**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

##### **FORM 10-Q**

**(MARK ONE)**
| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES**                                                                                                                                                     |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **EXCHANGE ACT OF 1934**                                                                                                                                                                                                    |
| ** ** | ** **                                                                                                                                                                                                                  |
| ** ** | **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007.**                                                                                                                                                                           |
| ** ** | ** **                                                                                                                                                                                                                  |
| ** ** | **OR**                                                                                                                                                                                                                      |
| ** ** | ** **                                                                                                                                                                                                                  |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                               |
| ** ** | ** **                                                                                                                                                                                                                  |
| ** ** | **FOR THE  TRANSITION PERIOD  FROM               TO               .** |

 

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

 

**(345)949-0050**(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

LARGE ACCELERATEDFILER x  ACCELERATED FILER o  NON-ACCELERATED FILER o

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

AT AUGUST 9, 2007, 58,625,725 ORDINARY SHARES, $0.01PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.

 

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APEX SILVER MINESLIMITEDFORM 10-QQUARTER ENDED JUNE 30, 2007

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

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1.    Financial Statements**

# **APEXSILVER MINES LIMITED**

**AnExploration and Development Stage Company**

# **CONSOLIDATEDBALANCE SHEETS**

**(Expressedin United States dollars)**

**(Unaudited)**
| ** **                                                                                                                                   | ** ** | **June 30,**                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2007**                                                  | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                   | ** ** | **(in thousands, except share data)** | ** ** |
| **Assets**                                                                                                                                   | ** ** | ** **                                                | ** ** | ** **            | ** ** |
| Current assets                                                                                                                               |       |                                                      |       |                  |       |
| Cash and cash equivalents                                                                                                                    |       | $                                                         | 151,156    |                  | $          | 49,840 |   |
| Restricted cash                                                                                                                              |       | 23,512                                                    |       | 31,942                |       |
| Investments                                                                                                                                  |       | 192,985                                                   |       | 325,536               |       |
| Restricted investments                                                                                                                       |       | 18,138                                                    |       | 65,343                |       |
| Ore inventories                                                                                                                              |       | 9,402                                                     |       | 3,183                 |       |
| Material and supply inventories                                                                                                              |       | 3,289                                                     |       | 3,149                 |       |
| Prepaid expenses and other assets                                                                                                            |       | 6,988                                                     |       | 9,984                 |       |
| Total current assets                                                                                                                         |       | 405,470                                                   |       | 488,977               |       |
|                                                                                                                                         |       |                                                      |       |                  |       |
| Property, plant  and equipment, net                                                                                                          |       | 822,649                                                   |       | 641,758               |       |
| Ore inventories                                                                                                                              |       | 41,938                                                    |       | 21,341                |       |
| Deferred  financing costs                                                                                                                    |       | 17,003                                                    |       | 19,485                |       |
| Value added tax  recoverable                                                                                                                 |       | 73,383                                                    |       | 54,158                |       |
| Investments                                                                                                                                  |       | 17,005                                                    |       | 42,255                |       |
| Deferred tax  asset                                                                                                                          |       | 1,596                                                     |       | —                |       |
| Other                                                                                                                                        |       | 5,958                                                     |       | 2,122                 |       |
| Total assets                                                                                                                                 |       | $                                                         | 1,385,002  |                  | $          | 1,270,096 |   |
|                                                                                                                                         |       |                                                      |       |                  |       |
| **Liabilities and Shareholders’ Deficit**                                                                                               | ** ** | ** **                                                | ** ** | ** **            | ** ** |
|                                                                                                                                         |       |                                                      |       |                  |       |
| Current liabilities                                                                                                                          |       |                                                      |       |                  |       |
| Accounts payable and other accrued liabilities                                                                                               |       | $                                                         | 44,601     |                  | $          | 47,979 |   |
| Accrued interest payable                                                                                                                     |       | 3,645                                                     |       | 3,405                 |       |
| Derivatives at fair value                                                                                                                    |       | 203,388                                                   |       | 39,080                |       |
| Current portion of long term debt                                                                                                            |       | 8,024                                                     |       | 4,408                 |       |
| Total current liabilities                                                                                                                    |       | 259,658                                                   |       | 94,872                |       |
| Long term debt                                                                                                                               |       | 575,734                                                   |       | 492,195               |       |
| Derivatives at  fair value                                                                                                                   |       | 672,150                                                   |       | 779,118               |       |
| Deferred gain on  sale of asset                                                                                                              |       | 945                                                       |       | 1,400                 |       |
| Uncertain tax  positions                                                                                                                     |       | 1,596                                                     |       | —                |       |
| Asset retirement  obligation                                                                                                                 |       | 6,350                                                     |       | 5,761                 |       |
| Total liabilities                                                                                                                            |       | 1,516,433                                                 |       | 1,373,346             |       |
| Minority  interest in consolidated subsidiaries                                                                                              |       | 532                                                       |       | 40                    |       |
| Commitments and  contingencies (Note 14)                                                                                                     |       |                                                      |       |                  |       |
|                                                                                                                                         |       |                                                      |       |                  |       |
| Shareholders’  deficit                                                                                                                  |       |                                                      |       |                  |       |
| Ordinary Shares, $.01 par value, 175,000,000 shares authorized;  58,702,075 and 58,577,700 shares issued and outstanding at respective dates |       | 587                                                       |       | 586                   |       |
| Additional paid in capital                                                                                                                   |       | 672,840                                                   |       | 669,487               |       |
| Accumulated deficit during development stage                                                                                                 |       | (805,205                                                  | )          | (773,339              | )          |
| Accumulated other comprehensive loss                                                                                                         |       | (185                                                      | )          | (24                   | )          |
| Total shareholders’ deficit                                                                                                             |       | (131,963                                                  | )          | (103,290              | )          |
| Total liabilities and shareholders’ deficit                                                                                             |       | $                                                         | 1,385,002  |                  | $          | 1,270,096 |   |

 

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

3

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**APEXSILVER MINES LIMITED**

**An Exploration and DevelopmentStage Company**

# **CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**

**(Expressed in United Statesdollars)**

**(Unaudited)**
| ** **                                                                | ** ** | **Three Months Ended**                          | ** ** | **Six Months Ended** | ** ** | **For the Period from  December 22, 1994  (inception)** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **June 30,**                                         | ** ** | **June 30,**              | ** ** | **through**                                                                      | ** ** |
| ** **                                                                | ** ** | **2007**                                                  | ** ** | **2006**                       | ** ** | **2007**                                                                         | ** ** | **2006** | ** ** | **June 30, 2007** | ** ** |
| ** **                                                                | ** ** | **(in thousands, except share data)** | ** ** |
| **Operating income and expenses:**                                        | ** ** | ** **                                                | ** ** | ** **                     | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Exploration                                                               |       | $                                                         | (3,635     | )                              | $          | (1,557                                                                           | )          | $ | (6,366 | ) | $ | (3,007 | ) | $ | (88,113 | ) |
| Administrative                                                            |       | (5,446                                                    | )          | (5,686                         | )          | (11,736                                                                          | )          | (10,999 | ) | (102,841 | ) |
| Loss on commodity  derivatives                                            |       | (165,647                                                  | )          | (78,143                        | )          | (57,341                                                                          | )          | (250,961 | ) | (923,009 | ) |
| Gain on foreign  currency derivatives and transactions                    |       | 1,236                                                     |       | 123                            |       | 2,220                                                                            |       | 236 |   | 3,833 |   |
| Asset retirement  accretion expense                                       |       | (146                                                      | )          | (94                            | )          | (285                                                                             | )          | (142 | ) | (691 | ) |
| Amortization and depreciation                                             |       | (76                                                       | )          | (101                           | )          | (190                                                                             | )          | (196 | ) | (1,989 | ) |
| Total operating  expenses                                                 |       | (173,714                                                  | )          | (85,458                        | )          | (73,698                                                                          | )          | (265,069 | ) | (1,112,810 | ) |
|                                                                      |       |                                                      |       |                           |       |                                                                             |       |   |   |   |   |
| **Other income and expenses:**                                            | ** ** | ** **                                                | ** ** | ** **                     | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and other  income                                                |       | 6,364                                                     |       | 5,264                          |       | 13,150                                                                           |       | 8,168 |   | 67,500 |   |
| Royalty income                                                            |       | 150                                                       |       | —                         |       | 444                                                                              |       | — |   | 2,063 |   |
| Gain on sale of  interest in subsidiary                                   |       | —                                                    |       | —                         |       | —                                                                           |       | — |   | 199,600 |   |
| Gain on extinguishment  of debt                                           |       | —                                                    |       | —                         |       | —                                                                           |       | 2,875 |   | 9,640 |   |
| Interest expense and  other borrowing costs (1)                           |       | —                                                    |       | (255                           | )          | —                                                                           |       | (774 | ) | (11,696 | ) |
| Total other income and  expenses                                          |       | 6,514                                                     |       | 5,009                          |       | 13,594                                                                           |       | 10,269 |   | 267,107 |   |
| Loss before minority  interest and income taxes                           |       | (167,200                                                  | )          | (80,449                        | )          | (60,104                                                                          | )          | (254,800 | ) | (845,703 | ) |
| Income taxes                                                              |       | (47                                                       | )          | (53                            | )          | (94                                                                              | )          | (107 | ) | (1,222 | ) |
| Minority interest in  (income) loss of consolidated subsidiaries          |       | 23,402                                                    |       | —                         |       | 28,332                                                                           |       | (7 | ) | 41,720 |   |
| Net loss                                                                  |       | $                                                         | (143,845   | )                              | $          | (80,502                                                                          | )          | $ | (31,866 | ) | $ | (254,914 | ) | $ | (805,205 | ) |
| Other comprehensive  income:                                              |       |                                                      |       |                           |       |                                                                             |       |   |   |   |   |
| Unrealized gain (loss)  on securities                                     |       | $                                                         | 71         |                           | $          | 77                                                                               |       | $ | (161 | ) | $ | 467 |   | $ | (428 | ) |
| Reclassification for  gain on securities included in net loss             |       | —                                                    |       | —                         |       | —                                                                           |       | 495 |   | 243 |   |
| Other comprehensive  income (loss)                                        |       | 71                                                        |       | 77                             |       | (161                                                                             | )          | 962 |   | (185 | ) |
| Comprehensive loss                                                        |       | $                                                         | (143,774   | )                              | $          | (80,425                                                                          | )          | $ | (32,027 | ) | $ | (253,952 | ) | $ | (805,390 | ) |
|                                                                      |       |                                                      |       |                           |       |                                                                             |       |   |   |   |   |
| **Net loss per Ordinary Share – basic**                              |       | $                                                         | (2.45      | )                              | $          | (1.40                                                                            | )          | $ | (0.54 | ) | $ | (4.68 | ) |   |   |
| **Weighted  average Ordinary Shares outstanding - basic and diluted (2)** |       | 58,651,952                                                |       | 57,551,214                     |       | 58,631,256                                                                       |       | 54,483,319 |   |   |   |

 

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(1)             Interest expense and other borrowing costs arenet of $12.5 million and $23.4 million capitalized for the three and six monthperiods ended June 30, 2007, respectively, and $6.4 million and $11.0 millionfor the three and six month periods ended June 30, 2006, respectively, and$59.1 million for the inception to date period ended June 30, 2007.

