**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549**

##### **FORM 10-Q/A**

**Amendment No. 1**

** **
| **(MARK ONE)** | ** ** | ** **                                                                                                                                                                                                                                                                                                                 |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                 |
| **x**          | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH  31, 2006.**                                                                                                                                                                               |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                 |
| **OR**         |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                 |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD  FROM               TO                .** |

 

**COMMISSION FILE NUMBER 1-13627**

**APEX SILVER MINES LIMITED**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

| **CAYMAN ISLANDS, BRITISH WEST INDIES**                                                        |   | **NOT  APPLICABLE**                   |
|------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (STATE OR OTHER  JURISDICTION OF  INCORPORATION OR ORGANIZATION)                               |   | (I.R.S. EMPLOYER  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’S TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECKMARK WHETHER 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 CHECKMARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER,OR A NON-ACCELERATED FILER:

LARGE ACCELERATEDFILER o   ACCELERATEDFILER  x   NON-ACCELERATEDFILER  o

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

AT MAY 4, 2006,58,408,400 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED ANDOUTSTANDING.

 

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**EXPLANATORYNOTE**

Apex Silver MinesLimited (“we,” “us,” or the “Company”) is filing this Amendment No. 1(this “Amendment”) to its Quarterly Report on Form 10-Q for the quarterlyperiod ended March 31, 2006 to restate its consolidated financial statementsand related financial information. 

We are restatingthe consolidated financial statements to correct the liability of our metalsderivative positions. We determined that the method used in prior periods toestimate the fair value of our open metals derivative positions was notappropriate. pursuant to Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“FAS No. 133”), we recordour open derivative positions at their fair value on our consolidated balancesheet and record the changes in fair value to current earnings at the end ofeach reporting period.

Our derivativepositions mature or expire on various dates over an approximate six-yearperiod commencing in July 2007. Many of the derivative positions mature orexpire beyond the periods covered by the major commodities price indices suchas LME or COMEX, or expire in future periods covered by those indices withrespect to which only limited trading activity has occurred. In instances whereonly limited market activity existed, we used price projections provided by anindependent third party employing statistical analysis and models to estimatethe fair value of our open derivative positions. The models used by theindependent third party relied on commodities prices indices out to threemonths and mean reversion statistical estimates beyond the three-monthperiod. Recently, we reassessed the market information reflected in thecommodities prices indices out to twenty-seven months and quoted pricesfrom the counterparties holding the derivative positions and concluded that theadditional market information is a more reliable indicator of fair value thanthe independent third party price projections we previously used.

Based on the reassessment,we concluded that we had understated the liability related to the openderivative positions commencing with the quarter ended September 30, 2005. Thecumulative liability for our open derivative positions was understated by$208.9 million at March 31, 2006.

As a result, wehave concluded that our financial statements for the quarter ended September30, 2005, the year ended December 31, 2005 and the first three quarters of 2006should be restated. Use of the additional market information in calculating thefair value of our open derivative positions will likely result in increasedvolatility in our earnings during the next three years, the period over whichmost of the derivatives mature or expire. We intend to settle these derivativeswith revenues from San Cristobal production over the six-year periodcommencing in July 2007. Therefore, the cash effect of settling these hedgeswill be realized as higher or lower revenue over that six-year period andthe ultimate losses or gains from these derivatives will be determined basedupon market prices at the time of settlement.

Theinformation contained in this Amendment, including the financial statements andthe notes thereto, amends only Items 1, 2, 3 and 4 of the original filing, ineach case to reflect only the restatement discussed herein. No otherinformation in the original filing is amended hereby. Currently-datedcertifications from our Chief Executive Officer and our Chief Financial Officerhave been included as exhibits to this Amendment.  As discussed in Item 4, Controls andProcedures (as restated), management identified a control deficiency thatrelates to the restatement that, under the circumstances, constitutes amaterial weakness. 

The foregoingitems have not been updated to reflect other events occurring after the filingdate of the original filing or to modify or update those disclosures affectedby subsequent events.  Except for theforegoing amended information, this Amendment continues to describe conditionsas of the date of the original filing, and we have not updated the disclosurescontained herein to reflect events that occurred at a later date. 

We do not intendto amend our previously-filed Annual Report on Form 10-K or our QuarterlyReports on Form 10-Q for the periods affected by the restatement describedherein that ended prior to January 1, 2006. 

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APEX SILVER MINES LIMITEDFORM 10-QQUARTER ENDED MARCH 31, 2006

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 AND HEDGING ACTIVITIES |   |
|                                 |   |   |   |
| 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

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**PART I. FINANCIAL INFORMATION**

**Item 1.****    FinancialStatements**

# **APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED BALANCE SHEETS(Expressed in United States dollars)(Unaudited)**

| ** **                                                                                                                                    | ** ** | **March 31,**                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2006**                                                  | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                    | ** ** | **Restated**                                              | ** ** | ** **            | ** ** |
| ** **                                                                                                                                    | ** ** | **(in thousands, except share data)** | ** ** |
| **Assets**                                                                                                                                    | ** ** | ** **                                                | ** ** | ** **            | ** ** |
| Current assets                                                                                                                                |       |                                                      |       |                  |       |
| Cash and cash  equivalents                                                                                                                    |       | $                                                         | 9,318      |                  | $          | 4,808 |   |
| Restricted cash                                                                                                                               |       | 46,624                                                    |       | 135,182               |       |
| Short term  investments                                                                                                                       |       | 1,076                                                     |       | 132,000               |       |
| Restricted  investments                                                                                                                       |       | 171,087                                                   |       | 67,491                |       |
| Prepaid expenses  and other assets                                                                                                            |       | 10,185                                                    |       | 5,824                 |       |
| Total current  assets                                                                                                                         |       | 238,290                                                   |       | 345,305               |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Property, plant and  equipment, net                                                                                                           |       | 445,606                                                   |       | 379,138               |       |
| Ore inventories                                                                                                                               |       | 3,620                                                     |       | —                |       |
| Deferred financing  costs                                                                                                                     |       | 20,603                                                    |       | 21,604                |       |
| Value added tax  recoverable                                                                                                                  |       | 26,063                                                    |       | 20,052                |       |
| Restricted investments                                                                                                                        |       | 76,158                                                    |       | 12,392                |       |
| Other                                                                                                                                         |       | 2,068                                                     |       | 2,020                 |       |
| Total assets                                                                                                                                  |       | $                                                         | 812,408    |                  | $          | 780,511 |   |
|                                                                                                                                          |       |                                                      |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                | ** ** | ** **                                                | ** ** | ** **            | ** ** |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Current liabilities                                                                                                                           |       |                                                      |       |                  |       |
| Accounts payable  and other accrued liabilities                                                                                               |       | $                                                         | 64,841     |                  | $          | 74,487 |   |
| Accrued interest  payable                                                                                                                     |       | 515                                                       |       | 3,096                 |       |
| Derivatives at  fair value                                                                                                                    |       | 20,607                                                    |       | 5,652                 |       |
| Current portion  of long term debt                                                                                                            |       | 2,413                                                     |       | 2,270                 |       |
| Total current  liabilities                                                                                                                    |       | 88,376                                                    |       | 85,505                |       |
| Long term debt                                                                                                                                |       | 340,579                                                   |       | 320,021               |       |
| Derivatives at fair  value                                                                                                                    |       | 300,413                                                   |       | 145,719               |       |
| Asset retirement  obligation                                                                                                                  |       | 3,933                                                     |       | 2,003                 |       |
| Total  liabilities                                                                                                                            |       | 733,301                                                   |       | 553,248               |       |
| Minority interest in  subsidiaries                                                                                                            |       | 41                                                        |       | 34                    |       |
| Commitments and  contingencies (Note 11)                                                                                                      |       |                                                      |       |                  |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Shareholders’ equity                                                                                                                     |       |                                                      |       |                  |       |
| Ordinary Shares,  $.01 par value, 175,000,000 shares authorized; 52,031,408 and 50,444,890  shares issued and outstanding at respective dates |       | 520                                                       |       | 504                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                |       | 642                                                       |       | (243                  | )          |
| Additional paid  in capital                                                                                                                   |       | 512,110                                                   |       | 486,762               |       |
| Accumulated  deficit during development stage                                                                                                 |       | (434,206                                                  | )          | (259,794              | )          |
| Total  shareholders’ equity                                                                                                              |       | 79,066                                                    |       | 227,229               |       |
| Total liabilities and  shareholders’ equity                                                                                              |       | $                                                         | 812,408    |                  | $          | 780,511 |   |

 

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

3

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**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(Expressed in United States dollars)****(Unaudited)**
| ** **                                                       | ** ** | **Three Months Ended**                          | ** ** | **For the Period from  December 22, 1994  (inception)** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **March 31,**                                        | ** ** | **through**                                                                      | ** ** |
| ** **                                                       | ** ** | **2006**                                                  | ** ** | **2005**                                                                         | ** ** | **March 31, 2006** | ** ** |
| ** **                                                       | ** ** | **Restated**                                              | ** ** | ** **                                                                       | ** ** | **Restated** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except share data)** | ** ** |
| **Operating income and expenses:**                               | ** ** | ** **                                                | ** ** | ** **                                                                       | ** ** | ** ** | ** ** |
| Exploration                                                      |       | $                                                         | (1,450     | )                                                                                | $          | (1,326 | ) | $ | (74,881 | ) |
| Administrative                                                   |       | (5,313                                                    | )          | (3,929                                                                           | )          | (75,171 | ) |
| Losses on  commodity derivatives                                 |       | (172,818                                                  | )          | (374                                                                             | )          | (323,366 | ) |
| Gains (losses)  on foreign currency derivatives and transactions |       | 113                                                       |       | (618                                                                             | )          | 841 |   |
| Other operating  expense (1)                                     |       | (48                                                       | )          | —                                                                           |       | (62 | ) |
| Amortization and  depreciation                                   |       | (95                                                       | )          | (16                                                                              | )          | (1,491 | ) |
| Total operating  expenses                                        |       | (179,611                                                  | )          | (6,263                                                                           | )          | (474,130 | ) |
|                                                             |       |                                                      |       |                                                                             |       |   |   |
| **Other income and expenses:**                                   | ** ** | ** **                                                | ** ** | ** **                                                                       | ** ** | ** ** | ** ** |
| Interest and  other income                                       |       | 2,904                                                     |       | 3,400                                                                            |       | 37,576 |   |
| Gain on  extinguishment of debt                                  |       | 2,875                                                     |       | —                                                                           |       | 9,640 |   |
| Interest expense  and other borrowing costs (2)                  |       | (519                                                      | )          | (1,990                                                                           | )          | (11,441 | ) |
| Total  other income and expense                                  |       | 5,260                                                     |       | 1,410                                                                            |       | 35,775 |   |
| Loss before  minority interest and income taxes                  |       | (174,351                                                  | )          | (4,853                                                                           | )          | (438,355 | ) |
| Income taxes                                                     |       | (54                                                       | )          | —                                                                           |       | (433 | ) |
| Minority  interest in (income) loss of consolidated subsidiary   |       | (7                                                        | )          | —                                                                           |       | 4,568 |   |
| Net loss                                                         |       | $                                                         | (174,412   | )                                                                                | $          | (4,853 | ) | $ | (434,220 | ) |
| Other  comprehensive income:                                     |       |                                                      |       |                                                                             |       |   |   |
| Unrealized gain  (loss) on securities                            |       | $                                                         | 390        |                                                                             | (135       | ) | 147 |   |
| Reclassification  for loss included in net income                |       | 495                                                       |       | —                                                                           |       | 495 |   |
| Other  comprehensive gain (loss)                                 |       | 885                                                       |       | (135                                                                             | )          | 642 |   |
| Comprehensive  loss                                              |       | $                                                         | (173,527   | )                                                                                | $          | (4,988 | ) | $ | (433,578 | ) |
|                                                             |       |                                                      |       |                                                                             |       |   |   |
| **Net loss per Ordinary Share —  basic and diluted (3)**    |       | $                                                         | (3.39      | )                                                                                | $          | (0.10 | ) |   |   |
| ** **                                                       | ** ** | ** **                                                | ** ** | ** **                                                                       | ** ** | ** ** | ** ** |
| **Weighted average Ordinary Shares outstanding**                 |       | 51,420,587                                                |       | 47,681,043                                                                       |       |   |   |

 

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(1)             Other operating expense is all related toaccretion expense associated with our asset retirement obligation at SanCristobal.

