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

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:

LARGE ACCELERATED FILER  x        ACCELERATED FILER  ¨

NON-ACCELERATED FILER  ¨        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 AUGUST 7, 2008, 58,931,475 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.

APEX SILVER MINES LIMITED

FORM 10-Q

QUARTER ENDED JUNE 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 21 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)

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, and there are certain risks associated with the Company’s ability to successfully achieve anticipated production volumes, manage cost increases and operate the San Cristóbal mine in accordance with the terms and covenants of the related project finance facility (the “Facility”) as described in Note 11.

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.

At June 30, 2008, the Company’s aggregate cash, restricted cash, short- and long-term investments were $213.9 million, including $70 million received from the sale of the deferred payment obligation to Sumitomo Corporation (“Sumitomo”) (see Note 17), 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 June 30, 2008 includes $82.2 million of unrestricted cash and cash equivalents, $7.1 million of unrestricted short-term investments, $2.2 million of long-term investments, $20.0 million of currently illiquid auction rate securities (“ARS”) classified as long-term (see Note 4), $91.0 million of cash, of which $30.3 million is recorded as current, that is restricted to collateralize the open metal derivative positions required by the Facility, and $11.4 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 $225 million Facility (see Note 11). At June 30, 2008, the Company’s aggregate unrestricted cash and investments (excluding ARS) totaled $91.5 million. On August 10, 2008, the Company completed negotiation of and approved a $50 million subordinated unsecured line of credit to be entered into by Minera San Cristóbal (“MSC”), as borrower, with a subsidiary of Sumitomo, as lender, and an initial loan thereunder of $15 million (see Note 22). The line of credit permits borrowings by MSC until October 31, 2008. The Company expects that the line of credit will become effective during the week of August 11, 2008, upon approval by MSC’s board of directors and satisfaction of customary closing conditions, and that the initial loan will be extended promptly thereafter.

In addition to the additional funding for the San Cristóbal mine as described below, in the next 12 months the Company expects its cash needs to include approximately $25 million for general corporate costs and debt service on its Convertible Notes (see Note 11) and $15 to $20 million for exploration activities. We expect the cash spending on those amounts to occur approximately equally over the 12 month period.

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During the first six months of 2008, the Company and Sumitomo contributed $97.0 million to San Cristóbal, including $15.0 million in the second quarter, to augment cash flow from concentrate sales in order to fund operating costs, income and other taxes, capital costs and financing costs, and to settle metal derivative positions required in connection with the Facility. The Company funded $58.5 million of this amount, and the remaining $38.5 million was funded by Sumitomo (these amounts vary from the parties’ respective ownership interests due to timing differences in their funding obligations, with Apex’ share paid prior to year-end 2007 and Sumitomo’s share paid at the beginning of 2008). In July and August 2008, an additional $55 million was contributed to San Cristóbal, of which the Company contributed $35.8 million and Sumitomo contributed $19.2 million. In particular, operating cash flow from San Cristóbal was adversely affected in the second quarter as lead prices declined by nearly 40% and zinc prices declined by approximately 20%, as compared to the first quarter of 2008. Silver prices in the second quarter remained relatively unchanged. The decline in lead and zinc prices reduced cash received from sales of concentrates shipped in the second quarter required payments of $6.1 million to settle concentrate sales made in the first quarter of 2008 and are likely to require additional payments of approximately $5.3 million to settle additional first and second quarter concentrate sales. Operating margins were also adversely affected by increased smelting charges for concentrates and increased costs for reagents, diesel fuel and other materials consumed in the operation. Rising fuel costs in the second quarter of 2008 have increased costs for power and mine equipment operation, as well as for transportation of materials into and out of the operation. Operating margins for 2008 are also negatively affected 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, San Cristóbal has aggregate debt service and derivative settlement requirements of approximately $383 million during the next 12 months. This amount comprises $96 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 $215 million to settle derivative positions (based on prevailing metals prices at June 30, 2008) maturing in the period. The Company projects that cash flow from operations will be insufficient to fund these amounts and that San Cristóbal will require an additional approximately $125 million of contributions from August 2008 through June 2009 to augment operating cash flow to cover these expenditures. The Company’s share of this funding requirement would be approximately $81 million, which exceeds the Company’s expected sources of funding during the period, including operating cash flow from San Cristóbal. Accordingly, the Company is reviewing alternative actions to meet its expected cash needs as discussed below. The projected level of required contributions is an estimate and will be affected by a variety of 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 San Cristóbal experiences 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 greater amounts than currently estimated.