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

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

4

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**APEX SILVER MINES LIMITED**

**An Exploration and DevelopmentStage Company**

# **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Expressed in United Statesdollars)**

**(Unaudited)**
| ** **                                                                                                                   | ** ** | **Six Months Ended** | ** ** | **For the period from  December 22, 1994  (inception)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **June 30,**              | ** ** | **through**                                                                      | ** ** |
| ** **                                                                                                                   | ** ** | **2007**                       | ** ** | **2006**                                                                         | ** ** | **June 30, 2007** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands)**        | ** ** |
| Cash flows from operating activities:                                                                                        |       |                           |       |                                                                             |       |   |   |
| Net cash used in  operating activities                                                                                       |       | $                              | (44,413    | )                                                                                | $          | (33,780 | ) | $ | (223,475 | ) |
| Cash flows from investing activities:                                                                                        |       |                           |       |                                                                             |       |   |   |
| Purchase of available  for sale investments                                                                                  |       | (411,878                       | )          | (188,212                                                                         | )          | (2,232,390 | ) |
| Sale of available for  sale investments                                                                                      |       | 547,302                        |       | 126,388                                                                          |       | 1,936,096 |   |
| Purchase of  held-to-maturity investments                                                                                    |       | —                         |       | —                                                                           |       | (263,869 | ) |
| Maturities of  held-to-maturity investments                                                                                  |       | 5,000                          |       | 1,003                                                                            |       | 227,620 |   |
| Purchase of available  for sale restricted investments                                                                       |       | (32,150                        | )          | (226,080                                                                         | )          | (298,600 | ) |
| Sale of available for  sale restricted investments                                                                           |       | 93,700                         |       | 181,900                                                                          |       | 373,935 |   |
| Purchase of  held-to-maturity restricted investments                                                                         |       | —                         |       | (46,862                                                                          | )          | (49,877 | ) |
| Maturity of  held-to-maturity restricted investments                                                                         |       | 2,800                          |       | 30,819                                                                           |       | 84,252 |   |
| Payment of derivative  premiums & settlements, net                                                                       |       | —                         |       | (32,219                                                                          | )          | (46,936 | ) |
| Advances for  construction of port facility                                                                                  |       | (4,000                         | )          | —                                                                           |       | (6,000 | ) |
| Advances to suppliers  and contractors                                                                                       |       | —                         |       | (4,089                                                                           | )          | — |   |
| Released from (transfer  to) restricted cash to collateralize credit facility, letters of credit and  interest payments, net |       | 8,430                          |       | 97,247                                                                           |       | (26,475 | ) |
| Proceeds from the sale  of interest in subsidiary                                                                            |       | —                         |       | —                                                                           |       | 224,000 |   |
| Payment of selling  costs related to sale of interest in subsidiary                                                          |       | —                         |       | —                                                                           |       | (6,384 | ) |
| Capitalized costs and  acquisitions of property, plant and equipment                                                         |       | (129,587                       | )          | (135,903                                                                         | )          | (693,316 | ) |
| Net cash provided by  (used in) investing activities                                                                         |       | $                              | 79,617     |                                                                             | $          | (196,008 | ) | $ | (777,944 | ) |
| Cash flows from financing activities:                                                                                        |       |                           |       |                                                                             |       |   |   |
| Proceeds from issuance  of Ordinary Shares                                                                                   |       | —                         |       | 156,795                                                                          |       | 580,357 |   |
| Proceeds from issuance  of convertible notes                                                                                 |       | —                         |       | —                                                                           |       | 339,987 |   |
| Payment of debt  issuance costs                                                                                              |       | —                         |       | (209                                                                             | )          | (24,992 | ) |
| Payments of notes  payable and long term debt                                                                                |       | (7,512                         | )          | (1,204                                                                           | )          | (12,964 | ) |
| Proceeds from note to  power line contractor                                                                                 |       | —                         |       | —                                                                           |       | 1,415 |   |
| Borrowings under  project finance facility                                                                                   |       | 45,000                         |       | 80,000                                                                           |       | 225,000 |   |
| Minority interest  contributions                                                                                             |       | 27,390                         |       | —                                                                           |       | 27,390 |   |
| Proceeds from exercise  of stock options and warrants                                                                        |       | 1,234                          |       | 1,449                                                                            |       | 16,382 |   |
| Net cash provided by  financing activities                                                                                   |       | $                              | 66,112     |                                                                             | $          | 236,831 |   | $ | 1,152,575 |   |
| Net  increase  in cash and cash equivalents                                                                             |       | 101,316                        |       | 7,043                                                                            |       | 151,156 |   |
| Cash and cash equivalents - beginning of period                                                                              |       | 49,840                         |       | 4,808                                                                            |       | — |   |
| Cash and cash  equivalents - end of period                                                                                   |       | $                              | 151,156    |                                                                             | $          | 11,851 |   | $ | 151,156 |   |

 

See Note 16 for supplemental cash flow information.

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

5

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**APEX SILVER MINES LIMITEDAn Exploration and Development Stage Company**

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

**(Expressedin United States dollars)**

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

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 omissionof certain information and footnote disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principlesin the United States of America, so long as such omissions do not render thefinancial statements misleading.  Certainprior period amounts have been reclassified to conform to the current periodpresentation.

In theopinion of management, these financial statements reflect all adjustments thatare necessary for a fair statement of the results for the periodspresented.  All adjustments were of anormal recurring nature.  These interimfinancial statements should be read in conjunction with the annual financialstatements of the Company included in its 2006 Annual Report on Form 10-K.

TheCompany is a mining exploration and development company that holds a portfolioof exploration and development properties primarily in South America andCentral America. The Company currently focuses its resources primarily on thedevelopment of its San Cristobal Project in Bolivia. At June 30, 2007, none ofthe Company’s properties were in production and, consequently, the Company doesnot have current operating income.

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

Effective January 1,2007, the Company adopted Financial Accounting Standards Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation ofFinancial Accounting Standards Statement No. 109, “Accounting for Income Taxes.”FIN 48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 requires that the Companyrecognize in its financial statements the impact of uncertain tax positions.FIN 48 also provides guidance on de-recognition, classification, interest and penalties,accounting in interim periods and disclosure. The adoption of FIN 48 did nothave a material impact on the Company’s financial position or results ofoperations (see Note 11).

*NewAccounting Standards*

During February 2007 theFinancial Accounting Standards Board (“FASB”) issued Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities-Including an amendment of FASB Statement No. 115” (“FAS No. 159”).FAS No. 159 permits entities to choose to measure many financial instrumentsand certain other items at fair value. Most of the provisions of FAS No. 159apply only to entities that elect the fair value option.  However, the amendment to FASB Statement No.115, “Accounting for Certain Investments in Debt and Equity Securities,”applies to all entities with available-for-sale and trading securities.  FAS No. 159 is effective as of the beginningof the first fiscal year that begins after November 15, 2007 (fiscal year 2008for the Company).  The Company does notexpect the adoption of FAS No. 159 to have a material impact on its financialposition or results of operations.

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

6

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fiscal years(fiscal year 2008 for the Company). The Company does not expect the adoption ofFAS No. 157 to have a material impact on its financial position or results ofoperations.

**3.****              Investments**

TheCompany considers all highly liquid investments with a maturity of three monthsor less when purchased to be cash equivalents. The Company accounts for its investments in auction rate securities (“ARS”)in accordance with Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” such that if theunderlying security of an ARS has a stated or contractual maturity date inexcess of 90 days, regardless of the frequency of the interest rate reset date,the security is classified as a current available-for-sale investment.Short-term investments include investments with maturities greater than threemonths, but not exceeding twelve months, and ARS.  Long-term investments include investmentswith maturities greater than twelve months.

TheCompany determines the appropriate classification of its investments in debtand equity securities at the time of purchase and re-evaluates classificationsat each balance sheet date. Debt securities are classified as held to maturitywhen the Company has the intent and ability to hold the securities tomaturity.  Held to maturity debtsecurities are stated at amortized cost and include government agency andcorporate obligations.  Available forsale investments are marked to market at each reporting period with changes invalue recorded as a component of other comprehensive income. If declines invalue are deemed other than temporary, a charge is made to net loss for theperiod.

The Company invests onlyin government and corporate securities rated “investment grade” or better. Thefollowing tables, based on quoted market prices, summarize the Company’sinvestments at June 30, 2007 and December 31, 2006:
| **June 30, 2007** | ** ** | **Cost**                | ** ** | **Fair Value** | ** ** | **Carrying  Value** | ** ** |
|-----------------------------|------------|-------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                  | ** ** | **(in Thousands)** | ** ** |
| Investments:                |       |                    |       |                |       |                |       |
| Short-term                  |       |                    |       |                |       |                |       |
| Available for sale          |       |                    |       |                |       |                |       |
| Auction rate securities     |       | $                       | 174,445    |                | $          | 174,281             |       | $ | 174,281 |   |
| Corporate notes             |       | 5,992                   |       | 6,000               |       | 6,000               |       |
| Government bonds            |       | 9,878                   |       | 9,875               |       | 9,875               |       |
| Common stock                |       | 761                     |       | 829                 |       | 829                 |       |
| Total available for  sale   |       | 191,077                 |       | 190,985             |       | 190,985             |       |
| Held to maturity            |       |                    |       |                |       |                |       |
| Government bonds            |       | 2,000                   |       | 1,996               |       | 2,000               |       |
| Total held to maturity      |       | 2,000                   |       | 1,996               |       | 2,000               |       |
| Total short-term            |       | $                       | 193,077    |                | $          | 192,981             |       | $ | 192,985 |   |
| Long-term                   |       |                    |       |                |       |                |       |
| Available for sale          |       |                    |       |                |       |                |       |
| Corporate notes             |       | $                       | 2,000      |                | $          | 1,937               |       | $ | 1,937 |   |
| Government bonds            |       | 15,097                  |       | 15,068              |       | 15,068              |       |
| Total available for  sale   |       | 17,097                  |       | 17,005              |       | 17,005              |       |
| Total long-term             |       | $                       | 17,097     |                | $          | 17,005              |       | $ | 17,005 |   |
|                        |       |                    |       |                |       |                |       |
| Restricted Investments:     |       |                    |       |                |       |                |       |
| Short-term                  |       |                    |       |                |       |                |       |
| Available for sale          |       |                    |       |                |       |                |       |
| Auction rate securities     |       | $                       | 15,350     |                | $          | 15,348              |       | $ | 15,348 |   |
| Total available for  sale   |       | 15,350                  |       | 15,348              |       | 15,348              |       |
| Held to maturity            |       |                    |       |                |       |                |       |
| Government bonds            |       | 2,790                   |       | 2,785               |       | 2,790               |       |
| Total held to maturity      |       | 2,790                   |       | 2,785               |       | 2,790               |       |
| Total short-term            |       | $                       | 18,140     |                | $          | 18,133              |       | $ | 18,138 |   |

 

 

7

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

 

Quoted marketprices at June 30, 2007 and December 31, 2006 were used to determine the fairvalues of the above investments.

The Companymaintains the majority of its investments in ARS which provide acceptableinterest rates with high liquidity allowing the Company to convert thesecurities to cash every 7 to 35 days depending on the terms of the specificARS.  ARS are floating rate securitieswith long-term nominal maturities of 25 to 30 years but are marketed byfinancial institutions with maturity and interest rate reset dates at 7, 28, or35 day intervals. As a result, the market typically is highly liquid, withlarge amounts of securities resetting interest rates every week.  Most of the Company’s ARS at June 30, 2007have reset dates of either 7 days or 28 days and annual yields ranging from5.0% to 5.8%.

8

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*Credit Risk*

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

The Companyinvests with financial institutions that maintain a net worth of not less than$1 billion and are members in good standing of the Securities InvestorProtection Corporation.  Of the Company’s$402.8 million total of cash and cash equivalents, restricted cash, short andlong term investments and restricted investments at June 30, 2007, $395.2million was held at twelve large multinational banks.

