Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Apex Silver Mines Limited (NYSEARCA:SIL)

Q2 2008 Earnings Call Transcript

August 12, 2008 10:00 am ET

Executives

Jerry Danni – SVP of Corporate Affairs

Jeffrey Clevenger – President and CEO

Bob Vogels – VP and Controller

Analysts

Ankush Agarwal – JPMorgan

John O’Brien – Ragen MacKenzie

John Tumazos – Very Independent Research

Operator

Good morning. My name is Lindsay, and I will be your conference operator today. At this time I would like to welcome everyone to the Apex Silver Mines second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) I would now like to turn the call over to Mr. Jerry Danni, Senior Vice President of Corporate Affairs. Mr. Danni, you may begin your conference.

Jerry Danni

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us in today’s call to discuss Apex’s 2008 second quarter results. This call is being broadcast live on the Internet and can be accessed through the company web site, www.apexsilver.com. A replay of the call will also be available for one week after on the web site. Today’s call will be led by Jeffrey Clevenger, President and CEO of Apex. Joining Jeff are other members of the Apex senior management team, including Gerald Malys, CFO, and Bob Vogels, Vice President of Finance and Controller.

Just a reminder, any forward-looking statements made today by management come under the Securities Legislation of the United States and involve a number of risks that could cause actual results to differ from our projections. Please refer to the forward-looking statements and risk factors in company’s Securities and Exchange Commission filings and to the Cautionary Statement slide in today’s earnings call presentation.

With that, I’d like to turn the call over to Jeff.

Jeffrey Clevenger

Thank you, Jerry. Good morning, everyone, and thank you for joining in today with Apex Silver Mines second quarter conference call. We welcome the opportunity to share with you this morning our progress at Minera San Cristóbal and to outline for you some opportunities and also some issues that we will be resolving going forward.

Focusing on San Cristóbal, and you can follow along the slides with us if you are queued into the web site, the ramp-up continues. All trends are in the positive direction. In the second quarter, we averaged 34,000 tons per day, which is just about 85% of the designed capacity. And our focus now is on maintaining 40,000 tons per day and improving metals recovery.

Second quarter production from San Cristóbal was 84,000 tons of zinc concentrates and 23,000 of lead concentrates, resulting in payable metal of 4.2 million ounces of silver, 42,000 tons of zinc, and 15,000 tons of lead. We’ve changed the format for our cash costs, believing that it represents the performance of the property better and something that should be easier for analysts and investors to consider when trying to measure the potential of this operation. And so we are reporting our cash costs on two bases. One, taking all credits to silver and reporting a silver cash cost, which turned out to be about $1.40 in the second quarter and then also doing the same thing for zinc using silver as a credit and lead as a credit and that results in a cash cost for the quarter of about $0.24 per pound of zinc.

We’d be remiss if we didn’t discuss with you today Apex’s liquidity. At the end of the quarter, we had cash, cash equivalents and investments totaling about $215 million, of which a little bit better than $90 million is unrestricted and readily available. This does include the $70 million of proceeds that we received from the sale of the deferred silver and zinc stream to Sumitomo.

Yesterday the Minera San Cristóbal Board approved the line of credit from Sumitomo. It’s an unsecured line. And MSC is the borrower, and the lender is a subsidiary of Sumitomo. This will provide short-term liquidity for the MSC project. And we would understate it if we did not tell you that there are significant financial obligations that we expect for the remainder of 2008 and 2009 coming directly from Minera San Cristóbal.

On an income basis, the income from operations for the second quarter was $204 million, that does include a $224 million mark-to-market gain on the metal derivative position. But it does exclude deferred revenues of $53 million, which did not go to the revenue line in the second quarter because title of risk had not passed.

Second quarter net income of $178 million does include the $63 million from the sale of the deferred payment obligation to Sumitomo resulting in net income per diluted share of $2.57. As we turn to the mine, for those that are following along, you can see the chart there. Tons mined are increasing, and the reason for that is we are trying to open up higher grade ore in the Tesorera area. And we’ve been so far successful at doing that. The mine is in pretty good shape.

