) loss $40  $ (177) $ 42  $110  $138  $556 

(1) Gains and losses on derivative instruments are realized upon expiration or repurchase. Cash received or paid for the derivative instrument may occur in a different period.

 

The Kinross common stock held as collateral for the margin loans at UBS Bank and RBC are held in Solitario’s brokerage accounts at UBS and RBC, respectively. See Note 3, “Short-term debt” above.