(2)             Interest expense and other borrowing costs arenet of $4.3 million and $1.1 million capitalized for the three months endedMarch 31, 2006 and 2005 respectively, and $13.6 million capitalized for theinception to date period ended March 31, 2006. In addition, interest expenseand other borrowing costs for the three months ended March 31, 2006 includes a$0.5 million write off of deferred issuance costs associated with the purchaseof a portion of the Company’s convertible debt (see Note 7).

(3)             Diluted earnings per share were anti-dilutivefor all periods presented.

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

4

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**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in United States dollars)(Unaudited)**
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** | **For the period from  December 22, 1994  (inception)** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**               | ** ** | **Through**                                                                      | ** ** |
| ** **                                                                                 | ** ** | **2006**                         | ** ** | **2005**                                                                         | ** ** | **March 31, 2006** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands)**          | ** ** |
| Cash flows from  operating activities:                                                     |       |                             |       |                                                                             |       |   |   |
| Net cash used in  operating activities                                                     |       | $                                | (12,111    | )                                                                                | $          | (5,046 | ) | $ | (119,089 | ) |
| Cash flows from  investing activities:                                                     |       |                             |       |                                                                             |       |   |   |
| Purchase of  available for sale investments                                                |       | (34,000                          | )          | (147,625                                                                         | )          | (1,227,192 | ) |
| Sale of  available for sale investments                                                    |       | 84,191                           |       | 165,315                                                                          |       | 1,148,143 |   |
| Purchase of  held-to-maturity investments                                                  |       | —                           |       | (17,524                                                                          | )          | (239,207 | ) |
| Sale of  held-to-maturity investments                                                      |       | 1,000                            |       | 15,669                                                                           |       | 188,007 |   |
| Purchase of  restricted investments                                                        |       | (191,612                         | )          | —                                                                           |       | (233,905 | ) |
| Sale of  restricted investments                                                            |       | 104,869                          |       | 1,868                                                                            |       | 119,645 |   |
| Payment of  derivative premiums, net                                                       |       | (3,168                           | )          | —                                                                           |       | (3,168 | ) |
| Advances for  construction of port facility                                                |       | —                           |       | —                                                                           |       | (2,000 | ) |
| Advances to  suppliers and contractors                                                     |       | (3,405                           | )          | (4,090                                                                           | )          | (7,280 | ) |
| Restricted cash  to collateralize credit facility, letters of credit and interest payments |       | 88,568                           |       | 108                                                                              |       | (49,576 | ) |
| Capitalized  property, plant and equipment                                                 |       | (76,186                          | )          | (19,620                                                                          | )          | (359,116 | ) |
| Net cash used in  investing activities                                                     |       | (29,743                          | )          | (5,899                                                                           | )          | (665,649 | ) |
|                                                                                       |       |                             |       |                                                                             |       |   |   |
| Cash flows from  financing activities:                                                     |       |                             |       |                                                                             |       |   |   |
| Proceeds from  issuance of Ordinary Shares                                                 |       | 5,728                            |       | —                                                                           |       | 429,291 |   |
| Proceeds from  issuance of convertible notes                                               |       | —                           |       | —                                                                           |       | 339,987 |   |
| Payment of debt  issuance costs                                                            |       | (209                             | )          | —                                                                           |       | (24,530 | ) |
| Payments of  notes payable and long term debt                                              |       | (569                             | )          | —                                                                           |       | (3,845 | ) |
| Borrowings under  project finance facility                                                 |       | 40,000                           |       | —                                                                           |       | 40,000 |   |
| Proceeds from  exercise of stock options and warrants                                      |       | 1,414                            |       | 91                                                                               |       | 13,153 |   |
| Net cash  provided by financing activities                                                 |       | 46,364                           |       | 91                                                                               |       | 794,056 |   |
| Net increase (decrease)  in cash and cash equivalents                                      |       | 4,510                            |       | (10,854                                                                          | )          | 9,318 |   |
| Cash and cash  equivalents - beginning of period                                           |       | 4,808                            |       | 27,740                                                                           |       | — |   |
| Cash and cash equivalents - end of period                                                  |       | $                                | 9,318      |                                                                             | $          | 16,886 |   | $ | 9,318 |   |

 

See Note 13 forsupplemental cash flow information.

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

5

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**APEX SILVER MINES LIMITED****An Exploration and Development Stage Company**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS****(Expressed in United States dollars)**

**1.****              Basis of Preparationof Financial Statements**

Theseunaudited interim consolidated financial statements of Apex Silver MinesLimited (the “Company”) and its subsidiaries have been prepared in accordancewith the rules and regulations of the Securities and Exchange Commission (“SEC”).Such rules and regulations allow the omission of certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America, so long as such omissions do not render the financial statementsmisleading. Certain prior period amounts have been reclassified to conform tothe current period presentation.

In theopinion of management, these financial statements reflect all adjustments thatare necessary for a fair statement of the results for the periods presented.All adjustments were of a normal recurring nature. These interim financialstatements should be read in conjunction with the annual financial statementsof the Company included in its 2005 Annual Report on Form 10-K.

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

Effective January 1, 2006 the Company adopted Financial AccountingStandards No. 123R, “Share-Based Payment” (“FAS No. 123R”), using the modifiedprospective approach, which revised Statement of Financial Accounting StandardsNo. 123 “Accounting for Stock-Based Compensation” (“FAS No. 123”), andsuperseded Accounting Principles Board (“APB”) Opinion 25, “Accounting forStock Issued to Employees” and its related implementation guidance. The Companyis currently evaluating whether it will adopt the short-cut method forcalculating the pool of windfall tax benefits as allowed by FinancialAccounting Standards Board (“FASB”) Statement of Position FAS No. 123R-3. TheCompany had previously adopted FAS No. 123 effective January 1, 2004. FAS No.123R requires measurement and recording in the financial statements of thecosts of employee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award, recognized overthe period during which an employee is required to provide services in exchangefor such award. Additionally, FAS No. 123R requires companies that did notpreviously include the effects of estimated forfeitures in the FAS No. 123expenses they reported, to record a cumulative adjustment to the incomestatements presented in the period of adoption of FAS No. 123R in order toreflect the effect of the estimated forfeitures. The forfeiture rate used bythe Company prior and subsequent to the adoption of FAS No. 123R has notchanged and, therefore, the Company did not record a cumulative effectadjustment related to prior period estimated forfeitures. The adoption of FASNo. 123R did not have a material impact on the Company’s financial position orresults of operations and is not expected to have a material impact in thefuture (see Note 10).

During 2004, a committee of the Emerging Issues Task Force (“EITF”)began discussing the accounting treatment for stripping costs incurred duringthe production phase of a mine. During March 2005, the EITF reached a consensus(EITF Issue No. 04-6) that stripping costs incurred during the production phaseof a mine are variable production costs that should be included in the costs ofinventory produced during the period that the stripping costs are incurred. TheFASB ratified the EITF consensus. The EITF consensus is effective for the firstreporting period in fiscal years beginning after December 15, 2005. In January2006, the EITF issued additional guidance defining the commencement ofproduction as the period when saleable minerals are first extracted in greaterthan *de minimis* amounts. In February 2006,the Company began mining significant amounts of oxide ore reserves at its SanCristobal project, which have been placed in stockpiles for future processing.The quantity and value of the minerals mined were sufficient to declare thestart of ore production according to the EITF consensus. The Company hasincluded the costs associated with the oxide ore production as long terminventory on its financial statements. The Company expects the mining ofsignificant amounts of oxide ore to continue throughout the year, with thecommencement of sulfide ore mining in the second half of the year.

6

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TheCompany records costs related to productive activities as inventory held forsale in the ordinary course of business or work in process for such sale.Work-in-process inventories include ore produced and stockpiled for whichfurther processing is necessary before a product is ready for sale. The Companyuses the average cost method to assign costs to the units of ore stockpiledduring the period. Inventories are carried at the lower of cost or the currentnet realizable value. If costs held in inventory exceed their net realizablevalue, the excess cost is recognized as a loss in the current period. Netrealizable value reflects the gross realizable value (“estimated selling price”)reduced by estimated costs of completion and disposal as of the balance sheetdate. Gross realizable value reflects the anticipated average realization thatthe inventory will generate when it is sold. Any inventory write-downs will notbe reinstated in subsequent periods should the net realizable value increase.

*NewAccounting Standards*

At a meeting held in March 2006 the EITF reached a tentative consensus(EITF Issue No. 05-1) that the issuance of equity securities to settle aninstrument that becomes convertible upon the issuer’s exercise of a call optionshould be accounted for as a conversion (as opposed to an extinguishment) if,at issuance, the debt instrument contains a substantive conversion featureother than the issuer’s call option. The EITF concluded that if an instrumentis deemed convertible at issuance, then a subsequent conversion of theinstrument is in accordance with a “conversion privilege that existed atissuance” and is, therefore, outside the scope of APB Opinion No. 26, “EarlyExtinguishment of Debt.”  Therefore, theissuance of shares to settle the debt pursuant to the original terms of theinstrument should be afforded conversion treatment. If the instrument does notcontain a substantive conversion feature at issuance, the issuance of equitysecurities to settle the instrument should be recognized as a debtextinguishment. EITF Issue No. 05-1 will become effective following itsanticipated ratification scheduled for June 2006. The Company has previouslyaccounted for two transactions involving the buy-back of its convertible debtas an extinguishment under APB Opinion No. 26. Ratification of EITF Issue No.05-1 would require similar transactions to be accounted for prospectively as aconversion.