In terms of the mills, tons milled increased almost 30% in the second quarter compared to the first quarter. It averaged 34,000 tons per day, again which is about 85% of designed capacity. We were successful in May at completing the 14-day throughput test that’s a requirement of our contract with Aker Kvaerner. And during that test, we averaged 43,000 tons per day for the 14-day period and saw days, several days, that exceeded 50,000 tons per day, which gives us quite a lot of comfort in the ability of this mill going forward.

In June we averaged just about 36,000 tons per day, again an increase over the second quarter. We slipped a little bit in July. It backed off just a bit to a little bit over 35,000 tons a day, but we did have a three-day shutdown in July that was scheduled maintenance, primarily from mill liners in the sag mill if you were to factor out those down days. Actually on the days we ran, we ran close to 40,000 tons a day at 39,000 tons.

The ramp-up again continues. The recoveries are below where we’d like them to be. Our focus has been on throughput and we now have a focused effort on recoveries. And probably the biggest thing that will improve recoveries going down the road is a distributive control system that we are installing for automating reagent additions.

You can see on the chart there that silver recoveries quarter-on-quarter. Zinc recoveries decreased slightly, but then they were up in July even above the first quarter. And lead recoveries continue to increase in July, continuing the trend from the first quarter through the second quarter. Those are something that would have been expected to bounce around a little bit. They are reasonably consistent and we do expect those numbers to improve substantially as we move forward and with the control system for reagent additions.

And in terms of the strip ratio, it has remained constant at 1:1, but keep in mind, you can’t simply take the tons milled and divide by the tons mined, because we do stockpile material both oxide and sulfide. Grades have been on the increase. The silver grade has ranged from about 63 to 68 grams per ton. The zinc grade in the second quarter was over 2%. We expect that increasing trend to continue through the year with grades continuing to increase. And the lead grade has gone from about six-tenths to seven-tenths of a percent 1Q to 2Q. Concentrate grades are reasonably consistent. Silver in zinc; silver in lead quite high, 4,500 grams per ton in the lead. And the zinc and lead concentrate grades respectively 58% and 68%.

If we compare the concentrate production quarter-on-quarter, zinc has increased a little over 40% and lead has increased a bit over 50%. If we compare June, which is of course our last month in the quarter, we see that zinc has increased about 70% and lead concentrate production has doubled. I will comment that July concentrate production was a bit off of that second quarter trend. And again that’s largely due to the three-day shutdown.

If we take a look at payable metal production, the trend is very similar to the concentrate tons produced. Silver increased over 40% in the quarter, zinc over 40%, and again lead over 50%.

Moving on to our guidance. We’ve issued guidance in the last quarter, so we’re doing it again. And we now believe that the mine this year will produce about 15 million payable ounces of silver. That’s the same as our last guidance. Zinc and lead guidance is a bit down and that’s again due to the effects of the ramp-up. 190,000 tons we’re now projecting for zinc and 60,000 tons for lead. On a cash cost basis, we feel fairly comfortable that we’ll end the year in the range of $0.50 to $0.75 per ounce cash cost of silver, or $0.15 to $0.20 per pound of zinc.

In the second quarter, sales decreased, and again that’s the timing of shipments and it resulted in increased inventories. There was about 41,000 tons of concentrate that was a deferred sale that was actually – we received the cash, but it wasn’t booked because the loss of risk had not yet passed and that was about 13,000 tons of lead and 28,000 tons of zinc. So the cash was received, but it’s not reflected in the revenue number. So the deferred sales represent about $53 million. Those will be recognized in the third quarter subject of course to mark-to-market price adjustments.

In terms of concentrate quality, we did have a silica issue during the quarter in some concentrates, resulting in one ship having to be re-routed to a different smelter as that smelter decided not to take it. And we think we’ve got now a handle on the silica, and what we’ve done is we’ve put a rain wash on the final column cleaning cell. And since we've installed that apparatus, we have seen very low silica grades, leading us to conclude that we believe the issue to be resolved.

We’ve got some financial data in the presentation now. And I’ll ask Bob Vogels to chat about that with you.

