Golden Minerals Co - Quarter Report: 2008 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

OR

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  ¨

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY:

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT):    YES  ¨    NO  x

AT NOVEMBER 7, 2008, 58,977,725 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.

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APEX SILVER MINES LIMITED

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2008

INDEX

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PART I. FINANCIAL INFORMATION

APEX SILVER MINES LIMITED

CONSOLIDATED BALANCE SHEETS

(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

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in United States dollars)

(Unaudited)

See Note 22 for supplemental cash flow information.

The accompanying notes form an integral part of these consolidated financial statements.

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APEX SILVER MINES LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in United States dollars)

1. Basis of Preparation of Financial Statements and Nature of Operations

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 in the United States of America (“GAAP”), 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. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These interim financial statements should be read in conjunction with the annual financial statements of the Company included in its 2007 Annual Report on Form 10-K.

The Company is a mining, exploration and development company that owns 65% of and operates the San Cristóbal silver, zinc and lead mine in Bolivia. The Company has focused its resources primarily on the development of the San Cristóbal mine, which began producing silver-bearing lead and zinc concentrates during the third quarter 2007 and reached sustained operating levels in the fourth quarter 2007. Prior to the third quarter 2007 the Company had no mining operations from which product was being produced and sold; consequently, the Company had not previously reported operating income. Although the Company’s senior corporate and operating management have significant experience in operating very large mining complexes in many countries, the Company had never operated a mine prior to commencement of operations at San Cristóbal. The Company also conducts exploration activities primarily in South America and Central America and currently holds interests in non-producing mineral properties in Argentina, Mexico, Peru, Bolivia, Ecuador and Australia.

In light of the significant liquidity issues facing the Company, the Company has been exploring strategic and financial alternatives to effect a comprehensive restructuring of its operations and capital structure as described below, and has been in discussions with Sumitomo Corporation (“Sumitomo”) regarding the possible sale to Sumitomo of the Company’s interest in the San Cristóbal mine and the continued management of the mine by the Company (see Note 23). Sumitomo currently owns 35% of the mine. The proposed transaction would be subject to significant conditions as described below and, if completed, would result in a change in the nature of the Company’s operations and the basis of presentation of its results of operations and financial condition. In particular, the Company would cease operations as a mining business, while continuing business as a management services and exploration company.

If the Company were to enter into a letter of intent regarding the sale, the Company will reclassify the San Cristóbal asset group as held for sale on the consolidated balance sheet, with a corresponding gain or loss recorded in the consolidated statement of operations. Based on discussions to date with Sumitomo and current metals prices, which impact the value of the metal derivatives positions relating to the asset group, the Company believes that cash sales proceeds would be limited and a substantial loss would be recorded on such sale. The ultimate amount of gain or loss on the sale would depend on the value of the metal derivatives positions at the date of closing, as well as the final terms of the transaction. On completion of a sale transaction, the asset group would be deconsolidated and the related minority interest eliminated, among other effects.

2. Liquidity and Capital Resources

Declining metals prices, among other factors, have caused continued significant deterioration in the Company’s liquidity, and the Company has relied increasingly on borrowings under a line of credit (the “Loan Agreement”) provided by a subsidiary of Sumitomo to fund cash needs associated with the San Cristóbal mine. The Company has been in discussions regarding certain covenants and metals derivatives payments under the project finance facility relating to the San Cristóbal mine (the “Facility”), liquidity issues and other matters with the Facility lenders, the counterparties under the metal derivatives positions and Sumitomo. Based on discussions to date, the Company believes that these matters can be resolved only by a comprehensive restructuring of its operations and capital structure. The Company has been in discussions with Sumitomo with respect to the sale to Sumitomo of the Company’s interest in the San Cristóbal mine and related liabilities and for the continued management of the mine by the Company (see Note 23). This transaction would be subject, among other conditions, to definitive documentation and a restructuring of the Facility and the Company’s 2.875% and 4.0% convertible subordinated notes due 2024 (the “Notes”). There can be no assurance that the discussions with Sumitomo will lead to a definitive agreement or that the Company will be able to accomplish the restructuring. Concurrent with its discussions with Sumitomo, the Company, in consultation with its financial advisor, Jefferies & Company, Inc., is continuing to explore other strategic and financial alternatives, including a sale of the Company or a sale of its interest in the San Cristóbal mine or in one or more of its exploration properties, and a voluntary filing under chapter 11 of the U.S. Bankruptcy Code.

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As described more fully below, the San Cristóbal mine will not achieve completion by year-end 2008 as required by the Facility. In the absence of a waiver or other relief, this failure will constitute an event of default under the Facility as of January 1, 2009, entitling the lenders to accelerate all indebtedness under the Facility and the counterparties to terminate the related metals derivative positions.

