Solitario Exploration & Royalty Corp. (XPL-AMEX, SLR-TSX)

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August 6, 2012 Issue

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In their Mt. Hamilton Gold Project in Nevada and the Bongará Zinc Project in Peru, Solitario Exploration & Royalty Corp. has Two Value Drivers and is On Track to Become One of the Newest U.S. Gold Producers

Company Profile:
www.solitarioxr.com

With completion of the Mt. Hamilton feasibility study in February 2012, Solitario Exploration & Royalty Corp. (NYSE Amex: XPL; TSX: SLR) is on track to become one of the newest U.S. gold producers. The Mt. Hamilton gold project in eastern Nevada is a development-stage project with operating cash costs of $535/oz. and an 8-year mine life averaging 54,000 ounces per year. Production is anticipated to begin in late-2014. Mt. Hamilton also has excellent potential to add additional resources to extend mine life.

Our second most important asset is our Bongara zinc project in Peru that is joint ventured with Votorantim Metais, the fifth largest zinc producer in the world. Over $50 million has been spent on the property to date and a Feasibility Study is anticipated in 2013. Importantly, Solitario is fully carried to production and will retain a 30% interest in the project.

Christopher Engle Herald, M.Sc.
Chief Executive Officer
Mr. Herald has been a director of Solitario since August 1992. He has also served as Chief Executive Officer since June 1999 and President since August 1993. Mr. Herald also served as a director of Crown since April 1989, as Chief Executive Officer of Crown since June of 1999, President of Crown since November 1990 and was Executive Vice President of Crown from January 1990 to November 1990. Prior to joining Crown, Mr. Herald was a Senior Geologist with Echo Bay Mines and Anaconda Minerals. Mr. Herald currently serves as Chairman of the Denver Gold Group, a not-for-profit industry association recognized for organizing preeminent North American and European gold conferences for institutional investors. Mr. Herald also serves on the board of Atna Resources Ltd. (TSX: ATN). Mr. Herald received a M.S. in Geology from the Colorado School of Mines and a B.S. in Geology from the University of Notre Dame.

Basic Materials
Gold
(XPL-AMEX, SLR-TSX)

Solitario Exploration & Royalty Corp.
4251 Kipling Street, Suite 390
Wheat Ridge, CO 80033
Phone: 303-534-1030
www.solitarioxr.com


 

Interview conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published – August 6, 2012

CEOCFO: Mr. Herald, what is the vision and focus at Solitario?

Mr. Herald: Right now, we are really focused on a very important gold project in the state of Nevada, our Mt. Hamilton project. We acquired this property about two years ago and completed a feasibility study on that gold project in February of this year. We are currently in the permitting phase of the project. The feasibility study was very favorable in terms of the economics of the project. We see 540,000 ounces of gold equivalent in reserves, another 100,000 beyond that which is in a category called resource. Currently, we have two drill rigs running at Mount Hamilton where we are trying to add new resources there. Our goal is to move the total resource base up into the 700,000 to 800,000 ounce range as we conduct more drilling. It is a good project in terms of economics with the feasibility study indicating it will cost us about $550 to produce an ounce of gold, and we’ll produce about 55,000 ounces of gold per year. If we add the resources that we are trying to add over the next twelve months, we think we will be able to move up the annual gold production rate and perhaps get into the 65-thousand ounce per year range, which really creates a very good return to us. The capital cost is very manageable at $70 million to put this project into production, and our time horizon there is first production in late 2014 or the spring of 2015, which is largely dependent on permitting, but we think that is a very achievable permitting schedule.

CEOCFO: What attracted you initially to the project?  As you started to look at the feasibility studies, what surprised you?

Mr. Herald: First, we really wanted to have an advanced gold project in the United States. The project was owned by a junior Canadian company. We have earned an 80% interest by completing the feasibility study. In the world today, we think the best place to be producing gold is in the United States, it is a very safe jurisdiction. The state of Nevada is very receptive to mining, so we looked at all those things, plus a relatively inexpensive cost of acquisition, which was very attractive to us. I think what surprised us is two things, one of them being the potential to add significant new resources to the project. The work we have done over the last two years has continued to give us confidence that we are going to add new resources as we continue to do more drilling, and the feasibility is the second thing that surprised us. The cash cost to produce an ounce of gold came in quite low, and we were pleasantly surprised with that. With $550 per ounce cash cost to produce one ounce of gold, that certainly puts it in the lower half of production cost in North America. It is attractive economics. One other thing is  the capital cost being just $70 million, that is a relatively modest capital cost in the world of new mining projects, so all those things were good surprises for us.

CEOCFO: What accounts for the low cost?

Mr. Herald: It has two very good attributes to it, it is an open pit mine so we are not underground, that allows us to achieve very low production costs, and we use big haul trucks and shovels. The second thing is we can recover the gold with a relatively inexpensive and very proven technology called heap leaching, so between those two attributes, we have low cost mining and we have low cost processing to recover that gold. There is nothing that is very complicated about this mine, it is as simple as mining can get and that was quite attractive to us.

