** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

##### **FORM10-Q**

##### ** **

**(MARK ONE)**

 

**x****        QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934 FOR THE QUARTERLY PERIOD ENDED**

**SEPTEMBER30, 2007.**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITIONPERIOD FROM          TO          .**

 

**COMMISSIONFILE NUMBER 1-13627**

 

**APEX SILVER MINES LIMITED**

(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **CAYMAN  ISLANDS, BRITISH WEST INDIES**  | ** ** | **NOT  APPLICABLE**  |
|-------------------------------------------|------------|----------------------|
| (STATE OR OTHER  JURISDICTION OF          |       | (I.R.S. EMPLOYER     |
| INCORPORATION OR  ORGANIZATION)           |       | IDENTIFICATION  NO.) |
|                                      |       |                 |
| **WALKER  HOUSE**                         | ** ** | ** **           |
| **MARY  STREET**                          | ** ** | ** **           |
| **GEORGE  TOWN, GRAND CAYMAN**            | ** ** | ** **           |
| **CAYMAN  ISLANDS, BRITISH WEST INDIES**  | ** ** | **NOT  APPLICABLE**  |
| (ADDRESS OF  PRINCIPAL EXECUTIVE OFFICES) |       | (ZIP CODE)           |

 

**(345)949-0050**

(REGISTRANT’STELEPHONE NUMBER, INCLUDING AREA CODE)

 

INDICATE BY CHECK MARKWHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BYSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILESUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THEPAST 90 DAYS:    YES x    NO o

 

INDICATE BY CHECK MARKWHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR ANON-ACCELERATED FILER:

 

LARGE ACCELERATEDFILER x   ACCELERATED FILER o  NON-ACCELERATED FILER o

 

INDICATE BY CHECK MARKWHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THEEXCHANGE ACT):  YES o       NO x

 

AT NOVEMBER 7, 2007,58,819,639 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED ANDOUTSTANDING.

 

 

----

 

APEX SILVER MINESLIMITED

FORM 10-Q

QUARTER ENDEDSEPTEMBER 30, 2007

 

INDEX

 
| PART I – FINANCIAL INFORMATION |      |
|-------------------------------------|-----------|
|                                |      |
|                                |      |
|                                |      |
|                                | ITEM 1.   | FINANCIAL  STATEMENTS |   |
|                                |      |   |   |
|                                | ITEM 2.   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS |   |
|                                |      |   |   |
|                                | ITEM 3.   | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |   |
|                                |      |   |   |
|                                | ITEM 4.   | CONTROLS AND  PROCEDURES |   |
|                                |      |   |
| PART II – OTHER  INFORMATION   |      |
|                                |      |   |
|                                | ITEM 1.   | LEGAL PROCEEDINGS |   |
|                                |      |   |   |
|                                | ITEM  1A. | RISK  FACTORS |   |
|                                |      |   |   |
|                                | ITEM 2.   | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS |   |
|                                |      |   |   |
|                                | ITEM 3.   | DEFAULTS  UPON SENIOR SECURITIES |   |
|                                |      |   |   |
|                                | ITEM 4.   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |   |
|                                |      |   |   |
|                                | ITEM 5.   | OTHER INFORMATION |   |
|                                |      |   |   |
|                                | ITEM  6.  | EXHIBITS |   |
|                                |      |   |
| SIGNATURES                          |      |

 

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

# **APEXSILVER MINES LIMITED**

**AnExploration and Development Stage Company**

# **CONSOLIDATEDBALANCE SHEETS**

**(Expressedin United States dollars)**

**(Unaudited)**

 
| ** **                                                                                                                                    | ** ** | **September 30,**                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2007**                                                  | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                    | ** ** | **(in thousands, except share data)** | ** ** |
| **Assets**                                                                                                                                    |       |                                                      |       |                  |       |
| Current assets                                                                                                                                |       |                                                      |       |                  |       |
| Cash and cash  equivalents                                                                                                                    |       | $                                                         | 82,123     |                  | $          | 49,840 |   |
| Restricted cash                                                                                                                               |       | 23,645                                                    |       | 31,942                |       |
| Investments                                                                                                                                   |       | 56,294                                                    |       | 325,536               |       |
| Restricted  investments                                                                                                                       |       | 612                                                       |       | 65,343                |       |
| Inventories                                                                                                                                   |       | 28,376                                                    |       | 6,332                 |       |
| Prepaid expenses  and other assets                                                                                                            |       | 11,313                                                    |       | 9,984                 |       |
| Total current  assets                                                                                                                         |       | 202,363                                                   |       | 488,977               |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Property, plant  and equipment, net                                                                                                           |       | 847,756                                                   |       | 641,758               |       |
| Ore stockpile  inventories                                                                                                                    |       | 63,829                                                    |       | 21,341                |       |
| Deferred  financing costs                                                                                                                     |       | 17,146                                                    |       | 19,485                |       |
| Value added tax  recoverable                                                                                                                  |       | 84,590                                                    |       | 54,158                |       |
| Restricted cash                                                                                                                               |       | 91,000                                                    |       | —                |       |
| Investments                                                                                                                                   |       | 45,814                                                    |       | 42,255                |       |
| Derivatives at  fair value                                                                                                                    |       | 6,458                                                     |       | —                |       |
| Deferred tax  asset                                                                                                                           |       | 1,720                                                     |       | —                |       |
| Other                                                                                                                                         |       | 5,310                                                     |       | 2,122                 |       |
| Total assets                                                                                                                                  |       | $                                                         | 1,365,986  |                  | $          | 1,270,096 |   |
|                                                                                                                                          |       |                                                      |       |                  |       |
| **Liabilities and Shareholders’ Deficit**                                                                                                |       |                                                      |       |                  |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Current  liabilities                                                                                                                          |       |                                                      |       |                  |       |
| Accounts payable  and other accrued liabilities                                                                                               |       | $                                                         | 54,534     |                  | $          | 47,979 |   |
| Accrued interest  payable                                                                                                                     |       | 2,218                                                     |       | 3,405                 |       |
| Derivatives at  fair value                                                                                                                    |       | 303,624                                                   |       | 39,080                |       |
| Current portion  of long term debt                                                                                                            |       | 8,914                                                     |       | 4,408                 |       |
| Total current  liabilities                                                                                                                    |       | 369,290                                                   |       | 94,872                |       |
| Long term debt                                                                                                                                |       | 581,623                                                   |       | 492,195               |       |
| Derivatives at  fair value                                                                                                                    |       | 686,546                                                   |       | 779,118               |       |
| Deferred gain on  sale of asset                                                                                                               |       | 945                                                       |       | 1,400                 |       |
| Uncertain tax  positions                                                                                                                      |       | 1,595                                                     |       | —                |       |
| Asset retirement  obligation                                                                                                                  |       | 6,660                                                     |       | 5,761                 |       |
| Total  liabilities                                                                                                                            |       | 1,646,659                                                 |       | 1,373,346             |       |
| Minority  interest in consolidated subsidiaries                                                                                               |       | 588                                                       |       | 40                    |       |
| Commitments and  contingencies (Note 15)                                                                                                      |       |                                                      |       |                  |       |
| Shareholders’  deficit                                                                                                                   |       |                                                      |       |                  |       |
| Ordinary Shares,  $.01 par value, 175,000,000 shares authorized; 58,687,675 and 58,577,700  shares issued and outstanding at respective dates |       | 587                                                       |       | 586                   |       |
| Additional paid  in capital                                                                                                                   |       | 675,287                                                   |       | 669,487               |       |
| Accumulated  deficit during development stage                                                                                                 |       | (957,046                                                  | )          | (773,339              | )          |
| Accumulated  other comprehensive loss                                                                                                         |       | (89                                                       | )          | (24                   | )          |
| Total  shareholders’ deficit                                                                                                             |       | (281,261                                                  | )          | (103,290              | )          |
| Total  liabilities and shareholders’ deficit                                                                                             |       | $                                                         | 1,365,986  |                  | $          | 1,270,096 |   |

 

The accompanying notesform an integral part of these consolidated financial statements.

 

3

----

 

**APEXSILVER MINES LIMITED**

**AnExploration and Development Stage Company**

# **CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS)**

**(Expressedin United States dollars)**

**(Unaudited)**

** **
| ** **                                                                              | ** ** | **Three Months Ended  September 30,**      | ** ** | **Nine Months Ended  September 30,** | ** ** | **For the Period from  December 22, 1994  (inception)  through** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                  | ** ** | **2006**                                            | ** ** | **2007**                                                                                  | ** ** | **2006** | ** ** | **Sept. 30, 2007** | ** ** |
| ** **                                                                              | ** ** | **(in thousands, except share data)** | ** ** |
| **Operating  income and expenses:**                                                     |       |                                                      |       |                                                |       |                                                                                      |       |   |   |   |   |
| Production  startup income/(expense), net (exclusive of amounts shown separately below) |       | $                                                         | (12,423    | )                                                   | $          | —                                                                                    |       | $ | (12,423 | ) | $ | — |   | $ | (12,423 | ) |
| Exploration                                                                             |       | (2,975                                                    | )          | (2,155                                              | )          | (9,341                                                                                    | )          | (5,162 | ) | (91,088 | ) |
| Administrative                                                                          |       | (7,457                                                    | )          | (4,123                                              | )          | (19,193                                                                                   | )          | (15,122 | ) | (110,298 | ) |
| Loss on  commodity derivatives                                                          |       | (136,895                                                  | )          | (119,934                                            | )          | (194,236                                                                                  | )          | (370,895 | ) | (1,059,904 | ) |
| Gain on foreign  currency derivatives and transactions                                  |       | 2,572                                                     |       | 203                                                 |       | 4,792                                                                                     |       | 439 |   | 6,405 |   |
| Asset retirement  accretion expense                                                     |       | (154                                                      | )          | (134                                                | )          | (439                                                                                      | )          | (276 | ) | (845 | ) |
| Depreciation,  depletion and amortization                                               |       | (4,675                                                    | )          | (100                                                | )          | (4,865                                                                                    | )          | (296 | ) | (6,664 | ) |
| Total operating  expenses                                                               |       | (162,007                                                  | )          | (126,243                                            | )          | (235,705                                                                                  | )          | (391,312 | ) | (1,274,817 | ) |
| **Other  income and expenses:**                                                         |       |                                                      |       |                                                |       |                                                                                      |       |   |   |   |   |
| Interest and  other income                                                              |       | 5,212                                                     |       | 4,469                                               |       | 18,362                                                                                    |       | 12,637 |   | 72,712 |   |
| Royalty income                                                                          |       | 267                                                       |       | —                                              |       | 711                                                                                       |       | — |   | 2,330 |   |
| Gain on sale of  interest in subsidiary                                                 |       | —                                                    |       | 199,600                                             |       | —                                                                                    |       | 199,600 |   | 199,600 |   |
| Gain on  extinguishment of debt                                                         |       | —                                                    |       | —                                              |       | —                                                                                    |       | 2,875 |   | 9,640 |   |
| Loss on auction  rate securities                                                        |       | (21,130                                                   | )          | —                                              |       | (21,130                                                                                   | )          | — |   | (21,130 | ) |
| Interest expense  and other borrowing costs (1)                                         |       | (7,290                                                    | )          | —                                              |       | (7,290                                                                                    | )          | (774 | ) | (18,986 | ) |
| Total other  income and expenses                                                        |       | (22,941                                                   | )          | 204,069                                             |       | (9,347                                                                                    | )          | 214,338 |   | 244,166 |   |
| Loss before  minority interest and income taxes                                         |       | (184,948                                                  | )          | 77,826                                              |       | (245,052                                                                                  | )          | (176,974 | ) | (1,030,651 | ) |
| Income taxes                                                                            |       | (394                                                      | )          | (54                                                 | )          | (488                                                                                      | )          | (161 | ) | (1,616 | ) |
| Minority  interest in (income) loss of consolidated subsidiaries                        |       | 33,501                                                    |       | (10,016                                             | )          | 61,833                                                                                    |       | (10,023 | ) | 75,221 |   |
| Net income  (loss)                                                                      |       | $                                                         | (151,841   | )                                                   | $          | 67,756                                                                                    |       | $ | (183,707 | ) | $ | (187,158 | ) | $ | (957,046 | ) |
| Other  comprehensive income (loss):                                                     |       |                                                      |       |                                                |       |                                                                                      |       |   |   |   |   |
| Unrealized gain  (loss) on securities                                                   |       | $                                                         | 96         |                                                | $          | (42                                                                                       | )          | $ | (65 | ) | $ | 160 |   | $ | (332 | ) |
| Reclassification  for gain on securities included in net loss                           |       | —                                                    |       | (518                                                | )          | —                                                                                    |       | 243 |   | 243 |   |
| Other  comprehensive income (loss)                                                      |       | 96                                                        |       | (560                                                | )          | (65                                                                                       | )          | 403 |   | (89 | ) |
| Comprehensive  income (loss)                                                            |       | $                                                         | (151,745   | )                                                   | $          | 67,196                                                                                    |       | $ | (183,772 | ) | $ | (186,755 | ) | $ | (957,135 | ) |
| **Net  income (loss) per Ordinary Share – basic**                                  |       | $                                                         | (2.59      | )                                                   | $          | 1.16                                                                                      |       | $ | (3.13 | ) | $ | (3.35 | ) |   |   |
| **Net  income (loss) per Ordinary Share – diluted**                                |       | $                                                         | (2.59      | )                                                   | $          | 1.15                                                                                      |       | $ | (3.13 | ) | $ | (3.35 | ) |   |   |
| **Weighted  average Ordinary Shares outstanding - basic**                               |       | 58,644,407                                                |       | 58,417,387                                          |       | 58,635,980                                                                                |       | 55,816,488 |   |   |   |
| **Weighted  average Ordinary Shares outstanding - diluted**                             |       | 58,644,407                                                |       | 58,989,561                                          |       | 58,635,980                                                                                |       | 55,816,488 |   |   |   |
|                                                                                         |            |                                                           |            |                                                     |            |                                                                                           |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           Interest expense and other borrowing costs arenet of $6.0 million and $29.6 million capitalized for the three and nine monthperiods ended September 30, 2007, respectively, and $7.7 million and $18.7million for the three and nine month periods ended September 30, 2006,respectively, and $65.1 million for the inception to date period endedSeptember 30, 2007.

 

The accompanying notes form an integral part of theseconsolidated financial statements.