September 30, 2008 Cash and Investments

At September 30, 2008, the Company’s aggregate cash, restricted cash, short- and long-term investments totaled $153.8 million, compared to an aggregate of $220.7 million in cash, restricted cash, short- and long-term investments and restricted investments at December 31, 2007. Cash and investments at September 30, 2008 includes $34.0 million of unrestricted cash and cash equivalents, $10.6 million of unrestricted short and long-term investments, $13.9 million of currently illiquid auction rate securities (“ARS”) classified as long-term (see Note 5), $91.0 million of cash that is restricted to collateralize the open metal derivative positions required by the Facility, and $4.3 million of cash held in a collateral account that is restricted to the operating requirements at the San Cristóbal mine and interest and principal payments on the Facility (see Note 12). At September 30, 2008, the Company’s aggregate unrestricted cash and investments (excluding ARS) totaled $44.6 million. During October and through November 7, 2008, the Company has used $9.1 million of this amount to fund MSC.

Funding of San Cristóbal and Other Cash Requirements

During the first nine months of 2008, the Company and Sumitomo provided $202.0 million in funding to MSC, including $105.0 million in the third quarter, to augment cash flow from concentrate sales in order to settle metal derivative positions required in connection with the Facility and to fund operating costs, income and other taxes, capital costs and financing costs. The Company funded $94.2 million of this amount, and the remaining $107.8 million was funded by Sumitomo, including $50.0 million advanced under the Loan Agreement (see Note 12). In October and through November 7, 2008, the Company and Sumitomo have funded an additional $46.0 million to MSC, of which the Company funded $9.1 million and Sumitomo funded $36.9 million, including $32.0 million advanced under the Loan Agreement. MSC operating cash flow has been significantly adversely affected during 2008 by falling metals prices. From January 1 through November 6, 2008 metals prices have declined by about 30% for silver, 55% for zinc, and 40% for lead, and from July 1 through November 6, 2008 prices have fallen about 40% for silver, 40% for zinc, and 20% for lead. Operating margins in 2008 have also been adversely affected by lower than anticipated production, and increased costs for reagents, diesel fuel and other materials consumed in the operation. Rising fuel costs in the second quarter 2008 have increased costs for power and mine equipment operation, as well as for transportation of materials into and out of the operation. Pressure on operating margins for 2008 has been exacerbated by industry-wide increases in treatment and refining charges, which have approximately doubled from 2007 for lead concentrates and risen about 30% for zinc concentrates.

In addition to operating costs, sustaining capital expenditures and taxes payable, the Company expects that MSC will have aggregate debt service and derivative settlement requirements of approximately $220 million during the next 12 months (from October 2008 through September 2009). This amount includes $95 million in scheduled principal and interest payments under the Facility, $72 million to fund the operating and debt service reserve accounts required under the Facility by December 2008, and approximately $53 million to settle derivative positions maturing during the period based on metals prices at November 6, 2008. Prices at November 6, 2008 were $10.41 per ounce silver, $0.50 per pound zinc, and $0.67 per pound lead. The Company projects that cash flow from operations during the next 12 months will be insufficient to fund these amounts and that MSC will require approximately $386 million of funding from October 2008 through September 2009 based on November 6, 2008 metals prices. The Company’s share of this funding requirement would be approximately $251 million, which exceeds its current cash and investment balances and expected sources of funding (including MSC operating cash flow) during the period.

The projected level of required funding for MSC is an estimate and will be affected by various factors, including metals prices, the amount and timing of concentrate production and shipments, revenues and related cash receipts and expenditures, many of which are beyond the Company’s control and difficult to predict given the mine’s limited operating history. If MSC were to experience unanticipated disruptions in production, or if projected metals prices, recovery rates or mine and mill cost estimates are not substantially achieved as projected, contributions may be required in significantly greater amounts than currently estimated.

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Facility Compliance

The San Cristóbal mine has not initiated certain performance tests required to achieve “completion”, and thus will not achieve completion by year-end 2008 as required by the Facility. In the absence of a waiver or other relief, this failure will constitute an event of default under the Facility as of January 1, 2009. In addition, the Facility requires the Company to maintain a minimum consolidated tangible net worth (“TNW”) of $280 million. The writedown of the San Cristóbal assets (see Note 3) has reduced the Company’s TNW below this amount. The Company believes that it will be unable to cure this breach of covenant, and the failure to do so for 30 days following notice from the lenders would also constitute an event of default under the Facility. The occurrence of an event of default would entitle the Facility lenders to accelerate all indebtedness under the Facility and the counterparties to terminate the related metals derivative positions. The Company’s 65% share of the $225.0 million Facility and approximately $225.0 million outstanding derivative position liability at September 30, 2008 (see Note 14) totals approximately $292.5 million. The Company does not have, and does not expect to have, sufficient cash and investments to settle fully its share of these obligations if they were to be immediately due and payable and believes that it would face significant challenges in obtaining additional funding to do so. If the Company were unable to repay these obligations when due, the lenders and the counterparties under the derivative positions would be entitled to enforce their liens and take possession of collateral securing indebtedness under the Facility and the metals derivative positions, including the assets that comprise the San Cristóbal mine and $91.0 million of cash and investments that is pledged as security for the derivative positions. A failure to pay amounts due and payable under the Facility and the derivative positions, including upon acceleration, would also result in a default under the terms of the Notes, entitling the holders to accelerate the maturity thereof. The Notes had an aggregate principal amount outstanding of $290 million at September 30, 2008.