The Facility requires the Company to, among other matters, achieve “completion” of the mine by year-end 2008 (as defined in the Facility). Failure to achieve completion would constitute an event of default under the Facility, entitling the lenders to accelerate repayment of all indebtedness thereunder. One requirement for completion is the funding of operating and debt service reserve accounts in the aggregate amount of $72 million as described above, which the Company believes cannot be achieved without the additional contributions from the Company and Sumitomo as described above. In light of recent operating experience gained at mill production rates of 40,000 tonnes per day, the Company also projects that San Cristóbal will likely not meet certain consumption and efficiency requirements as part of the completion test, including those related to the amount of required reagents and operating personnel. To address these issues, the Company and Sumitomo may seek a one-year extension of the completion test through year-end 2009, but cannot predict whether or when the lenders may agree to such an extension or the terms on which they would be willing to do so. Such terms could involve a delay in the release of $91.0 million of cash that is restricted to collateralize the metal derivative open positions.

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. 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

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lead. At June 30, 2008, spot COMEX market prices were $17.42 per ounce for silver, and spot LME market prices were $0.85 per pound for zinc and $0.79 per pound for lead. The Company must submit an updated operating plan to the lenders by November 1 of each year using the specified metals prices and provide projections of production and operating costs for the following year and life of the mine. Based on current operating costs and the specified metals prices, the Company does not expect to meet the financial covenant requirements under the Facility. In the event of non-compliance, the Company would be obligated to seek a concession from the lenders to allow use of prevailing metals prices in the operating plan or otherwise amend the covenants in the Facility. While the lenders agreed to reset the metals prices set forth in the Facility in the prior year, the Company cannot predict whether the lenders would agree to a concession or amendment or the terms on which they would be willing to do so.

Failure to meet one or more covenants under the Facility and to cure the non-compliance within specified periods would entitle the lenders to declare the Company in default and to accelerate repayment of all indebtedness under the Facility. The Company would also likely be required to immediately settle its share of all outstanding metal derivative positions established as required by the Facility. The Company’s 65% share of the $225 million Facility and approximately $433.4 million outstanding derivative position liability (see Note 13) amounts to $428.0 million at June 30, 2008. 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 derivative positions, including the assets that comprise the San Cristóbal mine and $91 million of cash and investments that are restricted 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 Company’s Convertible Notes, entitling the note-holders to accelerate the maturity of those notes, which had an aggregate principal amount outstanding of $290 million at June 30, 2008. Such events would require the reclassification of all amounts owed under the Facility, derivative liability, and convertible notes to short term.

Although the new $50 million subordinated line of credit provides the Company with additional short-term liquidity, the Company believes that it is likely to require a significant restructuring of its operations or indebtedness based on the foregoing factors and its projections with respect to the San Cristóbal mine. The Company has engaged Jefferies & Company, Inc. as its financial advisor to assist it in reviewing strategic and financial alternatives, which could include new debt or equity financing, a sale of additional interests in San Cristóbal or in one or more of the Company’s exploration properties or a restructuring, refinancing or amendment of the Facility or the related derivative positions. The Company cannot predict whether any of these alternatives, if undertaken, could be completed in a timely manner to avoid a default by the Company or be achievable on terms that would not further restrict the Company’s operating flexibility and ongoing ability to meet its cash requirements over a reasonable period of time. Certain of these alternatives could also require the consent of the Company’s creditors or other counterparties, notably the lenders under the Facility, and the Company cannot predict whether it could obtain any such consents. The Company’s interest in San Cristóbal could also be subject to reduction if Sumitomo funds its pro rata share of additional contributions at a time when the Company fails to fund its share or if Sumitomo determines to convert any borrowings by MSC under the new line of credit into additional MSC shares (see Notes 17 and 22).

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 were measured at fair value on a recurring (annual) basis. FAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, 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 $7.1 million and $55.8 million for the three month and six month periods ended June 30, 2008.