Financial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“FASNo. 154”) is effective for years beginning after December 15, 2005. FAS No. 154changes the requirements for the accounting and reporting of a change inaccounting principle. The statement applies to voluntary changes as well aschanges required by accounting pronouncements which do not otherwise providespecific transition provisions, requiring retrospective application to priorperiod’s financial statements where not impractical. FAS No. 154 did not have amaterial impact on the Company’s financial position or results of operationsfor the period and is not expected to have a material impact in the future.

*Correction of an Error Related tothe Valuation of Open Derivative positions*

Pursuant to the requirements of the lenders of its $225 million projectfinance facility, the Company was required to provide price protection for aportion of its planned production from the San Cristobal project. In the thirdquarter 2005, the Company entered into silver, zinc and lead derivativepositions utilizing primarily forward sales, but also puts and calls, to complywith this requirement. As discussed above, the Company records its openderivative positions at their estimated fair value on its balance sheet andrecords the change in estimated fair value in earnings at the end of eachreporting period.

The Company’s derivative positions mature or expire on various datesover an approximate six-year period commencing in July 2007. Many of thederivative positions mature or expire beyond the periods covered by the majorcommodity price indices such as LME or COMEX, or expire in future periodscovered by those indices with respect to which only limited trading activityhas occurred. In instances where only limited market activity exists, theCompany had historically used price projections to estimate a forward pricecurve provided by an independent third party employing statistical analysis andmodels to estimate the fair value of its open derivative positions. The modelsused by the independent third party relied on commodity price indices out tothree months and mean reversion statistical estimates beyond the three-monthperiod. Recently, the Company reassessed the market information reflected inthe commodities prices indices out to twenty-seven months and quoted pricesfrom the counterparties holding our derivative positions and concluded that theadditional market information is a more reliable indicator of fair value thanthe independent third party price projections previously used. Accordingly, theCompany concluded the derivative liability related to its open derivative positionswas understated at March 31, 2006 by $208.9 million ($4.06 per share) andDecember 31, 2005 by $95.1 million ($1.96 per share).

7

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The following table summarizes the impact of the restatement on thehistorical balances reported on the Company’s consolidated balance sheets forthe periods ended March 31, 2006:
|                                  | ** ** | **March 31, 2006** | ** ** |
|----------------------------------|------------|------------------------------|------------|
|                             |       |                         |       |
| Derivatives at  fair value       |       |                         |       |
|  As previously  reported    |       | $                            | 91,476     |   |
|  Adjustment                 |       | 208,937                      |       |
|  As restated                |       | 300,413                      |       |
| Total  liabilities               |       |                         |       |
|  As previously  reported    |       | $                            | 524,364    |   |
|  Adjustment                 |       | 208,937                      |       |
|  As restated                |       | 733,301                      |       |
| Accumulated  deficit             |       |                         |       |
|  As previously  reported    |       | $                            | (225,269   | ) |
|  Adjustment                 |       | (208,937                     | )          |
|  As restated                |       | (434,206                     | )          |
| Total  shareholders’ equity |       |                         |       |
|  As previously  reported    |       | $                            | 288,003    |   |
|  Adjustment                 |       | (208,937                     | )          |
|  As restated                |       | 79,066                       |       |

 

8

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The following table summarizes the impact of therestatement on the historical amounts reported on the Company’s consolidatedstatement of operations for the three months ended March 31, 2006 and theinception to date period through March 31, 2006:
| ** **                                      | ** ** | ** **                                | ** ** | **For the Period from** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **For the Three**               | ** ** | **December 22, 1994**        | ** ** |
| ** **                                      | ** ** | **Months**                                | ** ** | **(Inception)**                        | ** ** |
| ** **                                      | ** ** | **Ended March 31,**             | ** ** | **Through March 31,**        | ** ** |
| ** **                                      | ** ** | **2006**                                  | ** ** | **2006**                               | ** ** |
| ** **                                      | ** ** | **(amounts in thousands**       | ** ** |
| ** **                                      | ** ** | **except per share data)** | ** ** |
| Losses on  commodity derivatives                |       |                                      |       |                                   |       |
|  As previously  reported                   |       | $                                         | (58,979    | )                                      | $          | (114,429 | ) |
|  Adjustment                                |       | (113,839                                  | )          | (208,937                               | )          |
|  As restated                               |       | (172,818                                  | )          | (323,366                               | )          |
| Total operating  expenses                       |       |                                      |       |                                   |       |
|  As previously  reported                   |       | $                                         | (65,772    | )                                      | $          | (265,193 | ) |
|  Adjustment                                |       | (113,839                                  | )          | (208,937                               | )          |
|  As restated                               |       | (179,611                                  | )          | (474,130                               | )          |
| Loss before  minority interest and income taxes |       |                                      |       |                                   |       |
|  As previously  reported                   |       | $                                         | (60,512    | )                                      | $          | (229,418 | ) |
|  Adjustment                                |       | (113,839                                  | )          | (208,937                               | )          |
|  As restated                               |       | (174,351                                  | )          | (438,355                               | )          |
| Net loss                                        |       |                                      |       |                                   |       |
|  As previously  reported                   |       | $                                         | (60,573    | )                                      | $          | (225,283 | ) |
|  Adjustment                                |       | (113,839                                  | )          | (208,937                               | )          |
|  As restated                               |       | (174,412                                  | )          | (434,220                               | )          |
| Comprehensive loss                              |       |                                      |       |                                   |       |
|  As previously  reported                   |       | $                                         | (59,688    | )                                      | $          | (224,641 | ) |
|  Adjustment                                |       | (113,839                                  | )          | (208,937                               | )          |
|  As restated                               |       | (173,527                                  | )          | (433,578                               | )          |
| Net loss per  Ordinary                          |       |                                      |       |                                   |       |
| Share - basic and diluted                       |       |                                      |       |                                   |       |
|  As previously  reported                   |       | $                                         | (1.18      | )                                      |       |   |
|  Adjustment                                |       | (2.21                                     | )          |                                   |       |
|  As restated                               |       | (3.39                                     | )          |                                   |       |

 

The restatements had noimpact on the Company’s cash or investment balances or cash flows.

**3.****              Investments**

The Company considers allhighly liquid investments with a maturity of three months or less whenpurchased to be cash equivalents. Short-term investments include investmentswith maturities greater than three months, but not exceeding twelve months.Long-term investments include investments with maturities greater than twelvemonths.

The Company determinesthe appropriate classification of its investments in debt and equity securitiesat the time of purchase and re-evaluates classifications at each balance sheetdate. Debt securities are classified as held to maturity when the Company hasthe intent and ability to hold the securities to maturity. Held to maturitydebt securities are stated at amortized cost and include government agency andcorporate obligations. Available for sale investments are marked to market ateach reporting period with changes in value recorded as a component of othercomprehensive income. If declines in value are deemed other than temporary, acharge is made to net loss for the period.

The Companygenerally records its investments as short term or long term based on theunderlying maturity date of the investments held.  However, in certain instances the Company hasbeen required to place investment funds in escrow where the restrictions on theuse of such funds expire beyond the maturity dates of the underlyinginvestments.  In this instance, where theexpiration date of the restriction is greater than one year, the Companyclassifies the investment as long term. At March 31, 2006 the Company had placed $70.4 million of investments inescrow to fund possible overruns of the Company’s San Cristobal Project as arequirement of the project finance facility. The underlying investments in this escrow account have maturity dates ofless than twelve months but the escrow account will not be released until aftercompletion of the San Cristobal project, therefore, the Company has classifiedthese investments as long term.  (SeeNote 11 for additional discussion of restricted investments)

9

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The Company invests only in government and corporate securities rated “investmentgrade” or better. The following tables, based on quoted market prices,summarizes the Company’s investments at March 31, 2006 and December 31, 2005:
| **March 31, 2006** | ** ** | **Cost**                | ** ** | **Market** | ** ** | **Balance** | ** ** |
|------------------------------|------------|-------------------------|------------|------------|------------|-------------|------------|
| ** **                   | ** ** | **(in Thousands)** | ** ** |
| Short-term                   |       |                    |       |       |       |        |       |
| Available for  sale          |       |                    |       |       |       |        |       |
| Common stock                 |       | $                       | 434        |       | $          | 1,076       |       | $ | 1,076 |   |
| Total short term             |       | $                       | 434        |       | $          | 1,076       |       | $ | 1,076 |   |
|                         |       |                    |       |       |       |        |       |
| Restricted Investments:      |       |                    |       |       |       |        |       |
| Short-term                   |       |                    |       |       |       |        |       |
| Available for  sale          |       |                    |       |       |       |        |       |
| Auction rate  securities     |       | $                       | 142,466    |       | $          | 142,466     |       | $ | 142,466 |   |
| Total available  for sale    |       | 142,466                 |       | 142,466    |       | 142,466     |       |
| Held to maturity             |       |                    |       |       |       |        |       |
| Corporate notes              |       | 3,285                   |       | 3,275      |       | 3,285       |       |
| Government bonds             |       | 25,336                  |       | 25,183     |       | 25,336      |       |
| Total held to  maturity      |       | 28,621                  |       | 28,461     |       | 28,621      |       |
| Total short term             |       | $                       | 171,087    |       | $          | 170,927     |       | $ | 171,087 |   |
|                         |       |                    |       |       |       |        |       |
| Long-term                    |       |                    |       |       |       |        |       |
| Available for  sale          |       |                    |       |       |       |        |       |
| Auction rate  securities     |       | $                       | 18,334     |       | $          | 18,334      |       | $ | 18,334 |   |
| Total available  for sale    |       | 18,334                  |       | 18,334     |       | 18,334      |       |
| Held to maturity             |       |                    |       |       |       |        |       |
| Corporate notes              |       | 2,450                   |       | 2,444      |       | 2,450       |       |
| Government bonds             |       | 55,374                  |       | 54,911     |       | 55,374      |       |
| Total held to  maturity      |       | 57,824                  |       | 57,355     |       | 57,824      |       |
| Total long term              |       | $                       | 76,158     |       | $          | 75,689      |       | $ | 76,158 |   |

 
| **December 31, 2005** | ** ** | **Cost**                | ** ** | **Market** | ** ** | **Balance** | ** ** |
|---------------------------------|------------|-------------------------|------------|------------|------------|-------------|------------|
| ** **                      | ** ** | **(in Thousands**) | ** ** |
| Short-term                      |       |                    |       |       |       |        |       |
| Available for  sale             |       |                    |       |       |       |        |       |
| Common stock                    |       | $                       | 434        |       | $          | 686         |       | $ | 686 |   |
| Bond funds                      |       | 3,381                   |       | 2,885      |       | 2,885       |       |
| Auction rate  securities        |       | 127,426                 |       | 127,426    |       | 127,426     |       |
| Total available  for sale       |       | 131,241                 |       | 130,997    |       | 130,997     |       |
| Held to maturity                |       |                    |       |       |       |        |       |
| Corporate notes                 |       | 1,003                   |       | 998        |       | 1,003       |       |
| Total held to  maturity         |       | 1,003                   |       | 998        |       | 1,003       |       |
| Total short term                |       | $                       | 132,244    |       | $          | 131,995     |       | $ | 132,000 |   |
|                            |       |                    |       |       |       |        |       |
| Restricted Investments:         |       |                    |       |       |       |        |       |
| Short-term                      |       |                    |       |       |       |        |       |
| Available for  sale             |       |                    |       |       |       |        |       |
| Auction rate  securities        |       | $                       | 14,950     |       | $          | 14,950      |       | $ | 14,950 |   |
| Total available for  sale       |       | 14,950                  |       | 14,950     |       | 14,950      |       |
| Held to maturity                |       |                    |       |       |       |        |       |
| Corporate notes                 |       | 2,003                   |       | 2,004      |       | 2,003       |       |
| Government bonds                |       | 50,538                  |       | 50,191     |       | 50,538      |       |
| Total held to  maturity         |       | 52,541                  |       | 52,195     |       | 52,541      |       |
| Total short term                |       | $                       | 67,491     |       | $          | 67,145      |       | $ | 67,491 |   |
| Long-term                       |       |                    |       |       |       |        |       |
| Held to maturity                |       |                    |       |       |       |        |       |
| Government bonds                |       | $                       | 12,392     |       | $          | 12,173      |       | $ | 12,392 |   |