Bob Vogels

Okay. Thank you, Jeff. In reviewing our financial results for Q2, as Jeff mentioned, revenues from sales were lower in Q2, in part due to falling zinc and lead prices. Zinc price has dropped about 20% Q2 as compared to Q1 and lead was down 40%. In addition, as Jeff mentioned, we had about 41,000 tons of concentrate for which we received provisional cash payments that we did not count as sales in Q2, we will count those as sales in Q3. So that reduced our sales in Q2. And in addition, because of the falling prices, sales that we made in Q1 that hadn’t finally settled had negative price adjustments of about $11 million in quarter two.

Now costs to sales on a unit basis were essentially unchanged quarter-on-quarter, but we are anticipating a better result there. And I’m going to talk about that more in a moment. We also had a large mark-to-market gain in the quarter two and year-to-date. For the second quarter, we had $223 million mark-to-market gain on our derivative positions. I’ll mention that during the quarter we settled hedges for cash payments of $52 million, and for the year-to-date we’ve settled hedges for cost payments of $112 million. Now the reason obviously for the gain from the commodities marked-to-market was the lowering of lead and zinc prices.

Our liability now at the end June stands at about $133 million. I’ll mention that included in that liability is a reduction attributable to a new accounting pronouncement, FAS 157, a reduction of about $56 million due to revaluing our hedge liability considering our own credit risk. This new accounting pronouncement, which was effective starting in quarter one, requires when you are measuring a liability at fair market value to assume your own credit risk. Previously we were valuing that liability, the hedge liability, using a risk-free rate to discount the projected cash outflows from the hedges. We now employ a higher discount rate, which is more reflective of our own credit risk that results in a lower liability. And the lowering of that liability has generated more gain through the financial statement.

As you’ve probably seen, we have restated quarter one to take into account this new methodology. We filed that amended Q last night along with our Q for the quarter. In that Q, in that quarter one amended, we reflected a $49 million reduction in the hedge liability that reduction ramped to our P&L and reduced the loss that we have previously recorded in Q1 for the mark-to-market. Also as noted by Jeff, we included the sale of the deferred payment obligation that we had with Sumitomo back to Sumitomo, received $70 million in cash, assigned $7 million of net book value against those proceeds, and recorded a gain on the financial statements of $63 million. And again, primarily because of the hedge mark-to-market numbers, net income for the quarter was about $180 million and year-to-date were at $205 million.

Now turning to a discussion of our cost for the period. Overall, our costs have been higher than expected in Q2, even though unit costs for some components have been less. Given the additional production we had in Q2, we were anticipating lower unit cost than we actually achieved. The primary reason for the higher than expected costs were the increase in commodities prices for many of our inputs that we saw during the quarter. It’s well known the run-up in the oil and gas prices, that run-up has had a dramatic effect on our costs in transportation, fuel, power, and other materials that we consume in operations. I would note additionally that during the last year, the US dollar has devaluated about 10% against the boliviano. And in addition, inflation in Bolivia has moved into the 12% to 15% per annum rate. Those two factors have negatively impacted costs that we locally source in Bolivia. That’s also had an impact on our overall cost.

Now looking at some of the specific line items of costs, mining costs for the period Q2 versus Q1 were down, but that’s largely due to 20% more tons produced. Underlying those costs, however, are higher costs that we are experiencing for fuel, tires and explosives. So, our expectation was for actually lower numbers than we achieved.

Milling costs also down slightly, but on 30% more tons milled. So there again, our expectation was for lower cost. Cost for commodities, primarily reagents and copper sulfate, cost for valves and liners due to increase in steel prices, and higher manpower costs all contributed to higher than expected operating cost in the mill area.

In site support costs, again, slightly lower or about even on a unit basis. But with the additional throughput of concentrates, we were expecting lower cost there. The principal factor in that line item is our transportation to port, where escalators in that contract taken transport costs up by about 25%. We also include in that line item G&A, camp services, procurements and other general costs, all of which are running slightly higher.

The mine royalty tax that we pay on the contained metal of our production that’s shipped across the border went down slightly on a unit of concentrate basis, largely due to the decline in metals prices. And ocean freight, which has been high all year, has continued high – a little higher in the second quarter. Fuel prices impacting there and also demand for vessels continues very strong.

