Apex Silver Mines Might Be a Promising Short Play Now 9 comments
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Crashing commodities prices are not just putting hedge fund managers into a jam, they're also putting resource producers at risk. The price surge triggered by the commodities super-cycle had been a boon to large-scale miners in particular. Soaring prices for oil, nickel, copper, and molybdenum made the exploration and development of marginal sources not only feasible but profitable. Across the world, mines (especially silver mines) re-opened that had been abandoned as too expensive a decade and a half ago. (The only fly in the ointment was the falling dollar, which made operating expenses in non-dollar countries relatively more expensive.)
Just take gold: With stocks are as volatile as nitroglycerin, gold should be trading above $2,000 an ounce! But the dollar insurrection has shaken up the commodities markets. Some experts now put gold's downside at $500... even $400. What if they're right? (That's the reason we developed a gold hedge strategy that insures you will make money on your gold position either way. Find his Special Report on the Members Only Reports section of HotStockConfidential.com.)
But as the world economy moves into recession, credit locks up, and commodities prices continue to fall, we predict that a large number of mines will again be abandoned over the next three months, and that a sizeable number of mining companies will file for bankruptcy. We have picked up rumblings that one of these companies might be Apex Silver Mines (SIL). Of course, we cannot tell for sure.
Some of the information we have obtained could not be verified independently. Other bits may qualify as "insider information". But most of what we have compiled here is easily documentable in public sources. We have a couple of rules here at TFN. We don't spread rumors. We don't trade on insider information -- we publish it when we find it. And we don't trade on our own recommendations -- unless we disclose it to our readers. With appropriate warnings that you should do some digging on your own before you make a decision to buy, borrow, or sell shares.
According to our sources, the only important asset Apex currently owns is its 65% share in Minera San Cristobal (MSC), a sizeable silver, zinc, and lead mine in southwestern Bolivia. The problem is that the Bolivian government, inspired by its petro-Communist neighbors in Venezuela, has recently raised applicable mining taxes, increasing the income tax rate from 25% to 37.5% when prices meet specified thresholds and eliminating the creditability of the complementary mining tax against the income tax.
These changes will result in a higher income tax burden, and hence cost base, for the company. But there appear to be internal issues as well that point at lack of financial stability:
- Entry into a Material Definitive Agreement for a $225 million Senior Secured Loan arranged by BNP Paribas at LIBOR + 3.5%, secured by all tangible and intangible assets owned by Apex and all its subsidiaries (8-K Filing dated Dec 8, 2005).
- A complex derivative instrument required by the Senior Secured Loan which represents a current liability of over $450 million. This hedge accrues losses at a rate of approximately $115 million per month. (8-K filing dated August 12, 2008.)
Our source writes:
This Facility requires a first payment of the principal by Dec 2008 AND completion of Minera San Cristobal construction at full production by year-end 2008. Apex will not be able to comply with this requirement and thus the senior lenders , by contract, may require payment of the principal in full and settlement of the hedge position.
As early as the third quarter of 2006, the company had to sell 35% of Minera San Cristobal to Sumitomo (SSUMY.PK) for $224 million in cash and a Deferred Payment Agreement valued at $108 million (8-K filing of September 8, 2006). This past May, analysts expressed concern about the multi-million-dollar funding requirements of the San Cristobal silver mine in Bolivia. In response, Apex announced it had reached an agreement with joint venture partner Sumitomo Corporation to sell the rights for deferred payments to Sumitomo for $70 million.
Effective March 9, 2007, Apex Silver entered into an Indemnification Agreement with each member of its Board of Directors and its executive officers, "agreeing to indemnify each director and executive officer to the fullest extent permitted by law if he/she is made, or threatened to be made, a party to any threatened, pending or completed action, suit, or proceeding by reason of his affiliation with the Company. "The Agreement provides for the advancement of expenses incurred in defending or participating in any proceeding." (8-K filing dated March 15, 2007.)
Our source believes the company was able to survive for the last three months by settling the Deferred Payment Agreement of $108 million it had with Sumitomo for $70 million in cash, taking a loss of over $30 million in the transaction (8-K filing of July 8, 2008); and by tapping into a line of credit of $50 million from Sumitomo (8-K filing dated August 15, 2008) which was recently increased to $75 million (8-K filing dated October 3, 2008). Sumitomo has the option of exchanging debt for a greater share of Minera San Cristobal. Meanwhile, the company urgently needs cash to continue operating the mine, make the first payment of the principal to the senior secured lenders, make good on the accrued hedge losses, and restructure the senior loan because it will be unable to comply with the requirement to have MSC completed by Dec 2008.
