Is Apex Silver Mines a Buy?

In the current issues of the Silver Analyst, we have been analyzing and ranking 63 stocks, which have been known, perceived or touted as silver plays in the last 4 years. Clearly some come out as losers while others look like being winners for the next surge in silver prices. One stock caught my attention recently for technical and fundamental reasons and that is Apex Silver Mines Ltd (SIL).

Fundamentally, Apex Silver is a silver and zinc company that has a 65% ownership in the potentially 4th largest silver mine in the world at Cristobal in Bolivia. They plan to commence production in mid to late 2007 with a projected average five-year production rate of 16.9 million ounces of silver and 225,000 tonnes of zinc.

The respective cash cost prices are $1.97 per silver ounce and $0.51 per zinc pound, which compares to the current market rate of $13.50 per silver ounce and $1.76 per zinc pound.

At those projected levels, silver would generate $228 million revenues and zinc would see $873 million. However calculated on base profit, silver would see $195 million profit and zinc would have $620 million. Not including the smaller lead projections, Apex Silver is about a 32% silver company that compares well to other so-called silver mining companies.

We also note that the negative noises emanating from the Bolivian government seemed to have died down and become reassuring though such a matter as government whim must always be monitored.

From a technical point of view our newsletter looked at how Apex ranked amongst our 63 stocks. The study was based on how these stocks had actually outperformed and underperformed silver at key points in the last four years of the silver bull. Apex Silver was ranked 40th out of 63, which at first sight does not seem very promising. Our first chart shows how Apex has performed compared to silver (silver price is in red).

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Evidently there is a degree of correlation between silver and Apex though its connection to other metals such as zinc and lead will partly skew this relationship. But how has Apex actually performed against silver in terms of leveraged return against the gray metal? After all, this is why investors buy silver mining shares. The next graph answers that question as we chart the rolling four-year leverage that Apex returned against silver. The main thing you need to know from this chart is that a value below 1.00 means silver is outperforming Apex and a value above 1.00 means that Apex is outperforming silver.

click to enlarge

Clearly since about April 2005, Apex has been outperformed by silver to the extent that a low of 0.300 was reached in March this year. A value of 0.300 means that Apex only returned about a third what one could have gained holding silver bullion over the previous four years. The question to ask now is whether it can get any worse for Apex or has an important bottom been reached?

Take a look at the first chart again. Note how in each of the last two silver spikes in April 2004 and May 2006, Apex both times suddenly surged into life to almost double in price.

However, each time we saw it crash to earth again. In my opinion another surge in Apex is on the cards. The reason seems to be that Apex is always a latecomer to the silver bull party. That is because less favored stocks tend to get in late but can enjoy sudden surges in that brief span before silver corrects again. The essential thing is to get out before that silver correction occurs.

The present hour may not be the exact time to jump on silver stocks due to certain medium term bearish factors, but Apex Silver Mining looks like a stock which could quickly rise from our current ranking of 40 on our silver stock ranking report.

Comments

[Trey Wasser:]

Roland
You have clearly missed the fact that Apex has hedged more than half their zinc and nearly all lead production through 2011 at prices of $.48 for zinc and $.29 for lead. A small amount of silver has also been hedged at $7.3. These hedges are now over $1.2B under water. While the company has written off about half of the current losses, this will not help future cash flow. Meanwhile, cost for diesel, reagents, tires etc have risen dramatically. The lenders have rejected the recent SIL plan to increase price projections and are demanding an additional 10% of cash flow. Without a new plan approved, SIL is in default of their loan covenants. Sil is also being forced to deposit $91MM into their margin account carrying the hedges. The Sumitomo deal was supposed to help absorb 35% of the hedge losses, but accounting rules dont allow the losses to be transferred. I suspect, but have not confirmed, that Sumitomo is also on the recieving end of the $.48 zinc and $.29 lead. They invested to assure that SIL would stay afloat and get the mine into production. While lead is just a small by product, current losses on lead hedges alone are equal to the enitre loan ($200MM). This may very well go down as the most expensive loan in mining history.
The threat of a Bolivian tax increase to 30% is very real and would put additional pressure on the economics of the mine. A 30% tax would only put Bolivia in line with other South American tax regimes.
TA aside, SIL has some fundamental problems which you have totally ignored.
Trey Wasser- III-D Capital

2007 May 09 10:22 AM

[REBEL:]

I, too, thought that Apex was a good buy in 2005 and got in at $ 17. Then that Castro wannabe was elected and I worried about getting my investment money returned to me, (as opposed to the return on my investment). Then Morales. (president who had talked about nationalizing Bolivia's mining industry), ascended the inaugural stage wearing a necklace made from coca leaves and I got out. Investment? Hardly. I'd probably get better odds at a Las Vegas Blackjack table.

2007 Jun 05 01:19 AM

[EE:]

I would like to know how Trey Wasser got his info. not that I don't believe him,but SIL won't respond to hedge questions and so far neither has Roland Watson. Are you also unable to crack his info. channel? Earl Ellison

2007 Jun 08 04:13 PM