All right. As Jeff mentioned, we have adopted, if you will, a different methodology for reporting our cash costs. We think this new methodology will be more meaningful not only to management internally, but to outside analysts and investors. Essentially, as Jeff described, we are going to be reporting by assigning all the cost of operations to silver and then taking zinc and lead as byproduct. Conversely, we are also going to report zinc cost again using all the costs of operation against the zinc production and then reporting silver and lead as a byproduct against zinc. As we disclosed in all of our financial filings, of course, these cash cost numbers are non-GAAP item. On a GAAP basis, cost to sales is based on sales on a unit cost. Cash cost presentation is on a production basis. And there are other differences as well that as we described in our Q.

So taking a look at the results using this new method, you can see that for both silver and zinc, we started by allocating all of the cash operating costs to that. In the case of silver, we add additionally the silver refining charge. And then we subtract the lead and zinc revenue as a byproduct. We end up with year-to-date about $0.42 cash cost – I’m sorry, $0.26 cash cost – no, $0.43 cash cost for silver year-to-date per ounce of silver basis. For zinc we give a similar treatment. We take all the same operating costs, we then include zinc treatment costs, smelter and refining costs, and then deduct from that result lead and silver byproduct credits. And as you can see, we end up with $0.26 a pound year-to-date for zinc.

Below if you are following on the webcast, we have a table that shows what our new method looks like compared to our old. We think the new approach will provide a steadier and more meaningful result for those silver and zinc costs as we go forward.

Now I’ll turn it back to Jeff right now to discuss our liquidity situation.

Jeffrey Clevenger

Thank you, Bob. To start the discussion of liquidity, we need to look at our cash position at June 30. The total being $214 million, which is fairly well specified in the press release. The portion of that that’s unrestricted and completely liquid to us is $92 million. And you can see what the remainder is on the chart, but the bottom line is that the $92 million is the amount of money that we have to work with.

Cash contributions into Minera San Cristóbal this year through June were $97 million, of which Apex’s share was $59 million. In July and August, the total contribution to Minera San Cristóbal was $55 million, of which Apex’s share was $36 million. So you can do the math there, 90 minus 36 gives you something in the range of the mid-50s in terms of cash.

What has led to this influx of cash into MSC? Certainly the biggest item is increased cash costs and decreased prices. Lead and zinc prices dropped in the second quarter from the first quarter; zinc by about 20% compared to the first quarter, lead by 40% compared to the first quarter. First quarter ’08 sales were settled, finally settled at second quarter prices. This resulted in – what we do is we have – basically we get a 90% provisional payment on those shipments with 10% remaining to be settled, but because of the price drop instead of receiving cash for that 10%, we actually had to contribute cash because the price drop was greater than what would have offset the cash to us. So $6 million was settled for those previous invoices and then there was another $5 million mark-to-market on that remaining 10%. And increased operating costs, we’re living in the real world, much like Kedalpha Freeport [ph] we’ll report increased costs, and they are largely energy-related driven by petroleum prices.

If we take a look at projections point forward, under the Minera San Cristóbal project finance facility, we have, this is for the rest of this year, principal and interest payments due of about $53 million, and the reserve account to be set up in December would be $72 million, and then the derivative liability for the remainder of the year is about $115 million. So that results in a $240 million number right there cash requirements required into Minera San Cristóbal. Of course, operating profits will pay some of that, but when you project it out, it’s still not a favorable number.

Apex by itself has general corporate costs, which includes paying of convertible notes interest of about $15 million. And we have slashed our exploration budget for the remainder of the year, and we are saying on the slide less than $5 million and it is somewhat less than that.

If we take a look at our metal derivative positions, for those of you who do not – or not joined into the webcast, we’re showing basically a graphic format here of the derivative positions as they come due. The blue represents the blue sky, if you will, or positions that are unhedged. And the conclusion through this slide is that through 2009 certainly have a heavy burden with a hedge position for zinc and lead. The lead falls off after 2009 and the zinc continues somewhat into the following year, and then everything is reasonably unhedged going forward. Cash settlements made through June of this year have totaled $112 million. That’s to settle those hedge positions. And estimated settlements for the rest of the year include about $115 million at prices used a week or two ago.