 

4

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**APEXSILVER MINES LIMITED**

**AnExploration and Development Stage Company**

# **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Expressedin United States dollars)**

**(Unaudited)**

 
| ** **                                                                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** | **For the period from  December 22, 1994  (inception)  through** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2007**                                            | ** ** | **2006**                                                                                  | ** ** | **September 30, 2007** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands)**                             | ** ** |
| Cash flows from  operating activities:                                                                                       |       |                                                |       |                                                                                      |       |   |   |
| Net cash used in  operating activities                                                                                       |       | $                                                   | (111,098   | )                                                                                         | $          | (52,033 | ) | $ | (290,160 | ) |
| Cash flows from  investing activities:                                                                                       |       |                                                |       |                                                                                      |       |   |   |
| Purchase of  available for sale investments                                                                                  |       | (535,903                                            | )          | (385,104                                                                                  | )          | (2,356,415 | ) |
| Sale of  available for sale investments                                                                                      |       | 758,261                                             |       | 183,172                                                                                   |       | 2,147,055 |   |
| Purchase of  held-to-maturity investments                                                                                    |       | —                                              |       | (24,662                                                                                   | )          | (263,869 | ) |
| Maturities of  held-to-maturity investments                                                                                  |       | 5,000                                               |       | 8,000                                                                                     |       | 227,620 |   |
| Purchase of  available for sale restricted investments                                                                       |       | (32,150                                             | )          | (233,200                                                                                  | )          | (298,600 | ) |
| Sale of  available for sale restricted investments                                                                           |       | 109,050                                             |       | 246,400                                                                                   |       | 389,285 |   |
| Purchase of held-to-maturity  restricted investments                                                                         |       | (2,812                                              | )          | (22,199                                                                                   | )          | (52,689 | ) |
| Maturity of  held-to-maturity restricted investments                                                                         |       | 7,800                                               |       | 45,882                                                                                    |       | 89,252 |   |
| Payment of  derivative premiums & settlements, net                                                                       |       | (28,722                                             | )          | (39,519                                                                                   | )          | (75,658 | ) |
| Advances for  construction of port facility                                                                                  |       | (4,000                                              | )          | —                                                                                    |       | (6,000 | ) |
| Advances to  suppliers and contractors                                                                                       |       | —                                              |       | (1,480                                                                                    | )          | — |   |
| Released from  (transfer to) restricted cash to collateralize credit facility, letters of  credit and interest payments, net |       | (82,703                                             | )          | 120,010                                                                                   |       | (117,608 | ) |
| Proceeds from  the sale of interest in subsidiary                                                                            |       | —                                              |       | 224,000                                                                                   |       | 224,000 |   |
|                                                                                                                         |       |                                                |       |                                                                                      |       |   |   |
| Payment of  selling costs related to sale of interest in subsidiary                                                          |       | —                                              |       | (6,384                                                                                    | )          | (6,384 | ) |
| Capitalized  costs and acquisitions of property, plant and equipment                                                         |       | (148,326                                            | )          | (207,283                                                                                  | )          | (712,055 | ) |
| Net cash  provided by (used in) investing activities                                                                         |       | $                                                   | 45,495     |                                                                                      | $          | (92,367 | ) | $ | (812,066 | ) |
| Cash flows from  financing activities:                                                                                       |       |                                                |       |                                                                                      |       |   |   |
| Proceeds from  issuance of Ordinary Shares                                                                                   |       | —                                              |       | 156,795                                                                                   |       | 580,357 |   |
| Proceeds from  issuance of convertible notes                                                                                 |       | —                                              |       | —                                                                                    |       | 339,987 |   |
| Payment of debt  issuance costs                                                                                              |       | (650                                                | )          | (671                                                                                      | )          | (25,642 | ) |
| Payments of  notes payable and long term debt                                                                                |       | (8,362                                              | )          | (1,607                                                                                    | )          | (13,814 | ) |
| Proceeds from  note to power line contractor                                                                                 |       | —                                              |       | 1,407                                                                                     |       | 1,415 |   |
| Borrowings under  project finance facility                                                                                   |       | 45,000                                              |       | 120,000                                                                                   |       | 225,000 |   |
| Minority  interest contributions                                                                                             |       | 59,395                                              |       | —                                                                                    |       | 59,395 |   |
| Proceeds from  exercise of stock options and warrants                                                                        |       | 2,503                                               |       | 1,765                                                                                     |       | 17,651 |   |
| Net cash  provided by financing activities                                                                                   |       | $                                                   | 97,886     |                                                                                      | $          | 277,689 |   | $ | 1,184,349 |   |
| Net increase in  cash and cash equivalents                                                                                   |       | 32,283                                              |       | 133,289                                                                                   |       | 82,123 |   |
| Cash and cash  equivalents - beginning of period                                                                             |       | 49,840                                              |       | 4,808                                                                                     |       | — |   |
| Cash and cash  equivalents - end of period                                                                                   |       | $                                                   | 82,123     |                                                                                      | $          | 138,097 |   | $ | 82,123 |   |

 

See Note 17 forsupplemental cash flow information.

 

The accompanyingnotes form an integral part of these consolidated financial statements.

 

5

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**APEXSILVER MINES LIMITED**

**AnExploration and Development Stage Company**

 

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**(Expressedin United States dollars)**

 

**1.****             Basis of Preparationof Financial Statements and Nature of Operations**

 

These unaudited interim consolidated financialstatements of Apex Silver Mines Limited (the “Company”) and its subsidiarieshave been prepared in accordance with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Such rules and regulations allowthe omission of certain information and footnote disclosures normally includedin financial statements prepared in accordance with generally acceptedaccounting principles in the United States of America, so long as suchomissions do not render the financial statements misleading. Certain priorperiod amounts have been reclassified to conform to the current periodpresentation.

 

In the opinion of management, these financialstatements reflect all adjustments that are necessary for a fair statement ofthe results for the periods presented. All adjustments were of a normalrecurring nature. These interim financial statements should be read inconjunction with the annual financial statements of the Company included in its2006 Annual Report on Form 10-K.

 

The Company is a mining exploration and developmentcompany that holds a portfolio of exploration and development propertiesprimarily in South America and Central America. The Company has focused itsresources primarily on the development of its San Cristobal mine in Boliviawhich began producing silver bearing lead and zinc concentrates during thethird quarter 2007. Commissioning, calibrating and testing of the San Cristobalplant continued through the third quarter and at September 30, 2007, commercialproduction had not yet been reached. Consequently, the sale of concentratesproduced during the period, net of costs, have been recorded to productionstartup income/expense, net for the quarter ended September 30, 2007. TheCompany expects to achieve commercial production at San Cristobal during thefourth quarter 2007. Prior to the third quarter 2007 the Company did not haveany mine properties from which product was being produced and sold,consequently, the Company had not previously reported operating income.

 

**2.****             SignificantAccounting Policies**

 

*Income Taxes*

 

Effective January 1, 2007, the Company adoptedFinancial Accounting Standards Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”), an interpretation of FinancialAccounting Standards Statement No. 109, “Accounting for Income Taxes.” FIN 48prescribes a financial statement recognition threshold and measurementattribute for uncertain tax positions taken or expected to be taken in a taxreturn. FIN 48 also provides guidance on de-recognition, classification,interest and penalties, accounting in interim periods and disclosure. Theadoption of FIN 48 did not have a material impact on the Company’s financialposition or results of operations (see Note 12).

 

*Ore Stockpiles and Concentrate Inventories*

 

Ore stockpiles andconcentrate inventories are carried at the lower of average cost or netrealizable value. Net realizable value represents the estimated future salesprice of the product based on current and long-term metals prices, less the estimatedcosts to complete production and bring the product to sale. Write-downs of orestockpiles and concentrate inventories, resulting from net realizable valueimpairments, are reported as a component of production startup income/expense,net. The current portion of ore stockpiles is determined based on the expectedamounts to be processed within the next 12 months. Ore stockpiles not expectedto be processed within the next 12 months are classified as long-term (see Note5).

 

6

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*OreStockpiles*

 

Ore stockpilesrepresent ore that has been mined and is available for further processing. Orestockpiles are measured by estimating the number of tonnes added and removedfrom the stockpile, the contained metals (based on assay data) and theestimated metallurgical recovery rates. Costs are allocated to ore stockpilesbased on relative values of material stockpiled and processed using currentmining costs incurred up to the point of stockpiling the ore, includingapplicable overhead, depreciation, depletion and amortization relating tomining operations. Material is removed from the stockpile at an average costper tonne.

 

*ConcentrateInventories*

 

Concentrateinventories represent silver bearing zinc and lead concentrates available forshipment. At the San Cristobal mine the turnaround time to process materialfrom the ore stockpile to a concentrate inventory is approximately twenty fourhours. Accordingly, the Company does not track in-process inventories. Concentrateinventories are valued at the average cost of the ore sent to the processingplant from the ore stockpiles plus the plant processing costs incurred,including applicable depreciation related to the processing facilities and anallocable portion of administrative costs and related overhead. Costs are addedto and removed from the concentrate inventory based on tonnes of concentrateand are valued at the lower of average cost or net realizable value.

 

*Materialsand Supplies Inventories*

 

Materials and suppliesare valued at the lower of average cost or net realizable value. Cost includesapplicable taxes and freight.

 

*Revenue Recognition*

 

The Company sellsits concentrates directly to smelters. The Company recognizes a sale uponreceipt of provisional payment, as this is the earliest point that both risk ofloss and title transfer to the smelter.

 

Concentrate salesare initially recorded based on 100% of the provisional sales prices. Theprovisional sales price is based on estimated metals contained in theconcentrates (based on assay data) and the forward metals prices at theexpected settlement date net amounts retained by the smelter to cover itsrefining and treatment costs. Prior to final settlement, adjustments to theprovisional sales prices are made on a mark-to-market basis to reflect changesto the forward metals prices for the estimated date of settlement withadjustments recorded to revenue. Changes in provisional metal quantities arealso adjusted upon receipt of new information, assays and the final settlementinvoice with adjustments recorded to revenue. The primary risk associated withrecognition of sales on a provisional basis is the possibility of metal pricefluctuations between the date initially recorded and the date of finalsettlement. If a significant decline in metal prices occurs between theprovisional pricing date and the final settlement date, the Company could berequired to return a portion of the sales proceeds received based on theprovisional invoice.

 

The Companyentered into its first concentrate sale in September 2007. The sale consistedof approximately 3,500 dry metric tonnes of bulk concentrates, containingsilver, lead and zinc, with a provisional value of $7.7 million, which includesa positive mark-to-market adjustment of $0.4 million reflecting the marketchange between the provisional pricing date and September 30, 2007, and is netof $1.2 million retained by the smelter to cover its refining and treatmentcosts. The Company recorded a provisional net sale of $7.7 million and receivedprovisional payment from the smelter of $6.6 million. At September 30, 2007 noother sales had been completed and commercial production capacities had not yetbeen reached. Consequently, the $7.7 million sale was netted against $20.2 millionof operating expense incurred during the period, including an adjustment to thenet realizable value of the inventory produced during the period, with theresulting $12.4 million of net expense being reported as production startupincome and expense, net at September 30, 2007. The Company anticipates reachingcommercial production at the San Cristobal mine during the fourth quarter 2007.

 

7

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*New Accounting Standards*

 

During February2007 the Financial Accounting Standards Board (“FASB”) issued FinancialAccounting Standards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities-Including an amendment of FASB Statement No. 115” (“FASNo. 159”). FAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value. Most of the provisions ofFAS No. 159 apply only to entities that elect the fair value option. However,the amendment to FASB Statement No. 115, “Accounting for Certain Investments inDebt and Equity Securities,” (“FAS No. 115”) applies to all entities withavailable-for-sale and trading securities. FAS No. 159 is effective as of thebeginning of the first fiscal year that begins after November 15, 2007 (January1, 2008 for the Company). The Company does not expect the adoption of FAS No.159 to have a material impact on its financial position or results ofoperations.

 

During September2006 the FASB issued Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“FAS No. 157”). FAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles(GAAP), and expands disclosures about fair value measurements. This Standardaddresses how companies should measure fair value when they are required to usea fair value measure for recognition or disclosure purposes under U.S. GAAP.Accordingly, this Standard does not require any new fair value measurements.FAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears (fiscal year 2008 for the Company). The Company does not expect theadoption of FAS No. 157 to have a material impact on its financial position orresults of operations.

 

**3.****             Investments**

 

The Company considers all highly liquid investmentswith a maturity of three months or less when purchased to be cash equivalents. Short-terminvestments include investments with maturities greater than three months, butnot exceeding twelve months. Long-term investments include investments withmaturities greater than twelve months.

 

The Company determines the appropriate classificationof its investments in debt and equity securities at the time of purchase andre-evaluates those classifications at each balance sheet date. Debt securitiesare classified as held to maturity when the Company has the intent and abilityto hold the securities to maturity. Held to maturity debt securities are statedat amortized cost and include government agency and corporate obligations. Availablefor sale investments are marked to market at each reporting period with changesin value recorded as a component of other comprehensive income. If declines invalue are deemed other than temporary, a charge is made to net loss for theperiod. The Company invests only in government and corporate securities rated “investmentgrade” or better.

 

A portion of the Company’s investments are held inauction rate securities (“ARS”) which had credit ratings ranging from AA to AAAat the time of purchase. ARS are floating rate securities with long-termnominal maturities of 25 to 45 years which are marketed by financialinstitutions with auction reset dates at 7, 28, or 35 day intervals to provideshort-term liquidity. The underlying collateral of the ARS held by the Companyprimarily consists of collateralized debt obligations, mortgage backedsecurities, collateralized loan obligations, and credit default swaps.Beginning in August 2007 a number of ARS auctions began to fail. At September30, 2007 the Company held approximately $71.7 million in ARS at cost for whichthe reset auctions have failed. The failed auctions have resulted in higherinterest rates being earned on these investments, but the investments currentlylack short-term liquidity. The Company will not be able to access these fundsuntil a future auction for the ARS investments is successful or it sells thesecurities in a secondary market at a potentially substantial discount. Thecredit rating agencies have not evaluated these ARS subsequent to the date theCompany purchased them and any future evaluations by the credit agencies couldresult in downgrades to the credit ratings of the ARS the Company holds. Basedon the Company’s current cash, investment balances and expected operating cashflows, it does not anticipate that the lack of short-term liquidity for the ARSwill adversely affect its ability to conduct business.

 

At September 30, 2007 the Company recorded a $21.1million impairment charge to reduce the carrying value of its auction ratesecurities to an estimated fair value of $50.6 million. At September 30, 2007the Company recorded $16.7 million of its ARS investments, net of impairmentcharges, as short-term investments which were liquidated during the fourthquarter 2007 (see Note 18).  Theremaining $33.9 million of ARS investments, net of impairment charges, areclassified as long-term investments at September 30, 2007 as the Company doesnot anticipate liquidating these remaining ARS investments during the nexttwelve months.  The Company determinedthat the impairment is other than temporary, in accordance with FAS No. 115,and consequently recorded 

 

8

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the $21.1 million charge to earnings. The fair value for each ARS wasdetermined by the Company, with the assistance of a third party valuation firm,using a discounted cash flow model. Inputs into the model include assumptionsregarding default, recovery and prepayment rates.