In addition, following “completion,” cash flows from the mine must meet minimum loan coverage ratios computed using metals prices set forth in the Facility, which are lower than current market prices in the case of silver and lead. Specifically, for production during 2009, the debt service coverage ratio will be computed using metals prices of $7.32 per ounce for silver, $0.61 per pound for zinc, and $0.32 per pound for lead. At November 6, 2008, cash settlement metals prices were $10.41 per ounce for silver, $0.50 per pound for zinc and $0.67 per pound for lead. Based on current operating costs and the Facility mandated metals prices, the Company does not expect to meet the financial covenant requirements under the Facility and must either obtain a concession from the lenders to allow use of higher metals prices to calculate the ratios or otherwise amend the covenants in the Facility. Based on its discussions with the lenders to date, the Company does not believe that such a concession will be forthcoming in the absence of a comprehensive restructuring of the Company’s operations and capital structure.

Classification of Debt as Current

As described above, the San Cristóbal mine will not achieve completion by year-end 2008 as required by the Facility. In the absence of a waiver or other relief, this failure will constitute an event of default under the Facility as of January 1, 2009. In addition, the Company is not in compliance with its TNW covenant under the Facility and believes that it would be unable to cure the breach of covenant within the period provided in the Facility, which would constitute an event of default under the Facility. Finally, it is an event of default under the Facility if any event, condition or occurrence occurs that has a material adverse effect (“MAE”). In general, an MAE is defined as a material adverse effect on the condition (financial or otherwise) of the Company. Given the significant decline in metals prices that has occurred from the beginning of the third quarter 2008 and the resulting impact on the Company’s liquidity and financial resources, as discussed above, the Company believes that the Facility lenders could assert that an MAE has occurred with respect to the Company’s financial condition and declare a default under the Facility. Accordingly, the Company has reclassified all of its debt under the Facility and the related liability under its metal derivatives positions as current liabilities as of September 30, 2008. Because a default may occur under the Notes if the Company is in default on other material debt obligations, the Company has also reclassified the Notes as current liabilities as of September 30, 2008.

3. Impairment of Long-lived Assets

Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FAS 144”) provides financial accounting and reporting guidance for the impairment or disposal of long-lived assets. FAS 144 provides that recoverability of long-lived assets should be assessed whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Rapidly declining metals prices and continued high operating costs during the third quarter 2008 have reduced the operating margins at the Company’s San Cristóbal mine, which are expected to be

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insufficient to cover the Company’s financial obligations. The Company expects that the San Cristóbal mine will require substantial additional funding (see Note 2). Accordingly, following the guidance of FAS 144, the Company has used a probability weighted analysis of various cash flow scenarios in determining that future cash flows are not sufficient to recover the carrying value of the San Cristóbal asset group. The asset group includes all plant, property, and equipment, inventories, trade receivables, value added tax recoverable, accrued liabilities and leasing obligations related to the San Cristóbal mine. The asset group excludes the project finance facility and associated derivative liability.

The Company used a probability weighted analysis of various cash flow scenarios which assume the Company either continues ownership of or sells the asset group. A higher probability weighting was attributed to a potential sale of the asset group, based on the Company’s current liquidity situation and inability to continue to fund the cash required by the San Cristóbal mine. Declining metals prices have negatively impacted operating margins at MSC and the value the Company could receive in a sale of the San Cristóbal asset group. The Company has also factored into the impairment analysis scenarios in which the Company continues its ownership of the asset group and generates net cash flows during the remaining life of the asset group assuming various metals price scenarios. In assigning probabilities and combining the results of the various hold or sale scenarios, the Company has concluded that an impairment of the asset group has occurred in the third quarter 2008.

In measuring the amount of the impairment, the Company estimated the fair value of the asset group by discounting the cash flows for the various hold scenarios using a rate of 21.5%, which combines the risk free rate of 4.4% plus an additional interest factor for Bolivian country risk of 17.1% and factoring in various sale scenarios. The Company believes that applying a specific Bolivian risk factor is an appropriate method of capturing the additional country risk that is not otherwise reflected in the cash flow scenarios. The estimated fair value of the asset group, using the probability weighted average cash flow analysis, was $410.4 million which, when compared to the asset group carrying value of $1,025.4 million, results in an asset impairment charge of $615.0 million, which has been reflected in the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2008.