So the issue for MSC and for Apex is getting through the rest of 2008 and 2009. It’s what we believe to be a medium-term to short-term problem that we are trying to address. Those are the challenges that we face under the financing facility. We are evaluating alternative actions to meet the expecting cash needs. And as such, we have engaged with Jefferies group to assist with strategic and financial alternatives. These, we are not ready today to tell you exactly what they are. Discussions are ongoing, but they could include a number of things; could include debt, could include equity financing, could include sale of assets including an interest in San Cristóbal, could include restructuring, refinancing, or amending the loan facility or amending the metal derivative positions, perhaps smooth that thing out a little bit.

We did complete and approve a $50 million unsecured line of credit that will be entered into by MSC as the borrower with the subsidiary of Sumitomo as the lender with an initial draw of $15 million this week. Again, that was approved yesterday by the Minera San Cristóbal Board of Directors. Maybe just a comment on dilution. There is an option there for the lender to convert that loan into equity in Minera San Cristóbal. And on the principal amount of $50 million, that would be about a 7% share of MSC total equity.

Turning to exploration, we’re not going to spend a lot of time on this. We’ve done a lot of drilling this year. We drilled probably about 25,000 meters in these different properties. Assay returns are very slow. We’ve got a lot of data to analyze. And in light of our cash position, we’ve decided to go ahead and do that analysis and reduce our exploration expenditures going forward for the rest of the year. But I think you’re all familiar, at least those that are familiar with the company, that we have some really hot looking projects in Argentina, Mexico, and Peru. Of course, Bolivia is mostly focused around the mine site, actually entirely. And we have done some – a bit of exploration in Australia.

We are advancing some of these. We’re going to talk just quickly about San Cristóbal. And we’ve all, at least those that are familiar with the company, have seen this slide before. And we believe that the pit itself has opportunity to expand to the south and to the east, which in turn would open up the bottom of the pit where it holds bottom in [ph] ore. So we think there is a real good chance to significantly increase the reserve. We have been drilling at the Animas area because our interpretation was that there could be some higher grade over there to improve the upfront economics of the project. So that was attracted to us and we have drilled some holes there. The next slide shows that.

We’ve actually drilled over 24 holes and we say that based on I think it’s 17 of them, we say there is a resource of about 12 million tons of much higher than average ore grade in the pit of about 2.3% to 2.4% zinc. We think there is a good possibility of making that number 20 million metric tons. And what this will do for us? This would be something that will phase into the mine plan so that we can improve the grades from what is currently forecasted for the next couple of years. And we expect to get that work done this quarter.

The Colon area, if you call back on the map, it is off to the south a little bit. There is an opportunity there. We think in some shear zones to find some ore and it has the added potential. If we do mine it, it can reduce the haulage distance to the crusher by a bit over a kilometer, which – haul, when you save haul distance, you really start saving money. What’s interesting is that – at least interesting to us is that there was copper visible in several of those holes in the Colon area.

In Argentina, we have what we feel to be two very strong projects El Quevar and Chinchilla. El Quevar is in Salta Province and Chinchilla is in Jujuy Province. We are calling El Quevar a discovery. We control about 40,000-plus hectares. We own 80% of it. Minera Hochschild has the other 20%. We’ve drilled just short of 80 holes to date, just about 16,000 meters. We’ve completed a second phase drilling program. And I guess you’d say that that’s design to support and advance scoping study.

We’ve found two zones of high grade silver-lead mineralization in parallel structures. We’ve got about ten more to look at that certainly look good on the surface. These are the ones we are focused on to date. They are a mile in length and open at both ends. The metallurgy looks pretty darn good. And the second zone that we’ve pocked a hole in has shown us about 236 grams over a nine-meter intercept. So, nine meters, that’s about 30 feet, plenty minable and it’s not very deep either. It’s about 100 meters deep.

At Chinchilla, this is a project that we picked up last year. We own it 100%. We believe it to be the potentially large breccia-hosted zinc, silver and lead deposit. We’ve found disseminated mineralization over greater than a mile in length and about half a mile wide. Surface sampling has returned some very high grades, better than 10 or 15 ounces of silver and 7% zinc. We’ve done a geophysical survey. And based on that survey, we’ve initiated a seven-hole drilling program.

The reports from the field indicate that all holes encountered mineralization, most of those holes over much of the total depth of the drilling. We do have assays in for part of the first hole. And you say there for the first 75 meters averaged about 1.6% zinc, about eight-tenths of a percent lead, and 1.5 to 2.0 ounces of silver. We’ve now got assays down to 250 meters on that hole with similar assay results as those listed.