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The reduction in the fair value of the liability 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 13 for a discussion of the Company’s derivative instruments and Note 14 for detail regarding the Company’s fair value measurement disclosures in accordance with FAS No. 157.

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) for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

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 June 30, 2008 and is not expected to have a material impact in the future.

New Accounting Standards

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 of adopting this statement on the Company’s derivative instrument disclosures.

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, and goodwill acquired. FAS No. 141R also expands required disclosures around 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 currently 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 currently evaluating what impact if any FSP No. APB 14-1 will have on the Company’s financial position or results of operations.

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.

At June 30, 2008 the Company held investments in ARS with an adjusted cost basis of $18.3 million. The adjusted cost basis reflects $33.7 million of other than temporary impairment charges recorded through June 30, 2008. During the first six months of 2008 the Company recorded a $3.1 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 six months of 2008 the Company also recorded a temporary gain on certain ARS of $1.7 million which was recorded to other comprehensive income at June 30, 2008. During the first six 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 June 30, 2008 and December 31, 2007:

Quoted market prices at June 30, 2008 and December 31, 2007 were used to determine the fair values of the above investments, except with respect to the auction rate securities. See Note 14 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 equivalents and investments, credit risk represents the carrying amount on the balance sheet. We attempt to mitigate credit risk for cash and equivalents and investments by placing our funds and investments with high credit-quality financial institutions, limiting the amount of exposure to each of the financial institutions, monitoring the financial condition of the financial

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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.)

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 9). Prepaid contractor fees and vendor advances at June 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 our 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 are related to amounts receivable from Sumitomo for those retained interests in San Cristóbal mine silver and zinc production. The Company received the $6.7 million of deferred payments from Sumitomo during July 2008. Effective June 30, 2008 the Company terminated the retained interests discussed above for a one time $70.0 million payment from Sumitomo (see Note 17).

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

Concentrate inventories consist of approximately 70,153 tonnes and 19,863 tonnes of concentrates at June 30, 2008 and December 31, 2007, respectively, and are carried at cost, which is lower than net realizable value. 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 consist primarily of fuel, reagents and operating supplies and are carried at the lower of cost or market. The long term stockpile inventories consist of stockpiled ore that will be processed later in the mine life and are carried at cost, which is lower than net realizable value.

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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 (see Note 19). At June 30, 2008 and December 31, 2007, the VAT recoverable was $127.8 million and $95.3 million, respectively. The VAT recoverable amounts include $14.5 million and $8.6 million of recoverable Bolivian import duties for the periods ended June 30, 2008 and December 31, 2007, respectively.

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.

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.

For the six months ended June 30, 2008 and 2007 the Company recorded depreciation expense of $18.7 million and $0.2 million, respectively. For the six months ended June 30, 2007 the Company capitalized depreciation associated with the construction of the San Cristóbal mine in the amount of $4.7 million. No depreciation was capitalized for the comparable period of 2008.

At June 30, 2008 the Company had recorded a lease obligation of $50.1 million related to San Cristóbal mining equipment under capital lease (see Note 11).

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At June 30, 2008 other long term assets consists primarily of $0.8 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 June 30, 2008 the remaining principal amount of the note, plus accrued interest, was approximately $3.5 million. The principal amount of the note, plus accrued interest, is expected to be fully recovered by December 2009.

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 our San Cristóbal mine.

Amounts due smelters at June 30, 2008 include a $5.9 million payable to a smelter for a shipment for which a provisional payment had been received by the Company but that was above the smelter’s rejection limits for silica. The shipment was rerouted to another smelter. Also included in amounts due smelters at June 30, 2008 are $11.4 million of mark-to-market adjustments resulting from declining metals prices on unsettled shipments (see Note 18).

Accrued employee compensation and benefits at June 30, 2008 consist of $5.5 million of withholding taxes and benefits payable, $2.4 million of accrued performance bonuses and $4.0 million of accruals for statutory benefits required by Bolivian law including thirteenth month payments and mandatory severance requirements.

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The Company’s debt consists of the following:

2.875% Notes and 4.0% Notes

Both the 2.875% Notes and the 4.0% Notes (collectively 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.

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 June 30, 2008 the unamortized balance of deferred financing costs related to the Notes was approximately $6.0 million.

San Cristóbal Project Finance Facility

In December 2005 the Company closed on the $225 million 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 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.