**4.   Prepaid expenses and other assets**

Prepaid expenses andother assets consist of the following:
|                                            | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Prepaid insurance                          |       | $                       | 1,299      |                        | $          | 1,949 |   |
| Accrued interest on investments            |       | 1,589                   |       | 1,348                       |       |
| Prepaid consulting and contractor fees     |       | 3,314                   |       | 3,507                       |       |
| Prepaid import taxes and duties receivable |       | 144                     |       | 1,637                       |       |
| Other                                      |       | 642                     |       | 1,543                       |       |
|                                       |       | $                       | 6,988      |                        | $          | 9,984 |   |

 

The prepaidconsulting and contractor fees consist primarily of advance payments made tocontractors for work being performed for the San Cristobal Project.

**5.   Value Added Tax Recoverable**

The Company has recorded value added tax (“VAT”) paidin Bolivia and related to the San Cristobal Project as a recoverableasset.  Bolivian law states that VAT paidprior to production is recoverable as a credit against Bolivian taxes arisingfrom production, including income tax. The VAT is expected to be recoveredthrough future production and sales from the San Cristobal Project.  Future changes to Bolivian tax law could havean adverse effect on the Company’s ability to recover the VAT paid in Bolivia(see Note 14).  At June 30, 2007 andDecember 31, 2006, the VAT recoverable was $73.4 million and $54.2 million,respectively.  The VAT recoverableamounts include $7.1 million and $5.3 million of recoverable Bolivian importduties for the periods ended June 30, 2007 and December 31, 2006, respectively.

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

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**6.   Property, Plant and Equipment**

Thecomponents of property, plant and equipment were as follows:
|                                | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Mineral properties             |       | $                       | 117,616    |                  | $          | 117,390 |   |
| Construction in progress       |       | 617,078                 |       | 482,979               |       |
| Buildings                      |       | 13,590                  |       | 13,590                |       |
| Mining equipment and machinery |       | 15,027                  |       | 13,580                |       |
| Other furniture and equipment  |       | 3,656                   |       | 3,166                 |       |
|                           |       | 766,967                 |       | 630,705               |       |
| Less: Accumulated depreciation |       | (8,618                  | )          | (6,962                | )          |
|                           |       | 758,349                 |       | 623,743               |       |
| Equipment under capital lease  |       | 59,465                  |       | 22,183                |       |
| Less: Accumulated depreciation |       | (7,448                  | )          | (4,168                | )          |
|                           |       | 52,017                  |       | 18,015                |       |
| Port facilities under lease    |       | 12,283                  |       | —                |       |
| Less: Accumulated depreciation |       | —                  |       | —                |       |
|                           |       | 12,283                  |       | —                |       |
|                           |       | $                       | 822,649    |                  | $          | 641,758 |   |

 

The Company has a17-year contract with a third party to provide port services at the portfacilities in Mejillones, Chile.  Certainassets constructed at the port are for the exclusive use of the Company,including concentrate reception, unloading and storage facilities.  The Company has evaluated its contractualagreement with the port and has determined that the agreement contains aleasing arrangement with respect to the assets that will be operatedexclusively for the use of the Company. Following the guidance of Financial Accounting Standard No. 13, “Accountingfor Leases,” the Company is deemed to be the owner of the assets for which ithas exclusive use.  Accordingly, theCompany has recorded $12.3 million to port facilities under lease with anoffsetting financing obligation related to those assets (see Note 8).  The Company expects the port assets to be putinto service during the third quarter of 2007, at which time the Company willbegin recording depreciation.

For the six monthsended June 30, 2007 and 2006 the Company recorded depreciation expense of $0.2million and $0.2 million, respectively. Also, for the six months ended June 30, 2007 and 2006 the Companycapitalized depreciation associated with the San Cristobal Project in theamounts of $4.7 million and $2.4 million, respectively.

The June 30, 2007and December 31, 2006 construction in progress balances include $59.1 millionand $35.5 million of capitalized interest respectively.  The capitalized interest amounts are relatedto the Convertible Senior Subordinated Notes, the project finance facility andequipment under capital lease (see Note 8).

At June 30, 2007the Company had recorded a lease obligation of $47.9 million related tooutstanding equipment under capital lease (see Note 8).

**7.   Other Long Term Assets**

At June 30, 2007 other long term assets includes a $5.8 million notereceivable, plus accrued interest, from the contractor that constructed theload out facilities at the Port of Mejillones for funds previously advanced bythe Company. The note and accrued interest is to be repaid by applying aportion of the amounts owed for port charges by San Cristobal to theoutstanding note and accrued interest balances. The note and accrued interestare expected to be fully repaid by December 2009. San Cristobal began incurringminimum port fees in May 2007, per the port agreement, with approximately $0.2million of the minimum fees applied to the note as of June 30, 2007.Construction of the port facilities was completed during the second quarter2007.

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**8.   Debt**

The Company’s debtconsists of the following:
|                                                        | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Current**                 | ** ** | **Long term**              | ** ** | **Current** | ** ** | **Long term** | ** ** |
| ** **                                             | ** ** | **(in thousands)**     | ** ** |
| 2.875% Convertible Senior Subordinated Notes due  2024 |       | $                           | —     |                            | $          | 180,000 |   | $ | — |   | $ | 180,000 |   |
|                                                   |       |                        |       |                            |       |   |   |   |   |
| 4.0% Convertible Senior Subordinated Notes due 2024    |       | —                      |       | 109,987                         |       | — |   | 109,987 |   |
|                                                   |       |                        |       |                            |       |   |   |   |   |
| Project finance facility                               |       | —                      |       | 225,000                         |       | — |   | 180,000 |   |
|                                                   |       |                        |       |                            |       |   |   |   |   |
| Note payable to Ingelec for power line                 |       | 681                         |       | —                          |       | 1,415 |   | — |   |
|                                                   |       |                        |       |                            |       |   |   |   |   |
| Note assigned to Sumitomo                              |       | —                      |       | 8,013                           |       | — |   | 7,853 |   |
|                                                   |       |                        |       |                            |       |   |   |   |   |
| Capital leases                                         |       | 6,981                       |       | 40,871                          |       | 2,993 |   | 14,355 |   |
|                                                   |       |                        |       |                            |       |   |   |   |   |
| Port lease liability                                   |       | 362                         |       | 11,863                          |       | — |   | — |   |
|                                                   |       | $                           | 8,024      |                            | $          | 575,734 |   | $ | 4,408 |   | $ | 492,195 |   |

 

*2.875%Notes and 4.0% Notes*

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

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

Costs incurred inconnection with the issuance of the Notes were deferred and are being amortizedto interest expense over ten years which corresponds to the related callprovisions.  At June 30, 2007 theunamortized balance of deferred financing costs related to the Notes wasapproximately $7.1 million.

The indenturerelating to the 4.0% Notes requires the Company to maintain restrictedinvestments to cover the payment of interest through 2007.  The amount invested will at maturity equalthe interest payments due.  As of June30, 2007, $2.8 million of restricted investments were designated for thispurpose.

*SanCristobal Project Finance Facility*

In December 2005the Company closed on a $225 million project finance facility (the “Facility”),arranged by BNP Paribas and Barclays Capital, and funded by a group ofinternational financial institutions including banks, export credit agenciesand the Andean Development Corporation, a multilateral financial agency thatpromotes sustainable development in South America.  Borrowings from the Facility are being usedto complete the development of the Company’s San Cristobal Project. As of June30, 2007 the Company has

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borrowed the full $225 million available under the Facility. Intereston the outstanding amounts drawn under the Facility is based on LIBOR plus acredit spread.  The first principalpayment under the Facility is due in December 2008, and the Facility must befully repaid in December 2012.

In connection withthe September 2006 sale to Sumitomo Corporation (“Sumitomo”) of a 35% interest inthe subsidiaries that own and will operate the San Cristobal Project, Sumitomohas guaranteed the repayment of 35% of the project finance facility debtthrough project completion. (For this purpose completion is defined as thesatisfaction of certain financial and operational requirements including thecreation of operating and debt service reserves and meeting certain operationalperformance levels over specified periods of time and can occur no later thanDecember 2008.)

The Facilitycontains covenants that require the Company to, among other things, maintaincertain security interests, financial ratios after project completion,insurance coverage, minimum sales contracts and metals price protectioncontracts as well as other requirements. Failure to comply with these covenants or to cure related violationswithin specified periods could result in an event of default, pursuant to whichthe project lenders could require immediate repayment of all amountsoutstanding under the Facility and immediate cash settlement of the outstandingmetals derivative positions associated with the San Cristobal Project.

Pursuant to the debtcovenants contained in the Facility, the Company is required annually to submita revised Construction Budget, Operating Plan, and Financial Model(collectively the “Updated Plan”) for the San Cristobal Project.  The covenants require that the Updated Planreflect certain set metals prices that are substantially less than currentmetals prices. Followingdiscussions among representatives of the lenders and the Company,representatives of the lenders proposed (i) use in the Updated Plan of highermetals prices than those contained in the original agreement, which shouldallow the Company to meet the Facility’s financial requirements, (ii) anadjustment to the Facility repayment schedule to require a larger percentage ofprincipal to be repaid in earlier years, (iii) an increase in the mandatorycash flow sweep from 35% to 45% of excess cash flow, (iv) purchase by theCompany and Sumitomo of put options to protect additional cash flow needed forthe adjusted loan repayment schedule, and (v) funding by the Company of a $91million margin account, and a $49 million post-completion guarantee bySumitomo, for the benefit of the two banks holding the derivative positions,with the margin account and guarantee decreasing by 33% at the end of each of2008, 2009 and 2010.

The Company andSumitomo have accepted these proposals. The Company prepared and submitted to the lenders an Updated Plan and aformal request for and documentation of the Facility amendments.  The Company expects the Updated Plan and theFacility amendments to be approved by the lenders in August 2007, althoughthere can be no assurance that this will occur.

If the amendmentsand the Updated Plan are not approved by the lenders, until such time asapproval is obtained, the Company would be required to operate in all materialrespects, as defined by the Facility, in compliance with the initial OperatingPlan and Financial Model (the “Initial Plan”). If the Company’s operations failto comply with the Initial Plan in all material respects, the lenders coulddeclare a default and require the Company to settle all amounts outstandingunder the Facility and metals derivatives liability.  Because the Company’s current projectionsindicate that cash flows and operating ratios will exceed those in the InitialPlan, the Company believes that operations will comply in all material respectswith the Initial Plan.  However, theCompany cannot predict what actions the lenders might take if they deem thatthe Company is not in material compliance with the Initial Plan.

If an event ofdefault occurs, the lenders could require immediate payment of amountsoutstanding under the Facility and settlement of the derivativesliability.  If such a demand weresuccessfully made, the Company would require additional debt or equityfinancing in order to satisfy its obligations. There is no assurance that theCompany would be able to obtain additional financing on acceptable terms, or atall.

Direct costsincurred in obtaining the Facility were deferred and are being amortized tointerest expense over the term of the facility. At June 30, 2007 theunamortized balance of deferred financing costs related to the Facility wasapproximately $9.9 million.

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*PowerLine Notes*

The Company hasloaned funds to San Cristobal Transportadora de Electricidad, S.A. (“SC Tesa”),the contractor that has constructed the power line for the San CristobalProject, and holds a note receivable from SC Tesa in the amount of $22.3million. The Company expects to receive repayment of the note from SC Tesa inthe form of credits against charges for the delivery of power.  In connection with the sale of 35% of the SanCristobal Project to Sumitomo, the Company sold 35% of the $22.3 million noteto Sumitomo. As the Company receives payments from SC Tesa it must pay Sumitomoits 35% share of such payments. As a result, the Company has recorded a notepayable to Sumitomo in the amount of $8.0 million, including accrued interest.

SC Tesa borrowedapproximately $1.4 million from its parent company, Ingelec, to complete theconstruction of the power line.  Per theguidance of FASB Interpretation No. 46R, “Variable Interest Entities,” the Companyconsolidates the accounts of SC Tesa and accordingly has recorded the notepayable on its consolidated books.  AtJune 30, 2007 $0.7 million of the note remains outstanding.