This is what the company writes in its August 12, 2008 8-K filing:
Notwithstanding this new line of credit, the company believes that it is likely to require a significant restructuring of its operations or indebtedness based on the foregoing factors and its projections with respect to the San Cristóbal mine. The company has engaged Jefferies & Company, Inc. as its financial advisor to assist it in reviewing strategic and financial alternatives, which could include new debt or equity financing, a sale of additional interests in San Cristóbal or in one or more of the company's exploration properties or a restructuring, refinancing or amendment of the Facility or the related metal derivative positions.
With the current worldwide credit meltdown, it the only realistic source of cash for Apex now is Sumitomo. Here's what could happen in the next weeks:
- Sumitomo may purchase the Loan Facility ($225 million) at a discounted price from the Senior Secured Lenders, which are desperate for cash and will book a receivable of $225 million from Apex exchangeable for shares of MSC, as in the case of the recent loans.
- Sumitomo will pay the accrued derivative liability and book a receivable from Apex. Our source speculates: "For those SIL shareholders that were hoping for some big company to purchase SIL at a premium, the sad news is that Apex executives, in effect, are selling the only significant asset (MSC) to settle the huge liabilities it has."
When all is said and done,
Apex may owe Sumitomo more than $700 million. Considering it bought 35% of MSC for $294 million ($8.4 million/percentage ownership in MSC), this is more than enough to get 100% ownership of MSC. With Sumitomo sole owner of MSC, Apes Silver Mines Ltd. becomes an empty shell with some unwanted liabilities and Chapter 11 in the very short term. Of course, also some very angry shareholders. (Auditors PwC: look out for the class action lawsuit.)
Yesterday, SIL was trading at $1.56 a share, down from its 52-week high of $21.33.
Stock position: None.
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This article has 9 comments:
What if metals jump overnight 10-20%? This stock could easily double as in September?
Can someone experienced tell me if this is a good play?
Now somebody is buying, this is clear in the volume; i espect the stock to go to 4 $, very soon. A counter strategy here against short seller will pay off a lot..
If zinc have been hedge higher the compagny could buy back at current price it s hedge book.
I will be suicidal to short the stock, wich is a buy, as silver will be around 26$ per ounce in march 2009!
Lease rate on silver is going up, and gold sold buy centrale bank in Zurich and London will be stop in to weeks..
1000$ per once for gold will be the 35 $ per once of 1968.. below 900$ per ounce gold is going out of centrale Bank at speed of light..
Zurich ETF fund in gold find not enough place in their vault, and looking of an other vault to find place... Germany face a rush on gold.
Banks in europe are crashing one after an other...
Precious metal is the place to be; and in december the rally will be HUGE not to say more, like whan General de Gaulle ask to pay american deficit to France in real gold in 1968.. !!
People are missing the huge price manipulation going on here on the comex, while physical metal is in hard demand..
We have reach the bottom on all SILVER majors..
To early to buy gold mines but next month will be the entry price for gold stock..
BUY SIL CDE HL SSRI PAAS SLW at least HERE for a minimum 100% ride
Cheers its here the turn
I admit that you do present some legitimate information here, which is all teh reason why SIL is so cheap. But one should NEVER should any stock trading at $1-ish, period. So any time any one advocate shorting a stock at $1-ish, it should automatically be suspected of untold agenda and should immediately be rejected, and it should actually be used as a contrarian indicator that the stock should be bought instead.
Read my thoughts:
seekingalpha.com/artic...
What you failed to discuss is the bullish prospect of silver, the ridiculous high short rate in SIL, and that US dollar is being debased by the massive money printing press. If I have some big money. The way I would play SIL is load up massively at such cheap price ($1-ish), lend some money to SIL if that is all they need to survive, and kill the shorts.
How's that debased currency and the bullish prospect of silver treating you?
I'm just wondering what effect the hedge position will have on Apex in the future. With the decline in metal prices they should be close to booking a gain on their derivatives. For instance last quarter Apex book a $223 mil mark to market gain on their hedges and that quarter ended June 30th before the total collapse of metal prices. So I would argue that the $450 mil liability you mention is much lower if not positive. Also, it looks to me as if completion of SCM has already occurred. Therefore I would argue that they are not insolvent yet just illiquid. I wouldn't buy this company but at $1, but I wouldn't short it either- you could lose your shirt either way. If I am correct about the derivatives does it change your analysis?
BTW, let me clarify some fact about SIL for you. SIL is one of the few zinc and lead miners that benefits from a DROP in the price of those metals right now. WHY? Because SIL was forced by bankers to hedge those metals at rates killing SIL as the metals soared.low lead and zinc prices help SIl right now — possibly to the tune of tens of millions of dollars (maybe more)
Second, silver is holding up and went back over $10 today in NYC. It is after all a hedge against inflation and crazy times. SIL is not hedged on their silver production, so they can bask in these prices.
If I had shorted this under $5, then I would get out now. Some time soon this stock will run. The shorts from $15 have more time, though time will be money when SIL runs.