 

10

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TheCompany liquidated approximately $12.0 million of investments, previouslyrecorded as held to maturity, prior to their maturity dates as a requirement ofthe project finance facility and recognized a $0.1 million loss on theliquidation.

**4.****              Prepaid expenses andother assets**

Prepaid expenses and other assets consist of the following:
|                                           | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(in thousands)**  | ** ** |
| Prepaid insurance                    |       | $                        | 1,451      |                        | $          | 824 |   |
| Prepaid bank  fees                        |       | 209                      |       | —                      |       |
| Accrued interest  receivable              |       | 871                      |       | 758                         |       |
| Prepaid  consulting & contractor fees |       | 7,258                    |       | 3,874                       |       |
| Receivables,  travel advances and other   |       | 146                      |       | 118                         |       |
| Withholding  taxes receivable             |       | 250                      |       | 250                         |       |
|                                      |       | $                        | 10,185     |                        | $          | 5,824 |   |

 

The prepaid consulting and contractor fees consist primarily of advancepayments made to contractors for work being performed for the San CristobalProject.

**5.****              Value Added TaxRecoverable**

The Company has recordedvalue added tax (“VAT”) paid in Bolivia as a recoverable asset. Bolivian lawstates that VAT paid prior to production is recoverable as a credit againstBolivian taxes arising from production, including income tax. The VAT paid inBolivia is expected to be recovered through production from the proven andprobable reserves at the San Cristobal Project that the Company is developing.At March 31, 2006 and December 31, 2005 the recoverable VAT recorded forBolivia is $26.1 million and $20.1 million respectively.

In addition, the Companyhas incurred VAT related to various exploration activities outside of the SanCristobal project in Bolivia and other countries. Because of the uncertainty ofthe recoverability of these taxes they are charged to expense as incurred.

**6.****              Property, Plant andEquipment**

The components ofproperty, plant and equipment were as follows:
|                                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(in thousands)**  | ** ** |
| Mineral  properties             |       | $                        | 117,041    |                        | $          | 117,103 |   |
| Construction in  progress       |       | 297,500                  |       | 232,288                     |       |
| Buildings                       |       | 8,423                    |       | 8,423                       |       |
| Mining equipment  and machinery |       | 11,505                   |       | 10,127                      |       |
| Equipment under  capital lease  |       | 16,199                   |       | 14,928                      |       |
| Other furniture  and equipment  |       | 1,873                    |       | 1,966                       |       |
|                            |       | 452,541                  |       | 384,835                     |       |
| Less:  Accumulated depreciation |       | (6,935                   | )          | (5,697                      | )          |
|                            |       | $                        | 445,606    |                        | $          | 379,138 |   |

 

For the three month periods ended March 31, 2006 and 2005 the Companyrecorded depreciation expense of $95,000 and $16,000, respectively. Also, forthe three month periods ended March 31, 2006 and 2005 the Company capitalizeddepreciation associated with the San Cristobal Project in the amounts of $1.1million and $0.1 million respectively.

11

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The March 31, 2006 and December 31, 2005 construction in progressbalances contain $13.6 and $9.4 million of capitalized interest respectively.

**7.****              Debt**

The Company’s debt consists of the following:
|                                                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **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                         |       | — |   | 129,987 |   |
| Project finance  facility                              |       | —                       |       | 40,000                          |       |   |   |   |   |
| Capital lease  obligations                             |       | 2,413                        |       | 10,592                          |       | 2,270 |   | 10,034 |   |
|                                                   |       | $                            | 2,413      |                            | $          | 340,579 |   | $ | 2,270 |   | $ | 320,021 |   |

 

In December 2005 the Company closed on a $225 million project financefacility, arranged by BNP Paribas and Barclays Capital, and funded by a groupof international financial institutions including banks, export credit agenciesand the Andean Development Corporation, a multilateral financial agency thatpromotes sustainable development in South America. Borrowings from the facilityare being used to complete the development of the Company’s San CristobalProject. During the first quarter 2006 the Company borrowed $40.0 million underthe facility. The Company is required to pay a commitment fee on the undrawnamount of the facility. Interest on the outstanding amounts drawn under thefacility is based on LIBOR plus a credit spread for the outstanding amountsdrawn against the facility. Covenants related to the facility require theCompany to maintain certain security interests, financial ratios, insurancecoverage, minimum sales contracts and metal price protection contracts as wellas other requirements.

During the first quarter 2006 the Company placed in service $1.3million of additional mining equipment to be used in stripping and future mineproduction, and recorded the transaction as a capital lease, resulting in totalcapital lease obligations of $13.0 million at March 31, 2006. During the firstquarter 2006 the Company made payments of $0.6 million related to capital leaseobligations and will be required to make additional payments of $1.8 millionfor the remainder of 2006, $2.4 million during each of 2007 and 2008, $1.8million during 2009, $1.2 million during 2010 and $3.4 million thereafter.

During the first quarter 2006 the Company issued approximately 1.1million Ordinary Shares valued at $17.1 million and $0.3 million of cash forunpaid interest to complete the purchase of $20.0 million principal amount of theCompany’s 4.0% Convertible Senior Subordinated Notes due 2024 in a privatelynegotiated exchange transaction. The transaction resulted in the recognition ofa $2.9 million gain on extinguishment of debt. The Company canceled the notespurchased in the transaction.

Pursuant to the agreement related to the 4% Notes and certainprovisions of the project finance facility, the Company is required to maintainrestricted investments to cover the payment of interest on all of the Notesthrough 2007. The amount invested will at maturity equal the interest paymentsdue. As of March 31, 2006, $15.9 million of restricted investments weredesignated for this purpose including $9.6 million in investments classified ascurrent and $6.3 million in investments classified as long-term.

**8.****              Sales Contracts andDerivative Instruments**

Certain covenants related to the project finance facility required theCompany to provide price protection for a portion of its planned production ofmetals from San Cristobal. During the third quarter 2005, the Company enteredinto positions utilizing primarily forward sales, but also puts and calls tocomply with the project finance facility covenants. In order to maintainleverage to silver market prices, the Company entered into 

12

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proportionally more zinc and lead positions thansilver positions. These derivative positions represent approximately 3.5%,12.6% and 14.7% of planned life-of-mine payable production of silver, zinc andlead, respectively. Non-cash mark-to-market gains and losses from theseoutstanding metal derivative positions may fluctuate substantially from periodto period based on spot and forward prices and option volatilities.

In addition, the Company continues to make limited investments inshorter duration put and call options and other metals derivatives not requiredby the project financing.

The Company marks its open derivative positions to estimated fair valueat the end of each accounting period with the related change in estimated fairvalue recorded to earnings. For the quarter ended March 31, 2006 the Companyrecorded non-cash mark to market loss of $172.8 million and realized gainor loss of $nil compared to a $0.4 million non-cash mark to market lossand realized gain or loss of $nil for the quarter ended March 31, 2005 and anon-cash mark-to-market gain of $0.8 million and realizedgains or losses of $nil recorded for the year ended December 31, 2004. The 2006and 2005 losses are the result of continuing high spot and forward prices forsilver, zinc and lead. The actual financial impact of the required projectfinancing facility derivative positions will not be known until the positionsare closed on their future settlement dates. The Company does not intend tosettle the open derivatives position contracts relating to the projectfinancing facility prior to their settlement dates which begin during thesecond half of 2007. At the time of final settlement, the gain or loss recordedwill exclude previously recognized non-cash mark-to-marketgains or losses. 

The following table sets forth the Company’s open derivative positions atMarch 31, 2006. The contracts with open maturity dates of less than one yearrepresent the discretionary derivatives while those with maturities greaterthan one year are all related to the requirements of the project financing andwill be settled for cash based on monthly average prices for each metal in theperiod indicated.
| ** **                        | ** ** | **Current Maturity Date**             | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **Less Than**                              | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **1 Year**                                 | ** ** | **Years** | ** ** | **Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **(in thousands except prices)** | ** ** |
| **Forward Contracts**             | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (ounces)                   |       | 40.0                                            |       | 190.0 |   | 185.0 |   | 240.0 |   | 655.0 |   |
| Average price                     |       | $                                               | 14.13      |   | $ | 7.30 |   | $ | 7.21 |   | $ | 7.13 |   | $ | 7.63 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Zinc (pounds)                     |       | 12,181                                          |       | 300,846 |   | 413,227 |   | 61,729 |   | 787,983 |   |
| Average price                     |       | $                                               | 1.10       |   | $ | 0.48 |   | $ | 0.48 |   | $ | 0.48 |   | $ | 0.49 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Lead (pounds)                     |       | —                                          |       | 195,106 |   | 127,867 |   | — |   | 322,973 |   |
| Average price                     |       | $                                               | —     |   | $ | 0.30 |   | $ | 0.29 |   | $ | — |   | $ | 0.30 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| **Put Option Contracts Owned**    | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (ounces)                   |       | —                                          |       | 925 |   | 2,575 |   | 5,600 |   | 9,100 |   |
| Average price                     |       | $                                               | —     |   | $ | 5.40 |   | $ | 5.69 |   | $ | 5.88 |   | $ | 5.81 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Zinc (pounds)                     |       | 27,558                                          |       | — |   | — |   | — |   | 27,558 |   |
| Average price                     |       | $                                               | 0.61       |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.61 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Lead (pounds)                     |       | —                                          |       | 2,205 |   | — |   | — |   | 2,205 |   |
| Average price                     |       | $                                               | —     |   | $ | 0.50 |   | $ | — |   | $ | — |   | $ | 0.50 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| **Call Option Contracts Written** | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (ounces)                   |       | 2,425                                           |       | 3,450 |   | 5,675 |   | 675 |   | 12,225 |   |
| Average price                     |       | $                                               | 14.91      |   | $ | 8.44 |   | $ | 8.14 |   | $ | 9.24 |   | $ | 9.63 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Zinc (pounds)                     |       | 34,723                                          |       | 8,818 |   | 4,960 |   | — |   | 48,502 |   |
| Average price                     |       | $                                               | 0.78       |   | $ | 0.57 |   | $ | 0.57 |   | $ | — |   | $ | 0.72 |   |
|                              |       |                                            |       |   |   |   |   |   |   |   |   |
| Lead (pounds)                     |       | 14,606                                          |       | 17,637 |   | 9,921 |   | — |   | 42,163 |   |
| Average price                     |       | $                                               | 0.67       |   | $ | 0.39 |   | $ | 0.39 |   | $ | — |   | $ | 0.48 |   |