*CapitalLeases*

During the sixmonths ended June 30, 2007 the Company placed in service $37.3 million ofadditional mining equipment to be used in stripping and mine production, andrecorded these transactions as capital leases, resulting in cumulative capitallease obligations of $47.9 million at June 30, 2007. During the six monthsended June 30, 2007 the Company made payments of approximately $6.6 millionrelated to capital lease obligations including $4.1 million of upfrontmobilization fees.

*PortLease Liability*

Certain assetsconstructed at the port of Mejillones are for the exclusive use of the Company,including concentrate reception, unloading and storage facilities.  The Company determined that a leasingarrangement exists with respect to those assets (see Note 6). Accordingly, atJune 30, 2007 the Company recorded on its balance sheet $12.3 million to plantand equipment and a financing obligation of $12.2 million, which is net of $0.1million of the obligation amortized during the second quarter of 2007.  In addition, the Company holds a $5.8 millionnote receivable from the port contractor for funds previously advanced to thecontractor from the Company including interest (see Note 7).

**9.   SalesContracts and Derivative Instruments**

Certain covenantsrelated to the project finance facility required the Company to provide priceprotection for a portion of its planned production of metals from SanCristobal.  During the third quarter of2005, the Company entered into certain derivative positions utilizing primarilyforward sales but also puts and calls to comply with the project financefacility covenants.  In order to maintainleverage to silver market prices, the Company entered into proportionally morezinc and lead positions than silver positions. Non-cash mark-to-market gainsand losses from the open derivative positions may fluctuate substantially fromperiod to period based on spot and forward prices and option volatilities.

In addition, inthe past the Company made limited investments in shorter duration put and calloptions and other metals derivatives not required by the project financefacility.  During 2006, the Companyliquidated all of its discretionary derivative contracts. During the six monthsended June 30, 2007 the Company did not hold any derivative contracts other thanthose required by the project finance facility.

The Company marksits open derivative positions to fair value at the end of each accountingperiod with the related change in fair value recorded to earnings. The Companyrecorded losses of $165.6 million and $57.3 million as a result of marking tomarket its open derivative position for the quarter and six month periods endedJune 30, 2007, respectively.  For thequarter and six month periods ended June 30, 2006 the Company recorded totalderivative losses of $78.1 million and $251.0 million, respectively, whichincluded

13

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mark to market losses of $49.0 and $221.9, respectively, and a realizedloss of $29.1 for both periods.  The 2007mark to market losses are primarily the result of increasing spot and forwardprices for silver, zinc and lead during the six month period ended June 30,2007. The 2006 mark to market losses were primarily the result of increasingspot and forward prices for silver and zinc during the six months endedJune 30, 2006. The 2006 realized losses were related to the liquidation ofthe majority of the discretionary hedge positions held by the Company duringthe second quarter 2006. The actual final financial impact of the requiredproject finance facility derivative positions will not be known until thepositions are closed on their future settlement dates.  At the time of final settlement, the gain orloss recorded will exclude previously recognized non-cash mark to market gainsor losses.

As the result ofthe sale to Sumitomo of a 35% interest in the subsidiary that holds thederivative positions, Sumitomo has guaranteed the payment of 35% of the hedgepositions required by the project finance facility through completion (whichmay be no later than December 2008).

The followingtable sets forth the Company’s open derivative positions at June 30, 2007.
| ** **                        | ** ** | **Current Maturity Date** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **Year 1**                     | ** ** | **Years 2 and 3** | ** ** | **Years 4 and 5** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| **Forward Contracts**             | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)               |       | 150                                 |       | 160 |   | 200 |   | 80 |   | 590 |   |
| Average price (per  ounce)        |       | $                                   | 7.34       |   | $ | 7.15 |   | $ | 7.13 |   | $ | 7.15 |   | $ | 7.19 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                 |       | 112,931                             |       | 480,985 |   | 181,880 |   | — |   | 775,796 |   |
| Average price (per  pound)        |       | $                                   | 0.48       |   | $ | 0.48 |   | $ | 0.48 |   | $ | — |   | $ | 0.48 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Lead (000 pounds)                 |       | 99,866                              |       | 223,104 |   | — |   | — |   | 322,970 |   |
| Average price (per  pound)        |       | $                                   | 0.30       |   | $ | 0.30 |   | $ | — |   | $ | — |   | $ | 0.30 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| **Put Option Contracts Owned**    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)               |       | 400                                 |       | 2,020 |   | 5,790 |   | 890 |   | 9,100 |   |
| Average price (per  ounce)        |       | $                                   | 5.25       |   | $ | 5.64 |   | $ | 5.88 |   | $ | 5.63 |   | $ | 5.78 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| **Call Option Contracts Written** | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)               |       | —                              |       | 8,870 |   | 840 |   | 90 |   | 9,800 |   |
| Average price (per  ounce)        |       | $                                   | —     |   | $ | 8.22 |   | $ | 9.26 |   | $ | 8.95 |   | $ | 8.32 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                 |       | 3,858                               |       | 9,921 |   | — |   | — |   | 13,779 |   |
| Average price (per  pound)        |       | $                                   | 0.57       |   | $ | 0.57 |   | $ | — |   | $ | — |   | $ | 0.57 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Lead (000 pounds)                 |       | 7,716                               |       | 19,841 |   | — |   | — |   | 27,557 |   |
| Average price (per  pound)        |       | $                                   | 0.39       |   | $ | 0.39 |   | $ | — |   | $ | — |   | $ | 0.39 |   |

 

The Companydetermines the fair value of its open derivative positions by applying marketvalues obtained from the counterparties holding the Company’s derivativepositions.  The Company independentlyverifies that the values received from the counterparties are based on majorcommodities price indices such as the LME and COMEX and other available marketdata.

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 June 30, 2007, March 31, 2007 and December 31, 2006 and the change for thethree months and six months ended June 30, 2007.

14

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| ** **                                      | ** ** | **Amount To Be Realized In** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **Less Than**                               | ** ** | **2 to 3** | ** ** | **4 to 5** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Period Ended**                           | ** ** | **1 Year**                                  | ** ** | **Years** | ** ** | **Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                          | ** ** |
| March 31, 2007                                  |       | $                                                | 88,046     |   | $ | 484,871 |   | $ | 135,917 |   | $ | 1,058 |   | $ | 709,892 |   |
| June 30, 2007                                   |       | $                                                | 203,388    |   | $ | 574,129 |   | $ | 97,336 |   | $ | 686 |   | $ | 875,539 |   |
| Change for the three months ended June 30, 2007 |       | $                                                | 115,342    |   | $ | 89,258 |   | $ | (38,581 | ) | $ | (372 | ) | $ | 165,647 |   |
|                                            |       |                                             |       |   |   |   |   |   |   |   |   |
| December 31, 2006                               |       | $                                                | 39,080     |   | $ | 570,982 |   | $ | 207,696 |   | $ | 440 |   | $ | 818,198 |   |
| June 30, 2007                                   |       | $                                                | 203,388    |   | $ | 574,129 |   | $ | 97,336 |   | $ | 686 |   | $ | 875,539 |   |
| Change for the six  months ended June 30, 2007  |       | $                                                | 164,308    |   | $ | 3,147 |   | $ | (110,360 | ) | $ | 246 |   | $ | 57,341 |   |

 

**10.   Asset Retirement Obligations**

The Company has developed an asset retirement plan forits San Cristobal Project which is expected to begin producing in the thirdquarter 2007. The plan includes estimated reclamation, remediation and closurerequirements based on Bolivian government requirements, World Bank financingrequirements and the Company’s policies. Since the third quarter 2005 the Company has conducted development andmining activities that fall within the scope of the asset retirement plan andwill require future reclamation and closure expenditures. The Company accruesestimated reclamation liabilities based on the asset retirement plan asactivities requiring future reclamation and remediation occur.

The Company prepares estimates of the timing andamount of expected cash flows when an asset retirement obligation (“ARO”) isincurred. The fair value of the ARO is measured by discounting the expectedcash flows using a discount factor that reflects the credit-adjusted risk-freerate of interest. The Company records the fair value of an ARO when incurredwith an adjustment to the corresponding asset carrying amounts. The ARO isadjusted to reflect the passage of time (accretion cost) calculated by applyingthe discount factor implicit in the initial fair value measurement to thebeginning-of-period carrying amount of the ARO. The Company records accretioncosts to expense as incurred.

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

|                                  | ** ** | **Six Months  Ended June 30,  2007** | ** ** | **Year Ended  December 31, 2006** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **(in thousands)**                             | ** ** |
| Beginning balance                |       | $                                                   | 5,761      |                                             | $          | 2,003 |   |
|                             |       |                                                |       |                                             |       |
| ARO arising in the  period       |       | 304                                                 |       | 3,367                                            |       |
| Changes in estimates,  and other |       | —                                              |       | —                                           |       |
| Liabilities settled              |       | —                                              |       | —                                           |       |
| Accretion expense                |       | 285                                                 |       | 391                                              |       |
|                             |       |                                                |       |                                             |       |
| Ending balance                   |       | $                                                   | 6,350      |                                             | $          | 5,761 |   |

 

**11.   IncomeTaxes**

The Company andcertain of its subsidiaries operating in the Cayman Islands do not file incometax returns as the Cayman Islands currently does not impose any incometaxes.  The Company files Bolivian,United States and certain other foreign country income tax returns.  These tax returns and the amount of taxableincome or loss reported are subject to examination by the relevant taxing authorities.  The Company and subsidiaries have notgenerated taxable income since inception. For the six months ended June 30, 2007 and 2006 the Company recordedapproximately $0.1 million and $0.1 million of income tax expense related towithholding taxes on certain services provided to one of our Boliviansubsidiaries.

15

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

As of June 30,2007, the Company had $1.8 million of total gross unrecognized taxbenefits.  Certain of the unrecognizedtax benefits resulted in a reduction of the Company’s operating losscarryforwards by approximately $0.2 million. The Company has recorded a non-current tax payable and correspondingnon-current deferred tax asset of approximately $1.6 million for all remainingunrecognized tax benefits.  There is noimpact to retained earnings as a result of the adoption of FIN 48.

Tax years as earlyas 2001 remain open and are subject to examination in the Company’s principaltax jurisdictions.  Management hasestimated that unrecognized tax benefits will not significantly increase ordecrease within the next twelve months. There are no interest or penalties estimated on the underpayment ofincome taxes as a result of these unrecognized tax benefits.  The Company’s policy is to classify taxrelated interest and penalties as income tax expense.