The Company has been in discussions with Sumitomo with respect to the possible sale to Sumitomo of the Company’s interest in the San Cristóbal mine. There may be additional adjustments to the carrying value of the San Cristóbal asset group as a result of the sale, if completed (see Notes 1, 2 and 23).

4. Significant Accounting Policies

Recently Adopted Standards

Effective January 1, 2008 the Company adopted the provisions of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS No. 157”) for the financial assets and liabilities and nonfinancial assets and liabilities which are measured at fair value on a recurring annual basis. FAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. Among other requirements, FAS No. 157 requires that consideration be given to the Company’s own credit risk and risk of non-performance in the measurement of certain liabilities. The effect of considering the Company’s credit risk and risk of non-performance in the measurement of the fair value of its open metal derivative positions is a reduction of the derivative liability and an increase in the non-cash gain for commodity derivatives included in operations of $47.4 million and $103.2 million for the three month and nine month periods ended September 30, 2008. The reduction in the fair value of the liability and increase in the non-cash gain results from discounting the cash flows relating to the metal derivative positions using higher interest rates reflective of the Company’s increased credit risk. As the adjustment relates solely to fair value measurements, it does not affect the Company’s historical or future cash flow or the timing or amount of actual payments required to settle the applicable derivative positions. See Note 14 for a discussion of the Company’s derivative instruments and Note 15 for detail regarding the Company’s fair value measurement disclosures in accordance with FAS No. 157.

During September 2008, FASB issued Staff Position No 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of FASB Statement No. 157 in a market that is not active and provides an example

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to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective immediately for the Company. The guidance provided by FSP FAS 157-3 did not affect the Company’s financial position or results of operations.

Effective January 1, 2008 the Company adopted Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“FAS No. 159”). FAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of FAS No. 159 apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“FAS No. 115”) applies to all entities with available-for-sale and trading securities. The Company did not elect the fair value option for any of its financial assets or liabilities, and as a result, the adoption of FAS No. 159 did not have a material impact on the Company’s financial position or results of operations at September 30, 2008 and is not expected to have a material impact in the future.

New Accounting Standards

During February 2008 the Financial Accounting Standards Board (“FASB”) issued Staff Position No 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS No. 157 by one year (until fiscal years beginning after November 15, 2008; fiscal year 2009 for the Company) for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company is currently evaluating the potential impact of adopting this statement but does not believe it will have a material impact on the Company’s financial position or results of operations.

During March 2008 the FASB issued Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133” (“FAS No. 161”). FAS No. 161 enhances the disclosure requirements under FAS No. 133 pertaining to how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under FAS No. 133, and how derivative instruments and related hedge items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008 (fiscal year 2009 for the Company). The Company is currently evaluating the potential impact on the Company’s derivative instrument disclosures of adopting this statement.

During December 2007 the FASB issued Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements—an Amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“FAS No. 160”). A non-controlling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this Standard is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards related to non-controlling interests. FAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (fiscal year 2009 for the Company). Upon adoption of FAS No. 160, the Company will no longer report minority interest in the “mezzanine”, but will reflect such interests as part of shareholder’s equity. Furthermore, FAS No. 160 changes the way transactions among shareholders are accounted for and allows the full allocation of losses to the non-controlling interest, even when non-controlling interest’s equity balance is in a deficit position.

During December 2007 the FASB issued Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (“FAS No. 141R”). FAS No. 141R provides revised guidance on how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, non-controlling interests acquired, and goodwill acquired. FAS No. 141R also expands required disclosures regarding the nature and financial effects of business combinations. FAS No. 141R generally applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (fiscal year 2009 for the Company). The Company is evaluating the impact FAS No. 141R would have on its financial position and results of operations should it enter into a business combination in the future.

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During May 2008 the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”). FSP No. APB 14-1 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement, unless the embedded conversion option is required to be separately accounted for as a derivative under Financial Accounting Standards No. 133, “Accounting for Derivatives Instruments and Hedging Activities” (“FAS No. 133”) . FSP No. APB 14-1 will require the liability and equity components of convertible debt instruments to be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. If a convertible debt instrument within the scope of FSP No. APB 14-1 is settled through the issuance of cash, stock, or any combination thereof, or if a modification or exchange of an instrument is accounted for as an extinguishment, an issuer will recognize separately the extinguishment of the liability component and the reacquisition of the equity component. Any difference between the settlement consideration attributed to the liability component and its carrying amount is recognized in the income statement as a gain or loss on debt extinguishment. Any difference between the consideration attributed to the equity component and its carrying amount is recognized in stockholders’ equity. FSP No. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 (fiscal year 2009 for the Company) and interim periods within those fiscal years. The Company is evaluating what impact, if any, FSP No. APB 14-1 would have on the Company’s financial position or results of operations.

5. Investments

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments include investments with maturities greater than three months, but not exceeding 12 months. Long-term investments include investments with maturities greater than 12 months.

