Use these links to rapidly review the document APEX SILVER MINES LIMITED FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 INDEX
UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-Q
(MARK ONE)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001.
OR
FOR THE TRANSITION PERIOD FROM to
COMMISSION FILE NUMBER 1-13627
APEX SILVER MINES LIMITED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(345) 949-0050 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: Yes /x/ No / /
AT NOVEMBER 8, 2001, 34,728,759 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.
APEX SILVER MINES LIMITED FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED BALANCE SHEET (Expressed in United States dollars) (Unaudited)
The accompanying notes form an integral part of these consolidated financial statements.
APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED STATEMENT OF OPERATIONS (Expressed in United States dollars) (Unaudited)
APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED STATEMENT OF CASH FLOWS (Expressed in United States dollars) (Unaudited)
APEX SILVER MINES LIMITED
An Exploration and Development Stage Company
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars)
1. Basis of Preparation of Financial Statements
These unaudited interim consolidated financial statements of Apex Silver Mines Limited (the "Company") and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles, so long as such omissions do not render the financial statements misleading.
In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair statement of the results for the periods presented. All adjustments were of a normal recurring nature. These interim financial statements should be read in conjunction with the annual financial statements of the Company included in its 2000 Annual Report on Form 10-K.
2. New Accounting Standards
Financial Accounting Standards No. 133, Accounting for Derivatives and Hedging Activities ("SFAS 133"), as amended by SFAS 137 and SFAS 138, became effective for the Company on January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The Company engages in limited metals trading activities utilizing puts and calls and related instruments. Historically the Company has marked open positions to market, recording the difference in the carrying value to current earnings; accordingly, adoption of SFAS 133 at January 1, 2001, has no effect on the Company's financial position or results of operations. See note 7.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143, is effective for fiscal years beginning after June 15, 2002 (January 1, 2003 for the Company), and establishes an accounting standard requiring the recording of the fair value of liabilities associated with the retirement of long-lived assets in the period in which they are incurred. The Company is in the process of determining the future impact that the adoption of FAS 143 may have on its earnings or financial position but does not believe it will be material based on our current mine plan and understanding of the standard.
3. Value Added Tax Recoverable
The Company has recorded value added tax ("VAT") paid by its wholly owned subsidiaries, ASC Bolivia and Cordilleras Mexico, as recoverable assets. The VAT paid by ASC Bolivia is expected to be recovered through the sales of its production from the proven and probable reserves at the San Cristobal Project that the Company has begun to develop. Bolivian law states that VAT paid prior to production may be recovered as a credit against Bolivian taxes arising from production, including income tax. The VAT paid by Cordilleras Mexico is related to exploration activities and is recoverable upon application to the tax authorities. Cordilleras Mexico has received refunds for VAT taxes paid through 1998. Applications for refund of the remaining VAT continue to be filed and the remaining refunds are expected to be received. At September 30, 2001, the recoverable VAT recorded by ASC Bolivia and Cordilleras Mexico is $4,854,482 and $362,981, respectively.
4. Property, Plant and Equipment
The components of property, plant and equipment were as follows:
5. Notes Payable
During June and July 2001 the Company issued 70,875 shares of its common stock and paid $56,700 in cash, as payment in full of a $900,000 note due to Barex. The note was entered into in December 1997, in connection with the purchase of the Toldos property in the San Cristobal area.
6. Commitments and Contingencies
The Company had outstanding letters of credit in the aggregate amount of $610,000 at September 30, 2001. The letters of credit are associated with infrastructure development at the San Cristobal Project.
7. Interest and Other Income
For the three months ending September 30, 2001, interest and other income consist of interest of $489,423 and other income of $82,396 reduced by a mark-to-market loss on metals trading activities of $344,023. For the three months ended September 30, 2000, interest and other income consisted of interest of $1,246,992, other income of $35,520 and a mark-to-market gain on metals trading of $100,302.
For the nine months ending September 30, 2001, interest and other income consist of interest of $1,882,890 and other income of $99,640 reduced by a mark-to-market loss on metals trading of $507,271. For the nine months ended September 30, 2000, interest and other income consisted of interest of $4,046,009, other income of $54,852 and a mark-to-market gain on metals trading of $437,867.
The Company marks its metals trading open positions to market, recording the associated gain or loss to current earnings, according to SFAS 133. Program inception to date, the metals trading activities have generated a mark to market gain of approximately $25,000.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis summarizes the results of operations of Apex Silver Mines Limited for the three month and nine month periods ended September 30, 2001 and changes in our financial condition from December 31, 2000. This discussion should be read in conjunction with the Management's Discussion and Analysis included in our Annual Report on Form 10-K for the period ended December 31, 2000.
Apex Limited is a mining exploration and development company that holds a portfolio of silver and base metal exploration and development properties primarily in South America, Mexico and Central America. The composition and size of our exploration portfolio changes from time to time as we acquire new exploration properties with mineral potential and release exploration properties that have no further interest to us. None of the properties are in production and, consequently, we have no current operating income or cash flow. Our primary source of income since inception has been interest income. Our policy is to invest all excess cash in liquid, high credit quality, short-term financial instruments.
Apex Limited is incorporated in the Cayman Islands and does not conduct any business that currently generates U.S. taxable income. There is currently no corporate taxation imposed by the Cayman Islands. If any form of taxation were to be enacted in the Cayman Islands, we have been granted exemption until January 16, 2015. Apex Silver Mines Corporation, our U.S. management services company, is subject to U.S. federal, state and local income taxes. Other than the management services company, our company does not pay income tax in the U.S.
Results of Operations—Three Months Ended September 30, 2001
Interest and other income. Interest and other income for the third quarter of 2001 is $0.2 million, as compared to $1.4 million for the third quarter of 2000. The decrease in interest and other income for the third quarter of 2001 is primarily the result of lower cash balances and lower interest rates during 2001, compared to cash balances and interest rates during the same period of 2000. In addition we recorded a $0.3 million mark to market loss related to our metals trading program during the third quarter of 2001 compared to a $0.1 million gain for the same period in 2000. The mark to market gains and loses have not affected our cash flows.
Exploration. Exploration expense is $1.1 million compared to $1.5 million for the third quarter of 2000. The 2001 expenses include the $0.6 million value of stock issued to acquire and renew mineral options on two exploration properties. The decrease in exploration expense for 2001 is the result of reduced exploration activity as we continue to conserve our cash position and concentrate resources on the San Cristobal property.
Administrative. Administrative expenses are $0.9 million for the third quarter of 2001, compared to $2.0 million for the third quarter of 2000. The 2001 decrease in administrative expenses is primarily the result of a reduction in administrative spending as we continue to conserve our cash position.
Results of Operations—Nine Months Ended September 30, 2001
Interest and other income. Interest and other income for the first nine months of 2001 is $1.5 million, as compared to $4.5 million for the same period of 2000. The decrease in interest and other income for the first nine months of 2001 is primarily the result of lower cash balances and lower interest rates during 2001, compared to cash balances and interest rates during the same period of 2000. In addition we recorded a $0.5 million mark to market loss related to our metals trading program
during the first nine months of 2001 compared to a $0.4 million gain for the same period in 2000. The mark to market gains and loses have not affected our cash flows.
Exploration. Exploration expense is $3.0 million compared to $3.8 million for the same period of 2000. The 2001 expenses include the $0.9 million value of stock issued to acquire and renew mineral options on three exploration properties. The decrease in exploration expense for 2001 is the result of reduced exploration activity as we continue to conserve our cash position and concentrate resources on the San Cristobal property.
Administrative. Administrative expenses are $4.6 million for the first nine months of 2001 compared to $5.4 million for the same period of 2000. The 2001 expenses include the $0.5 million value of stock grants and options awarded to certain consultants and advisors in lieu of cash for their services. The 2001 decrease in administrative expenses is primarily the result of a reduction in administrative spending as we continue to conserve our cash position.
Liquidity and Capital Resources
As of September 30, 2001, we had cash and cash equivalents of $44.8 million, compared to $61.1 million at December 31, 2000. The decrease is the result of $10.4 million invested in property, plant and equipment primarily related to the development of the San Cristobal Project, $5.7 million used in operations, including $2.1 million spent on exploration and a $0.5 million reduction of debt, all partially offset by $0.3 million in proceeds from stock options exercised.
Major pre-construction expenditures on the San Cristobal Project were substantially completed during the second quarter of 2001. Pending opportunities in financial and metals markets, we expect to reduce our expenditures significantly while continuing to advance the project. Operations and project spending for the remainder of the year, including allocations, are expected to be approximately $2 million, net of interest and other income, and these annualized expenditures are expected to be reduced even further in the coming year. These expenditures will be funded from existing cash balances and interest and other income.
We will require significant additional debt and equity financing from outside sources to complete development of the San Cristobal Project. There can be no assurance that we will be able to obtain the required financing on attractive terms, or at all.
Forward-Looking Statements
Some information contained in or incorporated by reference into this report may contain forward-looking statements. These statements include comments regarding mine development and construction plans, costs, grade, production and recovery rates, permitting, financing needs, the availability of financing on acceptable terms, the timing of engineering studies and environmental permitting, and the markets for silver, zinc and lead. The use of any of the words "anticipate", "continue," "estimate," "expect," "may," "will," "project," "should," "believe" and similar expressions are intended to identify uncertainties. The Company believes the expectations reflected in those forward-looking statements are reasonable. However, the Company cannot assure that these expectations will prove to be correct. Actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and other factors set forth in, or incorporated by reference into, this report:
Many of those factors are beyond our ability to control or predict. You should not unduly rely on these forward-looking statements. These statements speak only as of the date of this report on Form 10-Q. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect future events or developments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk and Hedging Activities
Currently our major principal cash balances are held in U.S. dollars. We maintain minimum cash balances in foreign currencies and therefore have a relative low exposure to currency fluctuations. Because we conduct our activities largely in several foreign countries, we may in the future engage in hedging activities to minimize the risk of exposure to currency and interest rate fluctuations.
We expect that we will be required to hedge some portion of our planned production in advance in order to complete the financing necessary to develop San Cristobal. In addition, when we bring San Cristobal into production and begin to derive revenue from the production, sale and exchange of metals, we may utilize various price-hedging techniques to lock in forward delivery prices on a portion of our production. We would expect to balance the use of price-hedging techniques to mitigate some of the risks associated with fluctuations in the prices of the metals produced, while allowing us to take advantage of rising metal prices should they occur.
Our company is engaged in limited metals trading activities utilizing puts and calls and related instruments in a manner similar to anticipated lender requirements. We recorded mark to market losses from these activities of approximately $344,000 and $507,000 for the quarter and nine-month periods ended September 30, 2001, respectively. Program inception to date, a mark to market gain of approximately $25,000 has been recorded. As we continue to mark our open positions to market, in accordance with SFAS 133, we expect to record fluctuations in mark to market gains and losses resulting from our trading activities. When activity increases to meet lender requirements, fluctuations in mark to market gains and losses from trading activities may increase substantially. Such fluctuations in mark to market gains and losses do not affect our cash flows. There can be no assurance that we will always benefit from the use of these techniques.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned thereunto duly authorized.