**12.   Shareholders’ Deficit**

The followingtable sets forth the changes in shareholders’ deficit during the first sixmonths of 2007:
| ** **                                       | ** ** | ** **                                               | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** ** | **Accumulated  Other  Comprehensive** | ** **   | **Total**   | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|-----------------|------------|-------------|------------|---------------------------------------|--------------|-------------|------------|
| ** **                                       | ** ** | **Ordinary Shares**                                 | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **income**  | ** ** | **Shareholders’**                | ** **   |
| ** **                                       | ** ** | **Shares**                                               | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **(loss)**                            | ** **   | **Deficit** | ** ** |
| ** **                                       | ** ** | **(in thousands except share data)** | ** ** |
| **Balance, December 31, 2006**                   | ** ** | **58,577,700**                                           | ** ** | **$**       | **586**    | ** **      | **$**      | **669,487** | ** ** | **$**                                 | **(773,339** | **)**       | **$**      | **(24** | **)** | **$** | **(103,290** | **)** |
| Stock compensation accrued                       |       | —                                                   |       | —      |       | 2,120           |       | —      |       | —                                |         | 2,120       |       |
| Stock options exercised ($10.54 per share)       |       | 103,575                                                  |       | 1           |       | 1,233           |       | —      |       | —                                |         | 1,234       |       |
| Stock granted as compensation ($16.40 per share) |       | 20,800                                                   |       | —      |       | —          |       | —      |       | —                                |         | —      |       |
| Unrealized loss on marketable equity securities  |       | —                                                   |       | —      |       | —          |       | —      |       | (161                                  | )            | (161        | )          |
| Net loss                                         |       | —                                                   |       | —      |       | —          |       | (31,866     | )          | —                                |         | (31,866     | )          |
| **Balance, June 30, 2007**                       | ** ** | **58,702,075**                                           | ** ** | **$**       | **587**    | ** **      | **$**      | **672,840** | ** ** | **$**                                 | **(805,205** | **)**       | **$**      | **(185** | **)** | **$** | **(131,963** | **)** |

 

*Stock Option Plans* – TheCompany established a plan to issue share options and other share awards to officers,employees, consultants and agents of the Company and its subsidiaries (the “Employees’Plan”) as well as a Non-Employee Directors’ Share Plan (the “Directors’ Plan”)or jointly (the “Plans”).

TheCompany recognizes stock based compensation costs using a graded vestingattribution method whereby costs are recognized over the requisite serviceperiod for each separately vesting portion of the award.  The Company recognized stock basedcompensation costs of $2.1 million and $2.6 million for the six month periodsended June 30, 2007 and 2006 respectively, which includes amounts capitalized.

A summary of theCompany’s stock options issued under the Plans at June 30, 2007 and changesduring the six months then ended is presented in the following table:

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| Options                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|
| Outstanding at  beginning of period        |       | 2,992,572                  |       | $                                                      | 14.90      |   |
| Granted during  period                     |       | 66,835                     |       | 15.65                                                  |       |
| Forfeited or  expired during period        |       | (156,350                   | )          | 16.60                                                  |       |
| Exercised during  period                   |       | (131,475                   | )          | 12.99                                                  |       |
| Outstanding at  end of period              |       | 2,771,582                  |       | $                                                      | 14.87      |   |
| Exercisable at  end of period              |       | 2,119,008                  |       | $                                                      | 14.27      |   |
| Expected to vest at the  end of the period |       | 636,992                    |       | $                                                      | 17.02      |   |

 

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

A summary of thestatus of the Company’s restricted stock grants issued under the Employees’Plan at June 30, 2007 and changes during the six months then ended is presentedin the following table:
| Restricted Stock Grants     | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share**                              | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| Oustanding at beginning of the period |       | 223,575                    |       | $                                                                                                            | 17.30      |   |
| Granted during period                 |       | 38,200                     |       |                   16.40 |       |
| Restrictions lifted during the period |       | (32,025                    | )          |                   16.60 |       |
| Forfeited during period               |       | (8,850                     | )          |                   16.40 |       |
| Oustanding at end of the period       |       | 220,900                    |       | $                                                                                                            | 17.28      |   |

 

Thefair value of each restricted stock grant is based on the closing price of theCompany’s shares on the date of grant.

Duringthe second quarter of 2007 the board of directors adopted a Non-EmployeeDirector Deferred Compensation and Equity Award Plan (the “DeferredCompensation Plan”). In connection with the approval of this new compensationarrangement, the board of directors suspended the grant of options under theDirectors’ Plan.  Pursuant to theDeferred Compensation Plan the directors will receive a portion of theircompensation in the form of Restricted Stock Units. The Restricted Stock Units typicallyvest one year after the date of grant so long as the individual is stillserving as a director. Each Restricted Stock Unit entitles the directorto receive one unrestricted Ordinary Share for each vested RestrictedStock Unit upon the termination of the director’s board service.

A summary of thestatus of the Restricted Stock Unit grants issued under the DeferredCompensation Plan at June 30, 2007 and changes during the six months then endedis presented in the following table:

17

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

 

Thefair value of each Restricted Stock Unit grant is based on the closing price ofthe Company’s shares on the date of grant.

TheCompany has granted stock-based performance bonuses under the Employees’ Planto certain employees, related to cost targets and completion date targets forthe construction of the San Cristobal Project, pursuant to which up to 23,000Ordinary Shares with a grant date fair market value of $15.37 per share may beissued. The fair value of each performance bonus grant was based on the closingprice of the Company’s shares on the date of grant.

**13.   Minority Interest**

*Sumitomo Corporation*

During2006 the Company sold to Sumitomo a 35% interest in the three Companysubsidiaries that own its San Cristobal Project, market project concentratesand hold the metals hedge positions required by the project lenders. TheCompany continues to own 65% of these three subsidiaries.

Subsequent to the September 2006 close of the transaction withSumitomo, the Company incurred certain losses primarily related to marking tomarket its open derivative positions required by the project financefacility.  Such losses would normally beshared by Sumitomo in proportion to its 35% interest in the subsidiaryrecording the losses.  However, generallyaccepted accounting principles do not permit the allocation of losses to theminority interest in excess of the minority owner’s recorded interest in thesubsidiary. Accordingly, the Company has absorbed approximately $98.8 millionand $87.9 million of non-cash losses that normally would have been allocated toSumitomo at December 31, 2006 and June 30, 2007, respectively.   The reduction to the amount being absorbedby the Company for the six months ended June 30, 2007 is the result of Sumitomo’sadvance of $27.4 million to fund its share of certain excess costs related tothe San Cristobal Project partially offset by Sumitomo’s minority interest inthe loss for the period of $16.5 million. The Company expects to recover theremaining $87.9 million of losses it absorbed, and any additional losses it mayabsorb related to Sumitomo’s minority interest, from future earnings prior tothe allocation of earnings to Sumitomo or from future contributions bySumitomo.

*SC Tesa*

During 2005 the Company entered into a long-term contract with SC Tesato construct a power line and transport power to the San Cristobal Project fromthe Bolivian power grid. The Company has loaned SC Tesa $22.3 million toconstruct the power line which will be repaid through credits against chargesfor the delivery of power (see Note 8). Per the guidance of FIN 46R the Company fully consolidates the accountsof SC Tesa.

During the fourth quarter 2006, the San Cristobal Project beganreceiving limited amounts of power from the grid resulting in SC Tesa earning atransmission fee and recording earnings. Because SC Tesa is treated as a consolidated entity, the intercompanyprofit earned by SC Tesa is eliminated and the Company recognizes a minorityinterest offset to net income equal to SC Tesa’s share of the transmission feeearnings representing 100% of such earnings. For the six months ended June 30, 2007 the Company recorded $0.5 millionas SC Tesa’s minority interest in the earnings.

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**14.   Commitments and Contingencies**

*Project Financing* – Per theterms and conditions of the San Cristobal Project finance facility the Companywas required to deposit cash and investments in an account the use of which isrestricted to the development of the San Cristobal Project. At June 30, 2007the remaining balance in the account was $29.1 million of which $23.0 millionwas recorded to restricted cash and $6.1 million recorded to restrictedinvestments.

*Capital Commitments* – At June30, 2007 the Company expects to spend approximately $85 million on the SanCristobal Project to complete the commissioning and startup, make final paymentof accrued construction costs, provide for approximately $40 million of workingcapital requirements during the first several months of operation and completeconstruction of certain additional facilities not required for initialoperations.  The San Cristobal Projectbegan production of concentrates in August 2007 with the anticipated first salescheduled for late August or early September 2007.

*Taxes*– The Company hasreceived certain tax and duty benefits on a portion of the equipment itimported for its San Cristobal Project. The benefits are contingent upon theProject attaining production within two years after approval of the exemption,or by September 13, 2007, and fulfilling certain expenditure commitments withina specified period of time. Failing to comply with these commitments wouldobligate the Company to refund the benefits received, up to approximately $23.5million plus penalties and interest. The Company believes it has met therequirements necessary to retain these benefits.

*Performance Bonus* – TheCompany may be required to pay up to an estimated $4.0 million bonus to the SanCristobal Project construction management contractor contingent upon certainproject completion parameters. Based on the project status at June 30, 2007 theCompany believes it is probable that it will be required to pay the constructionmanagement contractor a portion of the bonus up to $1.3 million and has accruedthat amount at June 30, 2007 with the offset recorded to construction inprogress.

*Political Contingencies*– Atvarious times since his election, President Morales and others in hisadministration have made public statements regarding their desire to exertgreater state control over natural resource production in Bolivia. To date,there have been no formal proposals by the Bolivian government to nationalizethe mining industry but it is possible that the government may alter itscurrent policies with respect to the mining industry in the future.  In addition, the Bolivian governmentcontinues to consider various changes to applicable mining taxes, includingpossible increases in income and other tax rates, modification of thecreditability of the complementary mining tax against income tax, andelimination of the refund to exporters of a percentage of import duties andvalue added tax.  These potential changeswould have the effect of increasing the total tax burden on the San CristobalProject, which could adversely affect the earnings and cash flow generated bythe Project and the Company’s ability to recover its investment in the Projectand to meet its liabilities to the San Cristobal lenders and the counterpartiesholding the metals derivative positions required by those lenders.  The Company, together with Sumitomo, isengaged in continuing discussions with government representatives regardingvarious proposals and their potential effects on San Cristobal.  The Company is unable to predict whichchanges, if any, will be made to current mining tax legislation.

In May 2006, the Constitutional Court of Boliviaissued a ruling declaring certain articles of the 1997 Mining Codeunconstitutional.  The Court’s ruling isnot effective until May 2008 and the Court urged the Bolivian Congress to enactlegislation during that time which may supersede the ruling.  Although the Court’s ruling is not expectedto impact the Company’s ability to operate the San Cristobal Project, theruling may limit the transferability of the Company’s mining concessions andrestrict the ability to mortgage the San Cristobal mining concessions as collateralto the lenders providing financing for the Project.

*Other Contingencies* – Aspreviously disclosed, the Company has concluded, based on the results of aninternal investigation conducted under the direction of its Audit Committee,that certain senior employees of one of its South American subsidiaries wereinvolved in making impermissible payments of approximately $125,000 togovernment officials in 2003 and 2004 in connection with an inactive, earlystage exploration property that is not related to any of the Company’s activeexploration or development properties. Based on findings to date, no changes to the Company’s previously filedfinancial statements are warranted as a result 

19

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ofthese matters.  The Company contacted theDepartment of Justice (“DOJ”) and SEC and reported the results of our internalinvestigation.  The Company has beeninformed that the SEC and DOJ have commenced an investigation with respect tothese matters, including possible violations of the Foreign Corrupt PracticesAct.  The Company is cooperating fullywith the SEC and DOJ investigations. The Company cannot predict with anycertainty the final outcome of the investigations, including any fines orpenalties that may be imposed.