 

The followingtables, summarize the Company’s investments at September 30, 2007 and December31, 2006:

 

 
| **September 30, 2007** | ** ** | **Cost**                | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** |
|----------------------------------|------------|-------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **(in Thousands)** | ** ** |
| Investments:                     |       |                    |       |                |       |                    |       |
| Short-term                       |       |                    |       |                |       |                    |       |
| Available for  sale              |       |                    |       |                |       |                    |       |
| Corporate notes                  |       | $                       | 20,559     |                | $          | 20,496                  |       | $ | 20,496 |   |
| Government bonds                 |       | 16,382                  |       | 16,397              |       | 16,397                  |       |
| Auction rate  securities         |       | 19,550                  |       | 16,715              |       | 16,715                  |       |
| Common stock                     |       | 761                     |       | 686                 |       | 686                     |       |
| Total available  for sale        |       | 57,252                  |       | 54,294              |       | 54,294                  |       |
| Held to maturity                 |       |                    |       |                |       |                    |       |
| Government bonds                 |       | 2,000                   |       | 2,002               |       | 2,000                   |       |
| Total held to  maturity          |       | 2,000                   |       | 2,002               |       | 2,000                   |       |
| Total short-term                 |       | $                       | 59,252     |                | $          | 56,296                  |       | $ | 56,294 |   |
| Long-term                        |       |                    |       |                |       |                    |       |
| Available for  sale              |       |                    |       |                |       |                    |       |
| Auction rate  securities         |       | $                       | 52,175     |                | $          | 33,880                  |       | $ | 33,880 |   |
| Corporate notes                  |       | 2,900                   |       | 2,900               |       | 2,900                   |       |
| Government bonds                 |       | 9,000                   |       | 9,034               |       | 9,034                   |       |
| Total available  for sale        |       | 64,075                  |       | 45,814              |       | 45,814                  |       |
| Total long-term                  |       | $                       | 64,075     |                | $          | 45,814                  |       | $ | 45,814 |   |
| Restricted  Investments:         |       |                    |       |                |       |                    |       |
| Short-term                       |       |                    |       |                |       |                    |       |
| Held to maturity                 |       |                    |       |                |       |                    |       |
| Government bonds                 |       | 612                     |       | 612                 |       | 612                     |       |
| Total held to  maturity          |       | 612                     |       | 612                 |       | 612                     |       |
| Total short-term                 |       | $                       | 612        |                | $          | 612                     |       | $ | 612 |   |

 

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| **December 31, 2006** | ** ** | **Cost**                | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** |
|---------------------------------|------------|-------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **(in Thousands)** | ** ** |
| Investments:                    |       |                    |       |                |       |                    |       |
| Short-term                      |       |                    |       |                |       |                    |       |
| Available for  sale             |       |                    |       |                |       |                    |       |
| Common stock                    |       | $                       | 761        |                | $          | 779                     |       | $ | 779 |   |
| Corporate notes                 |       | 5,935                   |       | 5,995               |       | 5,995                   |       |
| Bond funds                      |       | 6,972                   |       | 6,973               |       | 6,973                   |       |
| Auction rate  securities        |       | 306,785                 |       | 306,789             |       | 306,789                 |       |
| Total available  for sale       |       | 320,453                 |       | 320,536             |       | 320,536                 |       |
| Held to maturity                |       |                    |       |                |       |                    |       |
| Government bonds                |       | 5,000                   |       | 4,991               |       | 5,000                   |       |
| Total held to  maturity         |       | 5,000                   |       | 4,991               |       | 5,000                   |       |
| Total short-term                |       | $                       | 325,453    |                | $          | 325,527                 |       | $ | 325,536 |   |
| Long-term  investments          |       |                    |       |                |       |                    |       |
| Available for  sale             |       |                    |       |                |       |                    |       |
| Corporate notes                 |       | $                       | 6,988      |                | $          | 6,960                   |       | $ | 6,960 |   |
| Government bonds                |       | 33,374                  |       | 33,295              |       | 33,295                  |       |
| Total available  for sale       |       | 40,362                  |       | 40,255              |       | 40,255                  |       |
| Held to maturity                |       |                    |       |                |       |                    |       |
| Government bonds                |       | 2,000                   |       | 1,996               |       | 2,000                   |       |
| Total held to maturity          |       | 2,000                   |       | 1,996               |       | 2,000                   |       |
| Total long-term                 |       | $                       | 42,362     |                | $          | 42,251                  |       | $ | 42,255 |   |
| Restricted  Investments:        |       |                    |       |                |       |                    |       |
| Short-term                      |       |                    |       |                |       |                    |       |
| Available for  sale             |       |                    |       |                |       |                    |       |
| Auction rate  securities        |       | $                       | 59,800     |                | $          | 59,800                  |       | $ | 59,800 |   |
| Total available  for sale       |       | 59,800                  |       | 59,800              |       | 59,800                  |       |
| Held to maturity                |       |                    |       |                |       |                    |       |
| Government bonds                |       | 5,543                   |       | 5,500               |       | 5,543                   |       |
| Total held to  maturity         |       | 5,543                   |       | 5,500               |       | 5,543                   |       |
| Total short-term                |       | $                       | 65,343     |                | $          | 65,300                  |       | $ | 65,343 |   |

 

 

Quoted marketprices at September 30, 2007 and December 31, 2006 were used to determine thefair values of the above investments, except with respect to the auction ratesecurities.

 

*Credit Risk*

 

Credit risk is therisk that a third party might fail to fulfill its performance obligations underthe terms of a financial instrument. For cash and equivalents and investments,credit risk represents the carrying amount on the balance sheet. We mitigatecredit risk for cash and equivalents and investments by placing our funds andinvestments with high credit-quality financial institutions, limiting theamount of exposure to each of the financial institutions, monitoring thefinancial condition of the financial institutions and investing only ingovernment and corporate securities rated “investment grade” or better. (Seethe discussion above regarding the Company’s ARS investments.)

 

The Companyinvests with financial institutions that maintain a net worth of not less than$1 billion and are members in good standing of the Securities InvestorProtection Corporation. Of the Company’s $299.5 million total of cash and cashequivalents, restricted cash, short and long term investments and restrictedinvestments at September 30, 2007, $294.4 million was held at six largemultinational banks.

 

**4.****     Prepaid expenses and other assets**

 

Prepaid expensesand other assets consist of the following:

 
| ** **                                  | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**      | ** ** |
| Trade accounts  receivable                  |       | $                            | 1,110      |                        | $          | — |   |
| Prepaid  insurance                          |       | 6,009                        |       | 1,949                       |       |
| Accrued interest  on investments            |       | 686                          |       | 1,348                       |       |
| Prepaid  consulting and contractor fees     |       | 1,967                        |       | 3,507                       |       |
| Prepaid import  taxes and duties receivable |       | 34                           |       | 1,637                       |       |
| Other                                       |       | 1,507                        |       | 1,543                       |       |
|                                        |       | $                            | 11,313     |                        | $          | 9,984 |   |

 

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The prepaidconsulting and contractor fees consist primarily of advance payments made tocontractors for work being performed for the San Cristobal mine. Trade accountsreceivable are primarily related to amounts due from smelters for the sale ofconcentrates. The prepaid insurance is related to commercial insurance coverageprimarily related to the San Cristobal mine.

 

**5.****     Inventories**

 

Inventories at ourSan Cristobal mine at September 30, 2007 and December 31, 2006 consist of thefollowing:

 
| **Current Inventories**           | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Concentrate  inventories               |       | $                                | 9,426      |                            | $          | — |   |
| Sulfide ore  stockpiles                |       | 1,042                            |       | 3,183                           |       |
| Material and  supplies                 |       | 17,908                           |       | 3,149                           |       |
| Total current  inventories             |       | $                                | 28,376     |                            | $          | 6,332 |   |
|                                   |       |                             |       |                            |       |
|   Long Term Stockpile Inventories |       |                             |       |                            |       |
| Sulfide ore  stockpiles                |       | $                                | 10,910     |                            | $          | — |   |
| Oxide ore  stockpiles                  |       | 52,919                           |       | 21,341                          |       |
|                                   |       | $                                | 63,829     |                            | $          | 21,341 |   |

 

The concentrateinventories consist of approximately 8,500 tonnes of concentrates and arecarried at net realizable value. The long term stockpile inventories consist ofstockpiled ore that will be processed later in the mine life and is carried atcost.

 

**6.****     Value Added Tax Recoverable**

 

The Company has recorded value added tax (“VAT”) paid in Bolivia andrelated to the San Cristobal mine as a recoverable asset. Bolivian law statesthat VAT paid prior to production is recoverable as a credit against Boliviantaxes arising from production, including income taxes. The VAT is expected tobe recovered through future production and sales from the San Cristobal mine. Futurechanges to Bolivian tax law could have an adverse effect on the Company’sability to recover the VAT paid in Bolivia (see Note 15). At September 30, 2007and December 31, 2006, the VAT recoverable was $84.6 million and $54.2 million,respectively. The VAT recoverable amounts include $7.9 million and $5.3 millionof recoverable Bolivian import duties for the periods ended September 30, 2007and December 31, 2006, 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 asincurred because of the uncertainty of recoverability.

 

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**7.****     Property, Plant and Equipment**

 

The components of property, plant and equipment were asfollows:

 
| ** **                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                            |       | **(in  thousands)**    |       |
| Mineral  properties             |       | $                      | 246,002    |                  | $          | 117,390 |   |
| Construction in  progress       |       | 2,048                  |       | 482,979               |       |
| Buildings                       |       | 14,571                 |       | 13,590                |       |
| Mining equipment  and machinery |       | 522,044                |       | 13,580                |       |
| Other furniture  and equipment  |       | 4,609                  |       | 3,166                 |       |
|                            |       | 789,274                |       | 630,705               |       |
| Less:  Accumulated depreciation |       | (13,022                | )          | (6,962                | )          |
|                            |       | 776,252                |       | 623,743               |       |
| Equipment under  capital lease  |       | 68,972                 |       | 22,183                |       |
| Less:  Accumulated depreciation |       | (9,712                 | )          | (4,168                | )          |
|                            |       | 59,260                 |       | 18,015                |       |
| Port facilities  under lease    |       | 12,283                 |       | —                |       |
| Less:  Accumulated depreciation |       | (39                    | )          | —                |       |
|                            |       | 12,244                 |       | —                |       |
|                            |       | $                      | 847,756    |                  | $          | 641,758 |   |

 

The Company has a17-year contract with a third party to provide port services at the portfacilities in Mejillones, Chile. Certain assets constructed at the port are forthe exclusive use of the Company, including concentrate reception, unloadingand storage facilities. The Company has evaluated its contractual agreementwith the port and has determined that the agreement contains a leasingarrangement with respect to the assets that will be operated exclusively forthe use of the Company. Following the guidance of Financial Accounting StandardNo. 13, “Accounting for Leases,” the Company is deemed to be the owner of the assetsfor which it has exclusive use. Accordingly, the Company has recorded $12.3million to port facilities under lease with an offsetting financing obligationrelated to those assets (see Note 9). The port assets were put into serviceduring the third quarter of 2007 and the Company has begun recordingdepreciation on these assets.

 

For the ninemonths ended September 30, 2007 and 2006 the Company recorded depreciationexpense of $4.9 million and $0.3 million, respectively. Also, for the ninemonths ended September 30, 2007 and 2006 the Company capitalized depreciationassociated with the San Cristobal mine in the amounts of $3.2 million and $3.6million, respectively.

 

At September 30,2007 and December 31, 2006 the Company had capitalized interest of $65.1million and $35.5 million respectively. The capitalized interest amounts arerelated to the Convertible Senior Subordinated Notes, the project financefacility and equipment under capital lease (see Note 9).

 

At September 30,2007 the Company had recorded a lease obligation of $55.4 million related tooutstanding equipment under capital lease (see Note 9).

 

**8.****     Other Long Term Assets**

 

At September 30,2007 other long term assets includes a $5.3 million note receivable, plusaccrued interest, from the contractor that constructed the load out facilitiesat the Port of Mejillones for funds previously advanced by the Company. Thenote and accrued interest is to be repaid by applying a portion of the amountsowed for port charges by San Cristobal to the outstanding note and accruedinterest balances. Construction of the port facilities was completed during thesecond quarter 2007 and the note and accrued interest are expected to be fullyrecovered by December 2009. San Cristobal began incurring port fees in May 2007,and at September 30, 2007 approximately $1.1 million of port fees have beenapplied to the note and accrued interest.

 

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**9.****     Debt**

 

The Company’s debtconsists of the following:

 
| ** **                                             | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Current**                      | ** ** | **Long-term**                   | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| ** **                                             | ** ** | **(in thousands)**          | ** ** |
|                                                   |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| 2.875%  Convertible Senior Subordinated Notes due 2024 |       | $                                | —     |                            | $          | 180,000 |   | $ | — |   | $ | 180,000 |   |
| 4.0% Convertible  Senior Subordinated Notes due 2024   |       | —                           |       | 109,987                         |       | — |   | 109,987 |   |
| Project finance  facility                              |       | —                           |       | 225,000                         |       | — |   | 180,000 |   |
| Note payable to  Ingelec for power line                |       | —                           |       | —                          |       | 1,415 |   | — |   |
| Note assigned to  Sumitomo                             |       | —                           |       | 8,013                           |       | — |   | 7,853 |   |
| Capital leases                                         |       | 8,538                            |       | 46,862                          |       | 2,993 |   | 14,355 |   |
| Port lease  liability                                  |       | 376                              |       | 11,761                          |       | — |   | — |   |
|                                                   |       | $                                | 8,914      |                            | $          | 581,623 |   | $ | 4,408 |   | $ | 492,195 |   |

 

*2.875% Notes and 4.0% Notes*

 

Both the 2.875%Notes and the 4.0% Notes (collectively the “Notes”) are convertible into theCompany’s Ordinary Shares at a conversion rate of 34.9406 shares per $1,000principal amount of the Notes (equal to an initial conversion price ofapproximately $28.62 per share), subject to adjustment in certaincircumstances. Holders may convert their Notes only if: (i) the price of ApexSilver Ordinary Shares reaches a specified threshold; (ii) the trading pricefor the Notes falls below certain thresholds; (iii) the Notes have been calledfor redemption; or (iv) specified corporate transactions occur. Full conversionof the Notes would result in the issuance of approximately 10.1 million of theCompany’s Ordinary Shares. Accumulated interest on the Notes is paid twice ayear in March and September.

 

During 2006 theCompany issued 1,086,653 of its Ordinary Shares, valued at $17.1 million, andrepurchased $20.0 million of its outstanding 4.0% Notes. The transactionrepresented an early extinguishment of debt and the Company recorded a gain of$2.9 million and recognized accelerated amortization of deferred issuance costsof $0.5 million related to the transaction. The Notes purchased in thetransaction have been cancelled.

 

Costs incurred inconnection with the issuance of the Notes were deferred and are being amortizedto interest expense over ten years which corresponds to the related callprovisions on the Notes. At September 30, 2007 the unamortized balance ofdeferred financing costs related to the Notes was approximately $6.8 million.