 

13

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The following table sets forth the fair value of theCompany’s open derivative positions based on indices such as the LME and COMEXand valuations from counterparties holding the Company’s derivative positionsat March 31, 2006 and December 31, 2005 and the change for the three monthsended March 31, 2006. 
| ** **                  | ** ** | **Amount To Be Realized In** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| **Period Ended ** | ** ** | **Less Than  1 Year**                  | ** ** | **2 to 3  Years** | ** ** | **4 to 5  Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                  | ** ** | **(in thousands)**                          | ** ** |
| 12/31/2005                  |       | $                                                | 5,652      |   | $ | 62,268 |   | $ | 77,584 |   | $ | 5,867 |   | $ | 151,371 |   |
| 3/31/2006 Restated          |       | $                                           | 20,607     |   | $ | 158,247 |   | $  | 134,437 |   | $  | 7,729 |   | $ | 321,020 |   |
| 2006 Change                 |       | $****                                            | **14,955** |   | $ | **95,979** |   | $**** | **56,853** |   | $**** | **1,862** |   | $**** | **169,649** |   |

 

During the first three months of 2005, the Companyrecognized a $0.6 million mark to market loss on a foreign currency collartransaction utilizing puts and calls that were put in place during 2004 tohedge currency fluctuations related to payments required on certainlong-lead equipment purchased for the San Cristobal project that wasdenominated in Euros. No such gains or losses were recognized during the threemonths ended March 31, 2006, and the Company did not have any foreign currencyderivative positions. 

The Company’s 2.875% and 4.0% Convertible SeniorSubordinated Notes Due 2024 have several embedded derivatives that have beendetermined to have no value. 

*Credit Risk and Risks Relating tothe Use of Derivatives*

Credit risk is the risk that a third party might failto fulfill its performance obligations under the terms of a financialinstrument. For derivatives, when the fair value of a derivative is negative,as in the Company’s case at March 31, 2006, we assume no credit risk. However,should the Company’s derivative positions become positive, the Company wouldbecome exposed to credit risk. All of the Company’s derivative positions atMarch 31, 2006 are required by the project finance facility and per the termsof the facility are concentrated with two counterparties. The twocounterparties are of high credit–quality and the Company monitors theirfinancial condition at regular intervals. Under the terms of the derivativeagreements, the counterparties cannot require the Company to immediately settleoutstanding derivatives, except upon the occurrence of customary events ofdefault such as covenant breaches, including financial covenants, insolvency orbankruptcy.

**9.****              Asset RetirementObligations**

TheCompany has developed an asset retirement plan for its San Cristobal Projectwhich is currently under construction and is expected to begin producing in2007. The plan includes estimated reclamation, remediation and closurerequirements based on government requirements, World Bank financingrequirements and the Company’s policies. Beginning in the third quarter 2005the Company has been conducting activities at its San Cristobal Propertyincluding earthworks and plant construction that fall

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within the scope of theasset retirement plan and as such will require future reclamation and closureexpenditures.

Perthe guidance of Statement of Financial Accounting Standards No. 143, “Accountingfor Asset Retirement Obligations” (“FAS No. 143”), the fair value of the assetretirement obligation (“ARO”) associated with the San Cristobal Project iscalculated by first estimating the cash flows required to settle an estimated$21.3 million ARO obligation in future periods using an inflation rate of 1.6percent and then discounting the future cash flows using the Company’scredit-adjusted risk-free rate of 9.8 percent.

Thefollowing table reconciles the beginning and ending balance for the Company’sasset retirement obligations (in thousands):

| Balance at December 31, 2005    |   | $      | 2,003  |   |
|---------------------------------|--------|--------|--------|--------|
|                            |   |   |   |
| Additions                       |   | 1,882  |   |
| Changes in estimates, and other |   | — |   |
| Liabilities settled             |   | — |   |
| Accretion expense               |   | 48     |   |
|                            |   |   |   |
| Balance at March 31,  2006      |   | $      | 3,933  |   |

 

**10.****       Shareholders’ Equity**

The following table sets forth the changes in shareholders’ equityduring the first three months of 2006:
| ** **                                        | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** **   | ** ** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------------------|--------------|------------|------------|
| ** **                                        | ** ** | ** **                                               | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**              | ** **   | **Total**  | ** ** |
| ** **                                        | ** ** | **Common Stock**                                    | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** **   |
| ** **                                        | ** ** | **Shares**                                               | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **income**             | ** **   | **Equity** | ** ** |
| ** **                                        | ** ** | **(in thousands except share data)** | ** ** |
| **Balance,  December 31, 2005**                   | ** ** | **50,444,890**                                           | ** ** | **$**       | **504.4**  | ** **      | **$**      | **486,762**       | ** ** | **$**                  | **(259,794** | **)**      | **$**      | **(243** | **)** | **$** | **227,229** | ** ** |
| Stock to  construct power line ($15.09 per share) |       | 369,033                                                  |       | 3.7         |       | 5,724           |       | —            |       | —                 |         | 5,728      |       |
| Shares issued to  retire debt, ($15.77 per share) |       | 1,086,653                                                |       | 10.9        |       | 17,114          |       | —            |       | —                 |         | 17,125     |       |
| Stock to  consultants ($15.90 per share)          |       | 2,832                                                    |       | —      |       | 45              |       | —            |       | —                 |         | 45         |       |
| Stock  compensation accrued.                      |       | —                                                   |       | —      |       | 1,052           |       | —            |       | —                 |         | 1,052      |       |
| Stock options  exercised ($13.09 per share)       |       | 108,000                                                  |       | 1.1         |       | 1,413           |       | —            |       | —                 |         | 1,414      |       |
| Stock granted as  compensation ($19.30 per share) |       | 20,000                                                   |       | 0.2         |       | —          |       | —            |       | —                 |         | —     |       |
| Unrealized gain  on marketable equity securities  |       | —                                                   |       | —      |       | —          |       | —            |       | 885                    |         | 885        |       |
| Net loss  Restated                                |       | —                                                   |       | —      |       | —          |       | (174,412          | )          | —                 |         | (174,412   | )          |
| **Balance, March 31, 2006  Restated**             | ** ** | **52,031,408**                                           | ** ** | **$**       | **520.3**  | ** **      | **$**      | **512,110**       | ** ** | **$**                  | **(434,206** | **)**      | **$**      | **642** | ** ** | **$** | **79,066** | ** ** |

 

*Ordinary Share Issuances* –During January 2006, the Company issued 369,033 of its Ordinary Shares, valuedat $5.7 million, as the last of four agreed upon advances to SC TESA for theconstruction of the power line to the San Cristobal project. The Company hadpreviously issued 1,134,799 of its Ordinary Shares, valued at $16.6 million,during 2005, as the first three advances to SC TESA. Excess proceeds of $0.1million received by SC TESA from the sale of the shares will be added to theadvances to be repaid to the Company with interest through credits againstcharges for future delivery of power.

InJanuary and February 2006 the Company issued approximately 1.1 million OrdinaryShares valued at $17.1 million and $0.3 million of cash for unpaid interest tocomplete the purchase of $20.0 million principal amount of the Company’s 4.0%Convertible Senior Subordinated Notes due 2024 in a privately negotiatedexchange transaction. The Company canceled the notes purchased in thetransaction.

*Stock Option Plans* – TheCompany has established a plan to issue share options and other share awards forofficers, employees, consultants and agents of the Company and its subsidiaries(the “Plan”).

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Option awards aregenerally granted with an exercise price equal to the market price of theCompany’s stock at the date of grant. Options typically vest ratably overperiods of up to four years with the first tranche vesting on the date of grantor the first anniversary of the date of grant. Unexercised options expiretypically ten years after the date of grant. The options and other awardsprovide for accelerated vesting if there is a change in control as defined inthe Plan.

TheCompany has also established a share option plan for its non-employee directors(the “Director Plan”). Options granted under the Director Plan vest on the dateof the grant and expire ten years after the date of the grant or three yearsafter the date that a non-employee director ceases to be a director of theCompany. Options granted under the Director Plan are transferable only inlimited circumstances.

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes option-pricing model that uses the assumptions noted in thefollowing table. Expected volatilities are based on historical volatility ofthe entity’s stock. The Company uses historical data to estimate optionexercise and employee termination within the Black-Scholes model. The expectedterm of options granted represents the period of time that options granted areexpected to be outstanding and is based on past experience and future estimatesand includes data from both the Plan and the Directors Plan. The risk-free ratefor periods within the contractual life of the option is based on the U.S.Treasury yield curve in effect at the time of grant.

Forpurposes of calculating the fair value of options, volatility for the periodspresented is based on the historical volatility of the Company’s OrdinaryShares. The Company currently does not foresee the payment of dividends in thenear term. The fair value for these options was estimated at the date of grantusing the Black-Scholes option-pricing model with the following assumptions:
|                              | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Expected  volatility         |       | 43.8% - 44.                                          | 5%         | 42.6 | % |
| Weighted average  volatility |       | 44.0                                                 | %          | 42.6 | % |
| Expected dividend  yield     |       | —                                               |       | — |   |
| Expected term  (in years)    |       | 3.55                                                 |       | 3.58 |   |
| Risk-free rate               |       | 4.47                                                 | %          | 3.62 | % |

 

Asummary of the Company’s stock options at March 31, 2006 and changes during thethree months then ended is presented in the following table:
| Options                                    | ** ** | **Number of   Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted   Average   Remaining   Contractual   Life** | ** ** | **Aggregate Intrinsic   Value** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| Outstanding at  beginning of period        |       | 2,859,781                        |       | $                                                      | 14.42      |                                                                        | 6.4 Years  |                                      | $          | 4,232,476 |   |
| Granted during  period                     |       | 32,644                           |       | $                                                      | 19.63      |                                                                        | 9.9 Years  |                                      | $          | — |   |
| Forfeited or  expired during period        |       | (30,000                          | )          | $                                                      | 16.61      |                                                                        |       |                                      | $          | (13,653 | ) |
| Exercised during  period                   |       | (108,000                         | )          | $                                                      | 13.09      |                                                                        |       |                                      | $          | 944,404 |   |
| Outstanding at  end of period              |       | 2,754,425                        |       | $                                                      | 14.51      |                                                                        | 6.2 Years  |                                      | $          | 25,450,887 |   |
| Exercisable at end  of period              |       | 1,926,249                        |       | $                                                      | 13.25      |                                                                        | 5.1 Years  |                                      | $          | 20,225,615 |   |
| Expected to vest at the  end of the Period |       | 828,176                          |       | $                                                      | 17.43      |                                                                        | 8.7 Years  |                                      | $          | 5,234,072 |   |

 

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Duringthe three months ended March 31, 2006 and March 31, 2005, the Company grantedequity awards with weighted average grant date fair values of $0.2 million and$0.4 million, respectively; options were exercised with total intrinsic valuesof $0.9 million and $0.1 million, respectively; and the total fair value ofshares vested during those three months was $0.3 million and $0.0 million,respectively.