**15.   Foreign Currency**

Gains and losseson foreign currency transactions consist of the following:
|                                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                      | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                      | ** ** | **(in thousands)**          | ** ** | **(in thousands)**        | ** ** |
| Gain on re-measurement  of monetary assets denominated in other than US dollars |       | $                                | 1,236      |                           | $          | 123 |   | $ | 2,220 |   | $ | 236 |   |
| Total                                                                           |       | $                                | 1,236      |                           | $          | 123 |   | $ | 2,220 |   | $ | 236 |   |

 

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

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**16.   Supplemental cash flow information**

Thefollowing table reconciles net loss for the period to cash from operations:
| ** **                                                                                  | ** ** | ** **                     | ** ** | ** **        | ** ** | **For the period** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------|------------|------------------------------|------------|
| ** **                                                                                  | ** ** | ** **                     | ** ** | ** **        | ** ** | **from December**       | ** ** |
| ** **                                                                                  | ** ** | ** **                     | ** ** | ** **        | ** ** | **22, 1994**            | ** ** |
| ** **                                                                                  | ** ** | ** **                     | ** ** | ** **        | ** ** | **(inception)**              | ** ** |
| ** **                                                                                  | ** ** | **Six Months Ended** | ** ** | **through**       | ** ** |
| ** **                                                                                  | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** |
| ** **                                                                                  | ** ** | **2007**                       | ** ** | **2006**          | ** ** | **2007**                     | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**        | ** ** |
| Cash flows from  operating activities:                                                      |       |                           |       |              |       |                         |       |
| Net loss                                                                                    |       | $                              | (31,866    | )                 | $          | (254,914                     | )          | $ | (805,205 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                |       |                           |       |              |       |                         |       |
| Amortization and  depreciation                                                              |       | 190                            |       | 196               |       | 1,989                        |       |
| Amortization of  deferred financing costs                                                   |       | —                         |       | 555               |       | 3,134                        |       |
| Accretion of asset  retirement obligation                                                   |       | 285                            |       | 142               |       | 691                          |       |
| Amortization of  premiums and discounts                                                     |       | 50                             |       | (1,033            | )          | (2,003                       | )          |
| Mark-to-market (gain)  loss on derivative positions                                         |       | 57,341                         |       | 250,961           |       | 923,009                      |       |
| Loss (gain) on Euro  hedge                                                                  |       | —                         |       | —            |       | (534                         | )          |
| Gain on extingushment  of debt                                                              |       | —                         |       | (2,875            | )          | (9,640                       | )          |
| Gross gain on sale of interest  in subsidiary                                               |       | —                         |       | —            |       | (199,600                     | )          |
| Minority interest in  loss of consolidated subsidiary                                       |       | (28,332                        | )          | 7                 |       | (41,720                      | )          |
| Stock compensation, net  of amounts capitalized                                             |       | 1,610                          |       | 2,035             |       | 20,787                       |       |
| Shares issued in  consideration for services                                                |       | —                         |       | 27                |       | 8,585                        |       |
| Shares issued to  purchase mineral rights                                                   |       | —                         |       | —            |       | 1,799                        |       |
| Changes in operating  assets and liabilities:                                               |       |                           |       |              |       |                         |       |
| Increase in accrued  interest receivable                                                    |       | (241                           | )          | (954              | )          | (1,649                       | )          |
| Port fees applied to  Port of Mejillones note                                               |       | 217                            |       |              |       | 217                          |       |
| (Increase) decrease in  prepaid expenses and other assets net of amounts capitalized        |       | 3,029                          |       | (1,273            | )          | (1,305                       | )          |
| Increase in inventories                                                                     |       | (26,957                        | )          | (12,403           | )          | (54,629                      | )          |
| Increase in value added  tax recoverable (net)                                              |       | (19,225                        | )          | (14,829           | )          | (73,383                      | )          |
| Increase in accrued  interest payable net of amounts capitalized                            |       | —                         |       | —            |       | 1,680                        |       |
| Increase (decrease) in  accounts payable and accrued liabilities net of amounts capitalized |       | (484                           | )          | 156               |       | 4,153                        |       |
| Other increase  (decrease)                                                                  |       | (30                            | )          | 422               |       | 149                          |       |
| Net cash used in  operating activities                                                      |       | $                              | (44,413    | )                 | $          | (33,780                      | )          | $ | (223,475 | ) |

 

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Thefollowing table sets forth supplemental cash flow information and non-cashtransactions:

 
|                                                            | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **June 30,**              | ** ** |
| ** **                                                 | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**        | ** ** |
| **Supplemental  disclosure:**                              | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest paid,  net of amounts capitalized                 |       | $                              | —     |   | $ | 9,455 |   |
|                                                       |       |                           |       |   |   |
| **Supplemental  disclosure of non-cash transactions:**     | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Capitalized  stock based compensation costs                |       | $                              | 483        |   | $ | 560 |   |
| Payment of debt  with Ordinary Shares                      |       | —                         |       | 17,125 |   |
| Capitalized  consulting services paid with Ordinary Shares |       | —                         |       | 27 |   |
| Depreciation  expense capitalized                          |       | 4,650                          |       | 2,351 |   |
| Initial  measurment of asset retirement obligation         |       | 304                            |       | 2,791 |   |
| Equipment  acquired through capital lease                  |       | 37,282                         |       | 3,896 |   |
| Capitalized port  facility lease                           |       | 12,283                         |       | — |   |

 

**17.  Subsequent Events**

Duringearly August 2007 the Company financially settled the first of the metalsderivative positions required by the San Cristobal Project financefacility.  These positions are held in aseparate Cayman subsidiary which is owned 65% by the Company and 35% bySumitomo, and not by the Bolivian operating entity, Minera San Cristobal. TheCayman Island does not impose a corporate income tax or allow deductions forlosses. Certain of the positions matured July 31, 2007 and were settled basedon the average price for July. The Company settled 1,388 tonnes of zinc soldforward with an average strike price of $1,060 per tonne by making a payment of$3.4 million and 2,583 tonnes of lead sold forward with an average strike priceof $661 per tonne by making a payment of $6.3 million.  (See Note 9 for a discussion of the Company’sopen derivative positions.)

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**Item 2:  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

**General**

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

Apex Silver is amining exploration and development company that holds a portfolio ofexploration and development properties primarily in South America and CentralAmerica. We currently focus our resources primarily on the development of ourSan Cristobal Project in Bolivia. At June 30, 2007, none of our properties werein production and, consequently, we have no current operating income. Our firstsale of concentrates from our San Cristobal mine and related operating results areexpected to be recognized during the third quarter 2007.

**Overview**

Development of SanCristobal

Physicalconstruction of our San Cristobal Project in southwestern Bolivia issubstantially complete.  At June 30, 2007we estimated that we will be required to make payments of approximately $85million to complete the commissioning and startup, make final payment ofaccrued construction costs, provide for approximately $40 million of workingcapital requirements during the first several months of operation and completeconstruction of certain additional facilities not required for initialoperations on our San Cristobal Project. The flotation circuit has beencommissioned and in early August 2007 we began producing both silver bearinglead and zinc concentrates.  Thefiltration and load out system has been commissioned and concentrate containershave been loaded and shipped by rail to the port at Mejillones, Chile. Weexpect to record our first sale of concentrates in the third quarter 2007.

More than 3.5 milliontonnes of sulfide ore have been stockpiled for the concentrator.  The primary crusher and overland conveyor areoperating at design rates delivering ore to the coarse ore stockpile.  With production testing ongoing and operatingwith a previously untrained workforce, the plant is operating with thesemi-autogenous mill and one of two ball mills. Processing the harder of the two ore types in the San Cristobal orebody, we have achieved continuous throughput of 19,000 tonnes per day, withinfive percent of design capacity. The second ball mill motor has been repairedand is being commissioned, and we expect continuous production from this ballmill in early September.  Other systemsincluding the well field, tailing system, railroad, and other supportingsystems have been commissioned and are generally performing as anticipated.

The plant willcontinue in startup and commissioning during August with emphasis oncommissioning of the zinc regrind circuit and fine tuning throughout theflotation plant including improvements in the calibration of instruments andtuning of control loops and level controls in the plant.  In addition, we expect to completecommissioning of the second ball mill, together with final processes andcoordination with Bolivian power providers, in early September. We intend toramp up production at San Cristobal until the full production rate ofapproximately 55 thousand tonnes of concentrate per month is reached during thefourth quarter 2007.

Financing and CommodityDerivatives Matters

During 2007 weborrowed $45 million under the $225 million San Cristobal Project financefacility (the “Facility”) bringing the total borrowings against the Facility tothe full $225 million available. The covenants require that we annually submita Construction Budget, Operating Plan and Financial Model (collectively, the “UpdatedPlan”) for the Project. The covenants in the Facility require that the UpdatedPlan reflect certain set metals prices that are substantially less than currentmetals prices. Following our 

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discussions withrepresentatives of the lenders, representatives of the lenders proposed (i) usein the Updated Plan of higher metals prices than those contained in theoriginal agreement, which should allow us to meet the Facility’s financialrequirements, (ii) an adjustment to the Facility repayment schedule to requirea larger percentage of principal to be repaid in earlier years, (iii) anincrease in the mandatory cash flow sweep from 35% to 45% of excess cash flow,(iv) purchase by Apex and Sumitomo of put options to protect additional cashflow needed for the adjusted loan repayment schedule, and (v) funding by Apexof a $91 million margin account, and a $49 million post-completion guarantee bySumitomo, for the benefit of the two banks holding the metals derivativepositions, with the margin account and guarantee decreasing by 33% at the end ofeach of 2008, 2009 and 2010.

We and Sumitomohave accepted these proposals.  We have prepared and submitted to thelenders an Updated Plan and a formal request for and documentation of theFacility amendments.  We expect the Updated Plan and the Facilityamendments to be approved by the lenders in August 2007, although there can beno assurance that this will occur.

If the amendmentsand the Updated Plan are not approved by the lenders, or until such time asapproval is obtained, we would be required to operate in all material respects,as defined by the Facility, in compliance with the Construction Budget,Operating Plan and Financial Model initially approved by the lenders when theFacility was entered into (the “Initial Plan”). If our operations fail tocomply with the Initial Plan in all material respects, the lenders coulddeclare a default and require us to settle all amounts outstanding under theFacility, including the metals derivatives liability.  Because our current projections indicate thatcash flows and operating ratios will exceed those in the Initial Plan, webelieve that operations will comply in all material respects with the InitialPlan.  However, we cannot predict whatactions the lenders might take if they deem that we are not in materialcompliance with the Initial Plan.

For the six months ended June 30, 2007, we recorded a$57.3 million loss as a result of marking-to-market our open derivativepositions required by the terms of the project financing facility. The loss isthe result of continuing high spot and forward prices for silver, zinc andlead. During the periods that the metals derivative positions are outstanding,gains and losses may fluctuate substantially from period to period based onspot prices, forward prices and quoted option volatilities. The actual finalfinancial impact of the required project financing facility derivativepositions will not be known until the positions are closed on their futuresettlement dates. At the time of final settlement, the gain or loss recordedwill exclude previously recognized non-cash mark-to-market gains or losses. Thefirst derivative positions to settle were positions with maturity dates of July31, 2007 and settlement payments were made the first week of August 2007.  We settled 1,388 tonnes of zinc sold forwardwith an average strike price of $1,060 per tonne by making a payment of $3.4million and 2,583 tonnes of lead sold forward with an average strike price of$661 per tonne by making a payment of $6.3 million.

Political Matters in Bolivia

At various times since his election, President Moralesand others in his administration have made public statements regarding theirdesire to exert greater state control over natural resource production inBolivia. To date, there have been no formal proposals by the Boliviangovernment to nationalize the mining industry but it is possible that thegovernment may alter its current policies with respect to the mining industryin the future.  In addition, the Boliviangovernment continues to consider various changes to applicable mining taxes,including possible increases in income and other tax rates, modification of thecreditability of the complementary mining tax against income tax, andelimination of the refund to exporters of a percentage of import duties andvalue added tax.  These potential changeswould have the effect of increasing the total tax burden on our San CristobalProject, which could adversely affect the earnings and cash flow generated bythe Project and our ability to recover our investment in the Project and tomeet our liabilities to the San Cristobal lenders and the counterparties holdingthe metals derivative positions required by those lenders.  We, together with Sumitomo, are engaged incontinuing discussions with government representatives regarding variousproposals and potential proposals, and their potential effects on the Project.  We are unable to predict which changes, ifany, will be made to current mining tax legislation.

