UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002.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 ý NO o
AT MAY 10, 2002, 35,042,154 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.
APEX SILVER MINES LIMITED FORM 10-Q QUARTER ENDED MARCH 31, 2002 INDEX
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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.
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APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED STATEMENT OF OPERATIONS (Expressed in United States dollars) (Unaudited)
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APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED STATEMENT OF CASH FLOWS (Expressed in United States dollars) (Unaudited)
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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 2001 Annual Report on Form 10-K.
2. New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("FAS 143"). FAS 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 the value added tax ("VAT") paid by its wholly owned subsidiary, ASC Bolivia as a recoverable asset. 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 intends 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 in Mexico is related to exploration activities and according to Mexican law is recoverable upon application to the tax authorities. Although the application process in Mexico is current, no refunds have been received in two years. Based on these circumstances, the Company has recorded a 50% impairment of the recoverable asset even though it remains the Company's intent to recover the full amount of VAT paid in Mexico. At March 31, 2002, the recoverable VAT recorded for Bolivia and Mexico is $4,891,603 and $193,247, respectively, net of impairment.
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4. Property, Plant and Equipment
The components of property, plant and equipment were as follows:
5. Commitments and Contingencies
The Company had outstanding letters of credit totaling $610,000 at March 31, 2002. The letters of credit are associated with the port and power facilities for the San Cristobal Project and assure the contractors of the reimbursement of their out-of-pocket costs should the Company terminate the letter of intent and not utilize their services. See "Note 6."
6. Subsequent Events
During April 2002, the Company sold 500,000 of its Ordinary Shares pursuant to its universal shelf registration statement. The Company realized gross proceeds of approximately $6.6 million and net proceeds of approximately $6.5 million after fees and expenses. Proceeds from the offering may be used, among other things, to continue development of San Cristobal, to continue exploring the Company's other properties, to maintain control or ownership of the Company's properties and for general corporate purposes.
In early May 2002, Electroandina, the owner of the Tocopilla Port in Chile drew down its full $410,000 letter of credit from the Company as reimbursement for its out-of-pocket expenses incurred to date.
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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 ("Apex Limited", "our company" or "we") for the three month period ended March 31, 2002 and changes in our financial condition from December 31, 2001. 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, 2001.
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 March 31, 2002
Interest and other income. Interest and other income for the first quarter of 2002 is $0.2 million, as compared to $0.8 million for the first quarter of 2001. The decrease in interest and other income for the first quarter of 2002 is primarily the result of lower cash balances and lower interest rates during 2002, compared to cash balances and interest rates during the same period of 2001.
Trading gains and losses. During the first quarter of 2002, we recorded a $0.1 million mark to market gain related to our metals trading program compared to a $0.1 million mark to market loss for the same period in 2001. We measure the fair value of open positions at each reporting period, recording the difference in the carrying value to current earnings, in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). Under FAS 133, fair value measurements may vary substantially from period to period based on spot prices, forward prices and quoted option volatilities.
Exploration. Exploration expense for the first quarter of 2002 is $0.6 million, compared to $1.1 million for the first quarter of 2001. The decrease in exploration expense for the first quarter of 2002 as compared to the same period of 2001 is the result of reduced exploration activity as we continue to conserve our cash position and concentrate resources on the San Cristobal property. In addition, the 2001 expenses include the $0.3 million value of stock issued to acquire a 40% interest in the El Zapote property in El Salvador.
Administrative. Administrative expenses are $0.7 million for the first quarter of 2002, compared to $1.5 million for the first quarter of 2001. The decrease in our administrative expenses for the first quarter of 2002 compared to the same period of 2001 is primarily the result of cost savings associated with the reduction of personnel and office facilities as part of our cash conserving policy.
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Liquidity and Capital Resources
As of March 31, 2002, we had cash and cash equivalents of $40.7 million, compared to $41.5 million at December 31, 2001. The decrease is the result of $0.6 million invested in property, plant and equipment primarily related to the development of the San Cristobal Project and $1.1 million used to fund operations, property holding costs and administrative costs, net of interest and other income. Of the $1.1 million, $0.9 million was related to San Cristobal and was capitalized. These uses of cash were partially offset by $0.9 million in proceeds from the exercise of stock options.
Unless there is an improvement in the metals and capital markets, we expect to limit operations and project spending for the remaining three quarters of the year to approximately $7.0 million. We could significantly reduce these expenditures even further while still maintaining our current properties and key personnel should we deem it strategically desirable to do so. We plan to fund our project and operating expenditures for the remainder of the year from our existing cash balances, from interest and other income and from the issuance of limited amounts of stock.
During April 2002, our company sold 500,000 of its Ordinary Shares pursuant to its universal shelf registration statement. We realized gross proceeds of approximately $6.6 million and net proceeds of approximately $6.5 million after fees and expenses. Proceeds from the offering may be used, among other things, to continue development of San Cristobal, to continue exploring our other properties, to maintain control or ownership of our properties and for general corporate purposes.
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 metals or capital markets will improve or that we will be able to obtain the required financing on terms that we find attractive, 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. We believe the expectations reflected in those forward-looking statements are reasonable. However, our 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:
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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.
To complete the project financing for San Cristobal, our company expects to be required to hedge a portion of its planned production. In addition, when San Cristobal enters production, we may sell forward a portion of our production and use price hedging techniques to mitigate some of the risks associated with fluctuating metals prices. Our company currently engages in limited metals trading activities, utilizing puts and calls and other market instruments in anticipation of potential lender requirements for the San Cristobal project financing. See "Results of Operations."
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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
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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.
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