 

*San Cristobal Project FinanceFacility*

 

In December 2005the Company closed on a $225 million project finance facility (the “Facility”),arranged by BNP Paribas and Barclays Capital, and funded by a group ofinternational financial institutions including banks, export credit agenciesand the Andean Development Corporation, a multilateral financial agency thatpromotes sustainable development in South America. Borrowings from the Facilitywere used to complete the development of the Company’s San Cristobal mine. Asof September 30, 2007 the Company had borrowed the full $225 million availableunder the Facility. Interest on the outstanding amounts drawn under theFacility is based on LIBOR plus a credit spread. The first principal paymentunder the Facility is due in December 2008, and the Facility must be fullyrepaid by December 2012.

 

In connection withthe September 2006 sale to Sumitomo Corporation (“Sumitomo”) of a 35% interestin the subsidiaries that own and operate the San Cristobal mine, Sumitomoguaranteed the repayment of

 

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35% of the project finance facility debt through project completion.(For this purpose completion is defined as the satisfaction of certainfinancial and operational requirements including the creation of operating anddebt service reserves and meeting certain operational performance levels overspecified periods of time and can occur no later than December 2008.)

 

The Facilitycontains covenants that require the Company to, among other things, maintaincertain security interests, financial ratios after project completion,insurance coverage, minimum sales contracts and metals price protectioncontracts as well as other requirements. Failure to comply with these covenantsor to cure related violations within specified periods could result in an eventof default, pursuant to which the project lenders could require immediaterepayment of all amounts outstanding under the Facility and immediate cashsettlement of the outstanding metals derivative positions associated with theSan Cristobal mine.

 

During the third quarter of 2007 the Company and theFacility lenders entered into an agreement whereby certain sections of theoriginal Facility agreement were amended. The amendments became effective onSeptember 20, 2007, and among other things, allow for increased metals priceassumptions to be used in each annual update to the financial model pursuant towhich compliance with certain financial covenants of the Facility are measured.In addition, the amended agreement will require a larger percentage ofprincipal to be repaid in earlier years and the mandatory cash flow sweep ateach principal repayment date has increased from 35% to 45% of excess cash flow.Also, in connection with the amendments, the Company purchased at the moneylead put options to protect the additional cash flow needed for the acceleratedloan repayment schedule.  The purchase price of the options wasapproximately $10 million and was funded 65% by the Company and 35% by Sumitomo(see Note 10). TheCompany has also funded a $91 million margin account, recorded as restrictedcash non-current, and Sumitomo has provided a $49 million post-completionguarantee, for the benefit of the two banks holding the derivative positions.Both the margin account and the guarantee will decrease by one-third at the endof each of the years from 2008 through 2010.

 

Direct costsincurred in obtaining the Facility were deferred and are being amortized tointerest expense, using the effective interest method, over the term of thefacility. At September 30, 2007 the unamortized balance of deferred financingcosts related to the Facility was approximately $10.3 million.

 

*Power Line Notes*

 

The Company hasloaned funds to San Cristobal Transportadora de Electricidad, S.A. (“SC Tesa”),the contractor that has constructed the power line for the San Cristobal mine,and holds a note receivable from SC Tesa in the amount of $22.3 million. TheCompany expects to receive repayment of the note from SC Tesa in the form ofcredits against charges for the delivery of power. In connection with the saleof 35% of the San Cristobal mine to Sumitomo, the Company sold 35% of the $22.3million note to Sumitomo. As the Company receives payments from SC Tesa it mustpay Sumitomo its 35% share of such payments. As a result, the Company hasrecorded a note payable to Sumitomo in the amount of $8.0 million, includingaccrued interest.

 

SC Tesa borrowedapproximately $1.4 million from its parent company to complete the constructionof the power line. Per the guidance of FASB Interpretation No. 46R, “VariableInterest Entities,” the Company consolidates the accounts of SC Tesa andaccordingly has recorded the note payable on its consolidated books. As ofSeptember 30, 2007 the full balance of the note had been repaid.

 

*Capital Leases*

 

During the ninemonths ended September 30, 2007 the Company had placed in service $46.8 millionof mining equipment to be used in stripping and mine production, and recordedthese transactions as capital leases, resulting in capital lease obligations of$55.4 million at September 30, 2007. During the nine months ended September 30,2007 the Company made payments of approximately $8.7 million related to capitallease obligations.

 

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*Port Lease Liability*

 

Certain assetsconstructed at the port of Mejillones are for the exclusive use of the Company,including concentrate reception, unloading and storage facilities. The Companydetermined that a leasing arrangement exists with respect to those assets (seeNote 7). Accordingly, as of September 30, 2007 the Company had recorded on itsbalance sheet $12.2 million, of plant and equipment, net of accumulateddepreciation and a financing obligation of $12.1 million related to the portfacility. In addition, the Company holds a $5.3 million note receivable fromthe port contractor for funds previously advanced to the contractor includinginterest (see Note 8).

 

**10.****  Sales Contracts and DerivativeInstruments**

 

Certain covenantsrelated to the project finance facility required the Company to provide priceprotection for a portion of its planned production of metals from San Cristobal.During the third quarter of 2005, the Company entered into certain derivativepositions utilizing primarily forward sales but also puts and calls to complywith the project finance facility covenants. In order to maintain leverage tosilver market prices, the Company entered into proportionally more zinc andlead positions than silver positions. In addition, during September 2007 theCompany purchased additional at the money lead puts required by amendments madeto the project finance facility agreement during the third quarter 2007, at acost of approximately $10 million (see Note 9).

 

The Company beganto settle the derivative positions required by the project finance facilityduring the third quarter 2007 by making cash payments of $19.1 million. At thetime of final settlement, the gain or loss recorded excludes previouslyrecognized non-cash mark-to-market gains or losses. The actual financial impactof the remaining derivative positions will not be known until the positions areclosed on their future settlement dates.

 

The followingtable sets forth forward contracts settled and options expiring during thethird quarter 2007:

 
| ** **                      | ** ** | **Quantity**            | ** ** | **Average  Market  Price**       | ** ** | **Average  Contract  Price** | ** ** | **Average  Cash  Settlement** | ** ** | **Total Cash  Settlement** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------------------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** | **(per unit settled)** | ** ** | **(in thousands)**      | ** ** |
| **Forward  Contracts**          |       |                    |       |                             |       |                         |       |                          |       |                            |       |
| Zinc (000  pounds)              |       | 6,118                   |       | $                                | 1.54       |                         | $          | 0.48                          |       | $                               | 1.06       |   | $ | 6,493 |   |
| Lead (000  pounds)              |       | 11,390                  |       | $                                | 1.41       |                         | $          | 0.30                          |       | $                               | 1.11       |   | $ | 12,608 |   |
| **Put  Option Contracts Owned** |       |                    |       |                             |       |                         |       |                          |       |                            |       |
| Silver (000  ounces)            |       | 67                      |       | $                                | 12.44      |                         | $          | 5.25                          |       | $                               | —     |   | $ | — |   |
|                            |       |                    |       |                             |       |                         |       |                          |       |                            |       |
| Total                           |       |                    |       |                             |       |                         |       |                          |       | $                               | 19,101     |   |

 

The Companyadjusts its open derivative positions to estimated fair value at the end ofeach accounting period with the related change in fair value recorded toearnings. For the three month and nine month periods ended September 30, 2007the Company recorded total derivative losses of $136.9 million and $194.2million, respectively as a result of adjusting the open positions to estimatedfair value and settling the derivatives as discussed above. For the three monthand nine month periods ended September 30, 2006 the Company recorded mark-to-marketderivative losses of $112.6 million and $334.5 million respectively and realizedlosses for the same periods of $7.3 million and $36.4 million, respectively. The2006 realized losses were related to the liquidation of certain discretionaryderivatives not related to the project finance facility. All of thediscretionary derivatives were liquidated by the end of 2006 and the Companydid not hold any derivative positions not related to the project financefacility during the nine months ended September 30, 2007. The derivative lossesare the result of continuing high spot and forward prices for silver, zinc andlead during the periods the positions were held. Non-cash mark-to-market gainsand losses from the remaining outstanding derivative positions may fluctuatesubstantially from period to period based on spot and forward prices and optionvolatilities.

 

The followingtable sets forth the Company’s open derivative positions at September 30, 2007.

 

15

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| ** **                        | ** ** | **Current Maturity Date** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **Year 1**                     | ** ** | **Years 2 and 3** | ** ** | **Years 4 and 5** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| **Forward Contracts**             |       |                                |       |   |   |   |   |   |   |   |   |
| Silver  (000 ounces)              |       | 150                                 |       | 160 |   | 200 |   | 80 |   | 590 |   |
| Average  price (per ounce)        |       | $                                   | 7.34       |   | $ | 7.15 |   | $ | 7.13 |   | $ | 7.15 |   | $ | 7.19 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Zinc  (000 pounds)                |       | 103,753                             |       | 480,985 |   | 181,880 |   | — |   | 766,618 |   |
| Average  price (per pound)        |       | $                                   | 0.48       |   | $ | 0.48 |   | $ | 0.48 |   | $ | — |   | $ | 0.48 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lead  (000 pounds)                |       | 82,781                              |       | 223,104 |   | — |   | — |   | 305,885 |   |
| Average  price (per pound)        |       | $                                   | 0.30       |   | $ | 0.30 |   | $ | — |   | $ | — |   | $ | 0.30 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| **Put Option Contracts Owned**    |       |                                |       |   |   |   |   |   |   |   |   |
| Silver  (000 ounces)              |       | 300                                 |       | 2,020 |   | 5,790 |   | 890 |   | 9,000 |   |
| Average  price (per ounce)        |       | $                                   | 5.25       |   | $ | 5.64 |   | $ | 5.88 |   | $ | 5.63 |   | $ | 5.78 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lead  (000 pounds)                |       | —                              |       | 29,983 |   | 3,025 |   | — |   | 33,008 |   |
| Average  price (per pound)        |       | $                                   | —     |   | $ | 1.16 |   | $ | 1.07 |   | $ | — |   | $ | 1.15 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| **Call Option Contracts Written** |       |                                |       |   |   |   |   |   |   |   |   |
| Silver  (000 ounces)              |       | —                              |       | 8,870 |   | 840 |   | 90 |   | 9,800 |   |
| Average  price (per ounce)        |       | $                                   | —     |   | $ | 8.22 |   | $ | 9.26 |   | $ | 8.95 |   | $ | 8.32 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Zinc  (000 pounds)                |       | 3,858                               |       | 9,921 |   | — |   | — |   | 13,779 |   |
| Average  price (per pound)        |       | $                                   | 0.57       |   | $ | 0.57 |   | $ | — |   | $ | — |   | $ | 0.57 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lead  (000 pounds)                |       | 7,716                               |       | 19,841 |   | — |   | — |   | 27,557 |   |
| Average  price (per pound)        |       | $                                   | 0.39       |   | $ | 0.39 |   | $ | — |   | $ | — |   | $ | 0.39 |   |

 

The Companydetermines the fair value of its open derivative positions by applying marketvalues obtained from the counterparties holding the Company’s derivativepositions. The Company independently verifies that the values received from thecounterparties are based on major commodities price indices such as the LondonMetals Exchange (“LME”) and the New York Commodities Exchange (“COMEX”) andother available market data.

 

The following table setsforth the fair value of the Company’s net open derivative positions atSeptember 30, 2007, June 30, 2007 and December 31, 2006 and the change for thethree and nine months ended September 30, 2007.

 
| ** **                                            | ** ** | **Liability Amount To Be Realized In** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Less Than**                                              | ** ** | **2 to 3** | ** ** | **4 to 5** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Period Ended**                                 | ** ** | **1 Year**                                                 | ** ** | **Years** | ** ** | **Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                                         | ** ** |
| June 30, 2007                                         |       | $                                                               | 203,388    |   | $ | 574,129 |   | $ | 97,336 |   | $ | 686 |   | $ | 875,539 |   |
| September 30,  2007                                   |       | $                                                               | 303,624    |   | $ | 600,014 |   | $ | 85,887 |   | $ | 645 |   | $ | 990,170 |   |
| Change for the  three months ended September 30, 2007 |       | $                                                               | 100,236    |   | $ | 25,885 |   | $ | (11,449 | ) | $ | (41 | ) | $ | 114,631 |   |
|                                                  |       |                                                            |       |   |   |   |   |   |   |   |   |
| December 31,  2006                                    |       | $                                                               | 39,080     |   | $ | 570,982 |   | $ | 207,696 |   | $ | 440 |   | $ | 818,198 |   |
| September 30,  2007                                   |       | $                                                               | 303,624    |   | $ | 600,014 |   | $ | 85,887 |   | $ | 645 |   | $ | 990,170 |   |
| Change for the  nine months ended September 30, 2007  |       | $                                                               | 264,544    |   | $ | 29,032 |   | $ | (121,809 | ) | $ | 205 |   | $ | 171,972 |   |

 

The derivativepositions in the table above are required by the project finance facility andare held in a separate Cayman Island subsidiary which is owned 65% by theCompany and 35% by Sumitomo, and Sumitomo has guaranteed the payment of 35% ofthe derivative positions through completion (which, according to the terms ofthe Facility, may be no later than December 2008) (see Note 14). These positionsare presented as a net liability as allowed by the counterparty agreement.Caymen Island does not impose a corporate income tax or allow deductions forlosses.

 

Not included inthe table are 33.0 million pounds of at the money lead puts owned by thesubsidiary that holds our San Cristobal mine and are recorded as a derivativeasset of $6.5 million at September 30, 2007. As of September 30,

 

16

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2007, the asset will be realized during years two to three in theamount of $5.7 million and in year four in the amount of $0.8 million.

 

**11.****       Asset RetirementObligations**

 

The Company has developedan asset retirement plan for its San Cristobal mine which began producingconcentrates in the third quarter 2007. The plan includes estimatedreclamation, remediation and closure requirements based on Bolivian governmentrequirements, World Bank financing requirements and the Company’s policies. Sincethe third quarter 2005 the Company has conducted development and miningactivities that fall within the scope of the asset retirement plan and willrequire future reclamation and closure expenditures. The Company accruesestimated reclamation liabilities based on the asset retirement plan asactivities requiring future reclamation and remediation occur.

 

The Company preparesestimates of the timing and amount of expected cash flows when an assetretirement obligation (“ARO”) is incurred. The fair value of the ARO ismeasured by discounting the expected cash flows using a discount factor thatreflects the credit-adjusted risk-free rate of interest. The Company recordsthe fair value of an ARO when incurred with an adjustment to the correspondingasset carrying amounts. The ARO is adjusted to reflect the passage of time (accretioncost) calculated by applying the discount factor implicit in the initial fairvalue measurement to the beginning-of-period carrying amount of the ARO. TheCompany records accretion costs to expense as incurred.