On May 1, 2007 President Morales issued a Supreme Decreedeclaring a Mining Fiscal Reserve over the entire Bolivian national territoryto include all mineral resources, granting the Bolivian Mining

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Corporation (COMIBOL) theauthority and right to administer and exploit the Fiscal Reserve.  The Supreme Decree provides that miningconcessions granted prior to enacting the Supreme Decree, which includes theSan Cristobal mining concessions, will be respected and will remain in effect.

Exploration

Pursuant to ourSeptember 25, 2006 agreement with Sumitomo, Sumitomo has a two year OptionAgreement whereby it may acquire a 20 percent to 35 percent interest in each ofcertain of our active exploration properties at historical cost, and in each ofcertain inactive exploration properties at historical cost once we have spent$0.2 million in exploration costs. Sumitomo must exercise its option on each active property within 60 daysof receiving complete information regarding the property and on each inactiveproperty within 60 days of the Company spending $0.2 million on theproperty.  At June 30, 2007 Sumitomo hadexercised its options to acquire an interest in three of our active explorationproperties in Peru and plans to review certain of our active explorationproperties in Mexico and Argentina later in the year.

Subsequent Event

Mr. Alan Edwards, the Company’s Executive VicePresident and Chief Operating Officer since June 2004, has resigned effectiveAugust 20, 2007 to become the chief executive officer of another company.  Mr Edwards was instrumental in leading thesuccessful development, commissioning and startup of our San Cristobal Project.

**Results of Operations**

Three Months EndedJune 30, 2007

*Exploration.*  Exploration expense was $3.6 million for thesecond quarter of 2007 compared to $1.6 million for the second quarter of 2006.Exploration expense is incurred primarily in Argentina, Mexico and Peru. During2007, we have begun extensive drilling programs and other geologic testing toincrease the rate of evaluation of many of our properties.

*Administrative.*  Administrative expense of $5.4 million forthe second quarter of 2007 is comparable to $5.7 million for the second quarter2006.  Administrative expenses areincurred primarily by our corporate headquarters and consist primarily ofcompensation costs, professional fees paid for accounting and legal services, officeand equipment lease costs and other general costs. Administrative costs areincurred supporting the areas of finance, compliance, marketing and otheradministrative requirements including the indirect support of the financing,development and other requirements of our San Cristobal Project.

*Gainsand Losses - Commodity Derivatives*.  For the second quarter of 2007 we recorded aloss related to our metals derivative positions in the amount of $165.6 millioncompared to a loss of $78.1 million on our derivative positions for the secondquarter of 2006. The losses are the result of marking-to-market our openderivative positions as spot and forward prices for silver, zinc and leadfluctuate around record high levels and settlement dates draw closer. Duringthe periods that the metals derivative positions are outstanding, gains andlosses may fluctuate substantially from period to period based on spot prices,forward prices and quoted option volatilities. (See “Overview” for additionaldiscussion of the 2007 derivative loss).

*Interestand other income.* We recorded interest and other income of$6.4 million for the second quarter of 2007 as compared to $5.3 millionrecorded during the second quarter of 2006. The 2007 increase in interest and other income was the result of theincreased interest we earned on the higher average cash and investment balancesthat we held during the 2007 period resulting from the proceeds from the saleof a 35% interest in our San Cristobal Project in September 2006 and the proceedsreceived from the Ordinary Share offering completed during the second quarter2006.  Available interest rates were alsohigher for the second quarter 2007 as compared to the same period of 2006.

*Royalty Income.* During thesecond quarter 2007, we received $0.2 million of royalty income from a propertyin Mexico on which we retained a net smelter return royalty.  The property is being test mined by

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ajoint venture partner and we received royalties for product sold from the testmining operation. We did not receive any royalties in the second quarter 2006.

*Interestexpense and other borrowing costs.*  We recognized no interest expense and otherborrowing costs during the second quarter 2007 as the total $12.5 million ofthose costs were capitalized.  During thesecond quarter 2006 we recognized $0.3 million of interest expense and otherborrowing costs which were net of approximately $6.4 million capitalized.Interest costs for both periods are primarily related to the Convertible SeniorSubordinated Notes Due 2024 and the project finance facility. The increase inthe 2007 costs is primarily the result of increased borrowings outstandingunder the project finance facility.

*IncomeTaxes*.   For both thesecond quarter 2007 and 2006 we recorded nominal amounts of income tax expenseconsisting solely of withholding taxes on inter-company investment income andadministrative charges associated with one of our Bolivian subsidiaries.

Six Months EndedJune 30, 2007

*Exploration.*  Exploration expense was $6.4 million for thesix month period ended June 30, 2007 compared to $3.0 million for the six monthperiod ended June 30, 2006. Exploration expense is incurred primarily inArgentina, Mexico and Peru. During 2007 we have begun extensive drillingprograms and other geologic testing to increase the rate of evaluation of manyof our properties.

Administrative.  Administrative expense of $11.7 million forthe six month period ended June 30, 2007 is comparable to $11.0 million for thesix month period ended June 30, 2006. Administrative expenses are incurred primarily by our corporateheadquarters and consist primarily of compensation costs, professional feespaid for accounting and legal services, office and equipment lease costs andother general costs. Administrative costs are incurred supporting the areas offinance, compliance, marketing and other administrative requirements includingthe indirect support of the financing, development and other requirements ofour San Cristobal Project.

*Gainsand Losses - Commodity Derivatives*.  For the six month period ended June 30, 2007we recorded a loss related to our metals derivative positions in the amount of$57.3 million compared to a loss of $251.0 million on our derivative positionsfor the six month period ended June 30, 2006. The losses are the result ofmarking-to-market our open derivative positions as spot and forward prices forsilver, zinc and lead fluctuate around record high levels and settlement datesdraw closer. The $57.3 million loss for the six months ended June 30, 2007 isthe result of the combined $108.3 million gain recognized during the firstquarter of 2007 and the $165.6 million loss recognized during the secondquarter of 2007. During the periods that the metals derivative positions areoutstanding, gains and losses may fluctuate substantially from period to periodbased on spot prices, forward prices and quoted option volatilities. (See “Overview”for additional discussion of the 2007 derivative loss).

*Interestand other income.* We recorded interest and other income of$13.2 million for the first six months of 2007 as compared to $8.2 millionrecorded during the first six months of 2006. The 2007 increase in interest and other income was the result of theincreased interest we earned on the higher average cash and investment balancesthat we held during 2007 resulting from the proceeds from the sale of a 35%interest in our San Cristobal Project in September 2006 and the proceedsreceived from the Ordinary Share offering completed during the second quarter 2006.  Available interest rates were also higher forthe first six months of 2007 as compared to the same period of 2006.

*Royalty Income.* During thefirst six months of 2007, we received $0.4 million of royalty income from aproperty in Mexico on which we retained a net smelter return royalty.  The property is being test mined by a jointventure partner and we received royalties for product sold from the test miningoperation. We did not receive any royalties in the first six months of 2006.

*Interestexpense and other borrowing costs.*  We recognized no interest expense and otherborrowing costs during the first six months of 2007 as the total $23.4 millionof those costs were capitalized.  Duringthe first six months of 2006 we recognized $0.4 million of interest expense andother borrowing costs which were net of approximately $11.0 millioncapitalized. Interest costs for both periods are primarily related to theConvertible Senior Subordinated Notes due 2024 and the project financefacility.  The

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increase in the 2007costs is primarily the result of increased borrowings outstanding under the projectfinance facility.

*IncomeTaxes*.   For both thesix months ended 2007 and 2006 we recorded nominal amounts of income taxexpense consisting solely of withholding taxes on inter-company investmentincome and administrative charges associated with one of our Boliviansubsidiaries.

**Liquidity and Capital Resources**

At June 30, 2007 ouraggregate cash, restricted cash, short and long-term investments and restrictedinvestments totaled $402.8 million compared to an aggregate of $514.9 millionin cash, restricted cash, short and long-term investments and restrictedinvestments at December 31, 2006.  Thedecrease in our aggregate cash and investment balances as of June 30, 2007compared to December 31, 2006 was primarily the result of $129.6 millioninvested in property, plant and equipment related to the development of the SanCristobal Project, including $23.1 million of interest paid andcapitalized.  In addition, $44.4 millionwas spent to fund operations, property holding costs and administrative costs,net of interest and other income and $7.5 million was spent for the payment oflong term debt (primarily capital lease payments).  These amounts were partially offset by $45.0million of borrowings against the project finance facility, $27.4 million advancedby Sumitomo as their share of funding of excess costs for the San CristobalProject and $1.2 million of proceeds from employee stock options exercised.

The amounts held at June30, 2007 include $151.2 million in cash and cash equivalents, $210.0 million ininvestments, $29.6 million of cash and investments that are restricted to funddevelopment at our San Cristobal Project, $9.2 million of investments to collateralizecertain letters of credit and $2.8 million of investments that are restrictedand at maturity will provide the amounts necessary to pay interest throughSeptember 2007 on the 4.0% Convertible Senior Subordinated Notes Due 2024.

During the third quarterof 2007 we expect to spend approximately $85 million on our San CristobalProject to complete the commissioning and startup, make final payment ofaccrued construction costs, provide for approximately $40 million of workingcapital requirements during the first several months of operation and completeconstruction of certain additional facilities not required for initialoperations.  The amount includes anapproximate ten percent increase over the $650 million Project estimatepreviously disclosed, as a result of operating costs being experienced for alonger period before revenues are realized and additional costs associated withthe delay and repairs of the ball mills and other costs.  We anticipate funding our 65% share of theserequirements and any additional requirements from existing restricted cash andinvestments set aside to fund certain of these requirements and from existingnon-restricted cash and investments. Sumitomo will fund their remaining 35% ofthe current requirements and any additional requirements. We expect operatingcash flows from the Project to begin during the third quarter of 2007.

In addition, as a resultof our negotiations with the project finance facility lenders discussed above,we expect to deposit $91 million in a restricted fixed margin account duringthe third quarter of 2007 as security for the existing metals derivativepositions.  The margin account will bedecreased by 33% at the end of each of 2008, 2009 and 2010. We also expect tospend approximately $8 million to purchase put options to provide additionalcash flow protection for the San Cristobal Project.  The cost of the put options will be borne 65%by Apex and 35% by Sumitomo.

Finally, for theremainder of the year we expect to spend approximately $7 million on generalcorporate costs, $7 million on exploration efforts and approximately $5 millionon interest payments related to the outstanding convertible debt.  We plan to fund these expenditures from ourexisting cash and investment balances and from interest and other income.

Because we were unable totimely file our December 31, 2006 annual report on Form 10-K our existingshelf registration statements will not be available as a source of equity ordebt financing for at least nine months.

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**Significant Accounting Policies**

EffectiveJanuary 1, 2007, we adopted Financial Accounting Standards Interpretation No.48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”), an interpretationof Financial Accounting Standards Statement No. 109, “Accounting for IncomeTaxes.” FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 requires that we recognize in ourfinancial statements the impact of uncertain tax positions. FIN 48 alsoprovides guidance on de-recognition, classification, interest and penalties,accounting in interim periods and disclosure. The adoption of FIN 48 did nothave a material impact on our financial position or results of operations.

*NewAccounting Standards*

During February2007 the Financial Accounting Standards Board (“FASB”) issued FinancialAccounting Standards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities Including an amendment of FASB Statement No. 115” (“FASNo. 159”). FAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value. Most of the provisions ofFAS No. 159 apply only to entities that elect the fair value option.  However, the amendment to FASB Statement No.115, “Accounting for Certain Investments in Debt and Equity Securities,”applies to all entities with available-for-sale and trading securities.  FAS No. 159 is effective as of the beginningof the first fiscal year that begins after November 15, 2007, or fiscal year2008 for us.  We do not expect theadoption of FAS No. 159 to have a material impact on our financial position orresults of operations.