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and re-evaluates those classifications at each balance sheet date. Debt securities are classified as held to maturity when the Company has the intent and ability to hold the securities to maturity. Held to maturity debt securities are stated at amortized cost. Available for sale investments are marked to market at each reporting period with changes in value recorded as a component of other comprehensive loss. If declines in value are deemed other than temporary, a charge is made to net income (loss) for the period.

ARS Investments

At September 30, 2008 the Company held investments in ARS with an adjusted cost basis of $13.4 million. The adjusted cost basis reflects $38.6 million of other than temporary impairment charges recorded through September 30, 2008. During the first nine months of 2008 the Company recorded an $8.0 million other than temporary impairment charge for certain ARS for which there had been a decline in estimated fair value during the period. In addition, during the first nine months of 2008 the Company recorded a temporary gain on certain ARS of $0.5 million which was recorded to other comprehensive income at September 30, 2008. During the first nine months of 2008 the Company liquidated at par value approximately $0.3 million of its ARS. The fair value for each of the remaining ARS was determined by the Company, with the assistance of a third party valuation firm.

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The following tables summarize the Company’s investments at September 30, 2008 and December 31, 2007:

Quoted market prices at September 30, 2008 and December 31, 2007 were used to determine the fair values of the above investments, except with respect to the ARS. See Note 15 for further discussion on the fair value measurement techniques used by the Company to value the above investments.

Credit Risk

Credit risk is the risk that a third party might fail to fulfill its performance obligations under the terms of a financial instrument. For cash and cash equivalents and investments, the Company’s maximum exposure to credit risk represents the carrying amount on the balance sheet. The Company attempts to

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mitigate credit risk for cash and cash equivalents and investments by placing its funds and investments with high credit-quality financial institutions, limiting the amount of exposure to each financial institution, monitoring the financial condition of the financial institutions and investing only in government and corporate securities rated “investment grade” or better. The Company invests with financial institutions that maintain a net worth of not less than $1 billion and are members in good standing of the Securities Investor Protection Corporation. (See the discussion above regarding the Company’s ARS investments.)

6. Prepaid expenses and other assets

Prepaid expenses and other assets consist of the following:

The current portion of notes receivable is related to funds previously advanced by the Company to the contractor that constructed the load out facilities at the Port of Mejillones (see Note 10). Prepaid contractor fees and vendor advances at September 30, 2008 consist primarily of advance payments made to contractors and suppliers for mining and processing supplies and services at the San Cristóbal mine.

Under the terms of the sale to Sumitomo of a 35% interest in the subsidiary holding the Company’s San Cristóbal mine, the Company retained certain interests in future silver and zinc production from Sumitomo’s interest in San Cristóbal mine production. Deferred payments receivable at December 31, 2007 are amounts receivable from Sumitomo for those retained interests in San Cristóbal mine silver and zinc production. Effective June 30, 2008 the Company terminated the retained interests discussed above for a $70.0 million payment from Sumitomo (see Note 18).

7. Inventories

Inventories at our San Cristóbal mine at September 30, 2008 and December 31, 2007 consist of the following:

As the result of declining metals prices and increasing operating costs the Company wrote down the carrying value of its sulfide ore stockpile and concentrate inventories at September 30, 2008, to net realizable value. The Company reduced the carrying value of its concentrate inventories by $4.2 million and, its sulfide ore stockpile inventories by $30.2 million, and recorded a $34.4 million charge to write down of inventories on the accompanying consolidated statements of operations and comprehensive income (loss).

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Concentrate inventories consist of approximately 43,100 tonnes and 19,863 tonnes of concentrates at September 30, 2008 and December 31, 2007, respectively. Concentrate inventories include concentrates at the mine and in transit for which title and/or risk of loss have not yet passed to the smelter. Material and supplies inventory consists primarily of fuel, reagents and operating supplies and are carried at the lower of cost or market. The long-term oxide stockpile inventory consists of stockpiled oxide ore that will be processed later in the mine life and is carried at cost, which is lower than net realizable value.

8. Value Added Tax Recoverable

The Company has recorded value added tax (“VAT”) paid in Bolivia and related to the San Cristóbal mine as a recoverable asset. Bolivian law states that VAT paid prior to production is recoverable as a credit against Bolivian taxes arising from production, including income taxes. The VAT is expected to be recovered through future production and sales from the San Cristóbal mine. Future changes to Bolivian tax law could have an adverse effect on the Company’s ability to recover the VAT paid in Bolivia. At September 30, 2008 and December 31, 2007, the VAT recoverable was $149.5 million and $95.3 million, respectively. The VAT recoverable amounts include $17.9 million and $8.6 million of recoverable Bolivian import duties for the periods ended September 30, 2008 and December 31, 2007, respectively. The September 30, 2008 amount also includes $2.6 million of prepaid mining tax royalties. The September 30, 2008 VAT recoverable balance of $149.5 million is net of $0.2 million of VAT recovered during the first nine months of 2008.