 

The following tablereconciles the beginning and ending balance for the Company’s asset retirementobligations:

 
| ** **                       | ** ** | **Nine Months  Ended  September 30,  2007** | ** ** | **Year Ended  December 31,  2006** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **(in thousands)**                               | ** ** |
| Beginning  balance               |       | $                                                     | 5,761      |                                         | $          | 2,003 |   |
|                             |       |                                                  |       |                                         |       |
| ARO arising in  the period       |       | 460                                                   |       | 3,367                                        |       |
| Changes in  estimates, and other |       | —                                                |       | —                                       |       |
| Liabilities  settled             |       | —                                                |       | —                                       |       |
| Accretion  expense               |       | 439                                                   |       | 391                                          |       |
|                             |       |                                                  |       |                                         |       |
| Ending balance                   |       | $                                                     | 6,660      |                                         | $          | 5,761 |   |

 

**12.****          Income Taxes**

 

The Company andcertain of its subsidiaries operating in the Cayman Islands do not file incometax returns as the Cayman Islands currently does not impose any income taxes. TheCompany files Bolivian, United States and certain other foreign country incometax returns. These tax returns and the amount of taxable income or lossreported are subject to examination by the relevant taxing authorities. For thenine months ended September 30, 2007 and 2006 the Company recorded $0.5 millionand $0.2 million of income tax expense, of which, approximately $0.2 millionand $0.2 million related to foreign withholding taxes paid during the period.

 

In January 2007,the Company adopted Financial Accounting Standards Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FinancialAccounting Standards Statement No. 109, “Accounting for Income Taxes.” FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of an uncertain tax position taken orexpected to be taken in a tax return. FIN 48 requires that the Companyrecognize in its financial statements the impact of uncertain tax positions. FIN48 also provides guidance on de-recognition, classification, interest andpenalties, accounting in interim periods and disclosure.

 

As of September30, 2007, the Company had $1.8 million of total gross unrecognized tax benefits.Certain of the unrecognized tax benefits resulted in a reduction of the Company’soperating loss carryforwards by approximately $0.2 million. The Company hasrecorded a non-current tax payable and           

 

17

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corresponding non-current deferred tax asset of approximately $1.6million for all remaining unrecognized tax benefits. There was no impact toretained earnings as a result of the adoption of FIN 48.

 

Tax years as earlyas 2001 remain open and are subject to examination in the Company’s principaltax jurisdictions. Management has estimated that unrecognized tax benefits willnot significantly increase or decrease within the next twelve months. There areno interest or penalties estimated on the underpayment of income taxes as aresult of these unrecognized tax benefits. The Company’s policy is to classifytax related interest and penalties as income tax expense.

 

**13.****       Shareholders’ Deficit**

 

The followingtable sets forth the changes in shareholders’ deficit during the first ninemonths of 2007:

 
| ** **                                         | ** ** | **Ordinary Shares**                                 | ** ** | **Addi -  tional  Paid-in** | ** ** | **Accum  -ulated** | ** ** | **Accum-  -ulated  Other  Compre  -hensive  income** | ** ** | **Total  Shareholders’** | ** **   |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------|------------|--------------------|------------|------------------------------------------------------|------------|-------------------------------|--------------|
| ** **                                         | ** ** | **Shares**                                               | ** ** | **Amount**                       | ** ** | **Capital**        | ** ** | **Deficit**                                          | ** ** | **(loss)**                    | ** **   | **Deficit** | ** ** |
| ** **                                         | ** ** | **(in thousands except share data)** | ** ** |
| **Balance,  December 31, 2006**                    | ** ** | **58,577,700**                                           | ** ** | **$**                            | **586**    | ** **         | **$**      | **669,487**                                          | ** ** | **$**                         | **(773,339** | **)** | **$** | **(24** | **)** | **$** | **(103,290** | **)** |
| Stock  compensation accrued                        |       | —                                                   |       | —                           |       | 3,298              |       | —                                               |       | —                        |         | 3,298 |   |
| Stock options  exercised ($12.44 per share)        |       | 201,225                                                  |       | 2                                |       | 2,502              |       | —                                               |       | —                        |         | 2,504 |   |
| Stock granted as  compensation ($16.36 per share)  |       | 28,300                                                   |       | —                           |       | —             |       | —                                               |       | —                        |         | — |   |
| Stock  compensation restricted shares canceled (1) |       | (119,550                                                 | )          | (1                               | )          | —             |       | —                                               |       | —                        |         | (1 | ) |
| Unrealized loss  on marketable equity securities   |       | —                                                   |       | —                           |       | —             |       | —                                               |       | (65                           | )            | (65 | ) |
| Net loss                                           |       | —                                                   |       | —                           |       | —             |       | (183,707                                             | )          | —                        |         | (183,707 | ) |
| **Balance,  September 30, 2007**                   | ** ** | **58,687,675**                                           | ** ** | **$**                            | **587**    | ** **         | **$**      | **675,287**                                          | ** ** | **$**                         | **(957,046** | **)** | **$** | **(89** | **)** | **$** | **(281,261** | **)** |

 

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(1) Prior to 2007 when restricted shares were granted as compensationthe Company would issue shares and hold them in escrow until the restrictionlifted at which time they would be distributed to the employee. In conjunctionwith the retention of a third party stock compensation administrator theCompany now issues the restricted shares upon the lifting of the restriction. Accordingly,the Company canceled 119,550 shares that were being held in escrow for futuredistribution. The shares will now be issued upon the lifting of the restrictionat the end of the requisite service period.

 

*StockOption Plans* – The Company established a plan to issueshare options and other share awards to officers, employees, consultants andagents of the Company and its subsidiaries (the “Employees’ Plan”) as well as aNon-Employee Directors’ Share Plan (the “Directors’ Plan”) or jointly (the “Plans”).

 

The Company recognizesstock-based compensation costs using a graded vesting attribution methodwhereby costs are recognized over the requisite service period for eachseparately vesting portion of the award. The Company recognized stock-basedcompensation costs of $3.3 million and $3.6 million for the nine month periodsended September 30, 2007 and 2006 respectively, which includes amountscapitalized.

 

A summary of theCompany’s stock options issued under the Plans at September 30, 2007 andchanges during the nine months then ended is presented in the following table:

 

18

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| **Options**                         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
|-------------------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|
| Outstanding at  beginning of period |       | 2,992,572                  |       | $                                                      | 14.90      |   |
| Granted during  period              |       | 135,335                    |       | 17.15                                                  |       |
| Forfeited or  expired during period |       | (235,223                   | )          | 16.84                                                  |       |
| Exercised during  period            |       | (201,525                   | )          | 12.44                                                  |       |
| Outstanding at  end of period       |       | 2,691,159                  |       | $                                                      | 15.03      |   |
| Exercisable at  end of period       |       | 2,035,360                  |       | $                                                      | 16.45      |   |
| Granted and  expected to vest       |       | 616,713                    |       | $                                                      | 17.18      |   |
|                                |       |                       |       |                                                   |       |

 

The fair value of eachoption award is estimated on the date of grant using the Black-Scholesoption-pricing model.

 

A summary of the status ofthe Company’s restricted stock grants issued under the Employees’ Plan atSeptember 30, 2007 and changes during the nine months then ended is presentedin the following table:

 
| **Restricted Stock Grants**  | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|----------------------------------------|------------|-----------------------|------------|---------------------------------------------------------------------------------|------------|
| Oustanding at  beginning of the period |       | 223,575               |       | $                                                                               | 17.30      |   |
| Granted during  period                 |       | 73,200                |       | 15.85                                                                           |       |
| Restrictions  lifted during the period |       | (39,525               | )          | 16.59                                                                           |       |
| Forfeited during  period               |       | (37,450               | )          | 16.19                                                                           |       |
| Oustanding at  end of the period       |       | 219,800               |       | $                                                                               | 17.15      |   |

 

The fair value of eachrestricted stock grant is based on the closing price of the Company’s shares onthe date of grant.

 

During the second quarterof 2007 the board of directors adopted a Non-Employee Director DeferredCompensation and Equity Award Plan (the “Deferred Compensation Plan”). Inconnection with the approval of this new compensation arrangement, the board ofdirectors suspended the grant of options under the Directors’ Plan. Pursuant tothe Deferred Compensation Plan the directors will receive a portion of theircompensation in the form of Restricted Stock Units. The Restricted Stock Unitstypically vest one year after the date of grant so long as the individual isstill serving as a director. Each Restricted Stock Unit entitles the directorto receive one unrestricted Ordinary Share for each vested RestrictedStock Unit upon the termination of the director’s board service.

 

A summary of the statusof the Restricted Stock Unit grants issued under the Deferred Compensation Planat September 30, 2007 and changes during the nine months then ended ispresented in the following table:

 

19

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| **Restricted Stock Units**   | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|----------------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------|------------|
| Oustanding at  beginning of the period |       | —                     |       | $                                                                               | —     |   |
| Granted during  period                 |       | 25,806                     |       | 19.18                                                                           |       |
| Restrictions  lifted during the period |       | —                     |       | —                                                                          |       |
| Forfeited during  period               |       | —                     |       | —                                                                          |       |
| Oustanding at  end of the period       |       | 25,806                     |       | $                                                                               | 19.18      |   |

 

The fair value of eachRestricted Stock Unit grant is based on the closing price of the Company’sshares on the date of grant.

 

The Company has grantedstock-based performance bonuses under the Employees’ Plan to certain employees,related to certain startup operating targets, pursuant to which up to 8,000Ordinary Shares with a grant date fair market value of $15.41 per share may beissued. The fair value of each performance bonus grant was based on the closingprice of the Company’s shares on the date of grant.

 

**14.****       Minority Interest**

 

*Sumitomo Corporation*

 

During 2006 the Companysold to Sumitomo 35% interests in the subsidiaries that own its San CristobalProject, market project concentrates and hold the metals derivative positionsrequired by the project lenders. The Company continues to own 65% of thesesubsidiaries.

 

Subsequent to the September 2006 close of the transaction withSumitomo, the Company incurred certain losses primarily related to marking tomarket its open derivative positions required by the project finance facility. Suchlosses would normally be shared by Sumitomo in proportion to its 35% interestin the subsidiary recording the losses. However, generally accepted accountingprinciples do not permit the allocation of losses to the minority interest inexcess of the minority owner’s recorded interest in the subsidiary.Accordingly, the Company has absorbed approximately $111.9 million and $98.8million of non-cash losses that normally would have been allocated to Sumitomoat September 30, 2007 and December 31, 2006, respectively. The increase to theamount being absorbed by the Company for the nine months ended September 30,2007 is the result of Sumitomo’s minority interest in the loss for the periodof $72.5 million partially being offset by Sumitomo’s advances of $59.4 millionto fund its share of certain excess costs related to the San Cristobal mine aswell as certain other amounts owing to Sumitomo. The Company expects to recoverthe remaining $111.9 million of losses it absorbed, and any additional lossesit may absorb related to Sumitomo’s minority interest, from future earningsprior to the allocation of earnings to Sumitomo or from future contributions bySumitomo.

 

*SC Tesa*

 

During 2005 the Company entered into a long-term contract with SC Tesato construct a power line and transport power to the San Cristobal mine fromthe Bolivian power grid. The Company loaned SC Tesa $22.3 million to constructthe power line which will be repaid through credits against charges for thedelivery of power (see Note 9). Per the guidance of FIN 46R the Company fullyconsolidates the accounts of SC Tesa.

 

Starting in the fourth quarter 2006, the San Cristobal mine beganreceiving power from the grid resulting in SC Tesa earning a transmission feeand recording earnings. Because SC Tesa is treated as a consolidated entity,the intercompany profit earned by SC Tesa is eliminated and the Companyrecognizes a minority interest offset to net income equal to SC Tesa’s share ofthe transmission fee earnings representing 100% of such earnings. For the ninemonths ended September 30, 2007 the Company recorded $0.6 million as SC Tesa’sminority interest in those earnings.

 

20

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**15.****       Commitments andContingencies**

 

*ProjectFinancing* – Per the terms and conditions of the SanCristobal mine finance facility the Company was required to deposit cash andinvestments in an account the use of which is restricted to the development ofthe San Cristobal mine. At September 30, 2007 the remaining balance in the accountwas $10.0 million which was recorded to restricted cash.

 

*CapitalCommitments* – At September 30, 2007 the Company expectsto spend approximately $45 million on the San Cristobal mine to make finalpayment for accrued construction costs and complete construction of certainadditional facilities not required for initial operations. The San Cristobalmine began production of concentrates in August 2007 and made the first sale ofconcentrates during September 2007.

 

*PerformanceBonus* – The Company may be required to pay up to anestimated $4.0 million bonus to the San Cristobal mine construction managementcontractor contingent upon certain project completion parameters. Based on theproject status at September 30, 2007 the Company believes it is probable thatit will be required to pay the construction management contractor a portion ofthe bonus up to $1.3 million and has accrued that amount at September 30, 2007with the offset recorded to construction in progress.

 

*PoliticalContingencies*– At various times since his election,President Morales and others in his administration have made public statementsregarding their desire to exert greater state control over natural resourceproduction in Bolivia. The Bolivian government may alter its policies with respectto the mining industry in the future. In addition, the Bolivian governmentcontinues to consider various changes to applicable mining taxes, includingpossible increases in income and other tax rates, modification of thecreditability of the complementary mining tax against income tax, andelimination of the refund to exporters of a percentage of import duties andvalue added tax. These potential changes would have the effect of increasingthe total tax burden on the San Cristobal mine, which could adversely affectthe earnings and cash flow generated by the mine and the Company’s ability torecover its investment in the mine and to meet its liabilities to the SanCristobal lenders and the counterparties holding the metals derivativepositions required by those lenders. The Company, together with Sumitomo, isengaged in continuing discussions with government representatives regardingvarious proposals and their potential effects on San Cristobal. The Company isunable to predict which changes, if any, will be made to current mining taxlegislation.

 

In May 2006, theConstitutional Court of Bolivia issued a ruling declaring certain articles ofthe 1997 Mining Code unconstitutional. The Court’s ruling is not effectiveuntil May 2008 and the Court urged the Bolivian Congress to enact legislationduring that time which may supersede the ruling. Although the Court’s ruling isnot expected to impact the Company’s ability to operate the San Cristobal mine,the ruling may limit the transferability of the Company’s mining concessionsand restrict the ability to mortgage the San Cristobal mining concessions ascollateral to the lenders providing financing for the construction project.

 

*OtherContingencies* – As previously disclosed, the Company hasconcluded, based on the results of an internal investigation conducted underthe direction of its Audit Committee, that certain senior employees of one ofits South American subsidiaries were involved in making impermissible paymentsof approximately $125,000 to government officials in 2003 and 2004 inconnection with an inactive, early stage exploration property that is notrelated to any of the Company’s active exploration or development properties. Basedon findings to date, no changes to the Company’s previously filed financialstatements are warranted as a result of these matters. The Company contactedthe Department of Justice (“DOJ”) and SEC and reported the results of ourinternal investigation. The Company has been informed that the SEC and DOJ havecommenced an investigation with respect to these matters, including possibleviolations of the Foreign Corrupt Practices Act. The Company is cooperatingfully with the SEC and DOJ investigations. The Company cannot predict with certaintythe final outcome of the investigations, including any fines or penalties thatmay be imposed.

