Apex’s fourth quarter loss

Apex Silver‘s (SIL-X) hedge position may have hurt its bottom line for the fourth quarter but the loss bodes well for future profitability.

Rising zinc prices in the fourth quarter meant Apex was required to report greater non-cash losses in connection with its hedge-book due to recently applied accounting standards.

But as only 3.5%, 12.6% and 14.7% of planned production of silver, zinc and lead respectively, are hedged, the company sees the stronger prices which caused the non-cash losses as a positive indicator for its San Cristobal project — slated to go into production in the third quarter of 2007.

Net losses for the fourth quarter of 2005 were US$47.3 million or 94 per share, compared to a net loss of US$4.4 million or 9 per share for the same period in 2004.

The hedge position was put in place to help finance its massive San Cristobal project in Bolivia. The company required financing of US$225 million and it says the hedge will begin to be settled when San Cristobal goes into production.

The charge related to the hedge amounts to US$48.8-million non-cash mark-to-market and was made in connection to accounting standards that require all derivative instruments to be recorded on the balance sheet at fair value and that changes in fair value be recorded each period in current earnings.

In New York on Mar. 31, Apex’s shares were off roughly 5% or US$1.20 to US$23.75 on roughly 2 million shares traded.

Apex says future mine production is being used as collateral for the hedge and is therefore not subject to margin calls.

The higher non-cash mark-to-market charges in the fourth quarter and total year 2005 were partly offset by US$500,000 in higher interest and US$8.2 million in other income — primarily related to higher on-hand cash and investment balances.

In addition, the company recorded US$6.8 million gains related to the extinguishment of convertible notes in the full year 2005.

Apex’s aggregate cash, short and long-term investments and restricted investments and cash amounted to US$351.9 million at the end of 2005, which in combination with the recently-completed US$225-million project financing, should provide the company with sufficient financial resources to complete construction and development of San Cristobal, the press release says.

Major progress was made at San Cristobal for the fourth quarter according to Apex. By the end of the year, the company pre-stripped approximately three million tonnes of material and in January 2006 it began stockpiling oxide ore for future processing.

While mining activities were hampered by unusually heavy rains and flooding in the first two months of 2006, Apex says the time will be recouped as the year progresses and weather conditions improve.

As of December 31 2005, the San Cristobal project was roughly 40% complete.

The project has a designed production rate of 40,000 tonnes of ore per day, and is expected to produce approximately 22.3 million oz of payable silver, 182,500 tonnes of payable zinc and 85,000 tonnes of payable lead per year in the first five years of production.

By the end of 2005, Apex had spent US$279 million in total expenditures on the project. In addition, the company made prepayments and advances towards construction of port and power facilities totaling approximately US$17 million.

The US$600-million project remains on budget according to Apex and it says it expects to spend approximately US$325 million on the project, which includes prepayments and advances.