In Mexico, our primary focus year-to-date – change the slide, please – has been the Zacatecas district. And we control greater than 15,000 hectares there. We’ve got 30 kilometer of veins that we’re exploring. We have drilled 31 shallow drill holes. We’ve talked about those before. We have initiated a program, about a three or four-hole program to test a thesis of depth. And we are drilling those deep holes now and we do not yet have results.

That concludes our presentation. I would like to take the opportunity to express Apex’s appreciation for the services of Harry Conger. He was a Board member from the onset of Apex in 1997 until just the end of July. We very much thank him for his service. And I can tell you that he has given me very valuable advice and I consider him to be one of the few people – or several people in my life that have been a valuable mentor to me. And for that, I thank Harry much.

And finally, before we open up to questions, I think it’s worthwhile to mention that – look, we have disclosed our current lack of liquidity to everybody today in our writings and also in this talk today, and the challenges that we are faced to fund MSC as we go forward through 2008 and into 2009. And because of that, and we have engaged Jefferies group and we have initiated discussions with our partner, with our lenders, and with other parties to solve the current short-term liquidity problem that we face.

So I guess what I’m asking is in the questions, if we can stay away from that, that would be productive because we really can’t comment on it. We are not really at liberty to discuss details of any of these discussions that are taking place or will take place. And with that, I’d like to ask the operator to open the line up to questions, please.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from John Bridges with JPMorgan.

Jeffrey Clevenger

Good morning, John.

Ankush Agarwal – JPMorgan

Hi, everyone. This is Ankush Agarwal on behalf of John. We are just trying to understand a bit on this – a bit more on $53 million of deferred revenue. It seems it was not booked at all in Q2, is that correct, in the income statement?

Bob Vogels

That’s correct. Just going over that one more time, our accounting policy only allows us to record revenue when both title and risk of loss passes. When we ship to European smelters, the standard commercial practice is to have risk of loss pass (inaudible) imagine it takes about 40 days for the ship to arrive. So, the terms of our smelter agreements provide for upfront provisional payments once she ship, but the risk of loss doesn’t pass for 40 days. Therefore we made a number of shipments to European smelters toward the end of Q2. And we weren’t able – even though we collected cash on those shipments, we were not able to record those as sales, instead they were set up on our balance sheet as deferred revenue. And as Jeff mentioned earlier in Q3, all those ships will have arrived at their destination and those sales will be recordable in Q3.

Ankush Agarwal – JPMorgan

Okay. So, something like this would be – this could give a lot of variability from quarter to quarter while the industry practice in general is to book these things provisionally and then just account for their adjustment in the next quarter. Any thoughts on that?

Bob Vogels

That’s correct. It’s going to depend on where our ships are going towards the end of the quarter. I think from this point forward we’ll have some amount of deferred revenue at the end of each quarter. They will vary just based on the timing of shipments and where they are going.

Ankush Agarwal – JPMorgan

Okay. Thanks a lot.

Operator

Your next question comes from the line of John O’Brien from Ragen MacKenzie.

Jeffrey Clevenger

Good morning, John.

John O’Brien – Ragen MacKenzie

Good morning. Generally my question has to do with the additional contribution required going forward kind of through June. At the end of the first quarter you thought you wouldn’t need any additional contribution, but we saw metal prices come down and then we saw inflation. How would you divide kind of the additional cash you are required to fund into those two buckets, inflation versus metal prices coming down? Because if metal prices come up, obviously maybe that contribution comes down. So –

Jeffrey Clevenger

This isn’t precise, but I think in a general sense it’s probably three quarters price and one quarter cost.

John O’Brien – Ragen MacKenzie

Okay. The other issue is, in the silica, what were you – this seems to be the second kind of operational supplies here. What other issues in kind of looking forward that we are not going to get surprise to get in the third quarter? I mean, the re-routing to different smelter appears to have affected your pricing significantly. I noticed that the pricing you received, the average pricing over the quarter seems to be less than what I calculated the average pricing to be for the entire quarter. So, could you kind of comment on that a little bit?