As ofMarch 31, 2006, total unrecognized compensation cost related to the non-vestedstock options granted pursuant to the Plan was $3.0 million which the Companyexpects will be recognized over a weighted average period of 1.0 year.

Asummary of the status of the Company’s non-vested restricted stock grants atMarch 31, 2006 and changes during the three months then ended is presented inthe following table:
| Nonvested Shares             | ** ** | **Number of  Shares** | ** ** | **Weighted Average   Grant Date Fair   Value Per Share** | ** ** |
|-----------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Nonvested at  beginning of period |       | 173,200                    |       | $                                                                                           | 18.38      |   |
| Granted during  period            |       | —                     |       | $                                                                                           | —     |   |
| Vested during  period             |       | (1,500                     | )          | $                                                                                           | 23.11      |   |
| Forfeited during  period          |       | (3,000                     | )          | $                                                                                           | 16.03      |   |
| Nonvested at end of  period       |       | 168,700                    |       | $                                                                                           | 18.38      |   |

 

As ofMarch 31, 2006, total unrecognized compensation cost related to the non-vestedrestricted shares granted pursuant to the Plan was $2.3 million. The Companyexpects that the total unrecognized cost will be recognized over a weighted-averageperiod of 1.2 years.

During2005 the Company granted stock-based performance bonuses under the Plan,related to certain budget targets and completion date targets for the SanCristobal Project. The following table summarizes the stock-based performancebonus plan at March 31, 2006 and changes during the first three months of 2006:
| Nonvested Shares             | ** ** | **Number of  Shares** | ** ** | **Weighted Average   Grant Date Fair   Value Per Share** | ** ** |
|-----------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Nonvested at  beginning of period |       | 32,000                     |       | $                                                                                           | 15.41      |   |
| Granted during  period            |       | —                     |       | $                                                                                           | —     |   |
| Vested during  period             |       | —                     |       | $                                                                                           | —     |   |
| Forfeited during  period          |       | (6,000                     | )          | $                                                                                           | 16.25      |   |
| Nonvested at end of  period       |       | 26,000                     |       | $                                                                                           | 15.21      |   |

 

As ofMarch 31, 2006, total unrecognized compensation cost related to the non-vestedperformance bonuses granted pursuant to the Plan was $0.2 million. The Companyexpects that the total unrecognized cost will be recognized over aweighted-average period of 1.3 years.

Totalcompensation costs recognized for all stock-based employee compensation awards,including amounts capitalized, were $0.7 million and $0.6 million for the threemonths ended March 31, 2006 and 2005, respectively.

**11.****       Commitments andContingencies**

*Letters of Credit* – At March31, 2006, the Company had outstandingirrevocable standby letters of credit related to the San Cristobal Project inthe aggregate amount of $21.7 million. The letters of credit include$18.6 million associated with the rail contract to transport metal concentratesto the port facilities, $2.0 million associated with the constructionmanagement contract and $1.1 million associated with the

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power line construction.At March 31, 2006 the Company had deposited $20.6 million to collateralizecertain of the letters of credit and has recorded that amount to restrictedcash. Per the terms of the letters of credit the required amounts may bereduced from time to time depending on certain circumstances.

*Escrow Amounts*– At March 31,2006 the Company had placed $6.8 million in an escrow account to collateralizeits discretionary metals trading program. In addition, the Company has placed$4.0 million in an escrow account to provide for certain requirements relatedto the development of the port facility for the San Cristobal Project. At March31, 2006 the $8.2 million in these two escrow accounts was recorded asrestricted cash.

*Project Financing* – Per theterms and conditions of the San Cristobal Project finance facility the Companywas required to deposit cash and investments in a fund the use of which isrestricted to the development of the San Cristobal Project. At March 31, 2006the remaining balance in the account was $176.1 million which was recorded torestricted cash and restricted investments. In addition, per the terms of theproject finance facility the Company has placed $70.4 million of investments inan account to provide over-run funding for the San Cristobal project ifnecessary. At March 31, 2006 the amounts were recorded to restricted cash andrestricted investments and will be released upon certain project completion requirementsbeing met or to fund over-runs should they occur.

*Capital Commitments* – TheCompany has entered into agreements with certain service providers and placedorders for certain long-lead equipment and construction materials for its SanCristobal project resulting in open commitments totaling approximately $118.3million at March 31, 2006. If the Company had cancelled all of these agreementsor orders at March 31, 2006, it would have incurred cancellation fees totalingapproximately $21.4 million.

*Taxes*– The Company isreceiving certain tax and duty benefits on a portion of the equipment it isimporting for its San Cristobal Project. The benefits are contingent uponfulfilling certain expenditure commitments within a specified period of timeand returning certain equipment off shore within a specified period of time.Failing to comply with these commitments would obligate the Company to refundall or a portion of the benefits received.

*Other Contingencies*– TheCompany reported in its 10-K filing for the period ended December 31, 2005 thatit had concluded an internal investigation regarding impermissible paymentsmade to government official by several senior employees of one of its SouthAmerican subsidiaries during 2003 and 2004. The Company reported at that timethat the SEC had commenced an investigation with respect to these mattersincluding possible violations of the Foreign Corrupt Practices Act. We arecooperating fully with the SEC investigation and will cooperate with anyinvestigation by the U. S. Department of Justice. We cannot predict with anycertainty at this time the final outcome of any investigations that may takeplace including any fines or penalties that may be imposed.

**12.****       Foreign Currency**

Losses on foreign currency derivatives and translation consist of thefollowing:
|                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                          | ** ** |
| Loss on Euro  derivatives                                                          |       | $                                                | —     |   | $ | (618 | ) |
| Gain on  re-measurment of monetary   assets denominated in other that   US dollars |       | $                                                | 113        |   | $ | — |   |
| Total                                                                              |       | $                                                | 113        |   | $ | (618 | ) |

 

The re-measurement of monetary assets is related to certain taxesreceivable and other accounts denominated in Bolivianos.

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The loss on the Euro derivatives during 2005 is related to the markingto market of open Euro derivative positions held by the Company related tocertain capital equipment being purchased for San Cristobal in which the pricewas denominated in Euros. The Company held no such derivative positions atMarch 31, 2006.

**13.****       Supplemental cash flowinformation**

Thefollowing table sets forth supplemental cash flow information and non-cashtransactions:
|                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2006  RESTATED**                               | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                          | ** ** |
| **Supplemental  disclosure:**                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest paid                                          |       | $                                                | 5,477      |   | $ | 5,208 |   |
|                                                   |       |                                             |       |   |   |
| **Supplemental  disclosure of non-cash transactions:** | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Depreciation expense capitalized                       |       | $                                                | 1,145      |   | $ | 143 |   |
| Interest expense capitalized                           |       | $                                                | 4,296      |   | $ | 1,104 |   |
| Accrued interest capitalized                           |       | $                                                | 483        |   | $ | 201 |   |
| Stock issued as compensation to consultants            |       | $                                                | 45         |   | $ | 63 |   |
| Mark-to-market loss on derivatives                     |       | $                                                | 172,818    |   | $ | 374 |   |
| Accrued property plant & equipment                 |       | $                                                | (10,721    | ) | $ | 17,876 |   |
| Capitalized leases                                     |       | $                                                | 1,270      |   | $ | — |   |
| Stock issued to  purchase debt                         |       | $                                                | 17,125     |   | $ | — |   |

 

During the first quarter 2006 the Company had entered into certaincapital leases that resulted in non-cash increases to property, plant andequipment and long term debt of $1.3 million.

**14.****       Subsequent Events**

During April 2006 the Company completed the registeredoffering of 6,375,000 of its Ordinary Shares at $24.45 per share ($23.70 pershare net of commissions) pursuant to its shelf registration statement. TheCompany intends to use the net proceeds of approximately $151.1 million tocontinue further evaluation, exploration, advancement and expansion of itsportfolio of exploration properties and for other general corporate purposes.

DuringApril 2006 the Company borrowed an additional $20 million against the $225million project finance facility, bringing to $60 million the total borrowingsagainst the facility. The funds are restricted to the development of the SanCristobal Project.

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**Item 2:****           Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

**General**

The following discussionand analysis summarizes the results of operations of Apex Silver Mines Limited(“Apex Silver” or “we”) for the three month period ended March 31, 2006 andchanges in our financial condition from December 31, 2005. This discussionshould be read in conjunction with the Management’s Discussion and Analysisincluded in our Annual Report onForm 10-K for the period ended December 31, 2005.

Apex Silver is a miningexploration and development company that holds a portfolio of exploration anddevelopment properties primarily in South America and Central America. Wecurrently focus our resources primarily on the development of our San CristobalProject in Bolivia. At present, none of our properties are in production and,consequently, we have no current operating income.

**Overview**

During the first quarterof 2006 we continued to make significant progress on the construction of ourSan Cristobal Project in Bolivia with expenditures of approximately $76 millionon equipment procurement, plant construction, infrastructure development,engineering and other costs. Significant progress was made on construction ofthe primary crusher and the associated conveyor system, the installation ofmills, concrete work and power line construction during the quarter. At March31, 2006 the project was estimated to be approximately 54% completed and iscontinuing to track within budget and on time. We anticipate commencement ofproduction at the project in the third quarter of 2007.

We began mining oxideores at the San Cristobal Project during the first quarter 2006. At March 31,2006 we had stockpiled approximately 700,000 tonnes of work-in-process oreinventories recorded at a cost of $3.6 million. Work-in-process inventoriesinclude ore produced and stockpiled for which further processing is necessarybefore a product is ready for sale. We are scheduled to begin processingwork-in-process ore inventories to a salable product during the third quarterof 2007.

During the quarter endedMarch 31, 2006 we issued approximately 1.1 million Ordinary Shares valued at$17.1 million and $0.3 million of cash for unpaid interest to complete thepurchase of $20.0 million principal amount of our 4.0% Convertible SeniorSubordinated Notes due 2024 in a privately negotiated exchange transaction. Thetransaction resulted in the recognition of a $2.9 million gain onextinguishment of debt. The Company canceled the notes purchased in thetransaction.