 

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**16.****       Foreign Currency**

 

Gains and losseson foreign currency transactions consist of the following:

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                      | ** ** | **(in thousands)**          | ** ** | **(in thousands)**         | ** ** |
| Gain on  re-measurement of monetary assets denominated in other than US dollars |       | $                                | 2,572      |                            | $          | 203 |   | $ | 4,792 |   | $ | 439 |   |
| Total                                                                           |       | $                                | 2,572      |                            | $          | 203 |   | $ | 4,792 |   | $ | 439 |   |

 

The re-measurementof monetary assets is related to certain taxes receivable and other accountsdenominated in Bolivia’s local currency.

 

**17.****       Supplemental cash flowinformation**

 

The following tablereconciles net loss for the period to cash from operations:

 
| ** **                                                                                   | ** ** | ** **                      | ** ** | ** **             | ** ** | **For the period  from  December 22,  1994  (inception)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** | **through**            | ** ** |
| ** **                                                                                   | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** |
| ** **                                                                                   | ** ** | **2007**                        | ** ** | **2006**               | ** ** | **2007**                                                                 | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**         | ** ** |
| Cash flows from  operating activities:                                                       |       |                            |       |                   |       |                                                                     |       |
| Net loss                                                                                     |       | $                               | (183,707   | )                      | $          | (187,158                                                                 | )          | $ | (957,046 | ) |
| Adjustments to  reconcile net loss to net                                                    |       |                            |       |                   |       |                                                                     |       |
| cash used in  operating activities:                                                          |       |                            |       |                   |       |                                                                     |       |
| Amortization and  depreciation                                                               |       | 4,865                           |       | 296                    |       | 6,664                                                                    |       |
| Amortization of  deferred financing costs                                                    |       | 843                             |       | 1,018                  |       | 3,977                                                                    |       |
| Accretion of  asset retirement obligation                                                    |       | 439                             |       | 261                    |       | 845                                                                      |       |
| Amortization of  premiums and discounts                                                      |       | 11                              |       | (1,622                 | )          | (2,042                                                                   | )          |
| Mark-to-market  (gain) loss on derivative positions                                          |       | 194,236                         |       | 370,894                |       | 1,059,904                                                                |       |
| Loss (gain) on  Euro hedge                                                                   |       | —                          |       | —                 |       | (534                                                                     | )          |
| Loss on auction  rate security investments                                                   |       | 21,130                          |       | —                 |       | 21,130                                                                   |       |
| Gain on  extingushment of debt                                                               |       | —                          |       | (2,875                 | )          | (9,640                                                                   | )          |
| Gross gain on  sale of interest in subsidiary                                                |       | —                          |       | (199,600               | )          | (199,600                                                                 | )          |
| Minority  interest in loss of consolidated subsidiary                                        |       | (61,833                         | )          | 10,023                 |       | (75,221                                                                  | )          |
| Stock compensation,  net of amounts capitalized                                              |       | 2,803                           |       | 3,330                  |       | 21,980                                                                   |       |
| Shares issued in  consideration for services                                                 |       | —                          |       | 27                     |       | 8,585                                                                    |       |
| Shares issued to  purchase mineral rights                                                    |       | —                          |       | —                 |       | 1,799                                                                    |       |
| Changes in  operating assets and liabilities:                                                |       |                            |       |                   |       |                                                                     |       |
| Increase in  trade accounts receivable                                                       |       | (1,110                          | )          | —                 |       | (1,110                                                                   | )          |
| (Increase)  decrease in accrued interest receivable                                          |       | 662                             |       | (54                    | )          | (746                                                                     | )          |
| Port fees  applied to Port of Mejillones note receivable                                     |       | 782                             |       |                   |       | 782                                                                      |       |
| (Increase)  decrease in prepaid expenses and other assets net of amounts capitalized         |       | —                          |       | (5,714                 | )          | (4,334                                                                   | )          |
| Increase in  inventories                                                                     |       | (64,532                         | )          | (21,066                | )          | (92,204                                                                  | )          |
| Increase in  value added tax recoverable (net)                                               |       | (30,432                         | )          | (25,676                | )          | (84,590                                                                  | )          |
| Increase in  accrued interest payable net of amounts capitalized                             |       | 5,301                           |       | —                 |       | 6,981                                                                    |       |
| Increase  (decrease) in accounts payable and accrued liabilities net of amounts  capitalized |       | (124                            | )          | 5,976                  |       | 4,513                                                                    |       |
| Increase in  income taxes payable, net                                                       |       | (375                            | )          | —                 |       | (375                                                                     | )          |
| Other increase  (decrease)                                                                   |       | (57                             | )          | (93                    | )          | 122                                                                      |       |
| Net cash used in  operating activities                                                       |       | $                               | (111,098   | )                      | $          | (52,033                                                                  | )          | $ | (290,160 | ) |

 

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The following table setsforth supplemental cash flow information and non-cash transactions:

 
| ** **                                                 | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **September 30,**          | ** ** |
| ** **                                                 | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**         | ** ** |
| **Supplemental  disclosure:**                              |       |                            |       |   |   |
| Interest paid,  net of amounts capitalized                 |       | $                               | 5,917      |   | $ | 774 |   |
|                                                       |       |                            |       |   |   |
| **Supplemental  disclosure of non-cash transactions:**     |       |                            |       |   |   |
| Capitalized  stock based compensation costs                |       | $                               | 493        |   | $ | 784 |   |
| Payment of debt  with Ordinary Shares                      |       | —                          |       | 17,125 |   |
| Capitalized  consulting services paid with Ordinary Shares |       | —                          |       | 27 |   |
| Depreciation  expense capitalized                          |       | 3,214                           |       | 3,618 |   |
| Initial  measurment of asset retirement obligation         |       | 460                             |       | 3,115 |   |
| Equipment  acquired through capital lease                  |       | 46,789                          |       | 8,123 |   |
| Capitalized port  facility lease                           |       | 12,283                          |       | — |   |

 

**18. Sale of Auction Rate Securities**

 

During November 2007 theCompany sold certain of its ARS investments with an original cost basis of$19.6 million for $15.6 million.  Thecarrying value of these ARS investments had been written down to $16.7 millionat September 30, 2007 as part of the other than temporary impairment chargerecorded to earnings by the Company during the third quarter 2007 (see Note3).  The Company will recognize anadditional impairment charge to earnings of $1.1 million during the fourthquarter in connection with the sale of these investments. At September 30, 2007the Company classified these ARS investments sold as short-term investmentswith the remaining ARS investments not sold classified as long-term investmentsas the Company does not currently have the intent to sell them within the nexttwelve months. Considering that the Company sold these ARS investments belowthe impaired cost basis recorded at September 30, 2007 it is possible that theremaining ARS investments could experience further impairment charges to theestimated carrying values recorded at September 30, 2007.

 

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**Item2:   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**General**

 

The following discussion and analysis summarizes theresults of operations of Apex Silver Mines Limited (“Apex Silver” or “we”) forthe three and nine month periods ended September 30, 2007 and changes in ourfinancial condition from December 31, 2006. This discussion should be read inconjunction with Management’s Discussion and Analysis included in our AnnualReport on Form 10-K for the period ended December 31, 2006.

 

Apex Silver is a mining exploration and developmentcompany that holds a portfolio of exploration and development propertiesprimarily in South America and Central America. We have focused our resourcesprimarily on the development of our San Cristobal mine in Bolivia which beganproducing silver bearing lead and zinc concentrates during the third quarter2007. Commissioning, calibrating and testing of the San Cristobal plantcontinued through the third quarter as well and at September 30, 2007,commercial production had not yet been reached. Consequently, revenue from thesale of concentrates produced during the period, net of costs, have beenrecorded to production startup income and expense for the quarter endedSeptember 30, 2007. We expect to achieve commercial production at San Cristobalduring the fourth quarter 2007. Prior to the third quarter 2007 we did not haveany mine properties from which product was being produced and sold,consequently, we have not previously reported operating income.

 

**Overview**

 

Startup of San Cristobal

 

During the third quarter 2007 we completedconstruction of the major components of the plant and infrastructure at our SanCristobal mine.  The second ball mill,the last major component of the mine to be commissioned, was commissioned inSeptember 2007.  The total projectexpenditures for the San Cristobal mine from January 1, 2004 through September30, 2007 are approximately $685 million. This amount excludes $22 million in loans advanced through the issuanceof ordinary shares to the company that constructed the power line, $6 millionadvanced to the company that constructed the port facilities and approximately$6 million of working capital.  Advancesto the power line and port facility providers are expected to be recoupedthrough credits applied against payments for the contracted services.  At September 30, 2007 we estimated thatadditional payments of approximately $45 million will be required for finalpayment of accrued construction costs and to complete construction of certainadditional facilities and plant components not required for initial operationsat San Cristobal.

 

During the quarter, one shipment of bulk concentrateswas made from the port of Mejillones, Chile to a smelter in Japan. The shipmentconsisted of 3,500 dry metric tonnes of bulk concentrates containing lead,silver and zinc with a provisional value of $7.7 million which is net of$1.2 million retained by the smelter to cover its refining and treatment costs.We recorded the provisional net sale of $7.7 million and received a provisionalpayment from the smelter of $6.6 million during the quarter. The $7.7 millionsale was netted against $20.1 million of operating expense incurred during theperiod with the resulting net $12.4 million being reported as net startupexpense at September 30, 2007. At September 30, 2007 we had recorded 8,500tonnes of concentrate inventories valued at $9.4 million and 8.9 milliontonnes of sulfide ore have been stockpiled with a value of $12.0 million.

 

During October 2007 we shipped 9,100 dry metric tonnesof concentrates, from the port of Mejillones, Chile, with a total provisionalsales value of $11.8 million net of $2.6 million retained by the smelter tocover its refining and treatment costs. We intend to ramp up production at San Cristobalduring the fourth quarter of 2007 until the full production rate ofapproximately 40 thousand tonnes per day of ore throughput is reached. As theramp-up proceeds, we are focused on improving the reliability of process water,the continued training of the plant workforce, the reliability of operatingsupply delivery to site, and improving plant availability.

 

Financing and Commodity Derivatives Matters

 

During 2007 we borrowed $45 million under the $225million San Cristobal Project finance facility (the “Facility”) bringing thetotal borrowings against the Facility to the full $225 million available. Duringthe third quarter of 2007 we entered into an agreement with the Facilitylenders whereby certain provisions of the original Facility agreements wereamended. In connection with these amendments the Facility lenders formallyapproved our 2007 operating plan. The amendments became effective on

 

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September 20, 2007, and among other things, allow for increased metalsprice assumptions to be used in each annual update to the financial modelpursuant to which compliance with certain financial covenants of the Facilityare measured. In addition, the amended agreement requires a larger percentageof principal to be repaid in earlier years and the mandatory cash flow sweep ateach principal repayment date has increased from 35% to 45% of excess cash flow.Also, in connection with the amendments, we purchased at the money lead putoptions to protect the additional cash flow needed for the accelerated loanrepayment schedule.  The purchase price of the options was approximately$10 million and was funded 65% by us and 35% by Sumitomo. We also funded a$91 million margin account, and Sumitomo has provided a $49 millionpost-completion guarantee, for the benefit of the two lenders holding thederivative positions. Both the margin account and the guarantee will decreaseby one-third at the end of each of the years from 2008 through 2010.

 

For the nine months ended September 30, 2007, werecorded a $194.2 million loss as a result of marking-to-market our openderivative positions required by the terms of the project financing facility.The loss is the result of continuing high spot and forward prices for silver,zinc and lead. During the periods that the metals derivative positions areoutstanding, gains and losses may fluctuate substantially from period to periodbased on spot prices, forward prices and quoted option volatilities. The actualfinal financial impact of the required project financing facility derivativepositions will not be known until the positions are closed on their futuresettlement dates. At the time of final settlement, the gain or loss recordedexcludes previously recognized non-cash mark-to-market gains or losses.

 

We began settling derivative positions, required bythe project finance facility, which matured during the third quarter of 2007 bymaking cash payments of $19.1 million through September 30, 2007. We settled6.1 million pounds of zinc sold forward with an average strike price of $0.48per pound by making a payment of $6.5 million and 11.4 million pounds of leadsold forward with an average strike price of $0.30 per pound by making apayment of $12.6 million. We recognized a loss on settlement of these positionsof $19.1 million, which includes previously recognized non cash mark-to-marketlosses. The actual financial impact of the remaining derivative positions willnot be known until the positions are closed on their future settlement dates.

 

Political Matters in Bolivia

 

Atvarious times since his election, President Morales and others in hisadministration have made public statements regarding their desire to exertgreater state control over natural resource production in Bolivia. Thegovernment may alter its current policies with respect to the mining industryin the future. In addition, the Bolivian government continues to considervarious changes to applicable mining taxes, including possible increases inincome and other tax rates, modification of the creditability of thecomplementary mining tax against income tax, and elimination of the refund toexporters of a percentage of import duties and value added tax. These potentialchanges would have the effect of increasing the total tax burden on our SanCristobal mine, which could adversely affect the earnings and cash flowgenerated by the mine and our ability to recover our investment in the mine andto meet our liabilities to the San Cristobal lenders and the counterpartiesholding the metals derivative positions required by those lenders. We, togetherwith Sumitomo, are engaged in continuing discussions with governmentrepresentatives regarding various proposals and potential proposals, and theirpotential effects on the mine. We are unable to predict which changes, if any,will be made to current mining tax legislation.

 

Exploration

 

Pursuant to our September 25, 2006 agreement withSumitomo, Sumitomo has a two year Option Agreement whereby it may acquire a 20percent to 35 percent interest in each of certain of our active explorationproperties at historical cost, and in each of certain inactive explorationproperties at historical cost once we have spent $0.2 million in explorationcosts. Sumitomo must exercise its option on each active property within 60 daysof receiving complete information regarding the property and on each inactiveproperty within 60 days of the Company spending $0.2 million on the property. AtSeptember 30, 2007 Sumitomo had exercised its options to acquire an interest inthree of our active exploration properties in Peru and plans to review certainof our active exploration properties in Mexico and Argentina later in the year.

 

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**Results of Operations**

 

Three Months EndedSeptember 30, 2007

 

*ProductionStartup Income/Expense, net.*During the third quarter 2007 werecorded a provisional net sale of concentrates containing silver, lead andzinc for $7.7 million, which includes a positive mark-to-market adjustment of$0.4 million reflecting the market change between the provisional pricing dateand September 30, 2007, and is net of $1.2 million retained by the smelter tocover its refining and treatment costs. The $7.7 million sale was nettedagainst $20.1 million of operating expense incurred during the period with theresulting $12.4 million of net expense being reported as production startupincome and expense as of September 30, 2007. We had no such sales and expenseduring the third quarter 2006.

 

*Exploration.*Exploration expense was $3.0 million for the third quarter2007 compared to $2.2 million for the third quarter 2006. Exploration expenseis incurred primarily in Argentina, Mexico and Peru. During 2007, we have begunextensive drilling programs and other geologic testing to increase the rate ofevaluation of many of our properties.

