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Derivative Instruments

12 Months Ended

Dec. 31, 2012

6. Derivative instruments:

RMB warrants

Because the Facility Agreement requires Solitario to be current in its filings with the United States Securities and Exchange Commission, Solitario has determined the warrants could be cash settled in accordance with ASC 815-40, “Derivatives and Hedging, Contracts in Entity’s Own Equity.” Accordingly, Solitario has classified its RMB Warrants as a liability and adjusts the fair value of the warrants at each balance sheet date, with changes in value recorded in other income/expense in the statement of operations. Solitario recorded a loss on the RMB Warrants of $488,000 during 2012, based upon a Black-Scholes model using a 35 month-life, a volatility of 62% a stock price of $1.68 per share and a risk free interest rate of 0.35%

Covered call options

Beginning in December 2008, Solitario sold covered calls covering its shares of Kinross common stock. In September 2012, Solitario sold options covering 100,000 shares for proceeds of $68,000. In November 2012 Solitario repurchased options for 50,000 shares for $17,000, and recorded a gain on derivative instruments of $23,000. As of December 31, 2012, the remaining options for 50,000 shares were recorded in other current assets at their fair value of $3,000 and Solitario had recorded a gain on derivative instruments of $25,000. 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 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. Solitario does not use its covered call derivative instruments as trading instruments; any cash received or paid related to its derivative instruments is shown as investing activities in the consolidated statement of cash flows.

Ely warrants

During 2010, in connection with the acquisition of Mt. Hamilton and the formation of MH-LLC, Solitario made a series of equity investments in Ely. Solitario acquired 3,333,333 shares of Ely and warrants to purchase 1,666,666 shares of Ely stock for Cdn$0.25 per share, with warrants for 833,333 shares that expired on August 30, 2012 and warrants for 833,333 that expired on October 19, 2012. Solitario has recorded gains and losses on the Ely warrants in its gain (loss) on derivative instruments in the statement of operations as detailed below. Solitario has no remaining value for its investment in the Ely warrants in the consolidated balance sheet at December 31, 2012. Solitario’s fair value for its investment in the Ely warrants at December 31, 2011, based upon a Black-Scholes option pricing model, was recorded as a current asset as detailed below.

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.

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. Solitario has written-down its investment in the ILC Warrants and has no value recorded for the ILC warrants as of December 31, 2012.

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, 2012 and December 31, 2011:

(in thousands)	Derivatives
	Balance Sheet Location	December 31, 2012	December 31, 2011
Derivatives not designated as hedging instruments under ASC 815
RMB warrants	Long-term liabilities	$ 1,138	$ -
Ely Investment warrants	Current other assets	-	74
ILC warrants	Current other assets		4

The following amounts are included in loss on derivative instruments in the consolidated statement of operations for the years ended December 31, 2012 and 2011:

	Year ended December 31,
(in thousands)	2012	2011
(Loss) on derivatives not designated as hedging instruments under ASC 815
Ely warrants	$(74)	$ (179)
ILC warrants	(4)	2
Kinross Collar	-	(2)
Kinross Calls	48	42
Total loss	$ (30)	$(137)

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.