During the first quarter of 2006 we initiatedborrowing under the $225 million San Cristobal project finance facility that weclosed during December 2005. At March 31, 2006 we had borrowed $40.0 millionunder the facility. During April 2006 we borrowed an additional $20 millionagainst the facility, bringing to $60 million the total borrowings against thefacility.

During April 2006we completed the sale of 6,375,000 of our Ordinary Shares at $24.45 per share($23.70 per share net of commissions). We intend to use the net proceeds ofapproximately $151.1 million to continue further evaluation, exploration,advancement and expansion of our portfolio of exploration properties and forother general corporate purposes. With this additional available funding we areformulating plans to accelerate the evaluation of our current explorationportfolio and the expansion of new exploration opportunities.

During the quarter ended March 31, 2006 we recorded mark-to-marketlosses related to our metals derivative open positions in the amount of $172.8 million.The open metals positions are primarily related to the project finance facilityrequirement to provide price protection for a portion of our planned productionof metals from San Cristobal. In addition, the Company continues to makelimited investments in shorter duration put and call options and other metalsderivatives not required by the project financing. The recent increases in thespot and forward prices for silver, zinc and lead resulted in themark-to-market loss for the quarter. The loss did not have a material impact onour cash flows or cash position for the period. Further, while the finalfinancial impact of the required price protection program will not be knownuntil the positions are closed on their future settlement dates, we do notintend to settle the open positions with cash prior to the settlement datesbeginning in 2007. At 

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the time of finalsettlement, the gain or loss recorded will exclude previously recognizedmark-to-market gains or losses. In addition, should the increased metals priceprojections used to calculate the mark-to-market loss continue into theproduction phase of the San Cristobal Project, the increased revenue from salesof unhedged metals would generate a significant benefit to future earnings andcash flows. During the periods that the metal derivative positions areoutstanding, gains and losses may fluctuate substantially from period to periodin accordance with Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“FAS 133”), based on spotprices, forward prices and quoted option volatilities. If current spot pricescontinue into future periods that include the settlement dates of the Company’sopen derivative positions, the Company will report further mark-to-marketlosses in subsequent periods. 

At March 31, 2006 we have open contractual commitments of approximately$118.3 million related to contractor agreements and material and equipmentorders associated with the construction of our San Cristobal Project. Duringthe remainder of the year we expect to spend approximately $240 million on theabove commitments as well as on other San Cristobal Project construction anddevelopment. In addition, for the remainder of the year we expect to spendapproximately $10 million on general corporate costs and we will be required tomake interest payments of approximately $4 million on our outstanding debt. Ourcurrent plans call for expenditures of approximately $7 million on explorationefforts for the remainder of the year. However, with the additional availablefunding from the sale of Ordinary Shares discussed above, we are formulatingplans to accelerate the evaluation of our current exploration portfolio and theexpansion of new exploration opportunities which will likely increase thecurrent estimate.

With the installation of the new governmentin Bolivia we continue to monitor the political uncertainties that may affectour San Cristobal Project. Newly elected Bolivian President Evo Morales whotook office in January 2006 has issued a decree nationalizing the country’shydrocarbon industry. To date, there have been no formal proposals by theBolivian government to nationalize the mining industry but it is possible thatthe government may alter its current policies with respect to the miningindustry in the future.

**Resultsof Operations – Three Months Ended March 31, 2006**

*Exploration.*Explorationexpense was $1.5 million for the first quarter 2006 compared to $1.3 millionfor the first quarter 2005. Exploration expense is incurred primarily inBolivia, Peru, Argentina and Mexico with additional expenditures in Argentina duringthe first quarter of 2006.

*Administrative.*Administrativeexpense was $5.3 million for the first quarter 2006, compared to $3.9 millionfor the first quarter of 2005. The increase in administrative expense during2006 is primarily the result of additional personnel and related indirectsupport costs associated with the advancement of our San Cristobal Project andcertain legal fees and other costs associated with the investigation of apossible violation of the Foreign Corrupt Practices Act as previously reported.

*Gains and Losses - CommodityDerivatives*. For the quarter ended March 31, 2006 we recordedmark-to-market losses related to our metals derivative open positions in theamount of $172.8 million compared to a mark-to-market loss of $0.4 million onour open positions for the quarter ended March 31, 2005. The 2006 loss is theresult of the mark-to-market valuation of our open metals positions at March31, 2006 primarily related to the project finance facility requirement toprovide price protection for a portion of our planned production of metals fromSan Cristobal. The recent increases in the spot and forward prices for silver,zinc and lead resulted in the $172.8 million mark-to-market loss for the year.The loss did not have a material impact on our cash flows or cash position forthe period. Our open metals derivative position for the quarter ended March 31,2005 was substantially smaller prior to the lending requirements as reflectedin the smaller non-cash mark-to-market loss. (See “Overview” for additionaldiscussion of the first quarter 2006 mark-to-market derivative loss) 

*Interest and other income.*Interest and other income was $2.9 million for the first quarter 2006 comparedto $3.4 million recorded during the first quarter 2005. The 2006 decrease isprimarily the result of less interest earned because of lower average aggregatecash, cash equivalent and investment balances held during 2006 as compared tothe same period of 2005. The lower average aggregate cash, cash equivalent andinvestment balances are primarily the result of the investment we made over theyear in the

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development of our SanCristobal Project. Interest and other income for the first quarter 2006includes a $0.4 million loss on certain held to maturity investments that wereliquidated prior to their maturity dates as a requirement of the projectfinancing facility.

*Interest expense and otherborrowing costs.*Interest and other borrowing costs were $0.5and $2.0 million, net of approximately $4.3 and $0.7 million capitalized, forthe first quarter of 2006 and 2005, respectively. The 2006 interest expenseincludes a $0.5 million write off of deferred issuance costs related to theextinguishment of debt. The interest expense for 2006 is primarily related tothe Convertible Senior Subordinated Notes Due 2004 and the project financefacility while the 2005 interest expense is primarily related to theConvertible Senior Subordinated Notes Due 2004.

*IncomeTaxes*. For the quarter ended March 31, 2006 we recordedapproximately $0.1 million of income tax expense related to withholding taxeson certain services we provided to one of our Bolivian subsidiaries. No suchtaxes were incurred during the quarter ended March 31, 2005.

**Liquidity and Capital Resources**

AtMarch 31, 2006 our aggregate cash, restricted cash, short and long terminvestments and restricted investments totaled $304.3 million compared to anaggregate of $351.9 million in cash, restricted cash, short and long terminvestments and restricted investments at December 31, 2005. The amounts heldat March 31, 2006 include $9.3 million in cash and cash equivalents, $1.1million in short term investments, $46.6 million of cash that has beenrestricted to collateralize outstanding letters of credit, the discretionarymetals hedge position and certain obligations related to the project finance facility and $247.2 million of short andlong term investments composed of $231.3 million that is restricted to funddevelopment and possible over runs at our San Cristobal Project and $15.9million that at maturity will provide the amounts necessary to pay interestthrough September 2007 on the 4.0% Convertible Senior Subordinated Notes Due2024.

Asof March 31, 2006, we had cash and cash equivalents of $9.3 million, comparedto $4.8 million at December 31, 2005. The increase in our cash balance at March31, 2006 is the result of a net decrease in restricted cash of $88.6 million,$40.0 million of borrowings against the project finance facility,$5.7 million of net proceeds from the sale of Ordinary Shares to fund thepower line construction and $1.4 million of proceeds from employee stockoptions exercised, all partially offset by $76.1 million invested in property,plant and equipment related to the development of the San Cristobal Project,$12.1 million used to fund operations, property holding costs andadministrative costs, net of interest and other income, the net purchase of$35.5 million of investments, $3.2 million of net premiums paid to acquirederivatives related to our hedge position, $3.4 million paid to suppliers andcontractors related to our San Cristobal Project, $0.2 million paid to thebanks related to the credit facility and payments on long term debt (capitallease payments) of $0.6 million.

Our estimate for thetotal amount of project funding required for the San Cristobal Project fromJanuary 1, 2004 through the beginning of production in 2007 isapproximately $600 million. This amount includes all estimated costs requiredto commence production at San Cristobal, including all engineering, procurementand construction costs, as well as estimates for constant-dollar escalation andcontingencies. The estimate excludes $22 million advanced through the issuanceof Ordinary Shares to the company constructing the power line, $6 million advancedto or escrowed for the company constructing the port facilities and $27 millionof working capital. Advances to the power line and port facility providers areexpected to be recouped through credits applied against payments for thecontracted services. Including the power line and port advances, we spentapproximately $206 million on the Project during 2004 and 2005 and $76 millionduring the first quarter 2006. In addition to the amounts above, we expect toincur interest and other financing costs related to the project financefacility of approximately $30 million.

During April 2006 we completed the sale of 6,375,000 of our OrdinaryShares at $24.45 per share ($23.70 per share net of commissions). We intend touse the net proceeds of approximately $151.1 million to continue furtherevaluation, exploration, advancement and expansion of our portfolio ofexploration properties and for other general corporate purposes.

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For theremaining nine months of 2006, we expect to spend about $240 million on the SanCristobal Project including the purchase of equipment, construction materials,payments to contractors and other development costs already accrued or to beincurred during the year. Funds for this purpose will be provided byliquidating a portion of our restricted investments set aside for this purposeand drawing on additional funds from the project financing. In addition, forthe remaining nine months of 2006 we expect to spend approximately $10 millionon general corporate costs and approximately $4 million on interest payments.Our current plans call for expenditures of approximately $7 million onexploration efforts for the remainder of the year. With the additional availablefunding from the sale of Ordinary Shares discussed above, we are formulatingplans to accelerate the evaluation of our current exploration portfolio and theexpansion of new exploration opportunities that will likely increase our 2006exploration expenditures. We plan to fund these project, operating andfinancing cash expenditures from our existing cash and investment balances andfrom interest and other income.

**Significant Accounting Policies**

During 2006 we haveadopted and/or implemented the following new accounting policies:

Effective January 1, 2006 the Company adopted Financial AccountingStandards No. 123R, “Share-Based Payment” (“FAS No. 123R”), using the modifiedprospective approach, which revised Statement of Financial Accounting StandardsNo. 123 “Accounting for Stock-Based Compensation” (“FAS No. 123”), andsuperseded APB Opinion 25, “Accounting for Stock Issued to Employees” and itsrelated implementation guidance. The Company is currently evaluating whether itwill adopt the short-cut method for calculating the pool of windfall taxbenefits as allowed by Financial Accounting Standards Board (“FASB”) Statementof Position FAS No. 123R-3. The Company had previously adopted FAS No. 123effective January 1, 2004. FAS No. 123R requires measurement and recording inthe financial statements of the costs of employee services received in exchangefor an award of equity instruments based on the grant-date fair value of theaward, recognized over the period during which an employee is required to provideservices in exchange for such award. Additionally, FAS No. 123R requirescompanies that did not previously include the effects of estimated forfeituresin the FAS No. 123 expenses they reported, to record a cumulative adjustment tothe income statements presented in the period of adoption of FAS No. 123R inorder to reflect the effect of the estimated forfeitures. The forfeiture rateused by the Company prior and subsequent to the adoption of FAS No. 123R hasnot changed and, therefore, the Company did not record a cumulative effectadjustment related to prior period estimated forfeitures. The adoption of FASNo. 123R did not have a material impact on the Company’s financial position orresults of operations and is not expected to have a material impact in thefuture (see Note 10).