CEOCFO: Will you need to add to your team when you get to production? Has your group worked on production as well as exploration in the past?

Mr. Herald: Our key technical people have worked in operating mines. However, as a company, we have not operated a mine before, so we will be looking for additional talent for this project. Nevada is by far the largest gold producing state in the country and probably accounts for 75% of all the gold produced in the United States, so there is a pretty deep talent pool in Nevada. We will be adding specialists over the next twelve months that will increase the team’s technical abilities both on the mining side and the processing side. We have in-house a good team that could take the project through feasibility and permitting. We will be adding to the operational side of the management of the company in the next twelve months.

CEOCFO: You indicated that the funding is not much for a project like yours. In these difficult times how does Solitario reach the right people to work on the project or to invest in the project?

Mr. Herald: You are absolutely right; it is kind of a strange situation in the precious metal industry right now. We still have a very strong gold price somewhere in the vicinity of $1575 today, which makes it a very attractive price. The gold mining companies’ equities are really at significant lows including our own, and there has just been a divergence there. I think as the general market hopefully improves over the next six to eighteen months and we see gold even climbing higher which I believe it will, we will start seeing much more money flow back into the precious metal mining industry. It certainly has been in a tailspin for at least the last six months and realistically almost the last two years. We see funding in two principle ways. We did a funding ourselves about a month ago where we sold a 2.4% net smelter return royalty interest to a royalty company for $10 million, so that was very significant and added a great deal of credibility to this project. This was an arms-length transaction. We are also looking very seriously now at some debt type financing. We have strong interest in that, the economics are very good, and I think with the credibility of the project especially now with the sale of that NSR royalty for $10 million, the market is viewing this as a very real and a very financeable project. Anyone we have talked to about funding this project has been favorably impressed with the dynamics of it and the economics.

CEOCFO: Do you still have some other projects on the back burner in Latin America or is that off the table now?

Mr. Herald: It is not off the table, but it has become less important to us, and our focus is clearly on our Mt. Hamilton gold project in Nevada.  But there is one other project that I think is just so underappreciated in the market now for us, and that is called our Bongará Zinc Project in Peru. There we have a partner, a private Brazilian company called Votorantim Metais, which is a major Brazilian conglomerate, and I think they had $18 billion in sales last year. They are currently funding all the expenses on that project, and this year they are going to spend in the area of $10 million on our project. Well over $50 million has been spent on the project to date, and we think it is one of the best undeveloped zinc projects in the world. Votorantim Metais is the perfect partner for us because they own the largest zinc smelter in South America and it is located in Peru, so they are looking at our Bongará Zinc Project as a key project to feed that smelter. Currently, they are doing underground work and they are in pre- feasibility. Next year they are going to be full-fledged feasibility. They will also complete a thirty kilometer road to the project site itself, and up until now logistics has been all helicopter supported. The current timeline for production is sometime in the first half of 2016, so it is a little further out there, but the thing that really makes it attractive to us is that we are carried to production and we never have to spend another dime on the project, our partners are funding everything. We will retain a 30% interest, they will earn a 70% interest, and all the cost through feasibility is 100% funded by them. We do not have to pay them back. Once they go into construction, then they will be lending us money for our 30% interest, and we will pay them back through 50% of the cash flow due us. Economically, this is a very strong project for us because we do not have to finance it.

CEOCFO: Why should Solitario standout to investors?

Mr. Herald: We have two value drivers, which are Mt. Hamilton Gold Project and the Bongará Zinc Project. With Mt. Hamilton if you look at our peers that have development projects in North America of the size we have, you will see, many of them getting valuations in the neighborhood of $150-$300 per ounce of gold in the ground, right now our equity is probably at 30% of our peers in that relationship. As we develop this project, go through permitting, and continue to de-risk it, I think the market will reward those advancements. As the Bongará project moves through pre-feasibility into feasibility and then construction, I think the same thing will happen there. Comparing our cash flows that we see in the not too distant horizon, to our peers, we have a great deal of room to get rerated by the market as we achieve these different milestones that we see in front of us.

CEOCFO: What should people remember most about Solitario Exploration & Royalty?

Mr. Herald: I happen to believe that in the future, gold is a great place to be, even though it is going to have its cyclical ups and downs. Right now, gold has been consolidating in the neighborhood of $1500 an ounce to $1650. The longer term direction of that is still very much upward. When we look at the zinc price, many of the people that study in detail the commodity foresee three or four of the largest zinc mines in the world coming off stream over the next couple of years. There are not many new development projects out there in zinc, but this is one of them. I think this could catch fire again, so between the Mt. Hamilton Gold Project in Nevada and our Bongará Zinc Project in Peru, there is a great deal of room for optimism in the future.

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We have two value drivers, which are Mt. Hamilton Gold Project and the Bongará Zinc Project… Comparing our cash flows that we see in the not too distant horizon, to our peers, we have a great deal of room to get rerated by the market as we achieve these different milestones that we see in front of us. - Christopher Engle Herald, M.Sc.