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

## **Contractual Obligations**

As discussedabove, at June 30, 2007 we will be required to spend an additionalapproximately $85 million related to our San Cristobal Project to complete thecommissioning and startup, make final payment of accrued construction costs,provide for approximately $40 million of working capital requirements duringthe first several months of operation and complete construction of certainadditional facilities not required for initial operations.

During the sixmonths ended June 30, 2007 we borrowed the remaining $45 million availableunder the $225 million project finance facility. In addition during the sixmonths ended June 30, 2007 we placed in service $37.3 million of miningequipment recorded as capital leases resulting in total capital leaseobligations of $47.9 million at June 30, 2007.

## **Forward-Looking Statements**

Some informationcontained in or incorporated by reference into this report may containforward-looking statements. These statements include comments regarding SanCristobal development and construction plans, capital and other costs, fundingand timing; the timing of completion of San Cristobal construction, start-upand commencement of operations; anticipated spending during 2007; increasedfunding requirements, capital costs and working capital requirements for theSan Cristobal Project; contractual arrangements with Sumitomo, includingSumitomo’s obligations with respect to funding commitments; the likelyincreased volatility in future earnings due to forward sales, derivativepositions and metals trading activity; compliance with and anticipatedamendments to the San Cristobal Project finance facility; possible changes inthe mining or taxation policies of the Bolivian government; anticipated 

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ramp-up of San Cristobal production and sales, the commissioning of andcontinuous production from the second ball mill, 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 theexpectations reflected in those forward-looking statements are reasonable.  However, we cannot assure that theseexpectations will prove to be correct. Actual results could differ materially from those anticipated in theseforward-looking statements as a result of the factors set forth below and otherfactors set forth in, or incorporated by reference into this report:

·                  worldwideeconomic and political events affecting the supply of and demand for silver,zinc and 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 natural resourcesor other changes in the mining or taxation 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;

·                  delays ordifficulties on the start-up or operation of the San Cristobal Project;

·                  failure tocomply with obligations under the San Cristobal Project finance facility;

·                  failure to reachagreement with Sumitomo Corporation regarding future development or operationof San Cristobal, or failure to comply with agreements with Sumitomo related tothe San Cristobal Project;

·                  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, 2006.

Many of those factors arebeyond our ability to control or predict. You should not unduly rely on these forward-looking statements. Thesestatements speak only as of the date of this report on Form 10-Q.  Except as required by law, we are notobligated to publicly release any revisions to these forward-looking statementsto reflect future events or developments.

## **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**

## **Interest Rate Risk**

Ouroutstanding debt consists primarily of our 4.0% and 2.875% Convertible SeniorSubordinated Notes due 2024 and amounts borrowed under our San CristobalProject finance facility.  TheConvertible Senior Subordinated Notes bear interest at a fixed rate and thus donot have exposure to interest rate changes. The project finance facility bears interest at the LIBOR rate plus acredit spread.  With the full $225 millionborrowed under the facility, a 1% increase in the LIBOR rate would result in anannual increase in interest expense of $2.25 million.  We have not entered into any agreements tohedge against unfavorable changes in interest rates, but may in the futuremanage our exposure to interest rate risk.

We investexcess cash in U.S. government and debt securities rated “investment grade” orbetter.  The rates received on suchinvestments may fluctuate with changes in economic conditions. As a result, ourinvestment income may fall short of expectations during periods of lowerinterest rates.  Based on the averagecash, restricted cash, investments and restricted investment balancesoutstanding during the first six months of 2007, a 1% decrease in interestrates would have resulted in a reduction in interest income for the period ofapproximately $2.3 million.

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## **Foreign Currency Exchange Risk**

Although most of ourexpenditures are in U.S. dollars, certain purchases of labor, operatingsupplies and capital assets are denominated in Bolivianos, Euros or othercurrencies.  As a result, currencyexchange fluctuations may impact the costs of our operations.  Specifically, the appreciation of Bolivianosagainst the U.S. dollar may result in an increase in operating expenses andcapital costs at the San Cristobal Project in U.S. dollar terms.  To reduce this risk, we maintain minimum cashbalances in all foreign currencies, including Bolivianos, and complete most ofour purchases, including purchases relating to the San Cristobal Project, inU.S. dollars.

We have previouslyengaged in a limited amount of currency hedging activities primarily related toan equipment order for the San Cristobal Project that was denominated inEuros.  At June 30, 2007 we did not holdany foreign currency derivative positions.

## **Commodity Price Risk**

None of our properties arein production and, consequently, we do not have any current revenue fromsales.  When the San Cristobal Projectbegins production, our primary source of income will be from sales ofconcentrates containing silver, zinc and lead. As a result, changes in the price of any of these commodities couldsignificantly affect our results of operations and cash flows.

To complete the SanCristobal Project finance facility, we were required to implement priceprotection for a portion of our planned silver, zinc and lead production fromSan Cristobal.  We have entered into contracts utilizing forward sales,puts and calls.  Non-cash mark-to-market gains and losses from these andother derivative positions may fluctuate substantially from period to periodbased on spot and forward prices and option volatilities.  The actualfinal financial impact of the derivative positions required by the projectfinancing facility will not be known until the positions are closed on theirfuture settlement dates.  Our outstanding derivative positions represent4%, 13% and 17% of planned life-of-mine payable production of silver, zinc andlead at San Cristobal but represent a significantly higher proportion of ourplanned production during the six years in which the derivative positions arein place.   For the first six years ofproduction, we have hedged approximately 10%, 24% and 32% of planned productionof silver, zinc and lead, respectively.

During the first sixmonths of 2007 we recorded a non-cash mark-to-market loss on our open derivativepositions in the amount of $57.3 million. For the year ended December 31, 2006we recorded non-cash mark-to-market losses of $672.5 million on our openderivative positions.  As of June 30, 2007 the fair value of our openderivative positions reflected a $875.5 million liability.  Non-cash mark-to-market gains and losses fromthe open derivative positions have fluctuated substantially from period toperiod based on spot and forward prices and option volatilities and will mostlikely continue to do so as long as the derivative positions are outstanding.See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Results of Operations”.

Related to certainpending amendments to the project finance facility agreement as discussedabove, we and Sumitomo have agreed to purchase put options to protectadditional cash flow needed for the accelerated loan schedule.

# **Item 4. Controls and Procedures**

(a)    Disclosure Controls and Procedures

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in the reports we file or submit under theSecurities and Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to Apex Silver’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

As of theend of the period covered by this report, we carried out an evaluation, underthe supervision and with the participation of our Disclosure Committee andmanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15(e) under the SecuritiesExchange Act of

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1934.  Based upon this evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that as a result of theunremediated material weakness related to loan covenant compliance discussedbelow, our disclosure controls and procedures were not effective as of the endof the period covered by this report.

(b)    Change in Internal Control over FinancialReporting

ApexSilver’s management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934.  Ourinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles (GAAP).  Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with policies and procedures may deteriorate.

Managementissued a report on the effectiveness of our internal control over financialreporting as of December 31, 2006.  Inmaking its assessment, management used criteria set forth in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”).  Management’sassessment concluded that, as of December 31, 2006, we did not maintaineffective controls over the valuation of the metals derivatives positions andthe monitoring of our compliance with certain covenants related to its projectfinance facility.  As disclosed inmanagement’s report, these control deficiencies constituted material weaknessesas of December 31, 2006 and resulted in the following adjustments to ourfinancial statements:

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

·                  Anaudit adjustment to our 2006 annual consolidated financial statements toproperly reflect the balances of our derivative liabilities, gain on sale of aninterest in subsidiaries, minority interest in subsidiaries, minority interestloss of consolidated subsidiaries and the accumulated deficit accounts as aresult of reassessing available market data in the valuation of our metalsderivatives.

The materialweakness relating to the controls over the valuation of the metals derivativespositions has been remediated during the first six months of 2007.

However thematerial weakness relating to the controls over the monitoring of compliancewith certain covenants related to our project finance facility had not beenremediated. We have been actively engaged in the implementation of remediationefforts to address the monitoring of our compliance with certain covenantsrelated to its project finance facility material weaknesses described above.

Remediationefforts completed or to be completed include:

·                  Wehave hired a Senior Treasury Analyst, with experience commensurate with thecomplexity of our loan compliance requirements and we are designing and implementingeffective controls to ensure the Senior Treasury Analyst will closely monitorcompliance of our project finance facility and other financingarrangements.  Training will also beprovided to all key personnel involved in the loan compliance processes andprocedures.

We will continueto assign the highest priority to the remediation efforts in this area, withthe goal of remediating this material weakness before the end of the thirdquarter of 2007.

There has been noother change in our internal control over financial reporting during the mostrecent fiscal quarter that has materially affected, or that is reasonablylikely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

## **Item 1.   Legal Proceedings**

There were nomaterial developments to proceedings previously discussed in our Form 10-K forthe year ended December 31, 2006.

## **Item 1A. Risk Factors**

There were nomaterial changes from the risk factors as previously discussed in our Form 10-Kfor the year ended December 31, 2006.

## **Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

None.

## **Item 3.    DefaultsUpon Senior Securities**

None.

## **Item 4.    Submissionof Matters to a Vote of Security Holders**

The followingmatters were voted upon at the annual meeting of shareholders held on June 7,2007:

(a)           Election of four directors whoseterms expire at the date of the 2010 annual meeting,

(b)                                 Ratificationof the selection of PricewaterhouseCoopers LLP as independent registered publicaccounting firm for the current fiscal year.

All matters voted on atthe annual meeting were approved.  Thevoting results were as follows:
| Election of Directors          | ** ** | **For**    | ** ** | **Against  or  Withheld** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|------------------------------------------|------------|------------|------------|---------------------------|------------|-------------|------------|-----------------------|------------|
| Harry M. Conger                          |       | 47,596,428 |       | 110,835                   |       | —      |       | —                |       |
| Rodman L. Drake                          |       | 47,460,399 |       | 246,864                   |       | —      |       | —                |       |
| Ian  Masterton-Hume                      |       | 47,589,395 |       | 108,868                   |       | —      |       | —                |       |
| Charles B. Smith                         |       | 47,308,223 |       | 399,040                   |       | —      |       | —                |       |
|                                     |       |       |       |                      |       |        |       |                  |       |
| **Selection of  PricewaterhouseCoopers** |       | 47,217,115 |       | 470,479                   |       | 19,669      |       | —                |       |

 

**Item 5.     Other Information**

Mr. Alan Edwards,the Company’s Executive Vice President and Chief Operating Officer sinceJune 2004, has resigned effective August 20, 2007 to become the chiefexecutive officer of another company.

**Item 6.     Exhibits**
| 10.1 | Indemnification Agreement dated July 10, 2007  between Apex Silver Mines Limited and Deborah Friedman                                      |
|------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 | Change of Control Agreement dated July 10, 2007  between Apex Silver Mines Limited and Deborah Friedman                                    |
| 10.3 | Non-Employee Directors Deferred Compensation and  Equity Award Plan                                                                        |
| 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) |

 

32

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on behalf of the undersigned thereunto dulyauthorized.
|                                             |   | APEX SILVER MINES LIMITED                                 |
|---------------------------------------------|--------|-----------------------------------------------------------|
|                                        |   |                                                      |
|                                        |   |                                                      |
|                                        |   |                                                      |
| Date:    August 8, 2007 | By:    | \s\ Jeffrey G. Clevenger                                  |   |
|                                        |   |   Jeffrey G.  Clevenger                              |
|                                        |   |   President  and Chief Executive Officer             |
|                                        |   |                                                      |
|                                        |   |                                                      |
| Date:    August 8, 2007 | By:    | \s\ Gerald J. Malys                                       |   |
|                                        |   |   Gerald J.  Malys                                   |
|                                        |   |   Senior Vice  President and Chief Financial Officer |

 

33

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