 

*Administrative.*Administrative expense of $7.5 million for the third quarter2007 compared to $4.1 million for the third quarter 2006. Administrativeexpenses are incurred primarily by our corporate activities and consistprimarily of compensation costs, professional fees paid for accounting andlegal services, office and equipment lease costs and other general costs. Theincrease in the 2007 costs are primarily the result of increases in costsrelated to the indirect support of the financing, development, marketing andother requirements of our San Cristobal mine. In addition, the 2007administrative expense includes a one time $1.2 million charge for costsincurred related to an engineering study we undertook on the economicoptimization of processing oxide ores.

 

*Gainsand Losses - Commodity Derivatives*. For the third quarter2007 we recorded a loss related to our metals derivative positions in theamount of $136.9 million compared to a loss of $119.9 million on our derivativepositions for the third quarter of 2006. The losses are the result ofmarking-to-market our open derivative positions as spot and forward prices forsilver, zinc and lead fluctuate around record high levels and settlement datesdraw closer. During the periods that the metals derivative positions areoutstanding, gains and losses may fluctuate substantially from period to periodbased on spot prices, forward prices and quoted option volatilities. (See “Overview”for additional discussion of the 2007 derivative loss).

 

*Interestand Other Income.* We recorded interest and other income of$5.2 million for the third quarter 2007 as compared to $4.5 millionrecorded during the third quarter 2006. The 2007 increase in interest and otherincome was the result of the increased interest we earned on the higher averagecash and investment balances that we held during the 2007 period resulting fromthe proceeds from the sale of a 35% interest in the subsidiaries holding ourSan Cristobal mine in September 2006. Available interest rates were also higherfor the third quarter 2007 as compared to the same period of 2006.

 

*Depreciation,Depletion and Amortization.* We recorded depreciation, depletionand amortization expense of $4.7 million for the third quarter 2007 as comparedto $0.1 million recorded during the third quarter 2006. The 2007 increase isthe result of the commencement of operations at our San Cristobal property andthe recording of depreciation, depletion and amortization related to theprocessing plant, mining equipment and other assets related to the miningproperty. In addition, during the third quarter 2007 and 2006, depreciation andamortization costs incurred in connection with the development of the mine, andtotaling $1.0 million and $1.2 million, respectively, were capitalized.

 

*Royalty Income.* During thethird quarter 2007, we received $0.3 million of royalty income from a propertyin Mexico on which we retain a net smelter return royalty. The property isbeing test mined by a joint venture partner and we receive royalties forproduct sold from the test mining operation. We did not receive any royaltiesin the third quarter 2006.

 

*Loss on Auction Rate Securities.*During the third quarter 2007 we recognized a $21.1 million loss related to animpairment charge on auction rate securities (“ARS”) investments we own.  The impairment charge is the result of failedauctions in the ARS market affecting the short-term liquidity of the ARSinvestments.  No such impairment chargeswere recorded during the third quarter 2006. See the Liquidity and Capital Resources discussion below for furtherdetails regarding the ARS. 

 

*InterestExpense and Other Borrowing Costs.*During the third quarter2007 we recognized $7.3 million of interest expense and other borrowing costswhich were net of approximately $6.0 million

 

26

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capitalized. We recognized no interest expense and other borrowingcosts during the third quarter of 2006 as the total related costs of $7.1million were capitalized. Interest costs for both periods are primarily relatedto the Convertible Senior Subordinated Notes Due 2024 and the project financefacility. The increase in the 2007 costs is primarily the result of increasedborrowings outstanding under the project finance facility.

 

*IncomeTaxes*. For both the third quarter 2007 and 2006 we recordednominal amounts of income tax expense consisting primarily of withholding taxeson inter-company investment income and administrative charges associated withone of our Bolivian subsidiaries.

 

*MinorityInterest*. During the third quarter 2007 we allocated lossesto the minority interest holder of $33.5 million as compared to $10.0 millionfor the third quarter 2006. Due to Sumitomo’s cash contributions of $59 millionin 2007, losses for its share of the mark-to-market loss on the derivativepositions and the operating loss at San Cristobal were allocated to theminority interest holder. The 2006 minority interest expense is the result ofSumitomo’s interest in the mark-to-market gain on the open derivative positionsrecognized between the closing of the sale to Sumitomo and September 30, 2006.

 

Nine Months EndedSeptember 30, 2007

 

*ProductionStartup Income/Expense, net.*During the first nine months of2007 we recorded a provisional net sale of concentrates containing silver, leadand zinc for $7.7 million, which includes a positive mark-to-market adjustmentof $0.4 million reflecting the market change between the provisional pricingdate and September 30, 2007, and is net of $1.2 million of refining andtreatment charges. The $7.7 million sale was netted against $20.1 million ofoperating expense incurred during the period with the resulting $12.4 millionof net expense being reported as production startup income and expense as ofSeptember 30, 2007. We had no such sales and expense during the first ninemonths of 2006.

 

*Exploration.*Exploration expense was $9.3 million for the nine month periodended September 30, 2007 compared to $5.2 million for the nine month periodended September 30, 2006. Exploration expense is incurred primarily inArgentina, Mexico and Peru. During 2007 we have begun extensive drillingprograms and other geologic testing to increase the rate of evaluation of manyof our properties.

 

*Administrative.*Administrative expense of $19.2 million for the nine monthperiod ended September 30, 2007 compared to $15.1 million for the ninemonth period ended September 30, 2006. Administrative expenses are incurredprimarily by our corporate headquarters and consist primarily of compensationcosts, professional fees paid for accounting and legal services, office andequipment lease costs and other general costs. The increase in the 2007 costsare primarily the result of increases in costs related to the indirect supportof the financing, development, marketing and other requirements of our SanCristobal mine. In addition, the 2007 administrative expense includes a onetime $1.2 million charge for costs incurred related to an engineering study weundertook on the economic optimization of processing oxide ores.

 

*Gainsand Losses - Commodity Derivatives*. For the nine month periodended September 30, 2007 we recorded a loss related to our metals derivativepositions in the amount of $194.2 million compared to a loss of $370.9 millionon our derivative positions for the nine month period ended September 30, 2006.The losses are the result of marking-to-market our open derivative positions asspot and forward prices for silver, zinc and lead fluctuate around record highlevels and settlement dates draw closer. During the periods that the metalsderivative positions are outstanding, gains and losses may fluctuatesubstantially from period to period based on spot prices, forward prices andquoted option volatilities. (See “Overview” for additional discussion of the2007 derivative loss).

 

*Interestand Other Income.* We recorded interest and other income of$18.4 million for the first nine months of 2007 as compared to $12.6 millionrecorded during the first nine months of 2006. The 2007 increase in interestand other income was the result of the increased interest we earned on thehigher average cash and investment balances that we held during 2007 resultingfrom the proceeds from the sale of a 35% interest in the subsidiaries holdingour San Cristobal mine in September 2006 and the proceeds received from theOrdinary Share offering completed during the second quarter 2006. Availableinterest rates were also higher for the first nine months of 2007 as comparedto the same period of 2006.

 

27

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*Depreciation,Depletion and Amortization.* We recorded depreciation,depletion and amortization expense of $4.9 million for the first nine months of2007 as compared to $0.3 million recorded during the first nine months of 2006.The 2007 increase is the result of the commencement of operations at our SanCristobal property and the recording of depreciation, depletion andamortization related to the processing plant, mining equipment and other assetsrelated to the mining property. In addition, during the first nine months of2007 and 2006, depreciation and amortization costs incurred in connection withthe development of the mine, and totaling $3.2 million and $3.6 million,respectively were capitalized.

 

*Royalty Income.* During thefirst nine months of 2007, we received $0.7 million of royalty income from aproperty in Mexico on which we retain a net smelter return royalty. Theproperty is being test mined by a joint venture partner and we receiveroyalties for product sold from the test mining operation. We did not receiveany royalties in the first nine months of 2006.

 

*Loss onAuction Rate Securities.* During the first nine months of 2007 we recognized a $21.1 million lossrelated to an impairment charge on ARS investments we own.  The impairment charge is the result of failedauctions in the ARS market affecting the short-term liquidity of the ARSinvestments.  No such impairment chargeswere recorded during the first nine months of 2006.  See the Liquidity and Capital Resourcesdiscussion below for further details regarding the ARS. 

 

*InterestExpense and Other Borrowing Costs.*During the first ninemonths of 2007 we recognized $7.3 million of interest expense and otherborrowing costs which were net of approximately $29.6 million capitalized.During the first nine months of 2006 we recognized $0.8 million of interestexpense and other borrowing costs which were net of approximately $16.9 millioncapitalized. Interest costs for both periods are primarily related to theConvertible Senior Subordinated Notes due 2024 and the project finance facility.The increase in the 2007 costs is primarily the result of increased borrowingsoutstanding under the project finance facility.

 

*IncomeTaxes*. For both the nine months ended 2007 and 2006 werecorded nominal amounts of income tax expense consisting primarily ofwithholding taxes on inter-company investment income and administrative chargesassociated with one of our Bolivian subsidiaries.

 

*Minorityinterest*. During the first nine months of 2007 we allocatedlosses to the minority interest holder of $61.8 million as compared to $10.0million for the first nine months of 2006. Due to Sumitomo’s cash contributionsof $59 million in 2007, losses for its share of the mark-to-market loss on thederivative positions and the operating loss at San Cristobal were allocated tothe minority interest holder. The 2006 minority interest expense is the resultof Sumitomo’s interest in the mark-to-market gain on the open derivativepositions recognized between the closing of the sale to Sumitomo and September30, 2006.

 

**Liquidity and Capital Resources**

 

At September 30,2007 our aggregate cash, restricted cash, short and long-term investments andrestricted investments totaled $299.5 million compared to an aggregate of$514.9 million in cash, restricted cash, short and long-term investments andrestricted investments at December 31, 2006. The decrease in our aggregate cashand investment balances as of September 30, 2007 compared to December 31, 2006was primarily the result of $148.3 million invested in property, plant andequipment related to the development of the San Cristobal mine, including $29.0million of interest paid and capitalized. In addition, $111.1 million was spentto fund operations, property holding costs and administrative costs, net ofinterest and other income, $28.7 million was spent to settle maturingderivative positions and to purchase additional derivative positions, $8.4million was spent for the payment of long term debt (primarily capital leasepayments), $4.0 million advanced to the port contractor and $0.7 million ofdebt issuance costs were paid. These amounts were partially offset by $45.0 millionof borrowings against the project finance facility, $59.4 million advanced bySumitomo as their share of funding of excess costs for the San CristobalProject, $2.5 million of proceeds from employee stock options exercised. Inaddition, a $21.1 million impairment was charged to the carrying value ofour ARS investments.

 

The amounts held at September 30, 2007 include $82.1million in cash and cash equivalents, $102.1 million in investments, $91.0 millionof cash that is restricted to collateralize our open derivative positions,$16.5 million of cash that is restricted for the purpose of funding of our SanCristobal mine, $6.5 million of cash that is restricted to collateralizecertain letters of credit. We expect an additional $45 million will be spentthrough the first quarter of 2008 on our San Cristobal mine for final paymentof accrued construction costs and to complete construction of certainadditional facilities and plant components not required for initial operationsat San Cristobal. Total construction costs including the $45 million discussedabove represent a 13% increase over the $650 million construction estimatepreviously disclosed. The increase is the result of operating costs beingexperienced for a longer period before revenues are realized and additionalcosts associated with the delay and repairs of the ball mills and other costs.

 

28

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We anticipate funding our 65% share of the remainingconstruction costs from existing cash and investments with Sumitomo obligatedto fund the remaining 35%.

 

As a result of certain amendments to the projectfinance facility agreement completed during the third quarter 2007, we havedeposited $91 million in a restricted fixed margin account as security for theexisting metals derivative positions. The margin account will be released backto us in three equal amounts at the end of each of 2008, 2009 and 2010. We alsospent approximately $10 million to purchase put options to provide additionalcash flow protection for the San Cristobal mine. The cost of the put optionswas borne 65% by Apex and 35% by Sumitomo.

 

Finally, for the remainder of the year we expect tospend approximately $5 million on general corporate costs, $5 million on explorationefforts and approximately $5 million on interest payments related to theoutstanding convertible debt.

 

We plan to fund the above expenditures from ourexisting cash and investment balances, from interest and other income and fromoperating cash flows. We expect to achieve commercial production levels andsustained operating cash flows at San Cristobal during the fourth quarter of2007. During October 2007 we shipped 9,100 tonnes of concentrates with aprovisional sales value net of amounts retained by the smelter to cover its refiningand treatment costs of $11.8 million and as of the date of this filing we havereceived 90% provisional payments from the smelters of $10.6 million related toour October production.

 

Because we were unable to timely file our December 31,2006 annual report on Form 10-K our existing shelf registration statementswill not be available as a source of equity or debt financing until April 2008.

 

A portion of our investments are held in ARS withcredit ratings ranging from AA to AAA at the time of purchase. ARS are floatingrate securities with long-term nominal maturities of 25 to 45 years which aremarketed by financial institutions with auction reset dates at 7, 28, or 35 dayintervals to provide short term liquidity. The underlying collateral of the ARSheld by us primarily consists of collateralized debt obligations, mortgagebacked securities, collateralized loan obligations, and credit default swaps.Beginning in August 2007 a number of ARS auctions began to fail. At September30, 2007 we held approximately $71.7 million in ARS at cost for which thereset auctions have failed. The failed auctions have resulted in higherinterest rates being earned on these investments, but the investments currentlylack short-term liquidity. We will not be able to access these funds until afuture auction for the ARS investments is successful or we sell the securitiesin a secondary market potentially at a substantial discount. The credit ratingagencies have not evaluated these ARS subsequent to the date we purchased themand any future evaluations by the credit agencies could result in downgrades tothe credit ratings of the ARS we hold. Based on our current cash, investmentbalances and expected operating cash flows, we do not anticipate that the lackof short-term liquidity for the ARS to adversely affect our ability to conductbusiness.

 

At September 30, 2007 werecorded a $21.1 million impairment charge to reduce the carrying value of ourauction rate securities to an estimated fair value of $50.6 million and weclassified our remaining ARS investments, net of the impairment, as long-terminvestments. We determined that the impairment is other than temporary, inaccordance with FAS No. 115, and consequently we recorded a $21.1 millioncharge to earnings. We determined the fair value for each ARS, with theassistance of a third party valuation firm, using a discounted cash flow model.Inputs into the model include assumptions regarding default, recovery andprepayment rates.

 

During November 2007 wesold certain of our ARS investments with an original cost basis of $19.6million for $15.6 million.  The carryingvalue of these ARS investments had been written down to $16.7 million atSeptember 30, 2007 as part of the other than temporary impairment charge werecorded to earnings during the third quarter 2007 (see Note 3).  We will recognize an additional impairmentcharge to earnings of $1.1 million during the fourth quarter in connection withthe sale of these investments.  AtSeptember 30, 2007 we classified these ARS investments sold as short-terminvestments with the remaining ARS investments not sold classified as long-terminvestments as we do not currently have the intent to sell them within the nexttwelve months. Considering that we sold these ARS investments below the impairedcost basis recorded at September 30, 2007 it is possible that the remaining ARSinvestments could experience further impairment charges to the estimatedcarrying values recorded at September 30, 2007.