The Company has also paid VAT in Bolivia as well as other countries, primarily related to exploration projects, which has been charged to expense as incurred because of the uncertainty of recoverability.

9. Property, Plant and Equipment

The components of property, plant and equipment were as follows:

Mineral properties include engineering, financing and other costs not attributable to specific fixed assets at the San Cristóbal mine.

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At September 30, 2008 the Company reduced the carrying value of the San Cristóbal asset group by $615.0 million and recorded a $615.0 million impairment charge on the accompanying consolidated statement of operations (see Note 3). Due to the timing of the impairment, the Company has not yet been able to determine the allocation of the impairment charges against specific property, plant and equipment asset categories.

For the nine months ended September 30, 2008 and 2007 the Company recorded depreciation expense of $36.2 million and $4.9 million, respectively. For the nine months ended September 30, 2007 the Company capitalized depreciation associated with the construction of the San Cristóbal mine in the amount of $3.2 million. No depreciation was capitalized for the comparable period of 2008.

At September 30, 2008 the Company had recorded a lease obligation of $50.1 million related to San Cristóbal mining equipment under capital lease (see Note 12).

10. Other Long-Term Assets

At September 30, 2008 other long-term assets consists primarily of $0.2 million long-term portion of a note receivable, plus accrued interest, from the contractor that constructed the load out facilities at the Port of Mejillones for funds previously advanced by the Company. The note and accrued interest are being repaid by applying a portion of the amounts owed for port charges by the San Cristóbal mine to the outstanding note and accrued interest balances. At September 30, 2008, the remaining principal amount of the note, plus accrued interest, was approximately $2.9 million. The principal amount of the note, plus accrued interest, is expected to be fully recovered by December 2009.

11. Accounts Payable and Other Accrued Liabilities

The Company’s accounts payable and other accrued liabilities consist of the following:

Trade accounts payable and accruals are primarily related to amounts due to contractors and suppliers at the San Cristóbal mine.

Amounts due smelters at September 30, 2008 include a $6.6 million mark-to-market adjustment resulting from declining metals prices on unsettled shipments (see Note 19).

Accrued employee compensation and benefits at September 30, 2008 consist of $6.7 million of withholding taxes and benefits payable, $3.1 million of accrued performance bonuses and $4.1 million of accruals for statutory benefits required by Bolivian law, including thirteenth month payments and mandatory severance requirements.

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12. Debt

The Company’s debt consists of the following:

2.875% Notes and 4.0% Notes

Both series of the Notes are convertible into the Company’s Ordinary Shares at a conversion rate of 34.9406 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $28.62 per share), subject to adjustment in certain circumstances. Holders may convert their Notes only if: (i) the price of Apex Silver Ordinary Shares reaches a specified threshold; (ii) the trading price for the Notes falls below certain thresholds; (iii) the Notes have been called for redemption; or (iv) specified corporate transactions occur. Full conversion of the Notes would result in the issuance of approximately 10.1 million of the Company’s Ordinary Shares. Accumulated interest on the Notes is paid twice a year in March and September.

The agreements related to the Notes contain a clause that triggers a default upon failure to pay or acceleration of other material debt obligations. Because the Company believes that the Facility lenders could assert that an MAE has occurred with respect to the Company’s financial condition and declare a default under the Facility, the Company has reclassified the Notes as current liabilities as of September 30, 2008 (see Note 2).

Costs incurred in connection with the issuance of the Notes were deferred and are being amortized to interest expense over ten years which corresponds to the related call provisions on the Notes. At September 30, 2008 the unamortized balance of deferred financing costs related to the Notes was approximately $5.8 million.

San Cristóbal Project Finance Facility

In December 2005, the Company closed on the Facility, arranged by BNP Paribas and Barclays Capital, and funded by a group of international financial institutions including banks, export credit agencies and the Andean Development Corporation, a multilateral financial agency that promotes sustainable development in South America. During 2006 and 2007, the Company borrowed the full $225.0 million available under the Facility and the proceeds were used to complete construction of the Company’s San Cristóbal mine. Interest on the outstanding amounts drawn under the Facility is based on LIBOR plus a credit spread. The first principal payment under the Facility is due in December 2008, and the Facility must be fully repaid by December 2012.

Direct costs incurred in obtaining the Facility were deferred and are being amortized to interest expense, using the effective interest method, over the term of the Facility. At September 30, 2008 the unamortized balance of deferred financing costs related to the Facility was approximately $6.9 million.

In connection with the September 2006 sale to Sumitomo of a 35% interest in the subsidiaries that own and operate the San Cristóbal mine, Sumitomo guaranteed the repayment of 35% of the Facility debt through project “completion”, which entails the satisfaction of certain financial and operational requirements, including the creation of operating and debt service reserves and meeting certain operational performance levels over specified periods of time. Under the Facility, completion can occur no later than December 2008.

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The Facility also contains other covenants that require the Company to, among other things, maintain certain security interests, collateral accounts related to operating and debt service reserves, financial ratios after project completion, insurance coverage, minimum sales contracts and metals price protection contracts as well as other requirements.

As described above, the San Cristóbal mine will not achieve completion by year-end 2008 as required by the Facility. In the absence of a waiver or other relief, this failure will constitute an event of default under the Facility as of January 1, 2009. In addition, the Company is not in compliance with its TNW covenant under the Facility and believes that it would be unable to cure the breach of covenant within the period provided in the Facility, which would constitute an event of default under the Facility. The occurrence of an event of default would entitle the Facility lenders to accelerate all indebtedness under the Facility and the counterparties to terminate the related metals derivative positions. Based on current operating costs and the Facility mandated metals prices, the Company also does not expect to meet the financial covenant requirements under the Facility and must either obtain a concession from the lenders to allow use of higher metals prices to calculate the ratios or otherwise amend the covenants in the Facility. In addition, given the significant decline in metals prices that has occurred from the beginning of the third quarter 2008 and the resulting impact on the Company’s liquidity and financial resources, as discussed above, the Company believes that the Facility lenders could assert that an MAE has occurred with respect to the Company’s financial condition and declare a default under the Facility. Accordingly, the Company has reclassified all of its debt under the Facility and the related liability under its metal derivatives positions as current liabilities as of September 30, 2008 (see Note 2).

In connection with the Facility, the Company funded a $91 million margin account and Sumitomo has provided a $49 million post-completion guarantee, for the benefit of the two banks holding the metal derivative positions. At September 30, 2008, the margin account consisted of $91.0 million recorded as current restricted cash. Unless an event of default has occurred and is continuing, unused funds remaining in the margin account will be released and the guarantee will be reduced one-third per year on the first business day following December 31st of each of 2008, 2009 and 2010.

In May 2006, the Constitutional Court of Bolivia issued a ruling declaring certain articles of the 1997 Mining Code unconstitutional. The effect of the ruling would limit certain rights associated with mining concessions, including the right to mortgage the concessions. The effective date of the Court’s ruling was not made clear. The Court urged the Bolivian Congress to enact legislation which would supersede the ruling. On the basis of this Constitutional Court ruling, in April 2008, the Lower House of the Bolivian Congress enacted legislation which replaced certain articles of the Mining Code. The proposed legislation was then sent to the Senate, where changes clarifying that the law would not be applied retroactively were introduced. The legislation has not yet been approved by the full Bolivian Congress. The proposed legislation would limit the rights associated with mining concessions including the right to transfer, inherit, or mortgage the concessions. Although the Company believes that the Court’s ruling and subsequent legislation will not be applied retroactively, the ruling could limit the transferability of the Company’s mining concessions and could eventually call into question the enforceability of the pledges of the Company’s concessions to the lenders under the Facility.

Sumitomo Note Assignment

The Company has loaned funds to SC TESA, the contractor that constructed the power line for the San Cristóbal mine, and holds a note receivable from SC TESA in the amount of $21.9 million, which is eliminated in consolidation. The Company consolidates SC TESA for financial reporting purposes per the guidance of FASB Interpretation No.46R “Variable Interest Entities” (“FIN 46R”). The Company is receiving repayment of the note from SC TESA in the form of credits against electric transmission charges to the San Cristóbal mine. In connection with the sale of 35% of the San Cristóbal mine to Sumitomo, the Company sold 35% of the $21.9 million note to Sumitomo. As a result, at September 30, 2008 the Company has recorded a note payable to Sumitomo in the amount of $8.9 million, which includes accrued interest.

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Capital Leases

Certain mining equipment at the San Cristóbal mine used by the contractor that provides mining services to the Company has been recorded as capital leases because the equipment is used exclusively at the San Cristóbal mine. At September 30, 2008 the Company had recorded on its balance sheet $53.5 million of equipment, net of accumulated depreciation, and a capital lease obligation of $50.1 million related to the leased equipment. During the nine months ended September 30, 2008 the Company made payments of approximately $5.9 million related to its capital lease obligations.

Port Lease Liability

Certain assets constructed at the Port of Mejillones are for the exclusive use of the Company, including concentrate reception, unloading and storage facilities. The Company determined that a leasing arrangement exists with respect to those assets. As of September 30, 2008 the Company has recorded on its balance sheet $11.7 million, of plant and equipment, net of accumulated depreciation and a financing obligation of $11.8 million related to the port facility. In addition, the Company had previously advanced funds to the port contractor and holds a note receivable at September 30, 2008 for $2.9 million, including interest, related to those advances (see Note 10).

MSC Line of Credit

On August 11, 2008, MSC entered into the Loan Agreement, which is a subordinated unsecured line of credit provided by SC Minerals Aktiebolag (“SC Minerals”), a subsidiary of Sumitomo. The original amount available for borrowing under the Loan Agreement was $50.0 million. Loans under the Loan Agreement bear interest at an annual rate of 15%. The loans are subordinated to all amounts payable under the Facility, and MSC is not required to pay any amount of principal or interest with respect to any loan until maturity in August 2013. At September 30, 2008 the full $50.0 million had been borrowed under the Loan Agreement and is recorded to minority interest in consolidated subsidiaries on the accompanying consolidated balance sheets. On each of October 1, 2008 and October 31, 2008, the Loan Agreement was amended to increase the amount of available borrowings by $25.0 million, for a total increase of $50.0 million. At November 7, 2008, $82.0 million of the $100.0 million available under the amended Loan Agreement had been borrowed. The remaining amount may be borrowed at any time until December 31, 2008.

Pursuant to the Loan Agreement, SC Minerals may, at its option, convert outstanding advances (including accrued interest) into additional MSC shares at any time. Based on the full $100.0 million of borrowings and assuming no payments are made by MSC prior to maturity, if SC Minerals were to convert all amounts payable into MSC shares as of the maturity date, the Company’s indirect ownership interest in MSC would be reduced to approximately 46.4% (approximately 52.9% on conversion of principal only).

13. Asset Retirement Obligations

The Company has developed an asset retirement plan for its San Cristóbal mine which includes estimated reclamation, remediation and closure requirements based on Bolivian government requirements, World Bank financing requirements and the Company’s policies. The Company accrues estimated reclamation liabilities based on the asset retirement plan as activities requiring future reclamation and remediation occur.

The Company prepares estimates of the timing and amount of expected cash flows when an asset retirement obligation (“ARO”) is incurred. The fair value of the ARO is measured by discounting the expected cash flows using a discount factor that reflects the credit-adjusted risk-free rate of interest. The Company records the fair value of an ARO when it is incurred along with an offsetting increase in the mineral property asset. Changes in the fair value of the ARO are recorded as an adjustment to the corresponding mineral property asset carrying amount. The ARO is adjusted to reflect the passage of time (accretion cost) calculated by applying the discount factor implicit in the initial fair-value measurement to the beginning-of-period carrying amount of the ARO. The Company records accretion costs to expense as incurred.

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The following table reconciles the beginning and ending balance for the Company’s asset retirement obligations:

14. Derivative Instruments

Certain covenants of the Facility required the Company to provide price protection for a portion of its planned production of metals from San Cristóbal. The Company has entered into certain metal derivative positions utilizing primarily forward sales but also puts and calls to comply with the Facility covenants. In order to maintain leverage to silver market prices, the Company entered into proportionally more zinc and lead positions than silver positions.

The Company began to settle the metal derivative positions required by the Facility during the third quarter 2007. At the time of final settlement, the gain or loss recorded excludes previously recognized non-cash mark-to-market gains or losses.

The following table sets forth forward contracts settled and options that expired during the nine months ended September 30, 2008:

The average market price is calculated based on market prices during a pricing period that is set forth by the terms of each contract and varies between contracts. The actual financial impact of the remaining metal derivative positions will not be known until the positions are closed on their future settlement dates.

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The following table sets forth the Company’s open metal derivative positions at September 30, 2008:

The Company adjusts its open metal derivative positions to estimated fair value at the end of each accounting period with the related change in fair value recorded to earnings. For the nine months ended September 30, 2008, the Company recorded a gain of $358.9 million as a result of adjusting the open metal derivative positions and positions settled during the period to estimated fair value. For the nine months ended September 30, 2007, the Company recorded a loss of $194.2 million as a result of adjusting the open metal derivative positions and positions settled during that period to estimated fair value. Non-cash mark-to-market gains and losses from the remaining outstanding derivative positions may fluctuate substantially from period to period based on spot and forward prices and option volatilities. The Company does not intend to settle the remaining open derivatives position contracts prior to their settlement dates.

During the first quarter of 2008, the Company adopted FAS No. 157 which requires that, in the measurement of certain liabilities, consideration be given to the company’s own credit risk and risk of non-performance. The Company determined that FAS No. 157 applies to the fair value measurement of its open metal derivative positions. Inclusion of the impact of the Company’s credit risk and risk of non-performance on the fair value of its open metal derivative positions results in a reduction of the derivative liability and an increase in the non-cash gain on commodity derivatives of $103.2 million for the nine month period ended September 30, 2008. As the adjustment for credit and non-performance risk relates solely to fair value measurements, it does not affect the Company’s historical or future cash flow or the timing or amount of actual payments required to settle the applicable liabilities. The statements received from the counterparties holding the Company’s net open metal derivative positions indicate a total settlement amount due at September 30, 2008 of $328.3 million as compared to the total fair value of the net liability recorded at September 30, 2008 of $225.1 million.

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The following table sets forth the fair value of the Company’s net liability for open metal derivative positions at September 30, 2008 and December 31, 2007 and the change in that liability for the three and nine months ended September 30, 2008: