XML 64 R7.htm IDEA: XBRL DOCUMENT

Business and Significant Accounting Policies

9 Months Ended

Sep. 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 September 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 nine months ended September 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 September 30, 2013 and December 31, 2012, which consists of the following:

(in thousands)	September 30, 2013	December 31, 2012
Shares	600	670
Fair value
Current assets	$1,313	$3,110
Long term assets	$1,717	$3,402

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

(in thousands)	Three months ended September 30		Nine months ended September 30
	2013	2012	2013	2012
Shares sold	10	-	70	180
Proceeds	$45	$ -	$358	$1,591
Gain on sale	$38	$ -	$308	$1,464

As of September 30, 2013 Solitario has no outstanding short-term margin loans and as of December 31, 2012, Solitario had borrowed $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.” As of November 4, 2013 we own 600,000 shares of Kinross common stock which have a value of approximately $3.01 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 nine months ended September 30, 2013 Solitario recorded a reduction of $158,000 and $896,000, respectively, in its equity method investment for Solitario’s share of the loss of PBM. During the three and nine months ended September 30, 2012 Solitario recorded a reduction of $93,000 and $339,000, respectively, in its equity method investment for Solitario’s share of the loss of PBM. During the three and nine months ended September 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 nine months ended September 30, 2013, Solitario granted stock options for 120,000 shares with an exercise price of $1.14, the closing price of a share of Solitario common stock as quoted on the NYSE-MKT on the date of the grant. The options have a 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%. There were no options exercised from the 2013 Plan during the three and nine months ended September 30, 2013.

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 nine months ended September 30, 2013 and 2012. There were no options exercised during the three months ended September 30, 2013. During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2013, Solitario recorded $13,000 and $206,000, 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 nine months ended September 30, 2012, Solitario recorded $174,000 and $523,000, respectively, of stock option expense for the amortization of grant date fair value with a credit to additional paid-in-capital.

Revenue recognition

Solitario records delay rental payments as revenue in the period received. Solitario received $200,000 in delay rental payments on its Bongará property during the three and nine months ended September 30, 2013 and 2012, respectively. Any payments received for the sale of property interests without reserves are recorded as a reduction of the related property’s capitalized cost. Proceeds which exceed the capitalized cost of the property without reserves are recognized as revenue. Payments received on the sale of properties with reserves are recognized as revenue to the extent the proceeds exceed the proportionate basis in the assets sold. Gain on the sale of a mineral property revenue stream is deferred to the extent there is a guarantee for the future revenue stream until such time as the potential funding obligation for the guarantee is reduced or released.

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 nine months ended September 30, 2013 and 2012. During the three and nine months ended September 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 nine months ended September 30, 2013 and 2012, Solitario excluded an additional 1,624,748 shares related to warrants from the calculation of earnings per share 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)	September 30, 2013	December 31, 2012
Marketable equity securities at fair value	$3,790	$7,093
Cost	1,301	851
Accumulated other comprehensive income for unrealized holding gains	2,489	6,242
Deferred taxes on accumulated other comprehensive income for unrealized holding gains	1,400	2,328
Accumulated other comprehensive income	$1,089	$3,914

The following table represents changes in marketable equity securities:

(in thousands)	Three months ended September 30,		Nine months ended September 30,
	2013	2012	2013	2012
Gross cash proceeds	$ 45	$ -	$ 358	$1,591
Cost	7	-	50	127
Gross gain on sale included in earnings during the period	38	-	308	1,464
Deferred taxes on gross gain on sale included in earnings	(14)	-	(115)	(546)
Reclassification adjustment to unrealized gain in other comprehensive income for net gains included in earnings	(24)	-	(193)	(918)
Gross unrealized holding (loss) gain arising during the period included in other comprehensive loss.	(187)	1,544	(3,445)	(1,121)
Deferred taxes on unrealized holdings loss included in other comprehensive loss	(61)	(576)	813	418
Net unrealized holding loss (gain)	(248)	968	(2,632)	(703)
Other comprehensive loss (gain) from marketable equity Securities	$(272)	$968	$(2,825)	$(1,621)