During 2004, a committee of the Emerging Issues Task Force (“EITF”)began discussing the accounting treatment for stripping costs incurred duringthe production phase of a mine. During March 2005, the EITF reached a consensusthat stripping costs incurred during the production phase of a mine arevariable production costs that should be included in the costs of inventoryproduced during the period that the stripping costs are incurred. The FASBratified the EITF consensus. The EITF consensus is effective for the firstreporting period in fiscal years beginning after December 15, 2005. In January2006, the EITF issued additional guidance defining the commencement ofproduction as the period when saleable minerals are first extracted in greaterthan *de minimis* amounts. In February 2006,the company began mining significant amounts of oxide ore reserves at its SanCristobal project, which have been placed in stockpiles for future processing.The quantity and value of the minerals mined were sufficient to declare thestart of production according to the EITF consensus. The Company has includedthe costs associated with the oxide ore production as long term inventory onits financial statements. The Company expects the mining of significant amountsof oxide material to continue throughout the year, with the commencement ofsulfide ore mining in the second half of the year.

**New and Recent Accounting Developments**

At a meeting held in March, 2006 the EITF reached a tentative consensuson EITF Issue No. 05-1 that the issuance of equity securities to settle aninstrument that becomes convertible upon the issuer’s exercise of a call optionshould be accounted for as a conversion (as opposed to an extinguishment) if,at issuance, the debt instrument contains a substantive conversion featureother than the issuer’s call option. The EITF concluded that if an instrumentis deemed convertible at issuance, then a subsequent conversion of theinstrument is in accordance with a “conversion privilege that existed atissuance” and is, therefore, outside the scope of APB Opinion No. 26, EarlyExtinguishment of Debt. Therefore, the issuance of shares to

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settle the debt pursuantto the original terms of the instrument should be afforded conversion treatment.If the instrument does not contain a substantive conversion feature atissuance, then the issuance of equity securities to settle the instrumentshould be recognized as a debt extinguishment. EITF Issue No. 05-1 will becomeeffective following its anticipated ratification scheduled for June 2006. TheCompany has previously accounted for two transactions involving the buy-back ofits convertible debt as an extinguishment under APB Opinion No. 26.Ratification of EITF Issue No. 05-1 would require similar transactions to beaccounted for prospectively as a conversion.

Effective for years beginning after December 15, 2005 the Company hasadopted Financial Accounting Standards No. 154, “Accounting Changes and ErrorCorrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“FASNo. 154”). FAS No. 154 changes the requirements for the accounting andreporting of a change in accounting principle. The statement applies tovoluntary changes as well as changes required by accounting pronouncementswhich do not otherwise provide specific transition provisions, requiringretrospective application to prior period’s financial statements where notimpractical. FAS No. 154 did not have a material impact on the Company’sfinancial position or results of operations for the period and is not expectedto have a material impact in the future.

## **Contractual Obligations**

We have entered into agreements with certain service providers andplaced orders for certain equipment and construction materials for our San CristobalProject resulting in commitments totaling approximately $118.3 million at March31, 2006. If we had cancelled all of these agreements or orders at March 31,2006, we would have incurred cancellation fees totaling approximately $21.4million.

## **Forward-Looking Statements**

Some information contained in or incorporated by reference into thisreport may contain forward-looking statements. These statements includecomments regarding San Cristobal development and construction plans, capitaland other costs, funding and timing; the timing of completion of San Cristobalconstruction, start-up and commencement of operations; spending during 2006;the likely increased volatility in future earnings due to forward sales,derivative positions and metals trading activity; and the timing and amounts ofspending on the evaluation and expansion of our exploration portfolio. The useof any of the words “anticipate,” “continues,” “estimate,” “expect,” “may,” “will,”“project,” “should,” “believe” and similar expressions are intended to identifyuncertainties. We believe the expectations reflected in those forward-lookingstatements are reasonable. However, we cannot assure that these expectationswill prove to be correct. Actual results could differ materially from those anticipatedin these forward-looking statements as a result of the factors set forth belowand other factors set forth in, or incorporated by reference into this report:

·                  worldwideeconomic and political events affecting the supply of and demand for silver, zincand lead;

·                  political unrestand economic instability in Bolivia including the communities located near theSan Cristobal Project and other countries in which we conduct business;

·                  future actionsof the Bolivian government with respect to nationalization of gas and othernatural resources;

·                  Changes in themining policies of the Bolivian government;

·                  volatility inmarket prices for silver, zinc and lead;

·                  financial marketconditions;

·                  uncertaintiesassociated with developing a new mine, including potential cost overruns andthe unreliability of production and cost estimates in early stages of minedevelopment;

·                  variations inore grade and other characteristics affecting mining, crushing, milling andsmelting operations and mineral recoveries;

·                  geological,technical, permitting, mining and processing problems;

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·                  theavailability, terms, conditions and timing of required government permits andapprovals;

·                  uncertaintiesregarding future changes in applicable law or implementation of existing law,including Bolivian laws related to tax, mining, environmental matters andexploration; and

·                  the factorsdiscussed under “Risk Factors” in our Form 10-K for the period ended December31, 2005.

Many of those factors are beyond our ability tocontrol or predict. You should not unduly rely on these forward-lookingstatements. These statements speak only as of the date of this report on Form10-Q. Except as required by law, we are not obligated to publicly release anyrevisions to these forward-looking statements to reflect future events ordevelopments.

## **Item 3.****    Quantitative and Qualitative Disclosures About Market Riskand Hedging Activities**

Currently our majorprincipal cash balances are held in U.S. dollars. We maintain minimum cashbalances in foreign currencies and therefore have a relatively low exposure tocurrency fluctuations. We have previously engaged in a limited amount ofcurrency hedging activities primarily related to an equipment order for our SanCristobal Project that was denominated in Euros. In addition, because weconduct our activities mainly in Bolivia, as well as in several other foreigncountries, we may in the future engage in hedging activities to minimize therisk of exposure to currency and interest rate fluctuations.

We manage the timing ofthe cash required to construct the San Cristobal Project, to fund generalcorporate costs, exploration and other funding requirements and invest fundsnot immediately required in investments with varying maturities. Our policy isto invest only in government and corporate securities rated “investment grade”or better.

To complete the projectfinancing for San Cristobal, we were required to hedge a portion of our plannedproduction from San Cristobal. In addition, when San Cristobal entersproduction, we may sell forward a portion of our production and use pricehedging techniques to mitigate some of the risks associated with fluctuatingmetals prices. We recorded a non-cash mark-to-market trading loss for the threemonths ended March 31, 2006 of approximately $172.8 million. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Results of Operations.” 

# **Item 4.Controls and Procedures**

(a)   Background to the restatement

During the first quarterof 2007, we determined that the method used in the periods ended September 30,2005 through September 30, 2006 to estimate the fair value of our open metalsderivative positions was not appropriate. This resulted in a restatement of the Company’s 2005 annual consolidatedfinancial statements; interim consolidated financial statements for the quarterended September 30, 2005 and for each of the first three quarters of 2006; andan audit adjustment to the Company’s 2006 annual consolidated financialstatements.

See explanatory note andNote 2 to the consolidated financial statements included with this QuarterlyReport on Form 10-Q/A for the period ended March 31, 2006, for a discussion andsummary of the impact of the restatement on the previously issued financial statements.

(b)   Disclosure Controls and Procedures

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in the reports we file or submit under the Securities andExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to Apex Silver’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure.

In connection with theoriginal filing of report 10-Q for the period ended March 31, 2006, under thesupervision and with the participation of our Disclosure Committee andmanagement (including the Chief Executive Officer and Chief Financial Officer)we carried out an evaluation of the effectiveness and design and operation ofour disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e)under the Securities Exchange Act of 1934. Based upon this evaluation, theChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of the end of the periodcovered by this report.

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Subsequent to theevaluation made in connection with the filing of the original Form 10-Q and inconnection with the restatement discussed above in the explanatory note to thisForm 10-Q/A, our management, with the participation of our DisclosureCommittee, Chief Executive Officer and Chief Financial Officer, reevaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of March 31, 2006. Based upon this evaluation and subject to theforegoing, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were not effective because ofmaterial weaknesses.  For a discussion ofthe material weaknesses, see Item 9A of our annual report on Form 10-K for theyear ended December 31, 2006. Based upon the substantial work performed duringthe restatement process, management has concluded that the Company’s unauditedconsolidated financial statements for the periods covered by and included inthis Quarterly Report on Form 10-Q/A are fairly stated in all material respects.

(c)   Change in Internal Control over FinancialReporting

Apex Silver’s managementis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) under the Securities ExchangeAct of 1934. Our internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles (GAAP). Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance withpolicies and procedures may deteriorate.

In connection with thefiling of the original Form 10-Q for the period ended March 31, 2006, managementconcluded that there were no changes in the Company’s internal control overfinancial reporting during the fiscal quarter ended September 30, 2006, thathad materially affected, or were reasonably likely to materially affect, theCompany’s internal control over financial reporting.

Subsequent to the filingof the original Form 10-Q and as a result of the evaluation made in connectionwith the restatement discussed above in the explanatory note to this Form10-Q/A, management has concluded that the material weaknesses described in Item9A of our annual report on Form 10-K, for the year ended December 31, 2006,existed at March 31, 2006.

For a furtherdiscussion on the material weaknesses and the actions we are planning to taketo remediate the material weaknesses, see Item 9A of our annual report on Form10-K for the year ended December 31, 2006.

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**PART II: OTHER INFORMATION**

**Item 6.****    Exhibits**
| 10.1 |   | Underwriting agreement  with Harris Nesbitt Corp. dated April 6, 2006*                                                                     |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 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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* Previously filed withthe Form 10-Q filed on May 9, 2006. 

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report on Form 10-Q/A to be signed on behalf of theundersigned thereunto duly authorized. 

 
|   | APEX SILVER MINES  LIMITED |
|--------|----------------------------|
|   |                       |
|   |                       |
| Date:  | May 2, 2007           | By: | \s\ Jeffrey G.  Clevenger |   |
|   |                       |   | Jeffrey G. Clevenger |
|   |                       |   | President and Chief  Executive Officer |
|   |                       |   |
|   |                       |   |
| Date:  | May 2, 2007           | By: | \s\ Gerald J. Malys |   |
|   |                       |   | Gerald J. Malys |
|   |                       |   | Senior Vice President  and Chief Financial Officer |

 

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