Trey Wasser

Is Apex Silver Mines a Buy?

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