In connection with the September 2006 sale to Sumitomo Corporation (“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. (For this purpose completion is defined as 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 and can occur no later than December 2008.)

The Facility contains 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. Failure to comply with these covenants or to cure related

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violations within specified periods could result in an event of default, pursuant to which the project lenders could require immediate repayment of all amounts outstanding under the Facility and immediate cash settlement of the outstanding metal derivative positions associated with the San Cristóbal mine (see Note 2 related to the Company’s liquidity and ability to meet its obligations under the Facility).

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 June 30, 2008, the margin account consisted of $60.7 million recorded as non-current restricted cash and $30.3 million recorded as current restricted cash. 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 Court’s ruling is not effective until May 2008 and the Court urged the Bolivian Congress to enact legislation during that time which may supersede the ruling. In April 2008, the Lower House of the Bolivian Congress enacted legislation, which replaced certain articles of the Mining Code. The proposed legislation will require approval by the Senate to become a law. The proposed legislation would limit the rights associated with mining concessions including the right to transfer, inherit, or mortgage the concession. Although the Company understands 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 may call into question the enforceability of the pledges of our concessions to the lenders under the Facility.

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 June 30, 2008 the unamortized balance of deferred financing costs related to the Facility was approximately $7.7 million.

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 the Company receives payments from SC TESA it incurs an obligation to pay Sumitomo its 35% share of such payments. As a result, at June 30, 2008 the Company has recorded a note payable to Sumitomo in the amount of $8.8 million, which includes accrued interest.

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 June 30, 2008 the Company had recorded on its balance sheet $53.9 million, of equipment, net of accumulated depreciation and a capital lease obligation of $50.1 million related to the leased equipment. During the six months ended June 30, 2008 the Company made payments of approximately $5.2 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 June 30, 2008 the Company has recorded on its balance sheet $11.8 million, of plant and equipment, net of accumulated depreciation and a financing obligation of $11.9 million related to the port facility. In addition, the Company had previously advanced funds to the port contractor and holds a note receivable at June 30, 2008 for $3.5 million, including interest, related to those advances (see Note 9).

MSC Line of Credit

On August 10, 2008, the Company completed negotiation of and approved a $50 million subordinated unsecured line of credit to be entered into by MSC, as borrower, with a subsidiary of Sumitomo, as lender, and an initial loan thereunder of $15 million (see Note 22). The line of credit permits borrowings by MSC until October 31, 2008. The Company expects that the line of credit will become effective during the week of August 11, 2008, upon approval by MSC’s board of directors and satisfaction of customary closing conditions, and that the initial loan will be extended promptly thereafter.

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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.

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

Certain covenants related to 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.

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The following table sets forth forward contracts settled and options that expired during the six months ended June 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.

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

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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 six months ended June 30, 2008, the Company recorded a gain of $195.6 million as a result of adjusting the open metal derivative positions and positions settled during the period to estimated fair value. For the six months ended June 30, 2007 the Company recorded a mark-to-market derivative loss of $57.3 million with respect to these positions. 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 $55.8 million for the six month period ended June 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 June 30, 2008 of $489.2 million as compared to the total fair value of the net liability recorded at June 30, 2008 of $433.4 million.

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

The metal derivative positions in the tables above are primarily held in a separate Cayman Islands subsidiary which is owned 65% by the Company and 35% by Sumitomo, and Sumitomo has guaranteed the payment of 35% of the metal derivative positions through completion (which, according to the terms of the Facility, may be no later than December 2008) (see Note 11). The lead puts owned by Minera San Cristóbal which have a positive carrying value at June 30, 2008 of approximately $12.3 million are netted against the liabilities in the table above, which are reflected as $6.8 million and $5.5 million in current and non-current assets, respectively, in the accompanying consolidated balance sheet. (See Note 14 for fair value measurements disclosure).

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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 were measured at fair value on a recurring (annual) basis. FAS No. 157 establishes a framework for measuring fair value in the form of a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to quoted prices (unadjusted) in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy per FAS No. 157 are as follows:

Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.

Level 3: Unobservable inputs due to the fact that there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.

The following table summarizes the Company’s financial assets and liabilities at fair value at June 30, 2008, by respective level of the fair value hierarchy: