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Business and Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Business and Significant Accounting Policies

1. Business and Significant Accounting Policies

Business

Solitario Exploration & Royalty Corp. (“Solitario”) is a development stage company (but not a company in the “Development Stage”) under Industry Guide 7, as issued by the United States Securities and Exchange Commission, with a focus on developing the Mt. Hamilton project located in Nevada. In addition to its Mt. Hamilton project, Solitario acquires and holds a portfolio of precious and base metal exploration properties for future sale, joint venture or to create a royalty prior to the establishment of proven and probable reserves. Although Solitario intends to develop the Mt. Hamilton project, Solitario has never developed a mineral property. At June 30, 2013, Solitario's mineral properties are located in the United States, Mexico, Brazil and Peru.

The accompanying interim condensed consolidated financial statements of Solitario for the three and six months ended June 30, 2013 and 2012 are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America. They do not include all disclosures required by generally accepted accounting principles for annual financial statements, but in the opinion of management, include all adjustments, consisting only of normal recurring items, necessary for a fair presentation. Interim results are not necessarily indicative of results, which may be achieved in the future or for the full year ending December 31, 2013.

These financial statements should be read in conjunction with the financial statements and notes thereto which are included in Solitario’s Annual Report on Form 10-K for the year ended December 31, 2012. The accounting policies set forth in those annual financial statements are the same as the accounting policies utilized in the preparation of these financial statements, except as modified for appropriate interim financial statement presentation.

Investment in Kinross

Solitario has a significant investment in Kinross Gold Corporation (“Kinross”) at June 30, 2013 and December 31, 2102, which consists of the following:

(in thousands)	June 30, 2013	December 31, 2012
Shares	610	670
Fair value
Current assets	$1,326	$3,110
Long term assets	$1,785	$3,402

During the three and six months ended June 30, 2013 and 2012, Solitario sold the following shares of Kinross:

(in thousands)	Three months ended June 30		Six months ended June 30
	2013	2012	2013	2012
Shares sold	60	150	60	180
Proceeds	$313	$1,238	$313	$1,591
Gain on sale	$270	$1,132	$270	$1,464

As of June 30, 2013 and December 31, 2012, Solitario has borrowed $1,118,000 and $1,500,000 in short-term margin loans against its holdings of Kinross shares. The short-term margin loans are discussed below under, “Short-term debt.” Subsequent to June 30, 2013 Solitario sold 10,000 shares of Kinross for proceeds of $45,000 and as of August 6, 2013 we own 600,000 shares of Kinross common stock which have a value of approximately $3.0 million based upon the market price of $5.01 per Kinross share. Solitario’s investment in Kinross common stock represents a significant concentration of assets, with the inherent risk that entails. Any significant decline in the market value of Kinross common shares could have a material impact on our liquidity and capital resources.

Equity method investments

Solitario accounts for its 49% investment in Pedra Branca do Mineracao, Ltd. (“PBM”) under the equity method. During the three and six months ended June 30, 2013 Solitario recorded a reduction of $425,000 and $738,000, respectively, in its equity method investment for Solitario’s share of the loss of PBM. During the three and six months ended June 30, 2012 Solitario recorded a reduction of $137,000 and $246,000, respectively, in its equity method investment for Solitario’s share of the loss of PBM. . During the three and six months ended June 30, 2013 and 2012 PBM had no revenues.

Employee stock compensation plans

On June 18, 2013 Solitario’s shareholders approved the 2013 Solitario Exploration and Royalty Corp. Omnibus Stock and Incentive Plan (the “2013 Plan”). Under the terms of the 2013 Plan, the Board of Directors may grant awards for up to 1,750,000 shares to Directors, officers, employees and consultants. Such awards may take the form of stock options, stock appreciation rights, restricted stock, and restricted stock units. The terms and conditions of the awards are pursuant to the 2013 Plan and are granted by the Board of Directors or a committee appointed by the Board of Directors. During the three and six months ended June 30, 2013, Solitario granted a stock option for 120,000 shares with an exercise price of $1.14, the closing price of a shares of Solitario common stock as quoted on the NYSE-MKT on the date of the grant. The option has term of five years, vested 25% on the date of grant and 25% on each subsequent anniversary date, and a grant date fair value of $78,000, based upon a Black-Scholes model with a 68% expected volatility, an expected life of five years and a risk free interest rate of 1.24%.

On June 27, 2006 Solitario’s shareholders approved the 2006 Stock Option Incentive Plan (the “2006 Plan”). Under the terms of the 2006 Plan, the Board of Directors may grant up to 2,800,000 options to Directors, officers and employees with exercise prices equal to the market price of Solitario’s common stock at the date of grant.

There were no new options granted under the 2006 Plan during the three and six months ended June 30, 2013 and 2012. There were no options exercised during the three months ended June 30, 2013. During the six months ended June 30, 2013 options for 112,500 shares were exercised at a price of Cdn$1.55 per share for proceeds of $176,000 and 5,000 options were exercised at a price of Cdn$1.49 per share for proceeds of $7,000. No options were exercised during the three and six months ended June 30, 2012.

Solitario’s outstanding options on the date of grant have a five year term, and vest 25% on date of grant and 25% on each of the next three anniversary dates. Solitario recognizes stock option compensation expense on the date of grant for 25% of the grant date fair value, and subsequently, based upon a straight line amortization of the unvested grant date fair value of each of its outstanding options. During the three and six months ended June 30, 2013, Solitario recorded $68,000 and $192,000, respectively, of stock option expense for the amortization of grant date fair value with a credit to additional paid-in-capital. During the three and six months ended June 30, 2012, Solitario recorded $174,000 and $348,000, respectively, of stock option expense for the amortization of grant date fair value with a credit to additional paid-in-capital.

Earnings per share

The calculation of basic and diluted earnings and loss per share is based on the weighted average number of common shares outstanding during the three and six months ended June 30, 2013 and 2012. During the three and six months ended June 30, 2013 and 2012, Solitario excluded 2,600,900 and 2,433,400, respectively, potentially dilutive shares related to outstanding common stock options from the calculation because the effects were anti-dilutive. During the three and six months ended June 30, 2013, Solitario excluded an additional 1,624,748 shares related to warrants from the calculation because the effects were anti-dilutive.

Marketable equity securities

Solitario's investments in marketable equity securities are classified as available-for-sale and are carried at fair value, which is based upon quoted prices of the securities owned. The cost of marketable equity securities sold is determined by the specific identification method. Changes in fair value are recorded in accumulated other comprehensive income within shareholders' equity, unless a decline in fair value is considered other than temporary, in which case the decline is recognized as a loss in the consolidated statement of operations.

The following tables summarize Solitario’s marketable equity securities and accumulated other comprehensive income related to its marketable equity securities:

(in thousands)	June 30, 2013	December 31, 2012
Marketable equity securities at fair value	$4,022	$7,093
Cost	1,307	851
Accumulated other comprehensive income for unrealized holding gains	2,715	6,242
Deferred taxes on accumulated other comprehensive income for unrealized holding gains	1,354	2,328
Accumulated other comprehensive income	$1,361	$3,914

The following table represents changes in marketable equity securities:

(in thousands)	Three months ended June 30,		Six months ended June 30,
	2013	2012	2013	2012
Gross cash proceeds	$313	$1,238	$313	$1,591
Cost	43	106	43	127
Gross gain on sale included in earnings during the period	270	1,132	270	1,464
Deferred taxes on gross gain on sale included in earnings	(101)	(422)	(101)	(546)
Reclassification adjustment to unrealized gain in other comprehensive income for net gains included in earnings	(169)	(710)	(169)	(918)
Gross unrealized holding loss arising during the period included in other comprehensive loss.	(1,848)	(1,579)	(3,258)	(2,665)
Deferred taxes on unrealized holdings loss included in other comprehensive loss	348	589	874	994
Net unrealized holding loss	(1,500)	(990)	(2,384)	(1,671)
Other comprehensive loss from marketable equity Securities	$(1,669)	$(1,700)	$(2,553)	$(2,589)

On April 22, 2013 Solitario entered into an agreement with Ely Gold & Minerals, Inc. (“Ely”), whereby Solitario paid Ely $500,000, and subscribed for 5,131,150 shares of Ely common stock. As part of the agreement, Ely agreed to reduce Solitario’s required subscription for Ely common stock, from $750,000 to $500,000, the proceeds of which Ely used along with $250,000 of Ely’s funds to satisfy Solitario’s $750,000 payment obligation to Augusta Resource Corporation (“Augusta”) on June 1, 2013. As a result of receiving both Ely common stock worth $500,000 and reducing the obligation to Augusta by $500,000, Solitario recorded additional paid-in capital of $500,000 during the three and six months ended June 30, 2013. Solitario also recorded a credit to noncontrolling interest for Ely’s $250,000 payment of the obligation under the Augusta note during the three and six months ended June 30, 2013. See also Note 5, “Long-term debt” and Note 9, “Shareholders’ equity and noncontrolling interest” below.