 

**Significant Accounting Policies**

 

Effective January 1, 2007, we adopted Financial Accounting StandardsInterpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”),an interpretation of Financial Accounting Standards Statement No. 109, “Accountingfor Income Taxes.” FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 requires that werecognize in our financial statements the impact of uncertain tax positions.FIN 48 also provides guidance on de-recognition, classification, interest andpenalties, accounting in interim periods and disclosure. The adoption of FIN 48did not have a material impact on our financial position or results ofoperations.

 

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*New Accounting Standards*

 

During February2007 the Financial Accounting Standards Board (“FASB”) issued FinancialAccounting Standards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities Including an amendment of FASB Statement No. 115” (“FAS No.159”). FAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value. Most of the provisions ofFAS No. 159 apply only to entities that elect the fair value option. However,the amendment to FASB Statement No. 115, “Accounting for Certain Investments inDebt and Equity Securities,” applies to all entities with available-for-saleand trading securities. FAS No. 159 is effective as of the beginning of thefirst fiscal year that begins after November 15, 2007, or fiscal year 2008 forus. We do not expect the adoption of FAS No. 159 to have a material impact onour financial position or results of operations.

 

During September2006 the FASB issued Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“FAS No. 157”). FAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Standard addresses how companies should measure fair valuewhen they are required to use a fair value measure for recognition ordisclosure purposes under U.S. GAAP. Accordingly, this Standard does notrequire any new fair value measurements. FAS No. 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. We do not expect the adoption ofFAS No. 157 to have a material impact on our financial position or results ofoperations.

 

## **ContractualObligations**

## ** **

As discussedabove, at September 30, 2007 we will be required to spend an additionalapproximately $45 million on our San Cristobal mine as final payment foraccrued construction costs and to complete construction of certain additionalfacilities and plant components not required for initial operations at SanCristobal.

 

During the ninemonths ended September 30, 2007 we borrowed the remaining $45 million availableunder the $225 million project finance facility. In addition during the ninemonths ended September 30, 2007 we placed in service $46.8 million of miningequipment recorded as capital leases resulting in total capital leaseobligations of $55.4 million at September 30, 2007.

 

## **Forward-LookingStatements**

## ** **

Some informationcontained in or incorporated by reference into this report may containforward-looking statements. These statements include comments regarding SanCristobal startup and production, the timing of achieving full productionrates, anticipated spending during 2007, increased funding requirements,capital costs and working capital requirements for the San Cristobal mine;contractual arrangements with Sumitomo, including Sumitomo’s obligations withrespect to funding commitments; the likely increased volatility in futureearnings due to forward sales, derivative positions and metals tradingactivity; compliance with the San Cristobal project finance facility; possiblechanges in the mining or taxation policies of the Bolivian government; and thetiming and amounts of spending on the evaluation and expansion of ourexploration portfolio. The use of any of the words “anticipate,” “continues,” “estimate,”“expect,” “may,” “will,” “project,” “should,” “believe” and similar expressionsare intended to identify uncertainties. We believe the expectations reflectedin those forward-looking statements are reasonable. However, we cannot assurethat these expectations will prove to be correct. Actual results could differmaterially from those anticipated in these forward-looking statements as aresult of the factors set forth below and other factors set forth in, orincorporated by reference into this report:

 

•                  worldwide economic and political eventsaffecting the supply of and demand for silver, zinc and lead;

 

•                  political unrest and economicinstability in Bolivia including the communities located near the San Cristobalmine and other countries in which we conduct business;

 

•                  future actions of the Boliviangovernment with respect to nationalization of natural resources or otherchanges in the mining or taxation policies of the Bolivian government;

 

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•                  volatility in market prices forsilver, zinc and lead;

 

•                  financial market conditions;

 

•                  uncertainties associated with startupand operation of a new mine, including the unreliability of production and costestimates in early stages of operations;

 

•                  variations in ore grade and othercharacteristics affecting mining, crushing, milling and smelting operations andmineral recoveries;

 

•                  variationsin plant availability and processing rates;

 

•                  reliabilityof process water and delivery of operating supplies to the mine site;

 

•                  continuedtraining needs of the plant work force;

 

•                  failure to comply with obligationsunder the San Cristobal Project finance facility;

 

•                  failure to reach agreement withSumitomo Corporation regarding future development or operation of SanCristobal, or failure to comply with agreements with Sumitomo related to theSan Cristobal mine;

 

•                  uncertainties regarding futurechanges in applicable law or implementation of existing law, including Bolivianlaws related to tax, mining, environmental matters and exploration; and

 

•                  the factors discussed under “RiskFactors” in our Form 10-K for the period ended December 31, 2006.

 

Manyof those factors are beyond our ability to control or predict. You should notunduly rely on these forward-looking statements. These statements speak only asof the date of this report on Form 10-Q. Except as required by law, we are notobligated to publicly release any revisions to these forward-looking statementsto reflect future events or developments.

 

## **Item3.**    Quantitative andQualitative Disclosures About Market Risk

## ** **

## **InterestRate Risk**

## ** **

Ouroutstanding debt consists primarily of our 4.0% and 2.875% Convertible SeniorSubordinated Notes due 2024 and amounts borrowed under our San Cristobal minefinance facility. The Convertible Senior Subordinated Notes bear interest at afixed rate and thus do not have exposure to interest rate changes. The projectfinance facility bears interest at the LIBOR rate plus a credit spread. Withthe full $225 million borrowed under the facility, a 1% increase in the LIBORrate would result in an annual increase in interest expense of $2.25 million. Wehave not entered into any agreements to hedge against unfavorable changes ininterest rates, but may in the future manage our exposure to interest raterisk.

 

Weinvest excess cash in U.S. government and debt securities rated “investmentgrade” or better. The rates received on such investments may fluctuate withchanges in economic conditions. As a result, our investment income may fallshort of expectations during periods of lower interest rates. Based on theaverage cash, restricted cash, investments and restricted investment balancesoutstanding during the first nine months of 2007, a 1% decrease in interestrates would have resulted in a reduction in interest income for the period ofapproximately $4.2 million.

 

## **ForeignCurrency Exchange Risk**

## ** **

Althoughmost of our expenditures are in U.S. dollars, certain purchases of labor,operating supplies and capital assets are denominated in Bolivianos, Euros orother currencies. As a result, currency exchange fluctuations may impact thecosts of our operations. Specifically, the appreciation of Bolivianos againstthe U.S. dollar may result in an increase in operating expenses and capitalcosts at the San Cristobal mine in U.S. dollar terms. To reduce this risk, wemaintain minimum cash balances in foreign currencies, including Bolivianos, andcomplete most of our purchases, including purchases relating to the SanCristobal mine, in U.S. dollars.

 

Wehave previously engaged in a limited amount of currency hedging activitiesprimarily related to an equipment order for the San Cristobal mine that wasdenominated in Euros. At September 30, 2007 we did not hold any foreigncurrency derivative positions.

 

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## **CommodityPrice Risk**

## ** **

 With the San Cristobal mine producingconcentrates as of the third quarter 2007, our primary source of income is fromsales of concentrates containing silver, zinc and lead. As a result, changes inthe price of any of these commodities could significantly affect our results ofoperations and cash flows.

 

Tocomplete the San Cristobal project finance facility, we were required toimplement price protection for a portion of our planned silver, zinc and leadproduction from San Cristobal.  We have entered into contracts utilizingforward sales, puts and calls.  Non-cash mark-to-market gains and lossesfrom these and other derivative positions may fluctuate substantially fromperiod to period based on spot and forward prices and optionvolatilities.  The actual final financial impact of the derivativepositions required by the project financing facility will not be known untilthe positions are closed on their future settlement dates.  Ouroutstanding derivative positions provide price protection representing 9%, 13%and 19% of planned life-of-mine payable production of silver, zinc and lead respectively,at San Cristobal but represent a significantly higher proportion of our plannedproduction during the six years in which the derivative positions are in place.For the first six years of production and including the put option contractsthat we own, we have price protection representing approximately 21%, 24% and36% of planned production of silver, zinc and lead, respectively. See Item 1.Note 10 for a detailed schedule of our derivative postions by year ofsettlement.

 

Duringthe first nine months of 2007 we recorded a non-cash mark-to-market loss on ouropen derivative positions in the amount of $194.2 million. For the year ended December31, 2006 we recorded non-cash mark-to-market losses of $672.5 million on ouropen derivative positions.  As of September 30, 2007 the fair value of ouropen derivative positions reflected a net $983.7 million liability. We began tosettle the derivative positions required by the project finance facility duringthe third quarter of 2007 by making cash payments of $19.1 million. At the timeof final settlement, the gain or loss recorded excludes previously recognizednon-cash mark-to-market gains or losses. The actual financial impact of theremaining derivative positions will not be known until the positions are closedon their future settlement dates. Non-cash mark-to-market gains and losses fromthe open derivative positions have fluctuated substantially from period toperiod based on spot and forward prices and option volatilities and will mostlikely continue to do so as long as the derivative positions are outstanding.See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Results of Operations”.

 

# **Item 4. Controls and Procedures**

# ** **

(a)           DisclosureControls and Procedures

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the reportswe file or submit under the Securities and Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toApex Silver’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

As of the end of the period covered by this report, wecarried out an evaluation, under the supervision and with the participation ofour Disclosure Committee and management, including the Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures pursuant to Exchange Act Rule13a-15(e) under the Securities Exchange Act of 1934. Based upon thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this report.

 

(b)           Change inInternal Control over Financial Reporting

 

Apex Silver’s management is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Ourinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles (GAAP). Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with policies andprocedures may deteriorate.

 

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During the quarter ended September 30, 2007, therewere material additions to our accounting processes as a result of the start upof mining operations at our San Cristobal mine. These additions primarilyrelate to the initiation and recording of transactions with respect to revenue,trade receivables, cost of goods sold, and finished goods inventory. Managementhas not conducted testing of these internal controls as of September 30, 2007and has limited evidence that these internal controls are operating effectivelyas it pertains to these significant processes. Management expects to concludeits evaluation by the end of the fourth quarter 2007.

 

Management issued a report on the effectiveness of ourinternal control over financial reporting as of December 31, 2006. In makingits assessment, management used criteria set forth in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”). Management’s assessment concluded that, as ofDecember 31, 2006, we did not maintain effective controls over the valuation ofour open metals derivatives positions and we did not maintain effectivecontrols over the monitoring of certain covenant compliance related to ourproject finance facility. As disclosed in management’s report, these controldeficiencies constituted material weaknesses as of December 31, 2006.

 

The material weakness related to the valuation of ouropen metals derivative positions resulted in the following adjustments to ourfinancial statements:

 

•                  Restatement ofour 2005 annual consolidated financial statements; interim consolidatedfinancial statements for the quarter ended September 30, 2005 and for each ofthe first three quarters of 2006 as a result of adjustments to the balances ofour derivative liabilities, gain on the sale of an interest in subsidiaries, minorityinterest in subsidiaries, minority interest in loss of consolidatedsubsidiaries and the accumulated deficit accounts as a result of reassessingavailable market data in the valuation of our open metals derivative positions.

 

•                  An auditadjustment to our 2006 annual consolidated financial statements to properlyreflect the balances of our derivative liabilities, gain on sale of an interestin subsidiaries, minority interest in subsidiaries, minority interest loss ofconsolidated subsidiaries and the accumulated deficit accounts as a result ofreassessing available market data in the valuation of our open metalsderivative positions.

 

Per management’s assessment, the material weaknessrelating to the controls over the valuation of the open metals derivativepositions had been fully remediated at March 31, 2007.

 

The material weakness related to our failure tomaintain effective controls over the monitoring of certain covenants containedin our project finance facility resulted in redesigning and implementing moreeffective controls and processes.

 

The following remediation efforts have been completed:

 

•                  We have hired aSenior Treasury Analyst, with experience commensurate with the complexity ofour loan compliance requirements and we have designed and implemented effectivecontrols to ensure the Senior Treasury Analyst closely monitors compliance ofcovenants related to our project finance facility and other financingarrangements.

 

•                  We have providedtraining to all key personnel involved in the loan compliance processes andprocedures.

 

•                  We formed a LoanCompliance Committee to review and address loan compliance related issues. TheCommittee meets monthly and provides a monthly report to senior management.

 

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Per management’s assessment, the material weaknessrelating to the controls over the monitoring of compliance with certaincovenants related to our project finance facility has been fully remediated atSeptember 30, 2007.

 

There have been no other changes in our internalcontrols over financial reporting during the most recent fiscal quarter thathas materially affected, or that is reasonably likely to materially affect, ourinternal control over financial reporting other than the additional controls relatedto the startup of mining operations discussed above.

 

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PART II: OTHER INFORMATION

 

## **Item1.**    LegalProceedings

## ** **

There were no material developments to proceedingspreviously discussed in our Form 10-K for the year ended December 31,2006.

 

## **Item1A. Risk Factors**

## ** **

There were no materialchanges from the risk factors as previously discussed in our Form 10-K for theyear ended December 31, 2006.

 

## **Item2.**    UnregisteredSales of Equity Securities and Use of Proceeds

## ** **

None.

 

## **Item3.**    Defaults UponSenior Securities

## ** **

None.

 

## **Item4.**    Submission ofMatters to a Vote of Security Holders

## ** **

None.

 

**Item 5.****    Other Information**

 

None.

 

**Item 6.****    Exhibits**

 
|   | 10.1 | Second Omnibus  Amendment Agreement, dated September 4, 2007 among Minera San Cristobal S.A.,  Apex Silver Mines Limited, Apex Silver Mines Sweden AB, Apex Luxembourg  S.A.R.L., Apex Silver Finance Ltd., Apex Metals Marketing GmbH, Sumitomo  Corporation, SC Minerals Aktiebolag, Comercial Metales Blancos AB, BNP  Paribas, Barclays Capital, JPMorgan Chase Bank, N.A., Corporacion Andina de  Fomento and the senior lenders and hedge banks party thereto. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 31.1 | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                                                                                          |
|   | 31.2 | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                                                                                          |
|   | 32   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C., 1350  (Section 906 of the Sarbanes-Oxley Act)                                                                                                                                                                                                                                                                                                                           |

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on behalf of the undersigned thereunto dulyauthorized.

 
|                                           | APEX SILVER MINES  LIMITED |
|------------------------------------------------|----------------------------|
|                                           |                       |
|                                           |                       |
| Date:    November  9, 2007 | By:                        | \s\ Jeffrey G.  Clevenger |   |
|                                           |                       | Jeffrey G. Clevenger |
|                                           |                       | President and Chief  Executive Officer |
|                                           |                       |   |
|                                           |                       |   |
| Date:    November  9, 2007 | By:                        | \s\ Gerald J. Malys |   |
|                                           |                       | Gerald J. Malys |
|                                           |                       | Senior Vice President  and Chief Financial Officer |

 

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