Jeffrey Clevenger

First of all, the silica issue that where one shipment was re-routed we do not believe was material. It did cost us some money, but it wasn’t significant. We think we’ve got a handle on that. We don’t see anything. I mean, we produced in the first quarter all quality concentrates. This came up. We addressed it once we found out what was going on and we believe the thing is solved. Now I can’t sit here and tell you that there will never be another technical issue that comes up because we don’t see it. But when it does come up, we’ve got a team down there that’s equipped to address it in an expeditious manner.

John O’Brien – Ragen MacKenzie

Okay. And the other part of the question about the realized pricing seem to be less than kind of the average pricing over the quarter?

Bob Vogels

Yes, that’s due to – if we take our revenues and divide it by the pounds sold, you will get a lower number. But that’s because running through revenue or price adjustments for sales made in the previous quarter. It takes about three months – three to four months to settle finally our shipments to smelters. And so we had about $11 million of negative price adjustments that did not relate to new sales in the second quarter.

John O’Brien – Ragen MacKenzie

Okay. So with the increase in pricing from June 30 that you are seeing in zinc and lead, you would expect kind of an upward adjustment kind of in the third quarter if that kind of continues, correct?

Bob Vogels

I would have said that about a week ago, but over the last week we’ve seen silver fall by about $2 and lead and zinc have come off a little bit. So we’re really not going to know the answer to that until we get to the month of final settlement and then you take an average for that month and that’s what you get. So, if prices go up, you would see an adjustment.

John O’Brien – Ragen MacKenzie

Okay.

Bob Vogels

Positive adjustment.

John O’Brien – Ragen MacKenzie

Okay. Well, I’ll get back in the queue. Thanks.

Jeffrey Clevenger

Thank you, John.

Operator

Your next question comes from the line of John Tumazos, private investor.

Jeffrey Clevenger

Good morning, John.

John Tumazos – Very Independent Research

Hi. John Tumazos, Very Independent Research. Could you explain the cash that went from Minera San Cristóbal as collateral into the hedge account as zinc, lead and silver made their respective highs earlier, and the release of cash and return to Minera San Cristóbal as the prices fall and what that mechanic is? And I apologize, I haven’t read your entire release this morning and it might already be in there. But could you say what the mark-to-market was last night?

Jeffrey Clevenger

Let me just make the comment. First of all, John, the collateral that went with the hedge banks for the hedge facility was not put in by Minera San Cristóbal. It was put in by Apex and Sumitomo. Sumitomo guaranteed their share. We put in $91 million of cash. So it’s not a Minera San Cristóbal. The terms of that arrangement are that at the end of this year and the following ends of the next couple of years, one-third of that is returned to the contributor (inaudible) project that we are undergoing with Jefferies where we talk about restructuring our liabilities, restructuring our business not only at MSC but we’ll consider the Apex level as well. So I think that’s all fits into that package that we’re really not prepared to discuss at the moment.

John Tumazos – Very Independent Research

Okay. And I guess I'm a little [ph] surprised because the criteria for the – in terms of tons per day et cetera. And obviously your forecast probably includes the gain [ph] of the 40,000 tons a day, but –

Jeffrey Clevenger

Absolutely.

John Tumazos – Very Independent Research

Okay. Well, let me put it in different way. In terms of reagents aside, what are the other key issues in terms of getting to – that are constraining from getting to the production levels you want to achieve?

Operator

(Operator instructions)

Bob Vogels

No, we’re still here. Listen. There is a whole list of technical parameters in addition to monetary parameters that have to be satisfied for a completion test. I mean, we mentioned reagent consumption was one of them. We believe that this process controls system on reagent addition is going to go a long ways towards addressing that. There are several other minor, relatively insignificant issues technically with the completion test. We are not that uncomfortable with the technical aspects of the completion test that might need a fine tweaking. But the reality is that the entire completion test has to be looked in the context of the overall package of where we are moving forward.

John Tumazos – Very Independent Research

Okay. Thank you.

Operator

(Operator instructions)

Jeffrey Clevenger

Ladies and gentlemen, thank you very much for joining Apex’s second quarter conference call. We look forward to improving results for Minera San Cristóbal. And as the situation wants, we’ll be certain to update you on our progress. Thank you again.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Apex Silver Mines Limited Q2 2008 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts