**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                            to                            **

**Commissionfile number 1-13627**

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**APEX SILVER MINES LIMITED**

(Exact Name of Registrantas Specified in its Charter)

| **Cayman Islands, British West  Indies**  |   | **Not  Applicable**                   |
|-------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
| **Walker House**                          |   | ** **                            |
| **Mary  Street**                          |   | ** **                            |
| **George  Town, Grand Cayman**            |   | ** **                            |
| **Cayman  Islands, British West Indies**  |   | **Not  Applicable**                   |
| (Address of  principal executive office)  |   | (Zip Code)                            |

 

**(345) 949-0050**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act:

| **Title of each class**          | ** ** | **Name of each exchange on which registered** |
|---------------------------------------|------------|-----------------------------------------------|
| **Ordinary  Shares, $0.01 par value** |       | **American  Stock Exchange**                  |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o    No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.Yes x    No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.

| Large Accelerated Filer x |   | Accelerated Filer o |   | Non-accelerated  Filer o |
|--------------------------------|--------|---------------------|--------|--------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act). Yes o    No x

The aggregate market value of the voting and non-votingcommon equity held by non-affiliates as of June 30, 2006 was approximately$748 million, based on the closing price of the Ordinary Shares on the AmericanStock Exchange of $15.05 per share. The number of Ordinary Shares outstandingon March 27, 2007 was 58,628,150.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the Registrant’s Definitive Proxy Statementto be filed with the Securities and Exchange Commission pursuant toRegulation 14A in connection with the 2007 Annual Meeting of Shareholdersare incorporated by reference in Part III of this Report on Form 10-K.

 

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**FORWARD-LOOKINGSTATEMENTS**

Some information contained in or incorporated byreference into this report on Form 10-K may contain forward-lookingstatements. These statements include comments regarding San Cristobaldevelopment and construction plans, capital and other costs, funding andtiming; the timing of completion of San Cristobal construction, start-up andsale of concentrates; anticipated spending during 2007; increased fundingrequirements, capital costs and working capital requirements for the San Cristobalproject; contractual arrangements with Sumitomo, including Sumitomo’sobligations with respect to deferred payments and funding commitments; thelikely increased volatility in future earnings due to derivative positions;anticipated San Cristobal production, grades, recovery rates, mine life,operating costs and cash flows; evaluation and expansion of our explorationportfolio; the effect of the May 2006 Bolivian Constitutional Court decreeregarding the mining code; Bolivian political and economic conditions; themarkets for silver, zinc and lead; and the level of compensation for ourexecutives during 2007.

The use of any ofthe words “anticipate,” “continue,” “estimate,” “expect,” “may,” “will,” “project,”“should,” “believe” and similar expressions are intended to identifyuncertainties. We believe the expectations reflected in those forward-lookingstatements are reasonable. We cannot assure you, however, that theseexpectations will prove to be correct. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of the risk factors set forth below and other factors set forth in, orincorporated by reference into, this report:

·       worldwide economic andpolitical events affecting the supply of and demand for silver, zinc and lead;

·       political and economicinstability in Bolivia, including the communities located near the SanCristobal project and other countries in which we conduct business;

·       future actions of theBolivian government with respect to nationalization of natural resources orother changes in the mining or taxation policies of the Bolivian government;

·       volatility in market pricesfor silver, zinc and lead;

·       financial marketconditions;

·       uncertainties associatedwith developing a new mine, including potential cost overruns and theunreliability of production and cost estimates in early stages of minedevelopment;

·       variations in ore grade andother characteristics affecting mining, crushing, milling and smeltingoperations and mineral recoveries;

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

·       failure to comply with ourobligations under the San Cristobal project finance facility;

·       failure to reach agreementwith Sumitomo Corporation regarding future development or operation of SanCristobal, or failure to comply with agreements with Sumitomo related to theSan Cristobal project;

·       uncertainties regardingfuture changes in applicable law or implementation of existing law, includingBolivian laws related to tax, mining, environmental matters and exploration;and

·       the factors discussed under“Risk Factors.”

Many of those factors arebeyond our ability to control or predict. You should not unduly rely on theseforward-looking statements. These statements speak only as of the date of thisreport on Form 10-K. Except as required by law, we are not obligatedto publicly release any revisions to these forward-looking statements toreflect future events or developments. All subsequent written and oralforward-looking 

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statementsattributable to Apex Silver and persons acting on our behalf are qualified intheir entirety by the cautionary statements contained in this section andelsewhere in this report on Form 10-K.

**CONVERSION TABLE**

Inthis report, figures are presented in both United States standard and metricmeasurements. Conversion rates from United States standard to metric and metricto United States standard measurement systems are provided in the table below. 

| U.S. Unit      | ** ** | **Metric  Measure** | ** ** | **Metric Unit** | ** ** | **U.S. Measure**    |
|----------------|------------|---------------------|------------|-----------------|------------|---------------------|
| 1 acre         |       | 0.4047 hectares     |       | 1 hectare       |       | 2.47 acres          |
| 1 foot         |       | 0.3048 meters       |       | 1 meter         |       | 3.28 feet           |
| 1 mile         |       | 1.609 kilometer     |       | 1 kilometer     |       | 0.62 miles          |
| 1 ounce (troy) |       | 31.103 grams        |       | 1 gram          |       | 0.032 ounces (troy) |
| 1 ton          |       | 0.907 tonne         |       | 1 tonne         |       | 1.102 tons          |

 

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**PART I**

**ITEMS 1 AND2:  BUSINESS AND PROPERTIES**

Apex Silver Mines Limited, incorporated under the lawsof the Cayman Islands in 1996, is engaged in the exploration and development ofsilver and other mineral properties in Latin America. We have a large diversifiedportfolio of privately owned and controlled silver and other mineralexploration properties. We have rights to or control over numerous claims orconcessions located in or near the traditional silver producing regions ofCentral and South America, primarily Bolivia, Peru, Argentina and Mexico. Noneof our properties is in production, and consequently we have no income or cashflow from operations.

Our first development property, the 65% owned SanCristobal project located in southwestern Bolivia, is currently underconstruction and is expected to have its first sale of production in the thirdquarter of 2007. San Cristobal’s proven and probable reserves at December 31,2006, based on $8.51 per ounce silver, $0.86 per pound zinc and $0.47 per poundlead, total approximately 251 million tonnes of ore grading 55 grams per tonnesilver, 1.54% zinc and 0.53% lead, containing approximately 446 million ouncesof silver, 8.53 billion pounds of zinc and 2.92 billion pounds of lead. Theprices used in estimating ore reserves represent the three-year average pricefor each of the metals as required pursuant to Securities and ExchangeCommission (“SEC”) rules.

As used herein, *Apex Silver, we*and*our*refer collectively to Apex SilverMines Limited, its predecessors, subsidiaries and affiliates or to one or moreof them as the context may require.

All currency referencesare to United States dollars, unless otherwise indicated.

**AVAILABLEINFORMATION**

We make available, free ofcharge through our Internet website at *http://www.apexsilver.com*,our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports filedor furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as soon as reasonably practicable after suchmaterial is electronically filed with or furnished to the SEC. Information onour website is not incorporated into this report and is not a part of thisreport.

**BUSINESS STRATEGY**

Apex Silver is one of a limited number of silvercompanies with significant exposure to other metals. Our strategy is tocapitalize on the San Cristobal project and our sizeable portfolio of mineralexploration properties in order to achieve long-term profits and growth and toenhance shareholder value.

Although our primary focus is on silver, we intend toproduce other metals from deposits we may discover or acquire, including zinc,lead and gold. We are managed by a team of seasoned mining professionals withsignificant experience in the construction, development and operation oflarge-scale, open pit and underground, precious and base metals miningoperations, as well as the identification and exploration of mineral properties.From time to time, we also consider acquisitions of development or producingproperties and business combination opportunities.

The principalelements of our business strategy are to:

·       completethe successful start-up of the San Cristobal project;

·       continueto explore and develop those properties which we believe are most likely tocontain significant amounts of silver and/or other metals and divest thoseproperties that are not of continuing interest; and

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·       identify and acquireadditional mining and mineral properties that we believe contain significantamounts of silver and/or other metals or have development potential.

**SAN CRISTOBALPROJECT**

Our 65%-owned SanCristobal project is located in the San Cristobal mining district of the PotosiDepartment in southwestern Bolivia, a region that historically has produced asignificant portion of the world’s silver supply. San Cristobal is located inthe Bolivian Altiplano in the Andes mountains, approximately 500 kilometerssouth of the city of La Paz. The project is accessible by an improved gravelroad from the town of Uyuni, approximately 100 kilometers to the northeast, andfrom the Chilean border town of Ollagüe, approximately 135 kilometers to thewest. A railroad begins at the Chilean port of Antofagasta, approximately 460kilometers southwest of San Cristobal, and continues north to La Paz, passing50 kilometers to the north of San Cristobal. A spur is being built to connectthe mine to the railroad for shipment of concentrates and receipt of importedsupplies. The map below shows the location of the San Cristobal project.

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*History*

Silver was discovered inwhat is now the San Cristobal district in the early seventeenth century, andmining has occurred intermittently in the area ever since. Although no recordsfrom the Spanish colonial era mines have survived, and few records exist withrespect to production in the district during the nineteenth and twentiethcenturies, the district is believed to have produced millions of ounces ofsilver.

Other than sporadicunderground mining in the area of the planned San Cristobal pit, over theprevious 350 years only one portion of the San Cristobal project, the Toldosdeposit, has been mined. The Toldos mine was operated by Empresa Minera YanaMallcu S.A. as a block-caving underground operation between 1985 and 1988, andas an open-pit mine and silver heap leach between 1989 and 1995. The Toldosmine was shut down in 1995 and at present there is no significant mining orprocessing plant or equipment on the San Cristobal property remaining from theToldos mine.

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*Development and Construction of the San CristobalProject*

Beginning in 1993, ourfounders established certain companies to acquire and developsilver exploration properties throughout the world. Our predecessor companiesacquired the concessions comprising the San Cristobal project from Boliviancompanies and individuals in a series of transactions from 1994 through 1997. In1996, our predecessors began exploring the San Cristobal project and discovereda significant silver, zinc and lead deposit with the potential to be developedas a large-scale, open-pit mine. Apex Silver Mines Limited was formed in March 1996and acquired the San Cristobal project and other exploration properties in a seriesof transactions in 1996 and 1997. We completed the initial SanCristobal feasibility study, conducted by Kvaerner Metals, Davy NonferrousDivision, in 1997. In December 1997, we completed our initial publicoffering.

The San Cristobal propertyis comprised of certain mining concessions that are part of a large block ofconcessions covering approximately 500,000 acres, which we own or control. Underthese mining concessions, we have the right to carry out exploration, mining,processing and marketing of all mineral substances located within theconcessions, and to use the water found on the concessions. The area includesconcessions covering approximately 88,000 acres, which are held mostly fortransportation, power lines and other infrastructure. In order to maintain ourrights to these concessions, we must make annual mining patent payments to theBolivian government totaling approximately $400,000. We are not required to payany royalties in respect of production from the San Cristobal property, althoughwe are required to pay the complementary mining tax imposed by Bolivian taxauthorities. See  “Republic of Bolivia.”

In July 1999, wecompleted a detailed feasibility study on San Cristobal. The feasibility studywas prepared by an independent engineering firm, Kvaerner, E&C MetalsDivision. We subsequently selected Aker Kvaerner as the primary contractor atthe project and they commenced detailed engineering. In September 2000, wecompleted a metallurgical update to the feasibility study, which noted animprovement in the economics of the San Cristobal project as a result ofcertain positive metallurgical and operational factors.

In April 2001, dueprimarily to weak silver prices, we suspended detailed engineering for SanCristobal and significantly curtailed expenditures on the project. Thisinterruption continued for a period of nearly three years. During this period,we advanced the project primarily by continuing the evaluation and negotiationof infrastructure arrangements, including the selection of a port from which toship the concentrates to smelters, arrangements for the transportation ofconcentrates from San Cristobal to the port and the provision of power to SanCristobal.

In 2004, based onimproving silver and zinc prices, we retained Aker Kvaerner to complete anupdated estimate of San Cristobal capital and operating costs and an estimatedproject schedule. They completed this update during the third quarter of 2004,and in November 2004, we entered into an Engineering, Procurement and ConstructionManagement (“EPCM”) Agreement with Aker Kvaerner. Under the EPCM Agreement,Aker Kvaerner is responsible for completing detailed engineering, procuring thenecessary equipment and managing and overseeing the construction andinstallation of the facilities at the San Cristobal project.

The 2004 updated costestimate prepared by Aker Kvaerner provided the basis for an updatedDevelopment Plan. We completed the Development Plan, a detailed plan for thedevelopment and construction of the San Cristobal project, in November 2004.

We plan to mine the SanCristobal deposit from an open pit mine at the rate of approximately 40,000tonnes of ore per day and process the ore by conventional flotation methods. Wewill transport mined ore to the primary crusher by truck and then convey thecrushed ore to a mill and flotation plant with a design capacity of 40,000tonnes per day. The ore will be ground in a semi-autogenous (SAG) and ball millcircuit, and then processed by selective flotation to produce separate zinc-silverand lead-silver concentrates and lesser amounts of bulk lead-silverconcentrates. Filtered concentrates will be transported by rail to the port 

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inMejillones, Chile, and then by ocean vessel to smelters and refineries aroundthe world. The project is expected tohave a 17-year mine life, based on current reserves.

We began construction onthe San Cristobal project during the first quarter of 2005. By the end of 2006,the project was estimated to be over 90% completed and we anticipate the firstsale of concentrates during the third quarter of 2007. All the major mechanicalequipment, including the flotation circuit, filtration plant and the 10-kilometertailings line, including piping and booster pumping stations for the 15-kilometerwater supply system, has been installed. Major components, including the SAGand two ball mill motors, have been installed and are undergoing testingprocedures. Concentrator construction has shifted to systems completion and iscentered on final installation of process piping and electrical instrumentationequipment. Commissioning activities began in the fourth quarter of 2006 withthe electrical substation, utilities, the primary crusher and overlandconveyor.

We have completedconstruction of a power line from the town of Punutuma to San Cristobal and webegan drawing power from the national power grid during November 2006. Weare currently paying spot prices to acquire electricity from the national gridbut are negotiating a long-term power supply arrangement.

During 2006 we beganmining ore at the San Cristobal project and as of December 31, 2006 we hadstockpiled approximately 6.5 million tonnes of work-in-process ore. Approximately1.3 million tonnes of the total stockpiled ore are sulfide ore and theremainder is oxide ore. The sulfide ore will be processed through the SanCristobal mill first with the oxide ore scheduled for processing later in themine life.

A long-term agreement isin place for the transportation of the concentrates by rail to the port inMejillones, Chile. Construction of the rail spur from the mine site to the mainrail line began during the third quarter of 2006. The railroad spur isproceeding on schedule with 95% of the 65 kilometers of roadbed completed and14 kilometers or 20% of the total spur laid. We expect the rail spur to becompleted during the second quarter of 2007.

Concentrates will beunloaded from the rail cars at a facility at the port in Mejillones and thenloaded into ships for export. Construction of the Mejillones port facility isproceeding on schedule. We expect the port facilities to be completed duringthe second quarter of 2007.

Once the concentrates havearrived in Mejillones, they will be shipped by bulk carriers to smelters aroundthe world. We have signed long-term sales agreements with thirteen smelters inEurope, Australia, and Asia for the sale of a majority of the plannedproduction of zinc and lead concentrates for the first five years of productionat San Cristobal. We anticipate selling the remainder of our production on aspot basis.

We have all necessarypermits and approvals in hand in order to begin production at the project.

*October 2006 Update to the Development Plan*

During 2006, using newinformation obtained as a result of the advancement of construction and miningactivities, we undertook a review of the November 2004 San Cristobaldevelopment plan. The updated development plan, which was completed in October 2006,has caused us to increase our estimate for the total amount of project fundingand to increase our estimates of average cash operating costs. We have alsoincreased our estimates of zinc production and reduced our estimates of silverproduction for the first five years of operation.

These changes resultprimarily from record high commodity prices and the required stockpiling ofincreased amounts of oxide ore for future processing. Record high commoditiesprices have had a direct impact on the cost of supplies such as fuel, tires,and reagents, contributing to increased funding requirements for the projectand higher estimated operating costs once production begins. Pre-strippingactivity during 2006 provided additional information regarding the orebody,which indicates that the boundary between the surface silver-rich oxide orethat will be stockpiled for future processing and the 

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sulfideore that will be the first to be processed through the San Cristobal mill islower than previously believed.  This hasincreased the amount of oxide ore that must be stockpiled for future processingand has required that increased amounts of material be moved to access thesulfide ore.

Based on the updateddevelopment plan, in the first five years of operation San Cristobal isexpected to produce annually approximately 16.9 million ounces of payablesilver (at an average cash operating cost of approximately $1.97 per ounce),225,000 tonnes of payable zinc (at an average cash operating cost ofapproximately $0.51 per pound) and 82,000 tonnes of payable lead (lead iscredited as a by-product to silver production costs). The higher operatingcosts result primarily from the increases in the cost of supplies due to highercommodity prices and also from increases in estimated manpower requirementsover those anticipated in the original development plan. During its currentlyprojected 17-year life, San Cristobal is expected to produce annuallyapproximately 15.7 million ounces of payable silver, 166,000 tonnes of payablezinc and 59,000 tonnes of payable lead.

The financial measure “averagecash operating cost” will differ from measures of performance determined inaccordance with generally accepted accounting principles (“GAAP”). Ourestimated cash operating costs include estimated mining, milling and other minerelated overhead costs. The per-ounce of silver cost also includes off-sitecosts related to projected silver refining charges. The per-pound of zinc costalso includes charges related to transportation of zinc-silver concentrates andtheir projected treatment and smelting charges. All cash operating costsexclude taxes, depreciation, amortization and provisions for reclamation. Theaverage cash operating cost per ounce of silver is equal to the pro-rata shareof estimated average operating costs for the period reduced by the estimatedvalue of lead by-product credits for the period and divided by the number of “payableounces”. The lead by-product credits are net of charges related totransportation of lead-silver concentrates and their projected treatment andsmelting charges. The “payable ounces” are the estimated number of ounces ofsilver to be produced during the period reduced by the ounces required to coverestimated refining, treatment and transportation charges for the period.Average cash operating cost per pound of zinc is equal to the pro-rata share ofestimated average operating costs for the period divided by the number of “payablepounds”. The “payable pounds” are the estimated number of pounds of zinc to beproduced during the period reduced by the number of pounds required to coverestimated refining, treatment and transportation charges for the period. Estimatedcash operating costs are allocated between silver and zinc based on the revenuecontribution from each metal using the same prices we use for the purpose ofcalculating our reserves under SEC guidelines. We have included estimatedaverage cash operating cost information to provide investors with informationabout the cash generating capabilities of the San Cristobal project. Thisinformation should not be considered in isolation or as a substitute formeasures of performance that will be prepared in accordance with GAAP. Thesemeasures are not necessarily indicative of operating profit or cash flow fromoperations to be determined under GAAP and may not be comparable to similarlytitled measures of other companies.

Our estimate for the totalamount of project funding required from January 1, 2004 through thebeginning of production in 2007 is approximately $650 million, an increase ofapproximately $50 million, or 8%, over the original estimate developed in 2004.This amount includes all estimated costs required to commence production at SanCristobal, including all engineering, procurement and construction costs, aswell as estimates for constant dollar escalation and contingencies. Theestimate excludes $22 million advanced through issuance of Ordinary Shares tothe company constructing the power line, $6 million advanced to or escrowed forthe company constructing the port facilities and approximately $43 million ofworking capital. Advances to the power line and port facility providers areexpected to be recouped through credits applied against payments for thecontracted services. Of the $650 million budgeted amount, we have spent $518million through the end of 2006 and expect to spend the remaining amountsthrough the start up of operations and the resulting first sale of concentratesexpected during the third quarter of 2007.

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*Transaction withSumitomo Corporation*

On September 25, 2006, we sold to SumitomoCorporation (“Sumitomo”) a 35% interest in the San Cristobal project.Specifically, Sumitomo purchased a 35% interest in Minera San Cristobal S.A.(“MSC”), our Bolivian subsidiary that owns and operates the San Cristobalproject; Apex Silver Finance Ltd., our Cayman Islands subsidiary that holds themetals hedge positions; and Apex Metals Marketing GmbH, our Swiss subsidiarythat markets the project concentrates to smelters around the world. We alsosold to Sumitomo a 35% interest in certain other project-related assets notheld by these three subsidiaries.

We continue to own 65% of each of these threesubsidiaries and, subject to the provisions of the Shareholders Agreement describedbelow, we have operational control of the San Cristobal project. The MSCShareholders Agreement entered into in connection with the sale to Sumitomoprovides that the majority shareholder (currently Apex Silver) will have theright to name a majority of the directors on the MSC board of directors and toappoint the Chairman of the board. As long as the minority shareholder holdsmore than 25% of the outstanding stock of MSC, the minority shareholder willhave at least one representative on the board of directors and certainsignificant matters must be approved by that minority shareholder’s director.These significant matters include the approval of annual programs and budgets,increases of 15% or more over budgeted capital expenditures or operating expenses(with customary exceptions for emergencies and compliance), merger orliquidation, permanent cessation or suspension of mining for more than 180 daysat the project, or abandonment of the project. If a deadlock with respect tothe adoption or amendment in excess of 15% of a program and budget continuesfor 180 days, the majority shareholder’s directors are then entitled to approvethe program and budget.

The MSC Shareholders Agreement provides that we andSumitomo will contribute our proportionate share of funding required for MSC toachieve commercial operations. If either shareholder fails to provide its prorata share of funding, the shareholder’s interest in MSC will be diluted on atwo for one basis. Following the commencement of commercial operations, we andSumitomo may choose to provide our proportionate share of additional funding,if any, or be diluted on a one for one basis.  If either shareholder’sinterest in MSC is reduced, the corresponding interest in the other twosubsidiaries would be similarly adjusted so that the parties’ ownershipinterests in the three companies would remain identical.

If Sumitomo were to dilutebelow 25% ownership of MSC solely as a result of its failure to provide futurefunding, and were to refuse to approve a program and budget proposed by ApexSilver for more than 180 days, Sumitomo could elect to sell to us all (but notless than all) of its remaining interest in MSC for $224 million, reduced prorata by the percentage of year-end 2005 reserves already produced from the SanCristobal project.

*San CristobalProject Finance Facility*

In December 2005, we entered into a $225 millionproject finance facility to be used for the completion of construction of theSan Cristobal project. We amended the terms of the project finance facility inSeptember 2006 in connection with the Sumitomo transaction. As ofMarch 27, 2007, we had borrowed $200 million under the facility.

Under the terms of the project finance facility, allof the assets of MSC are secured in favor of the lenders. In addition, we andSumitomo have pledged all of the equity interests in our jointly ownedsubsidiaries: MSC, Apex Silver Finance and Apex Metals Marketing. We andSumitomo have each agreed to fund cost overruns at the San Cristobal projectand have guaranteed the satisfaction of the metals derivative positions held byApex Silver Finance. In each case, our obligation is limited to our pro rataownership interest in MSC and the obligation will terminate upon completion ofthe project, as defined in the project finance facility, which is expected tobe no later than December 2008. In connection with certain amendments tothe project finance facility, we and Sumitomo intend to provide a  limited post-completion guarantee of thesatisfaction of the metals derivative positions. See “Management’s Discussion 

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and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources—SanCristobal Project Finance Facility”.

As a result of therestatement of our financial statements relating to the valuation of our openderivative positions we breached certain representations and covenants underthe project finance facility regarding the preparation of financial statementsin accordance with U.S. GAAP. We also had certain other technical covenantviolations under the terms of the facility. In March 2007, we receivedwaivers and confirmations from our lenders for these potential covenantviolations and any related events of default. See “Managements Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources” for further discussion of the covenant violations and relatedwaivers.

*Reserves*

We have completed 549 reverse circulation drill holesand 85 diamond case drill holes, for a total of approximately 150,000meters at San Cristobal. The drill holes were generally spaced at intervals ofapproximately 75 meters. This drilling indicates that the mineralization ispresent over an area of 1,500 meters by 1,500 meters. The ore deposit definedby this drilling is open at depth and laterally.

The quality assurance/quality control program used atSan Cristobal included regular insertion and analysis of blanks and standardsto monitor laboratory performance. Blanks are used to check for contaminationand standards are used to check for grade-dependent biases. Duplicate sampleswere routinely submitted to different laboratories for assay, with the resultsof these check assays analyzed in total and separately by deposit, drill typeand grade. We conducted confirmation drilling, including our own twinning ofreverse circulation holes with diamond core holes and independent confirmationdrilling by an independent firm.

Usingadditional data collected during mining activities in 2005 and 2006, proven andprobable reserves were calculated in February 2007 using an $8.37 netsmelter return per tonne cutoff value for oxides, a $7.26 net smelterreturn per tonne cutoff value for sulfides and market price assumptions of $8.51 per ounce silver, $0.86 perpound zinc and $0.47 per pound lead. These prices represent thethree-year average prices for each of the metals through December 2006 asper guidelines established by the SEC. The following table shows our proven andprobable reserves of silver, zinc, and lead for sulfide ore and oxide ore atthe San Cristobal project. Our reserves were calculated by Mine ReservesAssociates, Inc., using a fully designed pit model that incorporatesdesign slopes, practical mining shapes and access ramps. Ore blocks within thedeposit model are designated as proven if they are within 40 meters (40 percentof the average variogram range) and at least three drill holes were used toevaluate the block. Ore blocks are designated as probable if they are between40 meters and the average variogram range of 100 meters and at least two drillholes were used to evaluate the block. Additionally, blocks within 40 metersbut evaluated by a single drill hole were also classified as probable. Provenand probable classifications are only determined after economic criteria areapplied to define the ore.

| ** **  | ** ** | **Proven and Probable Reserves** | ** ** |
|-------------|------------|-------------------------------------------------|------------|
| ** **  | ** ** | ** **                                      | ** ** | **Average Grade** | ** ** | **Contained Metals(1)** | ** ** |
| ** **  | ** ** | **Tonnes  of ore  (000s)**                 | ** ** | **Silver  Grade  (g/tonne)** | ** ** | **Zinc  Grade  (%)** | ** ** | **Lead  Grade  (%)** | ** ** | **Silver  Ounces  (000s)** | ** ** | **Zinc  Tonnes  (000s)** | ** ** | **Lead  Tonnes  (000s)** | ** ** |
| Sulfide Ore |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Proven      |       | 188,750                                         |       | 51.6 |   | 1.67 |   | 0.53 |   | 313,000 |   | 3,159 |   | 997 |   |
| Probable    |       | 40,244                                          |       | 46.5 |   | 1.73 |   | 0.50 |   | 60,000 |   | 696 |   | 201 |   |
| Oxide Ore   |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Proven      |       | 19,889                                          |       | 105.8 |   | 0.07 |   | 0.58 |   | 68,000 |   | 14 |   | 116 |   |
| Probable    |       | 1,890                                           |       | 84.5 |   | 0.07 |   | 0.52 |   | 5,000 |   | 1 |   | 10 |   |
| Total       |       | 250,773                                         |       | 55.3 |   | 1.54 |   | 0.53 |   | 446,000 |   | 3,870 |   | 1,324 |   |

 

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(1)          Amountsare shown as contained metals in ore and therefore do not reflect losses in therecovery process. Sulfide ore reserves are expected to have an approximate averagerecovery of 78% for silver, 93% for zinc and 86% for lead. Oxide ore reservesare expected to have an average recovery of 60% for silver and 50% for lead. Basedon the assumptions contained in the 2006 reserve report prepared by MineReserves Associates, Inc., the estimated strip ratio of the mine is2.29:1.

*Republic of Bolivia*

Bolivia is situated in central South America and isbordered by Peru, Brazil, Paraguay, Argentina and Chile. It has an area ofapproximately 1.1 million square kilometers and a population of approximately 9million people. Bolivia’s official and most widely spoken language is Spanish,but a large sector of the population is either native Aymara or Quechua Indian.

In December 2005, Evo Morales, the leader of theMovement to Socialism party, was elected president. At various times during2006, President Morales and others in his administration have made publicstatements regarding their desire to exert greater state control over resourceproduction in Bolivia, including mining. In May 2006, President Moralesrequired companies operating in the hydrocarbon industry to negotiate newcontracts with the government, resulting in some cases in a significantlyhigher effective tax rate. To date, there have been no formal proposals to nationalizethe mining industry. The government may, however, alter its current policieswith respect to the mining industry.

Bolivian law provides for unrestricted repatriation ofcapital, freedom to import goods and services and equality under the law betweenforeign and domestic companies.

Mining companies in Bolivia are subject to a 25%income tax, with taxable income determined in accordance with Boliviangenerally accepted accounting principles. Mining companies are also subject toa complementary mining tax (CMT), which is creditable against the income tax. Theamount of the CMT is equal to the value of the concentrate multiplied by a taxrate, which ranges from 1% to 5% for zinc and lead concentrates. The value ofthe concentrate is approximately equal to the amount of contained metals in theconcentrate multiplied by a commodity price that is published by the Boliviangovernment. Historically, these prices have been approximately equal to marketprices. The Bolivian government is currently considering various alternativesfor changes to the Mining Code and mining taxation, which could include changesin CMT rates. These changes could ultimately result in an increase in thetaxation of mining.

We are also subject to other taxes in Bolivia,including dividend and interest withholding tax, import duties, and value-addedtax (VAT). Most remittances abroad of Bolivian source income, includinginterest income, are subject to a 12.5% withholding tax. In addition, we arerequired to pay import duties of 5% on capital goods and 10% on other imports. Asan exporter, however, we are eligible for a refund of import duties up to anamount equal to 5% of the net value of our exports. We are also subject to VATof 13%. We are eligible for a refund of VAT paid on imports and raw materialsincluded in the cost of exported goods, but the amount recoverable is limitedto 13% of the net value of our exports. For the purpose of determining the capon refunds for both import duties and VAT, the net value of our exports isequal to the gross value of our exports reduced by certain statutory deductions.As provided by Bolivian law, we are importing certain plant components andequipment without payment of VAT or import duties.

All mineral deposits in Bolivia are the property ofthe State. Mining concessions awarded by the State grant the holder, subject tocertain payments, the exclusive right to carry out prospecting, exploration,exploitation, concentration, smelting, refining and marketing activities withrespect to all mineral substances located within a given concession. UnderBolivian law, local and foreign companies are treated equally in obtainingmineral concessions. With respect to nationalized and other concessions stillheld by State-owned Comibol, private investors may enter into joint venture,lease or services agreements with 

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Comibol. Holders of miningconcessions are obliged to pay an annual mining patent, the fees for which areprogressive and are based on the number of years of existence of theconcession. Mining concessions are liable to forfeiture when the correspondingannual patent is not paid. Concessions established before the enactment of theNew Mining Code in 1997, which comprise an area of more than 1,000 miningclaims, pay the equivalent of $1.00 per claim per year for the first five yearsof the existence of the concession; thereafter, the patent increases to theequivalent of $2.00 per claim per year. Concessions established under the NewMining Code pay the following:  for thefirst five years of the existence of a concession, the owner is required to paythe equivalent of $25.00 per cuadrícula (equivalent to 25 hectares) per year;thereafter the patent increases to the equivalent of $50.00 per cuadrícula peryear. Most of our material Bolivian concessions were established prior toenactment of the New Mining Code.

In May 2006, the Constitutional Court of Boliviaissued a ruling declaring certain articles of the 1997 Mining Codeunconstitutional. The Court’s ruling is not effective until May 2008 andthe Court urged the Bolivian Congress to enact legislation during that timewhich may supersede the ruling. Although the Court’s ruling is not expected toimpact our ability to operate the San Cristobal project, the ruling may limitthe transferability of our mining concessions and restrict our ability tomortgage our San Cristobal mining concessions as collateral to the lendersproviding financing for the project.

Bolivia has a national environmental policy to protectthe environment and to promote sustainable development, the preservation ofbiological diversity and environmental education. Under Bolivia’s environmentalregulations, environmental impact assessments are required, and concessionholders must maintain waterways running through their concessions in theirunspoiled state, employ exploration and development techniques that minimizeenvironmental damage and minimize damage to surface rights, to neighboringconcessions and to the environment.

Bolivia has experiencedhigh levels of unemployment and underemployment. Bolivia has a large pool ofunskilled and, in the mining sector, semi-skilled labor, but a relativeshortage of skilled labor and managerial expertise overall. A large portion ofthe labor force that is engaged in wage employment is also unionized, althoughunion participation is not mandatory and collective bargaining agreements arevery rare, as negotiations are generally carried out between an individualcompany’s union and management.

*Geology*

The geology of the San Cristobal deposit dates to theMiocene age and is comprised of volcanoclastics (tuff and tuffites),sedimentary and igneous (intrusives) rocks within a circular volcanic craterapproximately four kilometers in diameter. Volcanoclastic and sedimentary unitsformed during periods of intense volcanism and subsequent erosion, occupyingthe center portion of the crater, and were intruded by repeated intrusiveevents.

The San Cristobal ore body has formed as a result ofsyngenetic and epigenetic mineralizing events. Approximately half of thecurrent known mineralization lies within the volcanoclastic units asdisseminated stratabound mineralization, which is of a higher grade thanmineralization in the intrusives. Mineralization within the intrusives islargely restricted to breccias on the outer limits and vein to disseminatedhosted towards the center of the intrusive bodies.  The dominant sulfide minerals hosting thezinc, lead and silver are sphalerite, galena and tetrahedrite, respectively. Surfaceweathering has affected the upper part of the ore body (approximatelyforty-five to seventy meters), creating a small layer of oxide ore which coversthe larger sulfide ore body beneath.

The San Cristobal ore bodyis comprised of two major mineralized zones (Jayula and Tesorera), whichoutcrop at the surface but join at depth to form the same contiguous ore body.Initially, the two mineralized zones of Jayula and Tesorera were thought to betwo separate ore bodies. Subsequent drilling and improvements to the geologicalunderstanding of the deposit confirmed that Tesorera and Jayula are part of thesame massive ore body, which is currently open in nearly all directions and atdepth.

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**EXPLORATION**

In addition to SanCristobal, we have a portfolio of over 50 property groups in Mexico, Peru,Argentina and Bolivia that we believe contain potential for silver, base metalsand gold mineralization or have other significant exploration potential. Thesemineral properties typically consist of:

·       concessionswhich we have acquired, or applied for directly;

·       concessionswhich we have leased, typically with an option to purchase; and

·       concessionswhich we have agreed to explore and develop and, if feasible, bring intoproduction, in concert with joint venture partners.

We generally seek to structure our acquisitions ofmineral rights so that individual properties can be optioned for explorationand subsequently acquired at reasonable cost if justified by explorationresults. Properties that we determine do not warrant further exploration ordevelopment expenditures are divested, typically without further financialobligation to us.

We have increased the rate of evaluation of many ofour properties to the point that decisions can be made to either advance themor divest them. Our board of directors has approved an increase in ourexploration budget from $8.5 million in 2006 to $14.5 million for 2007. Ourfocus is to drill test our more promising projects to identify which of themmay be advanced to a development stage. At the end of 2006, five prospects werebeing drilled and several more were undergoing preparatory work for drilling inearly 2007. Our more promising projects are located in Argentina, Mexico andPeru, and early results indicate that at least one project in each country willshow sufficient promise to warrant a more advanced stage of exploration. Thiswould involve more drilling and preliminary metallurgical, engineering andenvironmental work.

Although we believe that our exploration propertiesmay contain significant silver and/or other mineralization, our analysis ofmost of these properties is at a preliminary stage and some or all of theproperties may not advance to a development stage. Due to the preliminary stageof activities at each of our exploration properties, we do not consider any ofour exploration properties to be individually material. The activitiesperformed to date at these properties often have involved the analysis of datafrom previous exploration efforts by others, supplemented by our ownexploration programs.

In connection with thesale of 35% of the San Cristobal project to Sumitomo, we and Sumitomo enteredinto a two-year Option Agreement pursuant to which Sumitomo may acquire a 20 to35 percent interest in certain of our active exploration properties athistorical cost, and in each of certain inactive exploration properties athistorical cost, once we have spent $200,000 in exploration costs. Sumitomomust exercise its option on each active property within 60 days of receivingcomplete information regarding the property and on each inactive propertywithin 60 days of our spending $200,000 on the property. As of March 27,2007, Sumitomo had not exercised its option to acquire any explorationproperties.

**METALS MARKETOVERVIEW**

**Silver Market**

Silver has traditionally served as a medium ofexchange, much like gold. Silver’s strength, malleability, ductility, thermaland electrical conductivity, sensitivity to light and ability to endure extremechanges in temperature combine to make silver a widely used industrial metal. Whilesilver continues to be used as a form of investment and a financial asset, theprincipal uses of silver are industrial, primarily in electrical and electroniccomponents, photography, jewelry, silverware, batteries, computer chips,electrical contacts, and high technology printing. Silver’s anti-bacterialproperties also make it valuable for use in medicine and in water purification.Additionally, new uses of silver are being developed in connection with the useof superconductive wire.

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Most silver production is obtained from miningoperations in which silver is not the principal or primary product. Approximately80% of mined silver is produced as a by-product of mining lead, zinc, gold orcopper deposits. The CPM Group, a precious metal and commodities consultant,estimates that total silver supply from mine production, recycling, estimateddishoarding and government stockpile sales has been insufficient to meetindustrial demand from 1990 through at least 2005.

Thefollowing table sets forth for the periods indicated the New York CommoditiesExchange (“COMEX”) nearby active silver futures contract’s high and low priceof silver in U.S. dollars per troy ounce. On March 27, 2007 the closingprice of silver was $13.27 per troy ounce. 

| ** ** | ** ** | **Silver** | ** ** |
|------------|------------|------------|------------|
| **Year**   | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
| 2002       |       | 5.13       |       | 4.22 |   |
| 2003       |       | 5.99       |       | 4.35 |   |
| 2004       |       | 8.29       |       | 5.49 |   |
| 2005       |       | 9.01       |       | 6.41 |   |
| 2006       |       | 14.83      |       | 8.74 |   |
|            |            |            |            |  |  |  |  |

 

**Zinc and LeadMarkets**

Due to the corrosion resisting property of zinc, zincis used primarily as the coating in galvanized steel. Galvanized steel is widelyused in construction of infrastructure, housing and office buildings. In theautomotive industry, zinc is used for galvanizing and die-casting, and in thevulcanization of tires. Smaller quantities of various forms of zinc are used inthe chemical and pharmaceutical industries, including fertilizers, foodsupplements and cosmetics, and in specialty electronic applications such assatellite receivers.

The primary use of lead is in motor vehicle batteries,but it is also used in cable sheathing, shot for ammunition and alloying. Leadin chemical form is used in alloys, glass and plastics. Lead is widelyrecycled, with secondary production accounting in recent years forapproximately half of total supply.

Thefollowing table sets forth for the periods indicated the London Metals Exchange’shigh and low settlement prices of zinc and lead in U.S. dollars per pound. On March 27,2007 the closing prices of zinc and lead were $1.45 and $0.84 per pound,respectively. 

| ** ** | ** ** | **Zinc**   | ** ** | **Lead** | ** ** |
|------------|------------|------------|------------|----------|------------|
| **Year**   | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 2002       |       | 0.42       |       | 0.33     |       | 0.24 |   | 0.18 |   |
| 2003       |       | 0.46       |       | 0.34     |       | 0.34 |   | 0.19 |   |
| 2004       |       | 0.56       |       | 0.42     |       | 0.45 |   | 0.29 |   |
| 2005       |       | 0.87       |       | 0.54     |       | 0.51 |   | 0.37 |   |
| 2006       |       | 2.05       |       | 0.87     |       | 0.80 |   | 0.43 |   |
|            |            |            |            |          |            |  |  |  |  |  |  |

 

 

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**EXECUTIVE OFFICERSOF APEX**

ApexSilver has four executive officers, a President and Chief Executive Officer, anExecutive Vice President and Chief Operating Officer, a Senior Vice Presidentand Chief Financial Officer, and a Vice President and Controller. Set forthbelow is a list of the executive officers and other personnel of Apex Silver.

| **Name**             | ** ** | ** ** | ** ** | **Age**                                                    | ** ** | **Position** |
|----------------------|------------|------------|------------|------------------------------------------------------------|------------|--------------|
| Jeffrey G. Clevenger |       | 57         |       | President and Chief  Executive Officer                     |
| Alan R. Edwards      |       | 49         |       | Executive Vice President  and Chief Operating Officer      |
| Gerald J. Malys      |       | 62         |       | Senior Vice President  Finance and Chief Financial Officer |
| Robert P. Vogels     |       | 49         |       | Vice President,  Controller                                |
|                 |       |       |       |                                                       |
| Jerry W. Danni       |       | 54         |       | Senior Vice President,  Corporate Affairs                  |
| Terry L. Owen        |       | 58         |       | Senior Vice President,  Project Development                |
| Robert B. Blakestad  |       | 60         |       | Vice President,  Exploration and Chief Geologist           |
| Donald R. Ratcliff   |       | 51         |       | Vice President, Marketing and Treasurer                    |

 

*JeffreyG. Clevenger.**  *Mr. Clevengerwas elected to serve as a director and appointed as our President and ChiefExecutive Officer in October 2004. Mr. Clevenger worked as anindependent consultant from 1999, when Cyprus Amax Minerals Company, hisprevious employer, was sold, until he joined us in 2004. Mr. Clevengerserved as Senior Vice President and Executive Vice President of Cyprus AmaxMinerals Company from 1993 to 1998 and 1998 to 1999, respectively, and asPresident of Cyprus Climax Metals Company and its predecessor, Cyprus CopperCompany, a large integrated producer of copper and molybdenum with operationsin North and South America, from 1993 to 1999. He was Senior Vice President ofCyprus Copper Company from August 1992 to January 1993. From 1973 to1992, Mr. Clevenger held various technical, management and executivepositions at Phelps Dodge Corporation, including President and General Managerof Phelps Dodge Morenci, Inc. Mr. Clevengerholds a B.S. in Mining Engineering with Honors from the New Mexico Institute ofMining and Technology and is a graduate of the Advanced International SeniorManagement Program of Harvard University. He is a Member of the AmericanInstitute of Mining, Metallurgical and Petroleum Engineers and theMetallurgical Society of America.

*AlanR. Edwards.**  *Mr. Edwardswas appointed to the position of Executive Vice President and Chief OperatingOfficer in June 2004. From July 2003 until he joined us,Mr. Edwards served first as Vice President, Technical Services and ProjectDevelopment and then as Vice President Operations of Kinross Gold Corporation.From March 2002 through June 2003, he pursued independent businessinterests. From April 2000 through February 2002, Mr. Edwardsserved first as Vice President, Surface Mines, and then as Senior Vice President,Operations of P.T. Freeport Indonesia. Mr. Edwards was Vice President andGeneral Manager and then President and General Manager of the Cyprus AmaxMinerals Company subsidiary which owned and operated the Cerro Verde open pitcopper mine in Peru from 1998 through 2000, and served from 1996 until 1998 asVice President and General Manager of the Cyprus subsidiary which owned andoperated the Sierrita copper mine in Arizona. Prior to joining Cyprus in 1996,Mr. Edwards spent 13 years in various positions at Phelps DodgeCorporation, including General Manager Operations at Chino Mines Company andMine Superintendent at Phelps Dodge Morenci, Inc. He holds a B.S. in Mining Engineering and a MBA from the University ofArizona.

*GeraldJ. Malys.*   Mr. Malys was appointed as ourSenior Vice President, Finance and Chief Financial Officer in June 2006.Mr. Malys was a private investor from 1999, when his previous employer,Cyprus Amax Minerals Company, was sold, until he joined us in 2006. Mr. Malyswas employed by Cyprus Amax Minerals Company from 1985 to 1999, first as VicePresident, Tax and Information Services, and 

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Corporate Controller from1985 to 1989, and then as Senior Vice President and Chief Financial Officerfrom 1989 to 1999. From 1972 to 1985, he held various positions with Gulf OilCompany, including Vice President of Gulf Exploration and Production Company,Assistant Corporate Controller, Senior Manager Corporate Accounting, andDirector of SEC Reporting. Mr. Malys served as a director of Amax GoldInc. from 1993 to 1998 and of Kinross Gold Corporation from 1998 to 1999.Mr. Malys has a bachelor of science in accounting from Gannon Universityand is a member of the American Institute of Certified Public Accountants.

*RobertP. Vogels.**  *Mr. Vogelshas served as controller of Apex Silver since January 2005 and was namedVice President in January 2006. Prior to joining Apex Silver, Mr. Vogelsserved as corporate controller for Meridian Gold Company from January 2004until December 2004. He served as the controller of INCO Limited’s Goroproject in New Caledonia from October 2002 to January 2004. Prior tojoining INCO, Mr. Vogels worked for Cyprus Minerals Company, which wasacquired in 1999 by Phelps Dodge Corp., from 1985 through October 2002. Duringthat time, he served in several capacities, including as the controller for itsEl Abra copper mine in Chile from 1997 until March 2002. Mr. Vogelsbegan his career in public accounting where he earned his CPA certification. Heholds a B.Sc. in accounting and an MBA degree from Colorado State University.

*JerryW. Danni.**  *Mr. Dannijoined Apex Silver in February 2005 as the Senior Vice President,Environment, Health and Safety and in March 2005 was appointed Senior VicePresident Corporate Affairs. Prior to joining Apex Silver, Mr. Danniserved as Senior Vice President, Environment Health and Safety of Kinross GoldCorporation from January 2003 until February 2005 and as VicePresident, Environmental Affairs from July 2000 until January 2003. Whileat Kinross he was instrumental in the design and implementation of integratedenvironmental, and health and safety (EHS) systems and processes for Kinrossoperations worldwide, and was also responsible for management of theReclamation Operations Business Unit. From 1994 to July 2000, Mr. Danniwas the Vice President of Environmental Affairs for Cyprus Climax MetalsCompany. Prior to working for Cyprus, Mr. Danni held senior environmental,and health and safety management positions with Lac Minerals Ltd. and HomestakeMining Company. Mr. Danni holds a B.S. in Chemistry from Western StateCollege, and is a member of the Society of Mining Engineers and a past directorof the National Mining Association.

*TerryL. Owen.*   In June 2005, Mr. Owen wasappointed Senior Vice President, Project Development of Apex Silver. Prior tojoining Apex Silver, Mr. Owen was an independent consultant from December 2003through May 2005. From February 2001 through September 2003, heserved as Vice President Capital Projects for INCO Limited. Prior to that hewas employed by Cyprus Amax Minerals Company from 1995 to 2000, in variouspositions, including Vice President Project Development. He also held variouspositions with Freeport McMoran Inc. from 1980 to 1995, beginning as AssistantGeneral Superintendent of one of Freeport’s mines and rising to the position ofVice President and Assistant General Manager. Mr. Owen holds a B.Sc. in Mining Engineering from the University ofIdaho and is a graduate of the Advanced Senior Management Program of HarvardUniversity.

*RobertB. Blakestad.***  **InNovember 2004, Mr. Blakestad was appointed as Vice President,Exploration of Apex Silver. Prior to joining Apex Silver, Mr. Blakestadserved as Chief Executive Officer of International Taurus Resources from May 1998until November 2004. He was Vice President—Exploration for Amax Gold from1996 to 1998 and Exploration Manager for Cyprus Amax Minerals Company from 1990until 1996. He held various positions at Homestake Mining Company from 1979until 1990, beginning as a Senior Geologist and rising to the position ofManager, U.S. Reconnaissance. Mr. Blakestadholds a B.S. in Mining Engineering from the New Mexico Institute of Mining andTechnology and an M.S. in Geology from the University of Colorado. He is amember of the American Institute of Mining, Metallurgical and PetroleumEngineers and of the Society of Economic Geologists. He holdsprofessional certifications from the State of Washington and the Province ofNova Scotia.

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*DonaldR. Ratcliff.**  *Mr. Ratcliffwas appointed to the position of Vice President, Risk Management and Treasurerof Apex Silver in November 2006. He was named Vice President, Marketingand Treasurer in January 2007.  Prior to joining Apex Silver, Mr. Ratcliffwas Vice President of Phelps Dodge Sales Company since 1999. From 1986 to 1999,Mr. Ratcliff held various positions with the Cyprus Amax Minerals Companyincluding Financial Analyst, Coordinator—Coal Contracts, Senior FinancialAnalyst, Coordinator—Metals Market Strategy, Assistant Manager—Raw Materials,and Manager—Commercial. He began his career at Tenneco Minerals Company wherehe worked from 1980 through 1986 as a planning analyst and as a planning andproject analyst. Mr. Ratcliff holds a B.A. in Economics and PoliticalScience from the University of Denver and an M.S. in Mineral Economics from theColorado School of Mines. He is a Member of the Mineral Economics andManagement Society and the American Institute of Mining, Metallurgical andPetroleum Engineers.

As of March 27, 2007, we had approximately 830full-time employees.

Our insider trading policypermits our officers, directors and other insiders to enter into trading plansor arrangements for systematic trading in our securities under Rule 10b5-1of the Securities Exchange Act of 1934. Certain of our officers previously haveestablished such plans, and we anticipate that some or all of our otherofficers, directors or insiders may establish trading plans at some date in thefuture.

**ITEM 1A:**       RISKFACTORS

Investors in Apex Silvershould consider carefully, in addition to the other information contained in,or incorporated by reference into, this report, the following risk factors.

**We have no historyof production.**

We have no history ofproducing silver or other metals. The development of our San Cristobal projectrequires the completion of construction, start-up and operation of the mine,processing plants and related infrastructure. As a result, we are subject toall of the risks associated with establishing new mining operations andbusiness enterprises. There can be no assurance that we will successfullyestablish mining operations or profitably produce silver or other metals at anyof our properties.

**We have a historyof losses and may not be able to achieve profitability in the future.**

As an exploration anddevelopment company that has no production history, we have incurred lossessince our inception. As of December 31, 2006, we had an accumulateddeficit of $773 million and a shareholder equity deficit of $103 million,due largely to the mark-to-market liability of our metals derivative positions.Our ability to address and sustain profitability at the San Cristobal projectwill depend on the prices of silver, zinc and lead, and on our ability tocontrol costs. There can be no assurance that we will achieve or sustainprofitability in the future.

**The calculation ofour reserves and other mineralization is subject to significant estimates.**

Unless otherwiseindicated, reserves and other mineralization figures presented in our filingswith the SEC, press releases and other public statements that may be made fromtime to time are based on estimates of contained silver and other metals madeby independent geologists or our own personnel. These estimates are imprecise anddepend on geological interpretation and statistical inferences drawn fromdrilling and sampling that may prove to be unreliable. There can be noassurance that:

·       theseestimates will be accurate;

·       reservesand other mineralization figures will be accurate; or

·       reservesor mineralization could be mined and processed profitably.

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Reserves and other mineralization estimates mayrequire adjustments or downward revisions based on actual production experience.For instance, the information we have gathered during pre-stripping activity atSan Cristobal during 2006 was one factor in the revisions to our reserveestimates in February 2007. In addition, extended declines in marketprices for silver, zinc and lead may render portions of our reserves uneconomicand result in reduced reported reserves. Any material reductions in estimatesof our reserves and other mineralization, or of our ability to extract thesereserves or mineralization, could have a material adverse effect on our resultsof operations, financial condition and cash flows.

We have not establishedthe presence of proven or probable reserves at any of our mineral propertiesother than the San Cristobal project. There can be no assurance that subsequenttesting or future feasibility studies will establish additional reserves at ourproperties. The failure to establish additional reserves could restrict ourability to successfully implement our strategies for long-term growth beyondthe San Cristobal project.

**The San Cristobalproject is subject to risks including delays in completion and we may be unableto achieve anticipated production volume or manage cost increases.**

Completion of thedevelopment and start-up of the San Cristobal project is subject to variousfactors, including the performance of our engineering and constructioncontractors, mining contractor, suppliers and consultants. Any delay in theperformance of any one or more of the parties listed above could delay orprevent the development of San Cristobal as currently planned. There can be noassurance:

·       whenor whether the San Cristobal project will be completed and start-up willcommence;

·       whetherthe resulting operations will achieve the anticipated production volume; or

·       thatthe construction costs and ongoing operating costs associated with thedevelopment of the San Cristobal project will not be higher than anticipated.

We have never developed or operated a mine or manageda significant mine development project. We cannot assure you that the start-upof San Cristobal will be completed at the cost and on the schedule predicted,or that silver, zinc and lead grades and recoveries, production rates oranticipated capital or operating costs will be achieved.

We believe that we havesufficient funds to complete the development of the San Cristobal project. Ifthe actual cost to complete the project is significantly higher than currentlyexpected, there can be no assurance that we will have sufficient funds to coverthese costs or that we will be able to obtain alternative sources of financingto cover these costs. Unexpected cost increases, reduced silver and zinc pricesor the failure to obtain necessary additional financing on acceptable terms, tocomplete the development of the San Cristobal project on a timely basis, or toachieve anticipated production capacity, could have a material adverse effecton our future results of operations, financial condition and cash flows.

**We depend on asingle mining project which is not 100% owned by us.**

We anticipate that the majority, if not all, of anyrevenues for the next few years and beyond will be derived from the sale ofmetals mined at the San Cristobal project. Therefore, if we are unable tocomplete and successfully mine the San Cristobal project, our ability togenerate revenue and profits would be materially adversely affected.

In September 2006, we sold 35% of the SanCristobal project to Sumitomo Corporation. As a result of this transaction,Sumitomo obtained certain rights with respect to the management and operationof the project. For example, certain significant matters for the projectrequire the approval of Sumitomo, including approval of annual programs andbudgets, increases of 15% or more in capital expenditures or operating expensesand mergers or liquidations. If Sumitomo does not approve our proposals withrespect 

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to these matters, we mayface significant delays in completing the project or improving its operationsand may be unable to operate the project in the manner we believe to be in thebest interests of our shareholders.

We and Sumitomo are required to provide ourproportionate shares of funding for the project in order to completeconstruction and begin commercial operations. In 2005, in connection with theproject finance facility, we placed in restricted accounts $184 million tofund construction of the San Cristobal project. In October 2005, weannounced a $50 million increase in anticipated construction costs, whichwill be funded 65% by us and 35% by Sumitomo. If additional funding isnecessary and Sumitomo does not pay its 35% share of such additional amounts,we would need to fund those amounts ourselves and there can be no assurancethat we would have sufficient capital to fund the amounts required, and even ifwe do, additional amounts spent at San Cristobal may decrease our ability tofully fund our exploration program.

Sumitomo is also requiredto comply with certain provisions of the San Cristobal project financingagreements. If Sumitomo fails to comply with its obligations, the failure couldresult in a default under those agreements, in the subsequent acceleration ofthe San Cristobal project loans and settlement obligations under the derivativepositions required by the project lenders, and enforcement of the lenders’liens against the San Cristobal project. See “—We may be unable to comply withthe terms and covenants of the debt financing for our San Cristobal Project.”

**Our success willdepend on our ability to manage our growth.**

As we increase ourdevelopment activity at San Cristobal and shift from construction to operation,we are experiencing significant growth in our operations, which we expect tocontinue and accelerate as we complete construction and anticipate the firstsale of concentrates in the third quarter of 2007. This growth has created andwill continue to create new positions and responsibilities for managementpersonnel and will substantially increase demands on our operating andfinancial systems, especially those management personnel and systems that arelocated in Bolivia. There can be no assurance that we will successfully meetthese demands and manage our anticipated growth.

**Our profitabilitywill be affected by changes in the prices of metals.**

Our profitabilityand long-term viability depend, in large part, on the market price of silver,zinc, lead and other metals. The market prices for these metals are volatileand are affected by numerous factors beyond our control, including:

·       globalor regional consumption patterns;

·       supplyof, and demand for, silver, zinc, lead and other metals;

·       speculativeactivities;

·       expectationsfor inflation; and

·       politicaland economic conditions.

The aggregate effect of these factors on metals pricesis impossible for us to predict. Decreases in metals prices in the past havedelayed the development of the San Cristobal project and could in the futureadversely affect our ability to finance the exploration and development of ourother properties, which would have a material adverse effect on our financialcondition and results of operations and cash flows. There can be no assurancethat metals prices will not decline.

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Thefollowing table sets forth for the periods indicated (1) the COMEX nearbyactive silver futures contract’s high and low price of silver in U.S. dollarsper troy ounce and (2) the London Metals Exchange’s high and lowsettlement prices of zinc and lead in U.S. dollars per pound.

| ** ** | ** ** | **Silver** | ** ** | **Zinc** | ** ** | **Lead** | ** ** |
|------------|------------|------------|------------|----------|------------|----------|------------|
| **Year**   | ** ** | ** ** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 2002       |       | 5.13       |       | 4.22     |       | 0.42     |       | 0.33 |   | 0.24 |   | 0.18 |   |
| 2003       |       | 5.99       |       | 4.35     |       | 0.46     |       | 0.34 |   | 0.34 |   | 0.19 |   |
| 2004       |       | 8.29       |       | 5.49     |       | 0.56     |       | 0.42 |   | 0.45 |   | 0.29 |   |
| 2005       |       | 9.01       |       | 6.41     |       | 0.87     |       | 0.54 |   | 0.51 |   | 0.37 |   |
| 2006       |       | 14.83      |       | 8.74     |       | 2.05     |       | 0.87 |   | 0.80 |   | 0.43 |   |
| 2007*      |       | 14.70      |       | 12.19    |       | 1.88     |       | 1.40 |   | 0.88 |   | 0.70 |   |
|            |            |            |            |          |            |          |            |  |  |  |  |  |  |  |  |

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*                    Through March 27,2007

The closing prices ofsilver, zinc and lead on March 27, 2007 were $13.27 per troy ounce, $1.45per pound and $0.84 per pound, respectively.

**We may not besuccessful in hedging against metals price, currency and interest ratefluctuations; we expect to incur mark-to-market losses on our metals pricehedges and could lose money through our hedging programs.**

We have entered into metals trading transactions tohedge against commodity and base metals price risks, using puts, calls andforward sales. The terms of our debt financing for the San Cristobal projectrequire that we utilize various price hedging techniques to hedge a portion ofthe metals we plan to produce at San Cristobal. If we fail to maintain theminimum level of hedge transactions required by the terms of our debt financingfor the San Cristobal project, our ability to draw additional amounts from thelenders may be adversely affected. These derivative positions represent 4%, 13%and 17% of planned life-of-mine payable production of silver, zinc and lead,respectively. Since the third quarter of 2005, when the hedge transactions wereentered into, we have recorded an aggregate of $818 million in non-cashmark-to-market losses related to the open metals derivative positions,resulting from increases in the spot and forward prices for silver, zinc andlead. During the periods that the derivative positions are outstanding, gainsand losses may fluctuate substantially from period to period based on spotprices, forward prices and quoted option volatilities.

We expect to settle these hedges over time after theSan Cristobal project is in production. If the completion and start-up of theproject is delayed, operations are interrupted for any significant period or ifwe are unable for any reason to sell the quantity of metals corresponding tothe terms of the applicable forward sale, we may be required to settle theforward sale and incur a loss equal to the difference in the terms of theforward sales agreement and the then current spot price. Depending on the priceof the applicable metal at that time, the settlement of the forward sales couldhave a material adverse effect on our financial condition, results ofoperations and cash flows.

Further, under certain circumstances, we may berequired to liquidate****our hedgepositions before their anticipated settlement date. Specifically, the hedgeagreements contain a cross-default provision which entitles the hedgecounterparties to accelerate the settlement date of the hedge positions in theevent we default on the repayment of amounts due under the project financefacility. Amounts due upon early termination of our hedge positions couldbe in excess of the mark-to-market losses we have already recorded. There canbe no assurance that we would have sufficient funds on hand or access toavailable capital to enable us to meet those commitments.

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Finally, there can be noassurance that the use of hedging techniques will ultimately be to our benefit.Hedging instruments that protect against metals market price volatility mayprevent us from realizing the benefit from subsequent increases in market priceswith respect to covered production, which would cause us to record amark-to-market loss, or decrease our cash flows and profits. In addition, ourability to hedge against zinc and lead price risk in a timely manner may beadversely affected by the smaller volume of transactions in both the zinc andlead markets. Hedging contracts also are subject to the risk that the otherparty may be unable or unwilling to perform its obligations under thesecontracts. Any significant nonperformance could have a material adverse effecton our financial condition, results of operations and cash flows.

**The exploration ofmineral properties is highly speculative in nature, involves substantialexpenditures and is frequently non-productive.**

Our future growthand profitability will depend, in part, on our ability to identify and acquireadditional mineral rights, and on the costs and results of our continuedexploration and development programs. Competition for attractive mineralexploration properties is intense. Our strategy is to expand our reservesthrough a broad program of exploration. Mineral exploration is highlyspeculative in nature and is frequently non-productive. Substantialexpenditures are required to:

·       establishore reserves through drilling and metallurgical and other testing techniques;

·       determinemetal content and metallurgical recovery processes to extract metal from theore; and

·       construct,renovate or expand mining and processing facilities.

If we discover ore, it usually takes several yearsfrom the initial phases of exploration until production is possible. Duringthis time, the economic feasibility of production may change. As a result ofthese uncertainties, there can be no assurance that we will successfullyacquire additional mineral rights, or that our exploration programs will resultin new proven and probable reserves in sufficient quantities to justifycommercial operations at any of our properties, other than the San Cristobalproject.

We consider from time totime the acquisition of operating or formerly operating mines. Our decisions toacquire these properties are based on a variety of factors including historicaloperating results, estimates of and assumptions about future reserves, cash andother operating costs, metals prices and projected economic returns, andevaluations of existing or potential liabilities associated with the propertyand its operation. Our estimates and assumptions may turn out to be erroneousor incorrect. In addition, there is intense competition for attractive properties.Accordingly, there is no assurance that our acquisition efforts will result inprofitable mining operations.

**Our profitabilitydepends, in part, on actual economic returns and actual costs of developingmines, which may differ significantly from our estimates and involve unexpectedproblems and delays.**

None of our mineralproperties, including the San Cristobal project, has an operating history uponwhich we can base estimates of future cash operating costs. Our decision todevelop the San Cristobal project is based on a feasibility study, anddecisions about the development of other projects in the future may also bebased on feasibility studies. Feasibility studies derive estimates of reserves,operating costs and project economic returns. Estimates of economic returns arebased, in part, on assumptions about future metals prices. Our profitabilitywill be affected by changes in the price of metals. Feasibility studies deriveestimates of average cash operating costs based upon, among other things:

·       anticipatedtonnage, grades and metallurgical characteristics of ore to be mined andprocessed;

·       anticipatedrecovery rates of silver and other metals from the ore;

·       cashoperating costs of comparable facilities and equipment; and

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·       anticipatedclimatic conditions.

Actual cash operating costs, production and economicreturns may differ significantly from those anticipated by our studies andestimates.

There are a numberof uncertainties inherent in the development and construction of any new mine,including the San Cristobal project. These uncertainties include:

·       thetiming and cost, which can be considerable, of the construction of mining andprocessing facilities;

·       theavailability and cost of skilled labor, power, water and transportation;

·       theavailability and cost of appropriate smelting and refining arrangements;

·       theneed to obtain necessary environmental and other governmental permits, and thetiming of those permits; and

·       theavailability of funds to finance construction and development activities.

The costs, timing andcomplexities of mine construction and development are increased by the remotelocation of many mining properties, like the San Cristobal project. It iscommon in new mining operations to experience unexpected problems and delaysduring development, construction and start-up at mines and mineral processingplants, and delays in the commencement of mineral production often occur. Further,mine construction and operation may be impacted by our relationships andstanding within the communities in which we operate. Accidents or eventsdetrimental (or perceived to be detrimental) to the health and safety of ouremployees, or to the environment or the communities in which we operate, couldnegatively impact our operations and create unforeseen problems and delays. Accordingly,there is no assurance that our future development activities will result inprofitable mining operations.

**Title to ourmineral properties may be challenged.**

Our policy is to seek toconfirm the validity of our rights to title to, or contract rights with respectto, each mineral property in which we have a material interest. However, wecannot guarantee that title to our properties will not be challenged. Titleinsurance generally is not available, and our ability to ensure that we haveobtained secure claim to individual mineral properties or mining concessionsmay be severely constrained. We have not conducted surveys of all of the claimsin which we hold direct or indirect interests and, therefore, the precise areaand location of these claims may be in doubt. Accordingly, our mineralproperties may be subject to prior unregistered agreements, transfers orclaims, and title may be affected by, among other things, undetected defects. Inaddition, we may be unable to operate our properties as permitted or to enforceour rights with respect to our properties.

**We may lose rightsto properties if we fail to meet payment requirements or development orproduction schedules.**

We derive the rights tosome of our mineral properties from leaseholds or purchase option agreementsthat require the payment of rent or other installment fees. In addition, wemust make annual mining patent payments to the Bolivian government totalingapproximately $400,000 to maintain our concessions at San Cristobal. If we failto make these payments when they are due, our rights to the property may lapse.There can be no assurance that we will always make payments by the requisitepayment dates. Some contracts with respect to our mineral properties requiredevelopment or production schedules. There can be no assurance that we will beable to meet any or all of the development or production schedules. Inaddition, our ability to transfer or sell our rights to some of our mineralproperties requires governmental approvals or third party consents, which maynot be granted.

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**We cannot insureagainst all of the risks associated with mining.**

The business ofmining is subject to a number of risks and hazards, including:

·       adverseenvironmental effects;

·       industrialaccidents;

·       labordisputes;

·       technicaldifficulties due to unusual or unexpected geologic formations;

·       failuresof pit walls; and

·       floodingand periodic interruptions due to inclement or hazardous weather conditions.

These risks canresult in, among other things:

·       damageto, and destruction of, mineral properties or production facilities;

·       personalinjury;

·       environmentaldamage;

·       delaysin mining;

·       monetarylosses; and

·       legalliability.

Although we maintain, andintend to continue to maintain, insurance with respect to our operations andmineral properties within ranges of coverage consistent with industry practice,there can be no assurance that insurance will be available at economicallyfeasible premiums. Insurance against environmental risks is not generallyavailable. These environmental risks include potential liability for pollutionor other disturbances resulting from mining exploration and production. Inaddition, not all risks associated with developing and producing silver, zinc,lead and other metals are included in coverage, and some covered risks mayresult in liabilities which exceed policy limits. Further, we may elect to notseek coverage for all risks. The occurrence of an event that is not fullycovered, or covered at all, by insurance, could have a material adverse effecton our financial condition, results of operations and cash flows.

**We may be subjectto fines or other penalties in connection with an alleged violation of theForeign Corrupt Practices Act.**

As we have previouslydisclosed, we have concluded, based on the results of an internal investigationconducted under the direction of our Audit Committee, that certain senioremployees of one of our South American subsidiaries were involved in makingimpermissible payments of approximately $125,000 to government officials in2003 and 2004 in connection with an inactive, early stage exploration propertythat is not related to any of our active exploration or development properties.Based on findings to date, no changes to our previously filed financialstatements are warranted as a result of these matters. We have contacted theDepartment of Justice (“DOJ”) and SEC and reported the results of our internalinvestigation. We have been informed that the SEC and DOJ have commenced aninvestigation with respect to these matters, including possible violations ofthe Foreign Corrupt Practices Act. We are cooperating fully with the SEC andDOJ investigations. We cannot predict with any certainty the final outcome ofthe investigations, including any fines or penalties that may be imposed.

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**Our San Cristobalproject and our exploration activities are in countries with developingeconomies and are subject to the risks of political and economic instabilityassociated with these countries.**

We currentlyconduct exploration activities in Latin American countries with developingeconomies, including Bolivia, Mexico, Argentina and Peru. These countries andother emerging markets in which we may conduct operations have from time totime experienced economic or political instability. We may be materiallyadversely affected by risks associated with conducting operations in countrieswith developing economies, including:

·       politicalinstability and violence;

·       warand civil disturbance;

·       actsof terrorism;

·       expropriationor nationalization;

·       changingfiscal regimes;

·       fluctuationsin currency exchange rates;

·       highrates of inflation;

·       underdevelopedindustrial and economic infrastructure; and

·       unenforceabilityof contractual rights.

Changes in miningor investment policies or shifts in the prevailing political climate in any ofthe countries in which we conduct exploration and development activities couldadversely affect our business. Our operations may be affected in varyingdegrees by government regulations with respect to, among other things:

·       productionrestrictions;

·       pricecontrols;

·       exportand import controls;

·       incomeand other taxes;

·       maintenanceof claims;

·       environmentallegislation;

·       foreignownership restrictions;

·       foreignexchange and currency controls;

·       labor;

·       welfarebenefit policies;

·       landuse;

·       landclaims of local residents;

·       wateruse; and

·       minesafety.

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We cannot accuratelypredict the effect of these factors. In addition, legislation in the UnitedStates regulating foreign trade, investment and taxation could have a materialadverse effect on our financial condition, results of operations and cashflows.

**Our San Cristobalproject may be adversely affected by changes in the Bolivian Government’spolicies toward the mining industry.**

In December 2005, Evo Morales, leader of theMovement to Socialism party, was elected president of Bolivia. He took officein January 2006. In May 2006, President Morales required companiesoperating in the hydrocarbon industry to negotiate new contracts with thegovernment, resulting in some cases in a significantly higher effective taxrate.

To date, there have been no formal proposals tonationalize the mining industry. The government may, however, alter its currentpolicies with respect to the mining industry. President Morales and others inhis administration have made public statements regarding their desire torecover natural resource production in Bolivia, including mining. If the SanCristobal project were nationalized, we might be unable to recover anysignificant portion of our investment in the project. The Bolivian governmentis currently considering various changes to applicable mining taxes, whichwould have the effect of increasing the overall tax burden on the San Cristobalproject. Should these changes occur, the profitability of the San Cristobalproject may be adversely effected.

If as a result of changes in government policy, we didnot complete construction or were unable to operate the San Cristobal project,we could have substantial liabilities in connection with our hedge positions. Wedo not maintain political risk insurance to cover losses that we may incur as aresult of nationalization, expropriation or similar events in Bolivia.

In May 2006, the Constitutional Court of Boliviaissued a ruling declaring certain articles of the Mining Code unconstitutional.The Court’s ruling is not effective until May 2008, and the ruling urgesthe Bolivian Congress to enact legislation during that time which may supersedethe ruling. Among other things, the ruling may limit the transferability ofmining concessions and restrict our ability to transfer or mortgage our miningconcessions, including the San Cristobal concessions that we have mortgaged ascollateral to the lenders providing financing for the San Cristobal project. Therecan be no assurance that the Bolivian Congress will enact legislation to permitthe transfer or mortgage of concessions prior to the May 2008implementation and, if implemented, what the impact of the Court’s ruling willbe. If the Court’s ruling is implemented and causes a negative effect on thevalidity of our existing San Cristobal mortgages, that situation could resultin a default under the San Cristobal project finance facility, which couldresult in acceleration of the loan and hedge liabilities.

Although the politicaldisturbances in Bolivia have not caused any material adverse impact on our SanCristobal project, political and economic uncertainties and instability maycontinue and may not be resolved successfully. The political and economicclimate may become more unstable, and political and economic uncertainties mayin the future have an adverse impact on the development or operations of SanCristobal.

**Our activities aresubject to foreign environmental laws and regulations that may materiallyadversely affect our future operations.**

We conduct mineral exploration and developmentactivities primarily in South America and Central America, and are most activein Bolivia, where the San Cristobal project is located, and Peru, Argentina andMexico. With the development of San Cristobal, we also expect to conduct miningoperations in Bolivia. These countries have laws and regulations which controlthe exploration and mining of mineral properties and their effects on theenvironment, including air and water quality, mine reclamation, waste handlingand disposal, the protection of different species of flora and fauna and thepreservation of lands. 

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These laws and regulationswill require us to acquire permits and other authorizations for certainactivities. In many countries, including Bolivia, there is relatively newcomprehensive environmental legislation, and the permitting and authorizationprocesses may not be established or predictable. There can be no assurance thatwe will be able to acquire necessary permits or authorizations on a timelybasis, if at all. Delays in acquiring any permit or authorization couldincrease the development cost of our projects and could delay the commencementof production.

Environmental legislation in many countries isevolving in a manner which will likely require stricter standards andenforcement, increased fines and penalties for non-compliance, more stringentenvironmental assessments of proposed projects and a heightened degree ofresponsibility for companies and their officers, directors and employees. InBolivia, where there is relatively new environmental legislation, enforcementactivities and strategies are under development, and thus may not bepredictable. We cannot predict what environmental legislation or regulationswill be enacted or adopted in the future or how future laws and regulationswill be administered or interpreted. Compliance with more stringent laws andregulations, as well as potentially more vigorous enforcement policies orregulatory agencies or stricter interpretation of existing laws, may (1) necessitatesignificant capital outlays, (2) cause us to delay, terminate or otherwisechange our intended activities with respect to one or more projects and (3) materiallyadversely affect our future operations.

In addition, as a condition of the San Cristobalproject finance facility, we are required to comply with the EquatorPrinciples, an assortment of environmental and social standards that have been adoptedby many large global financial institutions. The requirements set forth in theEquator Principles frequently exceed the requirements under Bolivian law. If wefail to materially comply with the Equator Principles, we would be in violationof the applicable loan covenant under our project finance facility. This maycause the lenders to declare a default which would have a material adverseeffect on the San Cristobal project and our financial condition. See “—We maybe unable to comply with the terms and conditions of the project financefacility for our San Cristobal project”.

Many of our explorationand development properties are located in historic mining districts where priorowners may have caused environmental damage that may not be known to us or tothe regulators. In most cases, we have not sought complete environmentalanalyses of our mineral properties and have not conducted comprehensive reviewsof the environmental laws and regulations in every jurisdiction in which we ownor control mineral properties. To the extent we are subject to environmentalrequirements or liabilities, the cost of compliance with these requirements andsatisfaction of these liabilities would reduce our net cash flow and could havea material adverse effect on our financial condition and results of operations.If we are unable to fund fully the cost of remediation of any environmentalcondition, we may be required to suspend operations or enter into interimcompliance measures pending completion of the required remediation.

**We compete againstlarger and more experienced companies.**

The mining industry is intensely competitive. Many ofthe largest mining companies are primarily producers of base metals, and maybecome interested in the types of silver deposits on which we are focusedbecause these deposits typically are polymetallic, containing significantquantities of base metals including zinc, lead and copper. Many of thesecompanies have greater financial resources, operational experience andtechnical capabilities than we have. We may encounter increasing competitionfrom other mining companies in our efforts to acquire mineral properties andhire experienced mining professionals. Increased competition in our businesscould adversely affect our ability to attract necessary capital funding oracquire suitable producing properties or prospects for mineral exploration inthe future.

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**Our ability toobtain dividends or other distributions from our subsidiaries may be subject torestrictions imposed by law, foreign currency exchange regulations and ourfinancing arrangements.**

We conduct, and willcontinue to conduct, all of our operations through subsidiaries. Our ability toobtain dividends or other distributions from our subsidiaries may be subject torestrictions on dividends or repatriation of earnings under applicable locallaw, monetary transfer restrictions and foreign currency exchange regulationsin the jurisdictions in which the subsidiaries operate. Further, our debtfinancing for the San Cristobal project includes requirements that we satisfycertain debt service reserve or operating reserve requirements or meet debtpayment obligations prior to payment to us of any dividends by our subsidiaries.Our subsidiaries’ ability to pay dividends or make other distributions to us isalso subject to their having sufficient funds to do so. If our subsidiaries areunable to pay dividends or make other distributions, our growth may beinhibited unless we are able to obtain additional debt or equity financing onacceptable terms. In the event of a subsidiary’s liquidation, we may lose allor a portion of our investment in that subsidiary.

**We may not be ableto raise the funds necessary to explore and develop our mineral properties.**

Although we believe thatwe have raised sufficient amounts to fund the expected cost of developing andconstructing the San Cristobal project, we will need additional externalfinancing to fund the exploration and development of our other mineralproperties. Sources of external financing may include bank borrowings andfuture debt and equity offerings. There can be no assurance that such futurefinancing will be available on acceptable terms, or at all. The failure toobtain financing would have a material adverse effect on our growth strategyand our results of operations and financial condition. The mineral propertiesthat we are likely to develop are expected to require significant capitalexpenditures. There can be no assurance that we will be able to secure thefinancing necessary to retain our rights to, or to begin or sustain productionat, our mineral properties.

**We may be unable tocomply with the terms and covenants of the project finance facility for our SanCristobal project.**

In December 2005, in order to financeconstruction and start-up costs for the San Cristobal project, we entered intoa $225 million project finance facility with several large financialinstitutions. As of March 27, 2007, we had borrowed $200 million pursuantto the facility and expect to draw the remaining amounts as part of our fundingfor the construction of the project. Our obligations under the facility aresecured by substantially all of the assets of certain of our subsidiaries,including our Bolivian subsidiary that holds the San Cristobal project. Theterms of the project finance facility obligate Apex Silver as well as certainof our subsidiaries, including our Bolivian subsidiary, to meet numerousongoing conditions and covenants. These covenants include obligations relatedto the construction and operation of the project as well as certain financialcovenants pertaining to Apex Silver and our subsidiaries. In some cases, such asthe lenders’ approval of the annual update to the San Cristobal operating planand budget, determining whether we are in compliance with the covenantsdepends, at least in part, on the reasonable judgment of the lenders. Failureto meet one or more of these conditions or covenants could prevent us fromfuture borrowing under the loan facility and could cause the lenders to declareus in default on our existing obligations. If such a default were declared andremained uncured, all borrowed amounts could become due and payable immediatelyand we may be required to immediately settle all outstanding hedge positions. Sincewe currently have no operations or source of funds, there can be no assurancethat we would be able to repay such amounts. If we are unable to repay theborrowed amounts or otherwise perform our obligations under the project financefacility, the lenders may be entitled, in certain circumstances, to enforcetheir lien and take possession of the secured assets, including the assets thatcomprise the San Cristobal project. In addition, failure to pay amountsaccelerated under the project 

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finance facility mayresult in a default under the terms of our 2.875% and 4.0% Convertible SeniorSubordinated Notes due 2024.

In the past, we haveviolated certain covenants or representations set forth in the project financefacility and have requested and received waivers from the lenders with respectto these potential violations. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources”.There can be no assurance that we would be able to obtain similar waivers fromthe lenders in the future. In addition, the project finance facility contains arepresentation that Apex Silver and certain of its subsidiaries are solvent. Thisrepresentation must be true each time we borrow under the facility. As a resultof the mark-to-market liability related to our metals derivative positions, itis not certain that we will be able to make that representation at the time offuture borrowings. If we are not solvent at a future borrowing date, thelenders may refuse to grant a waiver of that requirement and would be entitledto refuse to loan additional amounts under the facility.

**We depend on theservices of key executives.**

We are dependent on theservices of key executives including our chief executive officer and a smallnumber of highly skilled and experienced executives and personnel focused onthe development of the San Cristobal project. Due to the relatively small sizeof Apex Silver, the loss of these persons or our inability to attract andretain additional highly skilled employees required for the development of theSan Cristobal project may delay or otherwise adversely affect the development,start-up and operation of the San Cristobal project, which could have amaterial adverse effect on our business, financial condition, results ofoperations and cash flows.

**Apex Silver andcertain lower tier subsidiaries will likely be treated as passive foreign investmentcompanies for U.S. federal income tax purposes.**

We believe that Apex Silver likely was a passiveforeign investment company (“PFIC”) for 2004 through 2006, and likely will be aPFIC in 2007 as well as potentially with respect to future years. If we are aPFIC, a holder of Ordinary shares who is a U.S. person for U.S. tax purposes (a“U.S. Holder”) will be subject to certain adverse U.S. federal income tax rules.Under the PFIC rules, a U.S. Holder who disposes or is deemed to dispose ofOrdinary shares at a gain, or who receives or is deemed to receive certaindistributions with respect to Ordinary shares (“Excess Distributions”),generally will be required to treat such gain or distributions as ordinaryincome and pay an interest charge on the tax imposed with respect thereto. Certainelections may sometimes be used to reduce the adverse impact of the PFIC rules onU.S. Holders (so-called “qualifying electing fund” (“QEF”) and “mark-to-market”elections), but these elections may accelerate the recognition of taxableincome and may result in the recognition of ordinary income. The PFIC rules areextremely complex, and shareholders are urged to consult their own tax advisersregarding the potential consequences to them of Apex Silver being classified asa PFIC.

In addition, special adverse rules apply to U.S.Holders for any year in which Apex Silver is a PFIC and  has a non-U.S. subsidiary that is also a PFIC(a “Lower-tier PFIC”). As discussed below, we likely had a Lower-tier PFIC for2004 and 2005 and we had a Lower-tier PFIC for 2006. U.S. Holders of ApexSilver generally will be deemed to own any Lower-tier PFICs and will be subjectto the PFIC rules with respect to their indirect ownership of anyLower-tier PFICs. If we are a PFIC and a U.S. Holder does not make a QEFelection for a Lower-tier PFIC, the U.S. Holder could incur liability for thetax and interest charge described above if (i) we receive an ExcessDistribution from that Lower-tier PFIC; (ii) we dispose of all or part ofour interest in the Lower-tier PFIC; or (iii) the U.S. Holder disposes ofall or part of its Ordinary shares. Moreover, a QEF election that is made forApex Silver will not apply to Lower-tier PFICs. While a U.S. Holder may make aseparate QEF election for a Lower-tier PFIC in order to reduce the adverseimpact of the PFIC rules with respect to that Lower-tier PFIC, the QEFelection may accelerate the recognition of taxable income and may result in therecognition of ordinary income. In addition, a U.S. 

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Holder who has made amark-to-market election for Apex Silver could be subject to the PFIC rules withrespect to the Lower-tier PFIC, even though the value of the Lower-tier PFICalready was subject to tax via mark-to-market adjustments at the level of ApexSilver.

We previously disclosed that for 2005 and allsubsequent taxable years, the potential for our lower-tier subsidiaries to beclassified as Lower-tier PFICs with respect to new investors could besubstantially eliminated without adverse tax consequences. In connection withthe completion of the project financing for the San Cristobal project, however,we were required at the end of 2005 and in 2006 to contribute significantamounts to Minera San Cristobal S.A. (“MSC”), the Bolivian subsidiary thatholds the principal assets associated with the project. Following thosecontributions, MSC began to earn interest income and consequently we believethat MSC was a PFIC in 2005 and 2006. As a result, U.S. Holders may be subjectto the adverse tax treatment described above.

In certain filings made in years before 2006, westated that we believed that Apex Silver may have been a PFIC, but thatnone of our non-U.S. lower-tier subsidiaries were PFICs. We now believe thatcertain of our non-U.S. lower-tier subsidiaries, including MSC, were Lower-tierPFICs in certain prior years. As a result, there is a possibility that someU.S. Holders may have suffered, or will suffer, adverse U.S. federal income taxconsequences that they arguably might have avoided had they been aware of thePFIC status of these lower-tier subsidiaries. In the future, U.S. Holders mayclaim that they have suffered adverse tax consequences for which they couldhave taken remedial action if they had been aware that we had subsidiaries thatwere Lower-tier PFICs. It is not possible for us to determine the number ofU.S. Holders, if any, that might make such a claim or to determine the meritsor impact of such claims on us and whether such claims may be material to us.

Apex Silver reported a gain of $199.6 million on itsfinancial statements for the period ended December 31, 2006 as a result ofthe indirect sale by Apex Silver to Sumitomo Corporation of a 35% interest inApex’s San Cristobal project for $224 million in cash and certain deferredpayments based on production from the project (the “Transaction”).

A U.S. Holder may be taxedon a proportionate share of the gain from the Transaction, as determined forPFIC purposes, and be subject to an interest charge on the tax liability, asdescribed above, if Apex Silver and MSC are PFICs. A U.S. Holder who hastimely made QEF elections both for Apex Silver and MSC would avoid the ExcessDistribution rules, but would generally be subject to tax at rates applicableto capital gains on the holder’s proportionate share of the gain from theTransaction, or, if smaller, Apex Silver’s earnings and profits for the year. SomeU.S. Holders who have not made timely filed QEF elections may be eligible tomake a retroactive QEF election that would mitigate the adverse U.S. taxconsequences of the Transaction on them. Moreover, under applicable proposedregulations the fact that our lower-tier subsidiaries may not have had earningsand profits for any taxable year since formation may arguably eliminate anyadverse tax consequences arising from the failure of a U.S. Holder to make aQEF election with respect to the Lower-tier PFICs for prior years if the U.S.Holder makes a timely retroactive QEF election.

**ITEM 1B:**      UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 3:**               LEGALPROCEEDINGS

As previously disclosed,we concluded, based on the results of an internal investigation conducted underthe direction of our Audit Committee, that certain senior employees of one ofour South American subsidiaries were involved in making impermissible paymentsof approximately $125,000 to government officials in 2003 and 2004 inconnection with an inactive, early stage exploration property that is notrelated to any of our active exploration or development properties. Based onfindings to date, no changes to our 

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previouslyfiled financial statements are warranted as a result of these matters. We havecontacted the Department of Justice (“DOJ”) and SEC and reported the results ofour internal investigation. We have been informed that the SEC and DOJ havecommenced an investigation with respect to these matters, including possibleviolations of the Foreign Corrupt Practices Act. We are cooperating fully withthe SEC and DOJ investigations. We cannot predict with any certainty the finaloutcome of the investigations, including any fines or penalties that may beimposed.

**ITEM 4:**               SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of securityholders in the fourth quarter of 2006.

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**PART II**

**ITEM 5:**               MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our Ordinary Shares are listed on the American StockExchange under the symbol “SIL.”  As of March 27,2007, we had approximately 160 shareholders of record and an estimated 12,000additional beneficial holders whose Ordinary Shares were held in street name bybrokerage houses.

We have never paid any dividends on our OrdinaryShares and expect for the foreseeable future to retain any earnings fromoperations for use in expanding and developing our business. Any futuredecision as to the payment of dividends will be at the discretion of our boardof directors and will depend upon our earnings, receipt of dividends from oursubsidiaries, financial position, capital requirements, plans for expansion andsuch other factors as our board of directors deems relevant. Further, ourproject finance facility for the San Cristobal project includes a requirementthat we satisfy certain debt service reserve or operating reserve requirementsor meet debt payment obligations prior to payment to Apex Silver of anydividends by our subsidiaries.

Thefollowing table sets forth the high and the low sale prices per share of ourOrdinary Shares for the periods indicated. The closing price of the OrdinaryShares on March 27, 2007 was $13.57. 

| ** **  | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-------------|------------|------------|------------|----------|------------|
| **Period**  | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| 1st Quarter |       | $          | 25.48      |     | $          | 14.61 |   | $ | 19.47 |   | $ | 15.80 |   |
| 2nd Quarter |       | 26.00      |       | 12.85    |       | 15.84 |   | 11.54 |   |
| 3rd Quarter |       | 17.65      |       | 13.41    |       | 17.20 |   | 12.61 |   |
| 4th Quarter |       | 17.52      |       | 14.10    |       | 18.01 |   | 14.65 |   |
|             |            |            |            |          |            |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 6:**               SELECTEDCONSOLIDATED FINANCIAL DATA

Theselected consolidated financial data of Apex Silver for the years ended December 31,2006, 2005, 2004, 2003 and 2002 and the period from December 22, 1994(inception) through December 31, 2006, are derived from our auditedconsolidated financial statements. This table should be read in conjunctionwith the Consolidated Financial Statements and Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

| ** **                                          | ** ** | ** **                                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **For the period  from  December 22,  1994 Inception** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Year ended December 31,** | ** ** | **through**           | ** ** |
| ** **                                          | ** ** | **2006**                                   | ** ** | **2005  Restated(1)** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **December 31,  2006**                                                | ** ** |
| ** **                                          | ** ** | **(in thousands)**                    | ** ** |
| **Statement of Operations:**                        | ** ** | ** **                                 |       | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |                                                                       | ** ** | ** ** |   |
| Operating  (expenses)(2)                            |       | $                                          | (744,607   | )                     | $          | (175,498   | )          | $          | (21,366    | )          | $          | (6,594                                                                     | )          | $ | (9,524 | ) |   | $ | (1,039,112 | ) |   |
| Other income  (expense) net(3)                      |       | 222,998                                    |       | 13,725                |       | 2,521      |       | 550        |       | 870        |       |                                                                       | 253,513    |   |   |
| Net loss before  minority interest and income taxes |       | (521,609                                   | )          | (161,773              | )          | (18,845    | )          | (6,044     | )          | (8,654     | )          |                                                                       | (785,599   | ) |   |
| Income taxes                                        |       | (749                                       | )          | (379                  | )          | —     |       | —     |       | —     |       |                                                                       | (1,128     | ) |   |
| Minority interest in consolidated loss              |       | 8,813                                      |       | 16                    |       | —     |       | —     |       | —     |       |                                                                       | 13,388     |   |   |
| Net loss                                            |       | $                                          | (513,545   | )                     | $          | (162,136   | )          | $          | (18,845    | )          | $          | (6,044                                                                     | )          | $ | (8,654 | ) |   | $ | (773,339 | ) |   |
| Net loss per  Ordinary Share basic and diluted      |       | $                                          | (9.09      | )                     | $          | (3.34      | )          | $          | (0.41      | )          | $          | (0.17                                                                      | )          | $ | (0.24 | ) |   |   |   |   |
| Weighted average  Ordinary Shares outstanding       |       | 56,498                                     |       | 48,616                |       | 46,528     |       | 36,576     |       | 35,678     |       |                                                                       |       |   |   |
| **Cash  Flow Data:**                                | ** ** | ** **                                 |       | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |                                                                       | ** ** | ** ** |   |
| Net cash used in  operating activities              |       | (70,727                                    | )          | (24,338               | )          | (9,218     | )          | (3,199     | )          | (3,692     | )          |                                                                       | (177,604   | ) |   |
| Net cash used in  investing activities              |       | (223,012                                   | )          | (1,869                | )          | (518,926   | )          | (4,519     | )          | (5,452     | )          |                                                                       | (859,019   | ) |   |
| Net cash provided  by financing activities(4)       |       | $                                          | 338,771    |                  | $          | 3,275      |       | $          | 538,370    |       | $          | 3,875                                                                      |       | $ | 11,277 |   |   | $ | 1,086,463 |   |   |
| **Balance  Sheet Data:**                            | ** ** | ** **                                 |       | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |                                                                       | ** ** | ** ** |   |
| Total assets                                        |       | $                                          | 1,270,096  |                  | $          | 780,511    |       | $          | 693,818    |       | $          | 146,167                                                                    |       | $ | 144,055 |   |   |   |   |   |
| Long term  liabilities                              |       | $                                          | 1,278,474  |                  | $          | 467,743    |       | $          | 339,987    |       | $          | 599                                                                        |       | $ | 770 |   |   |   |   |   |
| Minority interest                                   |       | $                                          | 40         |                  | $          | 34         |       | $          | —     |       | $          | —                                                                     |       | $ | — |   |   |   |   |   |
| Shareholders’ equity  (deficit)                |       | $                                          | (103,290   | )                     | $          | 227,229    |       | $          | 346,116    |       | $          | 143,986                                                                    |       | $ | 141,731 |   |   |   |   |   |

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(1)          See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations, andthe Notes to our Consolidated Financial Statements, Note 2s for a discussion ofthe matters related to the restatement of the 2005 financial statements.

(2)          The 2006 amount includesa non-cash mark-to-market loss of $672.5 million related to our open derivativepositions and a realized loss of $42.6 million on certain liquidated derivativepositions. The 2005 amount includes a restated non-cash mark-to-market loss of$151.5 million related to our open derivative positions.

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(3)          The 2006 amounts includea $199.6 million gain related to the sale to Sumitomo of a 35% interest in thesubsidiaries that own our San Cristobal project.

(4)          The2006 amount includes $180.0 million of borrowings under the project financefacility and $156.8 million of net proceeds from the sale of Ordinary Shares. The2004 amounts include $328.1 million of net proceeds from the issuance ofconvertible notes and $208.6 million of net proceeds from sale of OrdinaryShares.

**ITEM 7:**               MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionand analysis should be read together with the consolidated financial statementsof Apex Silver Mines Limited and the selected financial data and related notesthereto included elsewhere in this report on Form 10-K.

**Overview**

During 2006 we made significant progress on theconstruction of our San Cristobal project in southwestern Bolivia and at theend of the year the project was over 90% complete. Virtually all theengineering has been completed and all the major mechanical equipment has beeninstalled. The most significant remaining task to be accomplished is thecompletion of the rail spur and the port facilities. Both of those tasks areproceeding on schedule and should be completed during the second quarter of2007. We are looking forward to the first sale of concentrates fromSan Cristobal in the third quarter of 2007.

In addition to thesignificant progress on the development of the San Cristobal project, our otherhighlights from 2006 included the following:

·       *Sumitomo Transaction—*In September 2006,we sold a 35% interest in the San Cristobal project to Sumitomo Corporation. Weretained a 65% interest in the project and continue to have operationalcontrol, subject to the provisions of a shareholders agreement entered intowith Sumitomo in connection with the transaction. See “San Cristobal Project—Transactionwith Sumitomo”. We recognized a gain of $199.6 million on the sale.

·       *Public Equity Offering—*In April 2006we completed a public equity offering in which we raised $151.1 million. Wehave used a portion of the proceeds to advance the evaluation of our portfolioof exploration properties and the remaining amount remains available forexploration, business development activities or general corporate purposes.

·       *Project Finance Facility—*In February 2006we received our first draw under our $225 million San Cristobal project financefacility. At year-end, we had drawn $180 million from the facility to financethe construction of the project. During February 2007 we borrowed anadditional $20 million against the finance facility, bringing total borrowingsunder the facility to $200 million.

·       *Royalty Income*—We received $1.6 million inincome from a net smelter return royalty we retained in connection with ourrecent sale of an exploration property. In 2004, we sold a section of ourPlatosa property in Mexico to an unaffiliated buyer. The buyer began testmining on the royalty section in 2006 and produced silver, zinc and lead with anet smelter value of $32.4 million. This royalty income represents our firstincome (other than investment income) since the inception of the company.

As we near thecommencement of production at the San Cristobal project in 2007, we continue toface challenges. Some of these challenges include:

·       *Derivative Positions—*During 2005, weentered into certain forward sales, puts and calls for silver, zinc and lead. Whilemost of these transactions were required in order to comply with a covenant in 

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our San Cristobal projectfinance facility, a portion of the transactions were discretionary. Because ofhigh spot and forward prices for silver, zinc and lead, we have recognizedsignificant non-cash, mark-to-market losses on these derivative positions. During2006, we made net cash payments of $48.3 million resulting in a realized lossof $42.6 million to settle all of our discretionary derivative positions, andrecognized a non-cash mark-to-market loss of $672.5 million for the year withrespect to the positions required by the project finance facility. Non-cashmark-to-market gains and losses from the open derivative positions mayfluctuate substantially from period to period based on spot and forward pricesand option volatilities. However, if current spot prices continue into thefuture, we anticipate that the increased revenue from metals which are nothedged will generate a significant benefit to future earnings and cash flows. See“—Restatement of Prior Periods’ Results of Operations” below for a discussionof the restated valuations of our open derivative positions.

·       *Political Matters in Bolivia*. At varioustimes during 2006, President Morales and others in his administration have madepublic statements regarding their desire to exert greater state control overnatural resource production in Bolivia. To date, there have been no formalproposals by the Bolivian government to nationalize the mining industry but itis possible that the government may alter its current policies with respect tothe mining industry in the future. In addition, the Bolivian government is currentlyconsidering various changes to applicable mining taxes, which would have theeffect of increasing the overall tax burden on the San Cristobal project. Atpresent, various ideas have been proposed by government officials and others,but there is no legislation pending. Should these changes occur, theprofitability of the San Cristobal project may be adversely effected.

·       *Managing Growth.*As the construction of the San Cristobalproject continues to advance, we have experienced an increase in our administrativeand management costs. These costs have arisen primarily due to the increasedsystems and personnel required to become an operating company, as well as theexpenditures required to maintain compliance with the San Cristobal projectfinance facility.

**Restatement ofPrior Periods’ Results of Operations**

We determined that the method used in prior periods toestimate the fair value of our open metals derivative positions was notappropriate. Pursuant to Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“FAS No. 133”), werecord our open derivative positions at their fair value on our consolidatedbalance sheet and record the changes in fair value to current earnings at theend of each reporting period.

Our derivative positions mature or expire on variousdates over an approximate six-year period commencing in July 2007. Many ofthe derivative positions mature or expire beyond the periods covered by themajor commodities price indices such as LME or COMEX, or expire in futureperiods covered by those indices with respect to which only limited tradingactivity has occurred. In instances where only limited market activity existed,we used price projections provided by an independent third party employingstatistical analysis and models to estimate the fair value of our openderivative positions. The models used by the independent third party relied oncommodities prices indices out to three months and mean reversion statisticalestimates beyond the three-month period. Recently, we reassessed the marketinformation reflected in the commodities prices indices out to twenty-sevenmonths and quoted prices from the counterparties holding derivative positionsand concluded that the additional market information is a more reliableindicator of fair value than the independent third party price projections wepreviously used.

Based on the reassessment, we concluded that we hadunderstated the liability related to the open derivative positions commencingwith the quarter ended September 30, 2005. The cumulative liability forour open derivative positions was understated by $95.1 million and $300.5million at December 31, 2005 

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and September 30,2006, respectively. In addition, correcting the error in the valuation of theopen derivative positions impacted the gain and minority interest that werecognized on the sale of the 35% interests in the subsidiaries that own theSan Cristobal project. The gain on the sale increased from $119.8 million to$199.6 million and the minority interest decreased from $88.4 million to $18.9million at September 30, 2006.

As a result, we haveconcluded that our financial statements for the quarter ended September 30,2005, the year ended December 31, 2005 and the first three quarters of 2006should be restated. Use of the additional market information in calculating thefair value of our open derivative positions will likely result in increasedvolatility in our earnings during the next three years, the period over whichmost of the derivatives mature or expire. We intend to settle these derivativeswith revenues from San Cristobal production over the six-year period commencingin July 2007. Therefore, the cash effect of settling these hedges will berealized as lower revenue over that six-year period and the ultimate losses orgains from these derivatives will be determined based upon market prices at thetime of settlement.

**Results ofOperations**

*Gainon Sale of Interest in Subsidiary.*   During 2006,we sold to Sumitomo Corporation a 35% interest in three subsidiaries that ownour San Cristobal project, market project concentrates and hold the metalsderivative positions associated with the project. We received $224 million incash and will receive certain future payments from Sumitomo based on silver andzinc production from the project. We recorded a minority interest of $8.8million in the net assets sold to Sumitomo and recognized a gain of $199.6million related to the transaction. The gain is net of approximately $6.4million of selling costs we incurred related to the transaction.

Subsequent to the close of the transaction withSumitomo, we incurred certain losses primarily related to marking to market ouropen derivative positions entered into in connection with the project financefacility. Such losses would normally be shared by Sumitomo in proportion to its35% interest in the subsidiary recording the losses. However, generallyaccepted accounting principles do not permit the allocation of losses to theminority interest in excess of the minority owner’s interest in the subsidiary,unless the minority interest has a primary obligation to fund such losses. Weand Sumitomo have each guaranteed our respective shares of the project financeobligations and the related metals derivative positions through the completion ofthe San Cristobal project (as defined in the project finance facility) at whichtime the guarantees will terminate. Project completion must occur byDecember 31, 2008. Since the derivative positions are expected to befunded through future earnings from the San Cristobal project, we do notanticipate that Sumitomo will be required to fund its proportionate interest inthe mark-to-market losses prior to the completion of the San Cristobal project.Although Sumitomo’s share of the subsidiary’s losses for the year ended December 31,2006, was $107.7, we only allocated $8.8 million of the loss to Sumitomo andabsorbed the remaining $98.8 million loss as the $8.8 million minority interestbenefit reduced the minority interest balance on our consolidated balancesheets to $0 at December 31, 2006. We anticipate recovering the $98.8million we absorbed, and any additional minority interest losses we may absorb,from future earnings prior to distribution to the minority interest. We had nocomparable transactions in 2005 or 2004.

See “Restatement of Prior Periods’ Results ofOperations” above for a discussion of the revised valuations of our openderivative positions which impacted the gain and minority interest werecognized on the sale of an interest in the subsidiaries. The revisedvaluation of the derivative positions resulted in the gain on the sale beingincreased from $119.8 million to $199.6 million and the minority interest beingdecreased from $88.4 million to $18.9 million at September 30, 2006.

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*Royalty Income.*   During2006, we received $1.6 million of royalty income from a property in Mexico onwhich we retained a net smelter return royalty. The property is being testmined by a joint venture partner and we receive a royalty for product sold fromthe test mining operation. We did not receive any such royalties for the yearsended December 31, 2005 and 2004.

*Exploration.*   Ourexploration expenses, including property holding costs and allocatedadministrative expenses, were $8.3 million for the year ended December 31,2006, as compared to $5.2 million and $5.3 million for the years endingDecember 31, 2005 and 2004, respectively. The increase in exploration costs during 2006, as compared to 2005 and2004, is primarily the result of our increased exploration activities inMexico, Argentina, Peru, and Bolivia. None of the exploration expenses reportedrelate to the San Cristobal project.

*Administrative.*   Administrativeexpense was $21.2 million, $17.9 million and $18.2 million for the years endedDecember 31, 2006, 2005 and 2004, respectively. The increase inadministrative expense during 2006, as compared to 2005 and 2004, is primarilythe result of increased compensation costs and administrative support costsindirectly associated with the advancement of our San Cristobal project,including marketing, treasury and compliance with the San Cristobal projectfinance facility. In addition, during 2006 we incurred legal fees related to aninvestigation of the previously reported improper payments at our South Americasubsidiary. The increase in administrative expense during 2005, as compared to2004, excluding $8.1 million of non-recurring expenses in 2004, is primarilythe result of additional personnel costs and related indirect support costsassociated with the advancement of our San Cristobal project and our projectfinancing efforts. The 2004 administrative expenses included approximately $6.6million of one time non-cash compensation expense primarily associated with theretirement of our chairman and a $1.5 million one time payment made to aconsultant related to the convertible note offerings completed during 2004.

*Interest and Other Income.*   Wehad interest and other income of $19.7 million, $14.3 million and $6.1 millionfor the years ended December 31, 2006, 2005 and 2004, respectively. The2006 increase in interest and other income, as compared to 2005 and 2004, isthe result of the increased interest we earned on the higher average cash andinvestment balances that we held during the year resulting from the proceedsreceived from the Ordinary Share offering completed during the second quarter2006 and the proceeds from the sale of the 35% interest in our San Cristobalproject during September 2006. The 2005 increase, as compared to 2004, isthe result of the increased interest we earned on the higher average cash andinvestment balances that we held during 2005 resulting from the proceeds receivedfrom the ordinary share and convertible debt offerings completed during 2004.In addition, interest rates have been gradually increasing since 2004.

*Gains and Losses—CommodityDerivatives.*   We recorded a loss of $715.1million and a restated loss of $151.5 million related to our total derivativepositions for the years ended December 31, 2006 and 2005, respectively,compared to a $0.7 million gain recorded for the year ended December 31,2004. The 2006 and 2005 losses are primarily the result of the non-cashmark-to-market valuation of our open metals positions related to the projectfinance facility hedge requirement and continuing high spot and forward pricesfor silver, zinc and lead. See “—Restatement of Prior Periods’ Results ofOperations” above for a discussion of the revised valuations of our openderivative positions.

*Interest Expense and OtherBorrowing Costs.*   Interest expense and amortizedborrowing costs were $0.8 million, $7.3 million and $3.6 million resulting fromtotal gross amounts of $26.9 million, $14.2 million and $6.1 million, lessinterest capitalized during the San Cristobal construction period of $26.1million, $6.9 million and $2.5 million for the years ended December 31,2006, 2005 and 2004, respectively. The gross increases are the result ofgreater average outstanding debt balances during the progressive years. The2006 and 2005 amounts include $0.5 and $0.9 million of accelerated amortizationof deferred borrowing costs recorded related to the extinguishment of a portionof the debt during the respective years. The 2006 interest and other borrowingcosts consisted of interest incurred on the project finance facility, interestincurred on the 2.875% and 4.0% Convertible Senior Subordinated Notes due 2024and interest incurred 

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on capital leases.The 2005 interest and other borrowing costs consisted of interest incurred onthe 2.875% and 4.0% Convertible Senior Subordinated Notes due 2024 and interestincurred on capital leases. The 2004 interest and other borrowing costs were relatedto the 2.875% and 4.0% Convertible Senior Subordinated Notes due 2024.

*Income Taxes.*   ApexSilver Mines Corporation, our U.S. management services company, is subject toU.S. income taxes on income derived from services provided to Apex Silver MinesLimited and its subsidiaries. Other than amounts payable by Apex Silver MinesCorporation, we pay no income tax in the U.S. since we are incorporated in theCayman Islands and do not conduct or expect to conduct business in the U.S.that would generate U.S. taxable income. The Cayman Islands currently impose nocorporate taxation. We have been granted an exemption until January 16,2015 from any form of corporate taxation that may subsequently be adopted inthe Cayman Islands. For the years ended December 31, 2006 and 2005 ourincome tax provision totaled $0.7 million and $0.4 million, respectively,and consisted solely of withholding taxes on inter-company investment incomeand administrative charges. No such taxes were incurred during the year ended December 31,2004. Deferred tax assets of approximately $30.0 million and $14.4 million at December 31,2006 and 2005, respectively, resulting from operating loss carry-forwards ofour subsidiaries, have been entirely offset by valuation allowances.

**Liquidity and Capital Resources**

*Cash and Investment Balances*

At December 31,2006, our aggregate cash, restricted cash, short and long-term investments andrestricted investments totaled $514.9 million compared to an aggregate of$351.9 million in cash, restricted cash, short and long-term investments andrestricted investments at December 31, 2005. The amounts held at December 31,2006 include $49.8 million in cash and cash equivalents, $367.8 million ininvestments, $27.9 million of cash and $51.8 million of investments that arerestricted to fund development at our San Cristobal project, $4.0 million ofcash restricted to develop the port facility, $8.0 million of investments to colateralizecertain letters of credit and $5.5 million of investments that are restrictedand at maturity will provide the amounts necessary to pay interest through September 2007on the 4.0% Convertible Senior Subordinated Notes Due 2024.

Theincrease in our aggregate balance of cash, restricted cash, short and long-terminvestments and restricted investments at December 31, 2006, compared tothe prior year, is primarily the result of $151.1 million of net proceeds froman equity offering in April 2006, $180.0 million of borrowings against theSan Cristobal project finance facility, and $224.0 million of proceeds from thesale of a 35% interest in our San Cristobal project to Sumitomo Corporation. Inaddition, our aggregate cash and investment balances increased as a result of$5.7 million of net proceeds from the sale of Ordinary Shares to fund the powerline construction, $3.4 million of proceeds from employee stock optionsexercised, $1.4 million of proceeds received from a loan from the power linecontractor’s parent and a net decrease in restricted cash of $103.2 million. Theincreases in our cash and investment balances were all partially offset by$276.9 million invested in property, plant and equipment related to thedevelopment of the San Cristobal project; $70.7 million used to fundoperations, property holding costs and administrative costs, net of interestand other income; the net purchase of $218.7 million of investments;$48.3 million of net premiums and liquidation payments made related to ourdiscretionary metals derivative positions; $6.4 million of selling costs paidrelated to the sale of a 35% interest in our San Cristobal project; $0.7million paid to the banks related to the project finance facility and paymentson long-term debt (capital lease payments) of $2.2 million.

In conjunction with thesale of the 35% equity interest in the subsidiaries that own our San Cristobalproject to Sumitomo, the project finance facility agreements were amended toprovide for the release to us of $70.0 million of overrun financing previouslyheld in accounts controlled by the lenders and approximately $5.7 millionpreviously escrowed to meet interest payments on our subordinated notes. This$75.7 million (which was included in the $103.2 million of net decrease inrestricted cash described above) 

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is nowunrestricted and available to us for general corporate purposes. At December 31,2006 these amounts were recorded as investments as discussed above.

In connection with anamendment to our San Cristobal project finance facility, we plan to depositapproximately $90 million in restricted margin accounts during the secondquarter of 2007 as security for our metals derivative positions. See—“SanCristobal Project Finance Facility” below.

*San Cristobal Project Finance Facility*

At December 31, 2006,we had borrowed $180 million under our San Cristobal project finance facility. Weborrowed an additional $20 million in February 2007, resulting in totaloutstanding borrowings of $200 million as of March 27, 2007. We arerequired to pay a 1.0% annual commitment fee on the undrawn amount of thefacility. Interest on the outstanding amounts drawn under the facility is basedon LIBOR plus a credit spread, which at December 31, 2006 was 3.3%. Thefirst principal payment under the facility is due in December 2008 withfinal maturity in December 2012. In connection with the transaction withSumitomo, Sumitomo has guaranteed the repayment of 35% of the facility untilcompletion, as defined in the facility. We have guaranteed repayment of theremaining 65% of the facility until completion. Project completion must occurby December 31, 2008.

The project financefacility contains covenants that require us to, among other things, maintaincertain security interests, financial ratios after project completion,insurance coverage, minimum sales contracts and metals price protectioncontracts as well as other requirements. Failure to comply with these covenantsor to cure related violations within specified periods could result in an eventof default, pursuant to which the project lenders could require repayment ofall amounts outstanding under the facility and cash settlement of anyderivative liabilities associated with the San Cristobal project.

As a result of therestatement described above, we breached certain representations and covenantsregarding the preparation of financial statements in accordance with U.S. GAAP.On March 15, 2007, we obtained waivers from the project lenders for thesebreaches and any related events of default. We have also obtained waivers ofcompliance with certain technical covenant violations and confirmation that theeffects of the restatement do not constitute a material adverse effect, asdefined.

Pursuant to the covenantscontained in the facility, we are required annually to submit a revisedConstruction Budget, Operating Plan, and Financial Model (collectively the “UpdatedPlan”) for the San Cristobal project by November 1. We are currentlyoperating under the Construction Budget, Operating Plan, and Financial Modelinitially approved by the lenders when the facility was entered into (the “InitialPlan”) which remains in effect until the Updated Plan is approved. We submittedour Updated Plan for 2007 in a timely manner. The Updated Plan required pricesof $5.25 per ounce for silver, $0.48 per pound for zinc and $0.26 per pound forlead, compared to spot prices as of March 27, 2007 of $13.27, $1.45 and$0.84, respectively. The Updated Plan also reflected higher operating coststhan previously assumed primarily as a result of the impact of record highcommodity prices. A large portion of Apex’s operating costs are directlyinfluenced by these high commodities prices, including costs for diesel, reagents,and tires.   The low metals prices requiredby the facility coupled with higher current operating costs resulted inprojected cash flow that would be insufficient to meet certain other facility requirements,including minimum cash flows and debt service coverage ratios required aftercompletion. As a result, we requested that the lenders approve certain waiversand amendments to permit the use of higher metals prices. In early January 2007,the lenders rejected the Updated Plan.

As provided by the termsof the project finance facility, we have since been engaged in discussions withthe lenders to agree upon a mutually acceptable Updated Plan. The lenders haveproposed higher metals prices than those contained in the agreement that willallow us to present an Updated Plan that will meet the project loan facility’sfinancial requirements. The lenders have also proposed an adjustment to thefacility’s repayment schedule to require a larger percentage of principal to berepaid in earlier years and an increase in the mandatory cash flow sweep from35% to 45% of excess cash flow. We and 

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Sumitomohave agreed to purchase zinc puts covering approximately 73,000 tonnes of zincproduction in 2008 and 2009. We will also fund a $91 million margin accountwith the two banks holding the derivative positions and Sumitomo will provide apost-completion guarantee of the derivative positions in the amount of $49million. This support will be decreased by 33% at the end of each of the yearsfrom 2008 through 2010.

We and Sumitomo haveaccepted these proposals and amendments to the facility agreements and anUpdated Plan for submission to the lenders are being drafted. Once theamendments to the agreements and Updated Plan are complete, an affirmative voteby the lenders is required for final approval. At the date of this filing,formal approval of the amendments to the agreements and the Update Plan by therequisite majority of lenders has not yet been obtained. While there can be noassurances that lender approval will be obtained, we believe the necessaryamendments and the Updated Plan will be approved by the requisite majority oflenders.

If the amendments and theUpdated Plan are not approved by the lenders, until such time as approval isobtained, we would be required to operate in all material respects, as definedby the facility, in compliance with 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 and derivatives liability. Because our current projections indicatethat cash 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 what actions the lenders might take if theydeem that we are not in material compliance with the Initial Plan.

If an event of defaultoccurs, the lenders could require immediate payment of amounts outstandingunder the facility and settlement of the derivatives liability. If such ademand were successfully made, we would require additional debt or equityfinancing in order to satisfy our obligations. There is no assurance that wewould be able to obtain additional financing on acceptable terms, or at all. Wehad liabilities in excess of our assets at December 31, 2006, due to ourderivative liability.

*Sources and Uses of Funds*

During the third quarter2006, we revised our estimate for the total amount of project funding requiredfor the San Cristobal project from January 1, 2004 through the beginningof production scheduled for the third quarter of 2007 to approximately $650million or an 8% increase over the original estimate developed in December 2004.This amount includes all estimated costs required to commence production at SanCristobal, including all engineering, procurement and construction costs, aswell as estimates for constant-dollar escalation and contingencies. Theestimate excludes $22 million advanced through the issuance of Ordinary Sharesto the company constructing the power line, $6 million advanced to or escrowedfor the company constructing the port facilities and approximately $43 millionof working capital. Advances to the power line and port facility providers areexpected to be recouped through credits applied against payments for thecontracted services. Excluding the power line and port advances, we have spentapproximately $518 million on the Project through December 31, 2006. Inaddition to the amounts above, we have incurred interest and other financingcosts related to the project finance facility of approximately $20 million andanticipate an additional $10 million prior to the start up of operations.

During 2007, we expect tospend approximately $160 million on the San Cristobal project,  representing the remainder of theapproximately $650 million total project cost estimate, plus an additional $40million of working capital and $10 million of project financing interest costsprior to start up of operations. The preceding amounts include $50 million intotal project costs and $16 million in working capital in excess of theoriginal estimates. We expect to fund these cash requirements by liquidatingthe restricted investments already set aside for this purpose, drawing theremaining funds available from the project financing facility, and usingexisting cash and investments to fund our 65% of the requirements in excess ofthe original estimates, with Sumitomo funding the remaining 35%. In addition,during the next twelve months we expect to spend approximately $18 million ongeneral corporate costs and approximately 

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$10million on interest payments related to the outstanding convertible debt. Ourcurrent plans call for expenditures of approximately $14 million on explorationefforts during the next twelve months. We plan to fund these expenditures fromour existing cash and investment balances and from interest and other income. Inaddition we expect operating cash flows to begin during the third quarter of2007. In addition, as discussed above, we plan to deposit approximately$91 million in restricted fixed margin account during the second quarterof 2007 as security for our metals derivative positions.

Because we did not fileour annual report on Form 10-K on or before the deadline prescribedby the SEC, we will be unable to use our existing shelf registration statementsto complete public equity or debt offerings until at least March 2008. Whilewe still may be able to access public capital markets by filing a newregistration statement, such offerings may be more difficult and subject togreater delay in the absence of an effective shelf registration statement.

**Off Balance Sheet Arrangements**

We have no off balancesheet arrangements.

**Table of Contractual Obligations**

Thefollowing table summarizes our contractual obligations at December 31,2006:

| **Contractual Obligations  (thousands)** | ** ** | **Total** | ** ** | **Less Than  1 Year** | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------|------------|-----------|------------|---------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Convertible debt                              |       | $         | 289,987    |                            |       | $              | —     |           |       | $              | —     |   | $ | — |   | $ | 289,987 |   |
| Interest payments  convertible debt           |       | 76,595    |       |                            | 9,574      |           |       | 19,149         |       | 19,149         |       | 28,723 |   |
| Bank debt                                     |       | 180,000   |       |                            | —     |           |       | 64,620         |       | 95,220         |       | 20,160 |   |
| Interest payments  bank debt                  |       | 60,798    |       |                            | 16,084     |           |       | 30,310         |       | 14,060         |       | 344 |   |
| Capital leases                                |       | 17,349    |       |                            | 2,993      |           |       | 5,451          |       | 3,693          |       | 5,212 |   |
| Interest payments  on capital leases          |       | 9,184     |       |                            | 2,397      |           |       | 3,467          |       | 2,129          |       | 1,191 |   |
| Operating leases                              |       | 879       |       |                            | 374        |           |       | 505            |       | —         |       | — |   |
| San Cristobal  property leases                |       | 6,800     |       |                            | 400        |           |       | 800            |       | 800            |       | 4,800 |   |
| Purchase obligations(1)                       |       | 49,695    |       |                            | 49,695     |           |       | —         |       | —         |       | — |   |
| Fair value of open  derivative positions      |       | 818,198   |       |                            | 39,080     |           |       | 570,982        |       | 207,696        |       | 439 |   |
|                                               |            |           |            |                                 |            |                |            |                |            |                |            |  |  |  |  |  |  |  |

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(1)          The amount does notinclude an approximately additional $60 million of purchase obligationsthe Company intends to commit to in the future to complete the San CristobalProject.

Total interest paymentsdue on the convertible debt includes only those payments expected to be madethrough 2014 based on our expectation that the convertible debt holders mayrequire us to repurchase the notes in 2014. The bank debt is all related to theproject finance facility and reflects the anticipated new amortization schedulediscussed above in Liquidity and Capital Resources. Interest on the projectfinance facility is based on LIBOR plus a credit spread, and the above interestcalculation is based on LIBOR at December 31, 2006. As provided in theproposed amendments to the San Cristobal project finance facility (see “—Liquidityand Capital Resources”), the payment schedule for the project finance facilitymay be modified to reflect total payments of $115.9 million in years two andthree and $64.1 million in years four and five. The operating lease obligationsare related to the office facilities at our corporate headquarters. The SanCristobal property lease payments are payments we must make to the Boliviangovernment to maintain our rights to the San Cristobal mining concessions. Thepurchase obligations are related to orders placed for long lead time equipmentbeing purchased for the San Cristobal project.

From time to time we enterinto lease option agreements related to exploration properties that are ofinterest to us. These agreements typically contain escalating lease paymentsrequired to maintain our exploration rights to the property. Such agreementsare not included in the above table because exploration success is historicallylow and the agreements can be terminated by us at any time.

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**RegulatoryCompliance**

Our current and futureexploration and development activities, as well as our future mining andprocessing operations, are subject to various federal, state and local laws andregulations in the countries in which we conduct our activities. These laws andregulations govern the protection of the environment, prospecting, development,production, taxes, labor standards, occupational health, mine safety, toxicsubstances and other matters. We expect to be able to comply with those laws anddo not believe that compliance will have a material adverse effect on ourcompetitive position. We intend to obtain all licenses and permits required byall applicable regulatory agencies in connection with our mining operations andexploration activities. We intend to maintain standards of environmentalcompliance consistent with regulatory requirements.

**Critical AccountingPolicies**

The selection andapplication of accounting policies is an important process that has developedas our business activities have evolved and as the accounting rules havechanged. Accounting rules generally do not involve a selection amongalternatives, but involve an implementation and interpretation of existingrules, and the use of judgment, to the specific set of circumstances existingin our business. Discussed below are the accounting policies that we believeare critical to our financial statements due to the degree of uncertaintyregarding the estimates or assumptions involved and the magnitude of the asset,liability, revenue or expense being reported.

*Reserves*

Reserve estimates involvesubjective judgment and are based on numerous assumptions that may later proveto be inaccurate. These estimates include engineering evaluations of assayvalues derived from samplings of drill holes and other openings. Additionally,changes in the market prices of metals may render certain reserves containingrelatively lower grades of mineralization uneconomic to mine. Further,availability of permits, changes in operating and capital costs, and otherfactors could materially and adversely affect ore reserves. Our current provenand probable reserve estimates at San Cristobal total approximately251 million tonnes of ore grading 55 grams per tonne silver, 1.54%zinc and 0.53% lead, containing approximately 446 million ounces ofsilver, 8.53 billion pounds of zinc and 2.92 billion pounds of lead.The reserves are based on $8.51 per ounce silver, $0.86 per poundzinc and $0.47 per pound lead. These prices represent the three-yearaverage prices for each of the metals as per guidelines established by theSecurities and Exchange Commission.

*Mineral properties*

When we determine that amineral property has proven and probable reserves, subsequent development costsare capitalized to mineral properties. When mineral properties are developedand operations commence, capitalized costs are charged to operations using theunits-of-production method over proven and probable reserves. BeginningSeptember 1, 1997, costs associated with our San Cristobal project havebeen capitalized. Capitalized costs at San Cristobal include all direct costsassociated with the project, certain interest costs, depreciation on assetsbeing used to construct the project and other internally allocated costsdirectly associated with the advancement of the project.

*Derivativepositions*

We record all open derivative positions on ourconsolidated balance sheet at estimated fair value. Changes in the fair valueof the open derivative positions are recorded each period in earnings. ThroughDecember 31, 2006, we had not accounted for any transactions as hedgetransactions. Therefore, all open 

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derivative positions havebeen adjusted to estimated fair value at the end of each reporting period withthe related change in value recorded to earnings.

We determine the fairvalue of our open derivative positions by applying market values obtained fromthe counterparties holding our derivative positions. We independently verifythat the values received from the counterparties are based on major commoditiesprice indices such as the LME, COMEX and other available market data. (See“Restatement of Prior Periods’ Results of Operations” above for a discussion ofthe restated fair market value of our open derivative liability for the periodsSeptember 30, 2005 through September 30, 2006). As ofDecember 31, 2006, the fair market value of our open derivative liabilitywas a net $818.2 million.

*Asset retirementobligations*

We record asset retirement obligations in accordancewith Statement of Financial Accounting Standards No. 143, “Accounting forAsset Retirement Obligations” (“FAS No. 143”), which establishes a uniformmethodology for accounting for estimated reclamation and abandonment costs. Accordingto FAS No. 143, the fair value of a liability for an asset retirementobligation (“ARO”) is recognized in the period in which it is incurred if areasonable estimate of fair value can be made.  An offsetting Asset Retirement Cost (“ARC”) iscapitalized as part of the carrying value of the assets with which it isassociated and depreciated over the useful life of the asset. During 2006 andthe second half of 2005, we conducted certain activities at our San Cristobalproperty, primarily certain earth works and plant construction, that willrequire future reclamation and closure expenditures. Prior to the second halfof 2005 there were no activities that resulted in an ARO.

See Note 2 of theaccompanying Notes to our Consolidated Financial Statements included in this Form 10-Kfor additional accounting policies.

**ITEM 7A:**       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

**Interest Rate Risk**

Our outstanding debt consists primarily of our 4.0%and 2.875% Convertible Senior Subordinated Notes due 2024 and amounts borrowedunder our $225 million project finance facility for the construction of the SanCristobal project. The Convertible Senior Subordinated Notes bear interest at afixed rate and thus do not have exposure to interest rate changes. The projectfinance facility bears interest at LIBOR plus a credit spread. As of December 31,2006, we had borrowed $180 million under the facility. Assuming the full $225million amount is borrowed under the facility, an increase of 0.5% in the LIBORwould result in an annual increase in interest expense of $1.125 million. Wehave not entered into any agreements to hedge against unfavorable changes ininterest rates but may in the future manage our exposure to interest rate risk.

We invest excess cash inU.S. government and debt securities rated “investment grade” or better. Therates received on such investments may fluctuate with changes in economicconditions. As a result, our investment income may fall short of expectationsduring periods of lower interest rates. Based on the average cash balancesoutstanding during 2006, a 1% decrease in interest rates would have resulted ina reduction in interest income for the period of approximately $4.2 million.

**Foreign CurrencyExchange Risk**

Although most of our expenditures are in U.S. dollars,certain purchases of labor, operating supplies and capital assets aredenominated in Bolivianos, Euros or other currencies. As a result, currencyexchange fluctuations may impact the costs of our operations. Specifically, theappreciation of Bolivianos against the U.S. dollar may result in an increase inoperating expenses and capital costs at the San Cristobal project in 

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U.S. dollar terms. Toreduce this risk, we maintain minimum cash balances in all foreign currencies,including Bolivianos, and complete most of our purchases, including purchasesrelating to the San Cristobal project, in U.S. dollars.

We have previously engagedin a limited amount of currency hedging activities primarily related to anequipment order for the San Cristobal project that was denominated in Euros. AtDecember 31, 2006, we did not hold any foreign currency derivativepositions.

**Commodity PriceRisk**

None of our properties are in production and,consequently, we do not have any current revenue from sales. When the SanCristobal project begins production, our primary source of income will be fromsales of concentrates containing silver, zinc and lead. As a result, changes inthe price of any of these commodities could significantly affect our results ofoperations and cash flows.

To complete the San Cristobal project financefacility, we were required to implement price protection for a portion of ourplanned silver, zinc and lead production from San Cristobal. We have enteredinto contracts utilizing forward sales, puts and calls. Non-cash mark-to-marketgains and losses from these and other derivative positions may fluctuatesubstantially from period to period based on spot and forward prices and optionvolatilities. The actual final financial impact of the derivative positionsrequired by the project financing facility will not be known until thepositions are closed on their future settlement dates. Our outstandingderivative positions represent 4%, 13% and 17% of planned life-of-mine payableproduction of silver, zinc and lead at San Cristobal but represent a significantlyhigher proportion of our planned production during the six years in which thederivative positions are in place.  Forthe first six years of production, we have hedged approximately 10%, 24% and32% of planned production of silver, zinc and lead, respectively. See the Notes to our Consolidated FinancialStatements, Note 9, “Sales Contracts and Derivative Instruments”.

As a result of risingcommodity prices, we recorded non-cash mark-to-market losses of $672.5 millionon our open derivative positions for the year ended December 31, 2006. Duringthe same period, we made net cash payments of $48.3 million and realized a$42.6 million loss to settle the majority of certain discretionary hedgepositions that were not required by the project financing facility. As of December 31,2006, the fair value of our open derivative positions reflected an $818.2million liability. Non-cash mark-to-market gains and losses from the openderivative positions may fluctuate substantially from period to period based onspot and forward prices and option volatilities. However, if current spotprices continue into the future, we anticipate that the increased revenue fromproduction which is not protected will generate a significant benefit to futureearnings and cash flows. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Results of Operations”.

**ITEM 8:**               FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The consolidated financialstatements and supplementary information filed as part of this Item 8 arelisted under Part IV, Item 15, “Exhibits, Financial Statement Schedulesand Reports on Form 8-K” and contained in this Form 10-Kat page F-1.

**ITEM 9:**               CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

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**ITEM 9A:**       CONTROLSAND PROCEDURES

**Consideration ofthe Restatement**

As discussed in Notes 2 and 19 to ourconsolidated financial statements and as also discussed in Item 7 in thisAnnual Report on Form 10-K, we have restated our consolidated financialstatements as of and for the quarter ended September 30, 2005, the yearended December 31, 2005, and for each of the three quarters in the ninemonths period ended September 30, 2006, to correct an understatement ofour derivatives liabilities as of each of those periods end dates.

Our decision torestate our consolidated financial statements follows a re-assessment of theavailable market information related to our metals derivatives and theconclusion that quoted prices from trading institutions are a more reliableindicator of fair value than the independent third party price projectionspreviously used by us. Accordingly, we concluded that our metals derivativeliability was significantly understated for the reporting periods noted above.The effects of the restatement are reflected in our consolidated financialstatements and accompanying notes included herein.

In connection with therestatement, management identified two material weaknesses in our internalcontrol over financial reporting at December 31, 2006. See “Management’sReport on Internal Control over Financial Reporting” presented below.

**Disclosure Controlsand Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the reportsthat we file or submit under the Securities Exchange Act of 1934, as amended (“theExchange Act”), is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required financial disclosure.

As of the end of the period covered by this report, wecarried out an evaluation, under the supervision and with the participation ofour Disclosure Committee and management, including the Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b).Based upon, and as of the date of this evaluation, the Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were not effective because of the material weaknesses in ourinternal control over financial reporting as described below.

Notwithstanding thematerial weaknesses described below, management believes that the consolidatedfinancial statements included in this Annual Report on Form 10-K arefairly presented in all material respects in accordance with generally acceptedaccounting principles.

**Management’s Reporton Internal Control over Financial Reporting**

The management ofthe Company is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rule 13a-15(f) underthe Exchange Act. Our internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles and includes thosepolicies and procedures that:

·       pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets,

·       providereasonable assurance that transactions are recorded as necessary to permit thepreparation of financial statements in accordance with generally acceptedaccounting principles, and that 

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receipts and expendituresof the Company are being made only in accordance with authorizations ofmanagement and directors of the Company, and

·       providereasonable assurance regarding the prevention or timely detection ofunauthorized acquisition, use or disposition of the Company’s assets that couldhave a material effect on our financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness as to future periods are subjectto the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

Management has assessed the effectiveness of theCompany’s internal control over financial reporting as of December 31,2006. In making its assessment, management used the criteria set forth in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected.

Based on itsevaluation, management has concluded that the following material weaknesses ininternal control over financial reporting existed as of December 31, 2006:

·       TheCompany did not maintain effective controls over the valuation of the metalsderivatives positions related to its project finance facility. Specifically,effective internal controls were not designed and operating to accuratelyassess available market data in the valuation of its metals derivatives. Thiscontrol deficiency resulted in the restatement of the Company’s 2005 annualconsolidated financial statements; interim consolidated financial statementsfor the quarter ended September 30, 2005 and for each of the first threequarters of 2006; and an audit adjustment to the Company’s 2006 annualconsolidated financial statements. Additionally, this control deficiency couldresult in a material misstatement of the Company’s derivatives liabilities,gain on sale of interest in subsidiaries, minority interest in subsidiaries,minority interest in loss of consolidated subsidiaries, and in the accumulateddeficit accounts, that would result in a material misstatement of the annual orinterim consolidated financial statements that would not be prevented ordetected. Accordingly, management has determined that this control deficiencyconstitutes a material weakness.

·       TheCompany did not maintain effective controls over the monitoring of itscompliance with certain covenants related to its project finance facility. Specifically,effective internal controls, including monitoring by management with therequisite level of experience commensurate with our loan compliancerequirements, were not designed and operating to enable the identification ofcovenant violations which affect certain of the Company’s financial statementdisclosures and presentations. This control deficiency could result in themisclassification of the amount outstanding under the project finance facility,as well as the derivatives liabilities as non-current liabilities, that wouldresult in a material misstatement of the annual or interim consolidatedfinancial statements that would not be prevented or detected. Accordingly,management has determined that this control deficiency constitutes a materialweakness.

Because of these material weaknesses, management hasconcluded that the Company did not maintain effective internal control overfinancial reporting as of December 31, 2006 based on the criteria setforth in the COSO framework.

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Management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting asof December 31, 2006, has been audited by PricewaterhouseCoopers LLP, anindependent registered accounting firm, as stated in their report which appearsherein.

**Remediation ofMaterial Weaknesses**

To address thematerial weaknesses described above, management has implemented a remediationplan which will supplement the existing controls of the Company, as follows:

·       strengthencontrols to ensure that management accurately assesses all available marketinformation in the valuation of the Company’s metal derivatives.

·       hirea  Senior Treasury Analyst, with a levelof experience to match our loan compliance requirements, who will have directresponsibility to closely monitor compliance with the Company’s project financefacility and other financing arrangements. Training will also be provided tokey personnel regarding the loan compliance requirements.

The material weaknesseswill be fully remediated when, in the opinion of the Company’s management, therevised control processes have been operating for a sufficient period of timeto provide reasonable assurance as to their effectiveness. The remediation andultimate resolution of the Company’s material weaknesses will be reviewed withthe Audit Committee of the Company’s Board of Directors.

**Changes in InternalControl over Financial Reporting**

There have been no changesto the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) during the quarter ended December 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

**ITEM 9B:**      OTHERINFORMATION

None.

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**PART III**

**ITEM 10:**        DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE

Information regarding directors of Apex Silver isincorporated by reference to the section entitled “Election of Directors”in our definitive proxy statement to be filed with the SEC pursuant toRegulation 14A in connection with the 2007 annual meeting of shareholders(the “Proxy Statement”). See “Part I—Items 1 and 2:  Business and Properties—Management” forinformation regarding executive officers of Apex Silver.

We have adopted a code ofethics that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller or those performing similarfunctions. A copy of the code of ethics is available on Apex Silver’s websiteat *www.apexsilver.com*. To view,click on “About Apex Silver” on the left side of the page and then clickon “Corporate Governance”. In the event our board of directors approves anamendment to or waiver from any provision of our code of ethics, we willdisclose the required information pertaining to such amendment or waiver on ourwebsite.

**ITEM 11:**        EXECUTIVECOMPENSATION

Reference is made to theinformation set forth under the caption “Executive Compensation and Other Information”in the Proxy Statement, which information (except for the report of the boardof directors on executive compensation and the performance graph) isincorporated by reference in this report on Form 10-K.

**ITEM 12:**        SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Reference is made to theinformation set forth under the caption “Security Ownership of PrincipalShareholders and Management” in the Proxy Statement, which information isincorporated by reference in this report on Form 10-K.

**ITEM 13:**        CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Reference is made to theinformation contained under the caption “Certain Transactions” contained in theProxy Statement, which information is incorporated by reference in this reporton Form 10-K.

**ITEM 14:**        PRINCIPALACCOUNTING FEES AND SERVICES

Reference is made to the information contained underthe caption “Audit Committee Report” contained in the Proxy Statement, whichinformation is incorporated by reference in this report on Form 10-K.

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**PART IV**

**ITEM 15:**        EXHIBITS,FINANCIAL STATEMENT SCHEDULES

(a)          Documents filed as partof this report on Form 10-K or incorporated by reference:

(1)          Our consolidatedfinancial statements are listed on the “Index to Financial Statements” on Page F-1to this report.

(2)          Financial StatementSchedules (omitted because they are either not required, are not applicable, orthe required information is disclosed in the notes to the financial statementsor related notes).

(3)          Thefollowing exhibits are filed with this report on Form 10-K orincorporated by reference.

**EXHIBITS**

| Exhibit   Number | ** ** | **Description of Exhibits**                                                                                                                                                       |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended and restated Memorandum of Association of  the Company.(1)                                                                                                                |
| 3.2              |       | Amended and restated  Articles of Association of the Company.(1)                                                                                                                  |
| 4.1              |       | Specimen of certificates  representing the Company’s ordinary shares, par value U.S. $0.01 each.(2)                                                                          |
| 4.2              |       | Form of Warrant  issued in connection with the January 2004 private placement.(3)                                                                                       |
| 4.3              |       | Indenture, dated  March 16, 2004, between Apex Silver Mines Limited and The Bank of New  York, as Trustee.(4)                                                                |
| 4.4              |       | Form of Global  Note, dated March 16, 2004.(4)                                                                                                                          |
| 4.5              |       | Form of Global  Note, dated April 1, 2004.(5)                                                                                                                           |
| 4.6              |       | Form of Warrant  issued in connection with the offering of our ordinary shares pursuant to a  prospectus supplement filed April 3, 2003.(6)                             |
| 4.7              |       | Form of Warrant  issued in connection with the offerings of our ordinary shares pursuant to  prospectus supplements filed May 22, 2002 and September 10,  2003.(6) |
| 4.8              |       | Indenture, dated  October 15, 2004, between Apex Silver Mines Limited and The Bank of New  York, as Trustee.(7)                                                              |
| 4.9              |       | Form of Global  Note, dated October 15, 2004.(7)                                                                                                                        |
| 4.10             |       | Form of Global  Note, dated December 14, 2004.(8)                                                                                                                       |
| 10.1             |       | Management Services  Agreement among the Company and its subsidiaries.(9)                                                                                                         |
| 10.2             |       | Employees’ Share Option  Plan(10)                                                                                                                                            |
| 10.3             |       | 2004 Equity Incentive  Plan.(11)                                                                                                                                                  |
| 10.4             |       | Form of Incentive  Share Option Agreement pursuant to the 2004 Equity Incentive Plan.(12)                                                                                    |
| 10.5             |       | Form of Restricted  Shares Award Agreement pursuant to the 2004 Equity Incentive Plan.(12)                                                                                   |
| 10.6             |       | Form of Option Grant  to Non-Employee Directors(13)                                                                                                                          |
| 10.7             |       | Form of Change of  Control Agreement.(14)                                                                                                                                    |

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| 10.8  |   | Registration Rights  Agreement, dated March 16, 2004, among Apex Silver Mines Limited, Barclays  Bank PLC and Citigroup Global Markets Inc.(4)                                                                                                                                                                         |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Registration Rights  Agreement, dated as of October 15, 2004, by and between Apex Silver  Mines Limited and Citigroup Global Markets Inc.(7)                                                                                                                                                                           |
| 10.10 |   | Collateral Pledge and  Security Agreement dated as of October 15, 2004, among Apex Silver Mines  Limited as Pledgor, The Bank of New York as Trustee and The Bank of New York  as Collateral Agent.(7)                                                                                                                 |
| 10.11 |   | Amended and Restated  Collateral Pledge and Security Agreement, dated December 14, 2004 among  Apex Silver Mines Limited as Pledgor, The Bank of New York as Trustee and The  Bank of New York as Collateral Agent.(8)                                                                                                 |
| 10.12 |   | EPCM Services Supply  Agreement between Minera San Cristobal, S.A. and Aker Kvaerner Metals Inc.,  Dated November 8, 2004.(14)                                                                                                                                                                                         |
| 10.13 |   | Open Pit Contract Mining  Services Agreement between Minera San Cristobal, S.A. and Washington Group  Bolivia, S.R.L.(12)                                                                                                                                                                                                   |
| 10.14 |   | Loan Agreement, dated  December 1, 2005, between Minera San Cristobal, S.A., the Lenders  identified therein and BNP Paribas, as Administrative Agent.(16)                                                                                                                                                             |
| 10.15 |   | Loan Agreement, dated  December 1, 2005, between Minera San Cristobal, S.A. and Corporacion  Andina de Fomento.(16)                                                                                                                                                                                                    |
| 10.16 |   | Common Security  Agreement, dated December 1, 2005, among Minera San Cristobal, S.A.,  Apex Silver Mines Sweden AB, Apex Luxembourg S.A.R.L Apex Metals GmbH, BNP  Paribas, Barclays Capital PLC, JPMorgan Chase Bank, N.A., Corporacion Andina  de Fomento and the secured parties and hedge banks party thereto.(16) |
| 10.17 |   | Sponsor Pledge  Agreement, dated December 1, 2005, between Apex Silver Mines Limited and  JPMorgan Chase Bank, N.A.(16)                                                                                                                                                                                                |
| 10.18 |   | Completion Agreement,  dated December 1, 2005, among Apex Silver Mines Limited, BNP Paribas,  Barclays Capital PLC and JPMorgan Chase Bank, N.A.(16)                                                                                                                                                                   |
| 10.19 |   | Retirement Agreement and  Release dated February 13, 2006 between Keith R. Hulley, Apex Silver  Mines Corporation and Apex Silver Mines Limited.(17)                                                                                                                                                                   |
| 10.20 |   | Restricted Shares Award  Agreement, dated February 21, 2006, between Apex Silver Mines Limited  and Keith R. Hulley.(17)                                                                                                                                                                                               |
| 10.21 |   | Option Agreement, dated  September 25, 2006, between Apex Silver Mines Limited and Sumitomo  Corporation.(18)                                                                                                                                                                                                          |
| 10.22 |   | MSC Shareholders  Agreement, dated September 25, 2006, between Apex Silver Mines Sweden  AB, Apex Luxembourg S.À R.L., Gotlex Lageraktiebolag nr. 451, and Minera San  Cristobal, S.A.(18)                                                                                                                        |
| 10.23 |   | Deferred Payments  Agreement, dated September 25, 2006, between Apex Silver Mines Sweden AB  and Sumitomo Corporation.(18)                                                                                                                                                                                             |

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| 10.24 |   | Omnibus Amendment  Agreement, dated September 20, 2006, between Minera San Cristobal, S.A.,  Apex Silver Mines Limited, Apex Silver Mines Sweden AB, Apex Luxembourg  S.A.R.L, Apex Metals GmbH, Apex Silver Finance Ltd., Gotlex Lageraktiebolag  nr. 451, Comercial Metales Blancos AB, BNP Paribas, Barclays Capital,  Corporacion Andina de Fomento; JPMorgan Chase Bank, N.A., the Senior Lenders  party thereto and the Hedge Banks party thereto.(18) |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25 |   | Purchase and Sale  Agreement, dated September 25, 2006, between Apex Silver Mines Limited,  Apex Luxembourg S.A.R.L., Apex Silver Mines Sweden AB and Sumitomo  Corporation.(18)                                                                                                                                                                                                                                                                             |
| 10.26 |   | Separation Agreement and  Release, dated June 9, 2006, between Mark A. Lettes and Apex Silver  Mines Corporation.(15)                                                                                                                                                                                                                                                                                                                                        |
| 10.27 |   | Underwriting Agreement,  dated April 6, 2006, between Apex Silver Mines Limited and Harris  Nesbitt Corp.(15)                                                                                                                                                                                                                                                                                                                                                |
| 10.28 |   | Non-Employee Directors’  Share Plan, as amended.(19)                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.29 |   | Form of  Indemnification Agreement.(20)                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 21    |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 23.1  |   | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                        |
| 23.2  |   | Consent of Mine Reserves  Associates, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1  |   | Certification of Chief  Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and  Rule 15d-14(a) (Section 302 of the Sarbanes-Oxley Act of  2002).                                                                                                                                                                                                                                                                            |
| 31.2  |   | Certification of Chief  Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and  Rule 15d-14(a) (Section 302 of the Sarbanes-Oxley Act of  2002).                                                                                                                                                                                                                                                                            |
| 32.1  |   | Certificate of Principal  Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350  (Section 906 of the Sarbanes-Oxley Act of 2002).                                                                                                                                                                                                                                                                                                     |

----

(1)          Incorporated byreference to our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2005.

(2)          Incorporated byreference to our amended Registration Statement on Form S-1/A (No. 333-34685)filed November 18, 1997.

(3)          Incorporated by referenceto our Annual Report on Form 10-K for the year ended December 31,2003.

(4)          Incorporated byreference to our Current Report on Form 8-K filed March 17,2004.

(5)          Incorporated byreference to our Current Report on Form 8-K filed April 2,2004.

(6)          Incorporated byreference to our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2004.

(7)          Incorporated byreference to our Current Report on Form 8-K filed October 18,2004.

(8)          Incorporated byreference to our Current Report on Form 8-K filed December 17,2004.

50

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(9)          Incorporated byreference to our amended Registration Statement on Form S-1/A (No. 333-34685)filed October 9, 1997.

(10) Incorporated by reference to our Annual Report on Form 10-Kfor the year ended December 31, 1998.

(11) Incorporated by reference to our Registration Statement on Form S-8(No. 333-117202) filed July 7, 2004.

(12) Incorporated by reference to our Annual Report on Form 10-Kfor the year ended December 31, 2004.

(13) Incorporated by reference to our Registration Statement on Form S-8(No. 333-53185) filed May 20, 1998.

(14) Incorporated by reference to our Quarterly Report on Form 10-Qfor the quarter ended September 30, 2004.

(15) Incorporated by reference to our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2006.

(16) Incorporated by reference to our Current Report on Form 8-Kfiled December 8, 2005.

(17) Incorporated by reference to our Current Report on Form 8-Kfiled February 27, 2006.

(18) Incorporated by reference to our Quarterly Report on Form 10-Qfor the quarter ended September 30, 2006.

(19) Incorporated by reference to our Annual Report on Form 10-Kfor the year ended December 31, 2005.

(20) Incorporated by reference to our Current Report on Form 8-Kfiled March 15, 2007.

51

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed April 2,2007 on its behalf by the undersigned, thereunto duly authorized.

|        | APEX SILVER MINES LIMITED   Registrant |
|--------|----------------------------------------|
|   | By:                                    | /s/ JEFFREY G. CLEVENGER |
|   |                                   | Jeffrey G. Clevenger |
|   |                                   | President and Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed by the following persons on behalf of the Registrant, in thecapacities and on the dates indicated.

|                           | **Signature** | ** **                                    | ** ** | ** **    | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------|---------------|-----------------------------------------------|------------|---------------|-----------|------------|------------|------------|----------|------------|
| /s/ JEFFREY G.  CLEVENGER |          | President, Chief  Executive Officer and       |       | April 2, 2007 |
| Jeffrey  G. Clevenger     |          | Director (Principal  Executive Officer)       |       |          |
| /s/ HARRY M.  CONGER      |          | Director                                      |       | April 2, 2007 |
| Harry  M. Conger          |          |                                          |       |          |
| /s/ OVE HOEGH             |          | Director                                      |       | April 2, 2007 |
| Ove  Hoegh                |          |                                          |       |          |
| /s/ KEITH R.  HULLEY      |          | Director                                      |       | April 2, 2007 |
| Keith  R. Hulley          |          |                                          |       |          |
| /s/ KEVIN R.  MORANO      |          | Director                                      |       | April 2, 2007 |
| Kevin  R. Morano          |          |                                          |       |          |
| /s/ TERRY M.  PALMER      |          | Director                                      |       | April 2, 2007 |
| Terry  M. Palmer          |          |                                          |       |          |
| /s/ CHARLES B.  SMITH     |          | Director                                      |       | April 2, 2007 |
| Charles  B. Smith         |          |                                          |       |          |
| /s/ PAUL SOROS            |          | Director                                      |       | April 2, 2007 |
| Paul  Soros               |          |                                          |       |          |
| /s/ GERALD J.  MALYS      |          | Chief Financial  Officer (Principal Financial |       | April 2, 2007 |
| Gerald  J. Malys          |          | Officer) and Senior Vice  President, Finance  |       |          |
| /s/ ROBERT P.  VOGELS     |          | Vice President  and Controller                |       | April 2, 2007 |
| Robert P. Vogels          |          | (Principal Accounting Officer)                |       |          |

 

52

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**APEXSILVER MINES LIMITEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX**

| ** **                                                                                                                                                                                                          | ** ** | **Page** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of  Independent Registered Public Accounting Firm                                                                                                                                                            |       | F-2      |       |
| Consolidated Balance Sheets at December 31,  2006 and 2005                                                                                                                                                     |       | F-5      |       |
| Consolidated Statements of Operations and  Comprehensive Loss for the years ended December 31, 2006,2005, and 2004  and for the period from December 22, 1994 (inception) through  December 31, 2006 |       | F-6      |       |
| Consolidated Statements of Changes in Shareholders’  Equity for the period from December 22, 1994 (inception) through  December 31, 2006                                                             |       | F-7      |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005, and 2004 and for the period from  December 22, 1994 (inception) through December 31, 2006                        |       | F-10     |       |
| Notes to the  Consolidated Financial Statements                                                                                                                                                                     |       | F-11     |       |

 

F-1

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors andShareholders of Apex Silver Mines Limited:

We have completedintegrated audits of Apex Silver Mines Limited’s consolidated financialstatements and of its internal control over financial reporting as of December 31,2006, in accordance with the standards of the Public Company AccountingOversight Board (United States). Our opinions, based on our audits, arepresented below.

*Consolidated financial statements*

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of operations and comprehensiveloss, changes in shareholders’ equity and cash flows present fairly, in allmaterial respects, the financial position of Apex Silver Mines Limited and itssubsidiaries (a development stage enterprise) at December 31, 2006 and2005, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2006 and, cumulatively, forthe period from December 22, 1994 (date of inception) to December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit of financial statements includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

As discussed in Note 2(s) to the consolidatedfinancial statements, the Company restated its 2005 consolidated financialstatements.

As discussed in Note 2(l) to the consolidatedfinancial statements, the Company changed its method of accounting for stockcompensation effective January 1, 2006.

As disclosed in Note 7 tothe consolidated financial statements, the formal approval by the requisitemajority of the lender consortium of the 2007 Construction Budget, OperatingPlan and Financial Model as required by the terms of the San Cristobal ProjectFinancing Facility has not yet been obtained.

*Internal controlover financial reporting*

Also, we have audited management’s assessment,included in Management’s Report on Internal Control over Financial Reportingappearing under item 9A, that Apex Silver Mines Limited did not maintaineffective internal control over financial reporting as of December 31,2006, because the Company did not maintain effective controls over (1) thevaluation of its metals derivatives positions related to its project financefacility and (2) the monitoring of its compliance with certain covenantsrelated to its project finance facility, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan 

F-2

----

and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. An audit ofinternal control over financial reporting includes obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we consider necessaryin the circumstances. We believe that our audit provides a reasonable basis forour opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weaknessis a control deficiency, or combination of control deficiencies, that resultsin more than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. The followingmaterial weaknesses have been identified and included in management’sassessment as of December 31, 2006:

1.                The Company didnot maintain effective controls over the valuation of its metals derivativepositions related to its project finance facility. Specifically, effectiveinternal controls were not designed and operating to accurately assessavailable market data in the valuation of its metals derivatives.   This control deficiency resulted in therestatement of the Company’s 2005 annual consolidated financial statements;interim consolidated financial statements for the quarter ended September 30,2005 and for each of the first three quarters of 2006; and, an audit adjustmentto the Company’s 2006 annual consolidated financial statements. Additionally**,**this control deficiency could resultin a material misstatement of the Company’s derivatives liabilities, gain onsale of interest in subsidiaries, minority interest in subsidiaries, minorityinterest in loss of consolidated subsidiaries, and in the accumulated deficitaccounts that would result in a material misstatement of the annual or interimconsolidated financial statements that would not be prevented or detected.

2.                The Company didnot maintain effective controls over the monitoring of its compliance withcertain covenants related to its project finance facility.  Specifically,effective internal controls, including monitoring by management with therequisite level of experience commensurate with the Company’s loan compliancerequirements, were not designed and operating to enable the identification ofcovenant violations which effect certain of the Company’s financial statementdisclosures and presentations. This control deficiency could result in themisclassification of the amount outstanding under the project finance facility,as well as the derivatives liabilities as non-current liabilities, that wouldresult in a material misstatement of the annual or interim consolidatedfinancial statements that would not be prevented or detected.

F-3

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These materialweaknesses were considered indetermining the nature, timing, and extent of audit tests applied in our auditof the 2006 consolidated financialstatements, and our opinion regarding the effectiveness of the Company’s internalcontrol over financial reporting does not affect our opinion on those consolidated****financial statements.

In our opinion, management’s assessment that ApexSilver Mines Limited did not maintain effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on criteria established in *Internal Control—IntegratedFramework* issued by the COSO. Also, in our opinion, because of theeffect of the material weaknesses described above on the achievement of theobjectives of the control criteria, Apex Silver Mines Limited has notmaintained effective internal control over financial reporting as of December 31,2006,  based on criteria established in *Internal Control—Integrated Framework* issued by the COSO

PricewaterhouseCoopers LLPDenver, ColoradoApril 2, 2007

F-4

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

| ** **                                                                                                                              | ** ** | ** **                                               | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **December 31,**                                    | ** ** | **2005**              | ** ** |
| ** **                                                                                                                              | ** ** | **2006**                                                 | ** ** | **Restated**          | ** ** |
| ** **                                                                                                                              | ** ** | **(in thousands except share data)** | ** ** |
| **Assets**                                                                                                                              |       |                                                     |       |                  |       |   |   |   |   |
| Current assets                                                                                                                          |       |                                                     |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                              |       |                                                     | $          | 49,840                |       |   |   | $ | 4,808 |   |   |
| Restricted cash                                                                                                                         |       |                                                     | 31,942     |                  |       |   | 135,182 |   |   |
| Investments                                                                                                                             |       |                                                     | 325,536    |                  |       |   | 132,000 |   |   |
| Restricted investments                                                                                                                  |       |                                                     | 65,343     |                  |       |   | 67,491 |   |   |
| Ore inventories                                                                                                                         |       |                                                     | 3,183      |                  |       |   | — |   |   |
| Materials and supply  inventory                                                                                                         |       |                                                     | 3,149      |                  |       |   | — |   |   |
| Prepaid expenses and  other assets                                                                                                      |       |                                                     | 9,984      |                  |       |   | 5,824 |   |   |
| Current assets                                                                                                                          |       |                                                     | 488,977    |                  |       |   | 345,305 |   |   |
| Property, plant and  equipment (net)                                                                                                    |       |                                                     | 641,758    |                  |       |   | 379,138 |   |   |
| Ore inventories                                                                                                                         |       |                                                     | 21,341     |                  |       |   | — |   |   |
| Deferred financing costs                                                                                                                |       |                                                     | 19,485     |                  |       |   | 21,604 |   |   |
| Value added tax  recoverable                                                                                                            |       |                                                     | 54,158     |                  |       |   | 20,052 |   |   |
| Investments                                                                                                                             |       |                                                     | 42,255     |                  |       |   | — |   |   |
| Restricted investments                                                                                                                  |       |                                                     | —     |                  |       |   | 12,392 |   |   |
| Other                                                                                                                                   |       |                                                     | 2,122      |                  |       |   | 2,020 |   |   |
| Total assets                                                                                                                            |       |                                                     | $          | 1,270,096             |       |   |   | $ | 780,511 |   |   |
| **Liabilities  and Shareholders’ Equity (Deficit)**                                                                                |       |                                                     |       |                  |       |   |   |   |   |
| Current liabilities                                                                                                                     |       |                                                     |       |                  |       |   |   |   |   |
| Accounts payable and  accrued liabilities                                                                                               |       |                                                     | $          | 47,979                |       |   |   | $ | 74,487 |   |   |
| Accrued interest payable                                                                                                                |       |                                                     | 3,405      |                  |       |   | 3,096 |   |   |
| Derivatives at fair  value                                                                                                              |       |                                                     | 39,080     |                  |       |   | 5,652 |   |   |
| Current portion of long  term debt                                                                                                      |       |                                                     | 4,408      |                  |       |   | 2,270 |   |   |
| Current liabilities                                                                                                                     |       |                                                     | 94,872     |                  |       |   | 85,505 |   |   |
| Long term debt                                                                                                                          |       |                                                     | 492,195    |                  |       |   | 320,021 |   |   |
| Derivatives at fair  value                                                                                                              |       |                                                     | 779,118    |                  |       |   | 145,719 |   |   |
| Deferred gain on sale of  asset                                                                                                         |       |                                                     | 1,400      |                  |       |   | — |   |   |
| Asset retirement  obligation                                                                                                            |       |                                                     | 5,761      |                  |       |   | 2,003 |   |   |
| Total liabilities                                                                                                                       |       |                                                     | 1,373,346  |                  |       |   | 553,248 |   |   |
| Minority interest in  subsidiaries (Note 12)                                                                                            |       |                                                     | 40         |                  |       |   | 34 |   |   |
| Commitments and contingencies (Note 14)                                                                                                 |       |                                                     |       |                  |       |   |   |   |   |
| Shareholders’ equity (Deficit)                                                                                                     |       |                                                     |       |                  |       |   |   |   |   |
| Ordinary Shares, $.01  par value, 175,000,000 shares authorized; 58,577,700 and 50,444,890 shares issued  and outstanding, respectively |       |                                                     | 586        |                  |       |   | 504 |   |   |
| Additional paid in  capital                                                                                                             |       |                                                     | 669,487    |                  |       |   | 486,762 |   |   |
| Accumulated deficit  during development stage                                                                                           |       |                                                     | (773,339   | )                     |       |   | (259,794 | ) |   |
| Accumulated other  comprehensive loss                                                                                                   |       |                                                     | (24        | )                     |       |   | (243 | ) |   |
| Total shareholders’  equity (Deficit)                                                                                              |       |                                                     | (103,290   | )                     |       |   | 227,229 |   |   |
| Total liabilities and shareholders’ equity (Deficit)                                                                               |       |                                                     | $          | 1,270,096             |       |   |   | $ | 780,511 |   |   |

 

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

F-5

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**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(Expressed in United States dollars)**

| ** **                                                                                                                            | ** ** | **The years ended December 31,**              | ** ** | **For the period  from  December 22,  1994 (inception)  through ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | ** **                                                        | ** ** | **2005**                                                                                    | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                            | ** ** | **2006**                                                          | ** ** | **Restated**                                                                                | ** ** | **2004** | ** ** | **2006** | ** ** |
| ** **                                                                                                                            | ** ** | **(in thousands except per share data)** | ** ** |
| Operating income and  expenses:                                                                                                       |       |                                                              |       |                                                                                        |       |   |   |   |   |   |   |
| Exploration                                                                                                                           |       | $                                                                 | (8,316     | )                                                                                           | $          | (5,235 | ) | $ | (5,306 | ) |   | $ | (81,747 | ) |   |
| Administrative                                                                                                                        |       | (21,247                                                           | )          | (17,860                                                                                     | )          | (18,162 | ) |   | (91,105 | ) |   |
| Gain (loss)—commodity derivatives                                                                                                |       | (715,120                                                          | )          | (151,515                                                                                    | )          | 751 |   |   | (865,668 | ) |   |
| Gain (loss)—foreign exchange and currency  derivatives                                                                           |       | 885                                                               |       | (678                                                                                        | )          | 1,406 |   |   | 1,613 |   |   |
| Asset retirement accretion expense                                                                                                    |       | (406                                                              | )          | —                                                                                      |       | — |   |   | (406 | ) |   |
| Amortization and depreciation.                                                                                                        |       | (403                                                              | )          | (210                                                                                        | )          | (55 | ) |   | (1,799 | ) |   |
| Total operating expenses                                                                                                              |       | (744,607                                                          | )          | (175,498                                                                                    | )          | (21,366 | ) |   | (1,039,112 | ) |   |
| Other income and  expenses:                                                                                                           |       |                                                              |       |                                                                                        |       |   |   |   |   |   |   |
| Interest and other income                                                                                                             |       | 19,678                                                            |       | 14,295                                                                                      |       | 6,108 |   |   | 54,350 |   |   |
| Royalty income (Note 15)                                                                                                              |       | 1,619                                                             |       | —                                                                                      |       | — |   |   | 1,619 |   |   |
| Gain on sale of interest in subsidiaries                                                                                              |       | 199,600                                                           |       | —                                                                                      |       | — |   |   | 199,600 |   |   |
| Gain on extinguishment of debt                                                                                                        |       | 2,875                                                             |       | 6,765                                                                                       |       | — |   |   | 9,640 |   |   |
| Interest expense and other borrowing costs (net of  $26,146, $6,895 and $2,478 capitalized during 2006, 2005 and 2004,  respectively) |       | (774                                                              | )          | (7,335                                                                                      | )          | (3,587 | ) |   | (11,696 | ) |   |
| Total other income and expenses                                                                                                       |       | 222,998                                                           |       | 13,725                                                                                      |       | 2,521 |   |   | 253,513 |   |   |
| Loss before  minority interest and income taxes                                                                                       |       | (521,609                                                          | )          | (161,773                                                                                    | )          | (18,845 | ) |   | (785,599 | ) |   |
| Income tax expense                                                                                                                    |       | (749                                                              | )          | (379                                                                                        | )          | — |   |   | (1,128 | ) |   |
| Minority interest in loss of consolidated subsidiary  (Note 12)                                                                       |       | 8,813                                                             |       | 16                                                                                          |       | — |   |   | 13,388 |   |   |
| Net loss                                                                                                                              |       | $                                                                 | (513,545   | )                                                                                           | $          | (162,136 | ) | $ | (18,845 | ) |   | $ | (773,339 | ) |   |
| Other comprehensive  income (loss):                                                                                                   |       |                                                              |       |                                                                                        |       |   |   |   |   |   |   |
| Unrealized gain (loss) on securities                                                                                                  |       | (24                                                               | )          | (311                                                                                        | )          | 68 |   |   | (267 | ) |   |
| Reclassification for loss on securities included in  net income                                                                       |       | 243                                                               |       | —                                                                                      |       | — |   |   | 243 |   |   |
| Comprehensive  loss                                                                                                                   |       | $                                                                 | (513,326   | )                                                                                           | $          | (162,447 | ) | $ | (18,777 | ) |   | $ | (773,363 | ) |   |
| Net loss per Ordinary  Share—basic and diluted(1)                                                                                |       | $                                                            | (9.09      | )                                                                                           | $     | (3.34 | ) | $  | (0.41 | ) |   |   |   |   |
| Weighted average  Ordinary Shares outstanding                                                                                         |       | 56,498,416                                                        |       | 48,615,586                                                                                  |       | 46,528,341 |   |   |   |   |   |

----

(1)          Potential dilutiveOrdinary Shares were antidilutive for all periods presented.

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

F-6

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Expressed in United States dollars)**

| ** **                                                                          | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **  | ** **  | **Accumulated**        | ** ** | ** ** | ** **  |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|-----------------|------------|-------------|-------------|------------------------|------------|------------|-------------|
| ** **                                                                          | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **  | ** **  | **Other**              | ** ** | ** ** | ** **  |
| ** **                                                                          | ** ** | ** **                                               | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** **  | **Comprehensive**      | ** ** | **Total**  | ** **  |
| ** **                                                                          | ** ** | **Ordinary Shares**                                 | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **income**  | ** **  | **Shareholders’** | ** ** |
| ** **                                                                          | ** ** | **Shares**                                               | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** **  | **(loss)**             | ** ** | **Equity** | ** **  |
| ** **                                                                          | ** ** | **(in thousands except share data)** | ** ** |
| **Issuance of shares upon incorporation  December 22, 1994 ($0.85 per share)** | ** ** | **8,822,546**                                            | ** ** |        | **$**      | **88.2**        | ** ** |        |        | **$**                  | **5,571**  | ** ** |        |   | **$** | **—** | ** ** |   |   | **$** | **—** | ** ** |   |   | **$** | **5,660** | ** ** |   |
| Net loss and comprehensive loss                                                     |       | —                                                   |       |        | —     |            |       |        | —      |                   |       |       | (213        | ) |   |   | — |   |   |   | (213 | ) |   |
| **Balance, December 31, 1994**                                                 | ** ** | **8,822,546**                                            | ** ** |        | **88.2**   | ** **      |       |        | **5,571**   | ** **             |       |       | **(213**    | **)** |   |   | **—** | ** ** |   |   | **5,446** | ** ** |   |
| Net loss and comprehensive loss                                                     |       | —                                                   |       |        | —     |            |       |        | —      |                   |       |       | (1,861      | ) |   |   | — |   |   |   | (1,861 | ) |   |
| **Balance, December 31, 1995**                                                 | ** ** | **8,822,546**                                            | ** ** |        | **88.2**   | ** **      |       |        | **5,571**   | ** **             |       |       | **(2,074**  | **)** |   |   | **—** | ** ** |   |   | **3,585** | ** ** |   |
| Issuance of shares in private placement ($8.00 per  share)                          |       | 4,256,700                                                |       |        | 42.6       |            |       |        | 32,407      |                   |       |       | —      |   |   |   | — |   |   |   | 32,449 |   |   |
| Net loss and comprehensive loss                                                     |       | —                                                   |       |        | —     |            |       |        | —      |                   |       |       | (11,723     | ) |   |   | — |   |   |   | (11,723 | ) |   |
| **Balance, December 31, 1996**                                                 | ** ** | **13,079,246**                                           | ** ** |        | **130.8**  | ** **      |       |        | **37,978**  | ** **             |       |       | **(13,798** | **)** |   |   | **—** | ** ** |   |   | **24,311** | ** ** |   |
| Purchase of minority interest in ASC Bolivia ($11.00  per share)                    |       | 268,496                                                  |       |        | 2.7        |            |       |        | 2,951       |                   |       |       | —      |   |   |   | — |   |   |   | 2,953 |   |   |
| Issuance of shares to associates ($11.00 per share)                                 |       | 138,595                                                  |       |        | 1.4        |            |       |        | 1,523       |                   |       |       | —      |   |   |   | — |   |   |   | 1,525 |   |   |
| Issuance of shares for services ($1.49 per share)                                   |       | 115,207                                                  |       |        | 1.2        |            |       |        | 232         |                   |       |       | —      |   |   |   | — |   |   |   | 233 |   |   |
| Stock option compensation expense                                                   |       | —                                                   |       |        | —     |            |       |        | 417         |                   |       |       | —      |   |   |   | — |   |   |   | 417 |   |   |
| Issuance of shares upon Initial Public Offering  ($11.00 per share)                 |       | 5,523,372                                                |       |        | 55.2       |            |       |        | 54,720      |                   |       |       | —      |   |   |   | — |   |   |   | 54,775 |   |   |
| Net loss and comprehensive loss                                                     |       | —                                                   |       |        | —     |            |       |        | —      |                   |       |       | (14,985     | ) |   |   | — |   |   |   | (14,985 | ) |   |
| **Balance, December 31, 1997**                                                 | ** ** | **19,124,916**                                           | ** ** |        | **191.2**  | ** **      |       |        | **97,820**  | ** **             |       |       | **(28,783** | **)** |   |   | **—** | ** ** |   |   | **69,229** | ** ** |   |
| Exchange of Apex LDC shares                                                         |       | 7,079,006                                                |       |        | 70.8       |            |       |        | (71         | )                      |       |       | —      |   |   |   | — |   |   |   | — |   |   |
| Stock options exercised ($7.91 per share)                                           |       | 25,001                                                   |       |        | 0.3        |            |       |        | 197         |                   |       |       | —      |   |   |   | — |   |   |   | 198 |   |   |
| Stock awards ($8.50 per share)                                                      |       | 21,838                                                   |       |        | 0.2        |            |       |        | 185         |                   |       |       | —      |   |   |   | — |   |   |   | 186 |   |   |
| Unearned compensation                                                               |       | —                                                   |       |        | —     |            |       |        | (186        | )                      |       |       | —      |   |   |   | — |   |   |   | (186 | ) |   |
| Net loss and comprehensive loss                                                     |       | —                                                   |       |        | —     |            |       |        | —      |                   |       |       | (11,030     | ) |   |   | — |   |   |   | (11,030 | ) |   |
| **Balance, December 31, 1998**                                                 | ** ** | **26,250,761**                                           | ** ** |        | **262.5**  | ** **      |       |        | **97,946**  | ** **             |       |       | **(39,812** | **)** |   |   | **—** | ** ** |   |   | **58,397** | ** ** |   |
| Stock options exercised ($8.77 per share)                                           |       | 25,549                                                   |       |        | 0.3        |            |       |        | 224         |                   |       |       | —      |   |   |   | — |   |   |   | 224 |   |   |
| Sale of Ordinary Share units ($12.00 per unit)                                      |       | 8,090,132                                                |       |        | 80.9       |            |       |        | 94,005      |                   |       |       | —      |   |   |   | — |   |   |   | 94,086 |   |   |
| Commissions paid in stock ($12.00 per share)                                        |       | 84,184                                                   |       |        | 0.8        |            |       |        | (1          | )                      |       |       | —      |   |   |   | — |   |   |   | — |   |   |
| Stock awards ($12.06 per share)                                                     |       | 15,542                                                   |       |        | 0.2        |            |       |        | 187         |                   |       |       | —      |   |   |   | — |   |   |   | 188 |   |   |
| Unearned compensation (net)                                                         |       | —                                                   |       |        | —     |            |       |        | (87         | )                      |       |       | —      |   |   |   | — |   |   |   | (87 | ) |   |
| Net loss and comprehensive loss                                                     |       | —                                                   |       |        | —     |            |       |        | —      |                   |       |       | (7,979      | ) |   |   | — |   |   |   | (7,979 | ) |   |
| **Balance, December 31, 1999**                                                 | ** ** | **34,466,168**                                           | ** ** |        | **344.7**  | ** **      |       |        | **192,275** | ** **             |       |       | **(47,791** | **)** |   |   | ** ** | ** ** |   |   | **144,828** | ** ** |   |
| Stock compensation ($10.88 per share)                                               |       | 5,100                                                    |       |        | 0.1        |            |       |        | 55          |                   |       |       | —      |   |   |   | — |   |   |   | 55 |   |   |
| Stock awards ($9.13 per share)                                                      |       | 15,361                                                   |       |        | 0.2        |            |       |        | 140         |                   |       |       | —      |   |   |   | — |   |   |   | 140 |   |   |
| Unearned compensation                                                               |       | —                                                   |       |        | —     |            |       |        | 273         |                   |       |       | —      |   |   |   | — |   |   |   | 273 |   |   |
| Net loss and comprehensive loss                                                     |       | —                                                   |       |        | —     |            |       |        | —      |                   |       |       | (7,740      | ) |   |   | — |   |   |   | (7,740 | ) |   |
| **Balance, December 31, 2000**                                                 | ** ** | **34,486,629**                                           | ** ** |        | **344.9**  | ** **      |       |        | **192,743** | ** **             |       |       | **(55,531** | **)** |   |   | **—** | ** ** |   |   | **137,557** | ** ** |   |

 

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

F-7

----

**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Expressed in United States dollars)**

 

| ** **                                                                                                  | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **  | ** **  | **Accumulated**        | ** **  | ** ** | ** **  |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|-----------------|------------|-------------|-------------|------------------------|-------------|------------|-------------|
| ** **                                                                                                  | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **  | ** **  | **Other**              | ** **  | ** ** | ** **  |
| ** **                                                                                                  | ** ** | ** **                                               | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** **  | **Comprehensive**      | ** **  | **Total**  | ** **  |
| ** **                                                                                                  | ** ** | **Ordinary Shares**                                 | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **income**  | ** **  | **Shareholders’** | ** **  |
| ** **                                                                                                  | ** ** | **Shares**                                               | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** **  | **(loss)**             | ** **  | **Equity** | ** **  |
| ** **                                                                                                  | ** ** | **(in thousands except share data)** | ** ** |
| **Balance, December 31, 2000**                                                                         | ** ** | **34,486,629**                                           | ** ** |        | **$**      | **344.9**       | ** ** |        |        | **$**                  | **192,743** | ** ** |        |   | **$** | **(55,531** | **)** |   |   | **$** | **—** | ** ** |   |   | **$** | **137,557** | ** ** |   |
| Stock to acquire mineral rights ($9.43 per share)                                                           |       | 96,136                                                   |       |        | 1.0        |            |       |        | 906         |                   |        |       | —      |   |   |   | — |   |   |   | 907 |   |   |
| Stock options exercised ($10.36 per share)                                                                  |       | 39,119                                                   |       |        | 0.4        |            |       |        | 405         |                   |        |       | —      |   |   |   | — |   |   |   | 405 |   |   |
| Stock issued as note payment ($10.95 per share)                                                             |       | 70,875                                                   |       |        | 0.7        |            |       |        | 775         |                   |        |       | —      |   |   |   | — |   |   |   | 776 |   |   |
| Stock ($11.04 per share) and options to consultants                                                         |       | 36,000                                                   |       |        | 0.4        |            |       |        | 525         |                   |        |       | —      |   |   |   | — |   |   |   | 525 |   |   |
| Stock awards (net) ($9.27 per share)                                                                        |       | 73,638                                                   |       |        | 0.7        |            |       |        | 678         |                   |        |       | —      |   |   |   | — |   |   |   | 679 |   |   |
| Net loss and comprehensive loss                                                                             |       | —                                                   |       |        | —     |            |       |        | —      |                   |        |       | (8,584      | ) |   |   | — |   |   |   | (8,584 | ) |   |
| **Balance, December 31, 2001**                                                                         | ** ** | **34,802,397**                                           | ** ** |        | **348.0**  | ** **      |       |        | **196,032** | ** **             |        |       | **(64,115** | **)** |   |   | **—** | ** ** |   |   | **132,266** | ** ** |   |
| Sale of Ordinary Shares ($13.10 per unit)                                                                   |       | 500,000                                                  |       |        | 5.0        |            |       |        | 6,545       |                   |        |       | —      |   |   |   | — |   |   |   | 6,550 |   |   |
| Stock to acquire mineral rights ($15.37 per share)                                                          |       | 58,307                                                   |       |        | 0.6        |            |       |        | 892         |                   |        |       | —      |   |   |   | — |   |   |   | 892 |   |   |
| Stock options exercised ($9.12 per share)                                                                   |       | 555,244                                                  |       |        | 5.6        |            |       |        | 5,057       |                   |        |       | —      |   |   |   | — |   |   |   | 5,063 |   |   |
| Stock issued as note payment ($16.19 per share)                                                             |       | 58,895                                                   |       |        | 0.6        |            |       |        | 953         |                   |        |       | —      |   |   |   | — |   |   |   | 954 |   |   |
| Stock ($13.34 per share) and options to consultants                                                         |       | 204,655                                                  |       |        | 2.0        |            |       |        | 3,561       |                   |        |       | —      |   |   |   | — |   |   |   | 3,563 |   |   |
| Stock awards (net) ($12.95 per share)                                                                       |       | 88,819                                                   |       |        | 0.9        |            |       |        | 1,149       |                   |        |       | —      |   |   |   | — |   |   |   | 1,150 |   |   |
| Offering costs                                                                                              |       | —                                                   |       |        | —     |            |       |        | (53         | )                      |        |       | —      |   |   |   | — |   |   |   | (53 | ) |   |
| Net loss and comprehensive loss                                                                             |       | —                                                   |       |        | —     |            |       |        | —      |                   |        |       | (8,654      | ) |   |   | — |   |   |   | (8,654 | ) |   |
| **Balance, December 31, 2002**                                                                         | ** ** | **36,268,317**                                           | ** ** |        | **362.7**  | ** **      |       |        | **214,137** | ** **             |        |       | **(72,769** | **)** |   |   | **—** | ** ** |   |   | **141,731** | ** ** |   |
| Stock options exercised ($9.77 per share)                                                                   |       | 317,220                                                  |       |        | 3.2        |            |       |        | 3,096       |                   |        |       | —      |   |   |   | — |   |   |   | 3,099 |   |   |
| Stock Warrants exercised ($12.92 per share)                                                                 |       | 60,000                                                   |       |        | 0.6        |            |       |        | 775         |                   |        |       | —      |   |   |   | — |   |   |   | 775 |   |   |
| Stock ($15.13 per share) and warrants to consultants                                                        |       | 137,987                                                  |       |        | 1.4        |            |       |        | 2,911       |                   |        |       | —      |   |   |   | — |   |   |   | 2,912 |   |   |
| Stock awards (net) ($16.90 per share)                                                                       |       | 79,829                                                   |       |        | 0.8        |            |       |        | 1,348       |                   |        |       | —      |   |   |   | — |   |   |   | 1,349 |   |   |
| Stock issued as note payment ($14.53 per share)                                                             |       | 11,287                                                   |       |        | 0.1        |            |       |        | 164         |                   |        |       | —      |   |   |   | — |   |   |   | 164 |   |   |
| Net loss and comprehensive loss                                                                             |       | —                                                   |       |        | —     |            |       |        | —      |                   |        |       | (6,044      | ) |   |   | — |   |   |   | (6,044 | ) |   |
| **Balance, December 31, 2003**                                                                         | ** ** | **36,874,640**                                           | ** ** |        | **368.7**  | ** **      |       |        | **222,430** | ** **             |        |       | **(78,813** | **)** |   |   | **—** | ** ** |   |   | **143,986** | ** ** |   |
| Stock options exercised ($11.03 per share)                                                                  |       | 159,700                                                  |       |        | 1.6        |            |       |        | 1,760       |                   |        |       | —      |   |   |   | — |   |   |   | 1,762 |   |   |
| Stock awards granted ($17.48 per share)                                                                     |       | 228,500                                                  |       |        | 2.3        |            |       |        | 2,718       |                   |        |       | —      |   |   |   | — |   |   |   | 2,720 |   |   |
| Stock to consultants ($19.64 per share)                                                                     |       | 23,681                                                   |       |        | 0.2        |            |       |        | 465         |                   |        |       | —      |   |   |   | — |   |   |   | 465 |   |   |
| Sale of Ordinary Shares net, ($21.02 per share)                                                             |       | 10,393,276                                               |       |        | 103.9      |            |       |        | 208,508     |                   |        |       | —      |   |   |   | — |   |   |   | 208,612 |   |   |
| Fair value of stock options granted                                                                         |       | —                                                   |       |        | —     |            |       |        | 3,220       |                   |        |       | —      |   |   |   | — |   |   |   | 3,220 |   |   |
| Stock option modification costs associated with  retirement of the Chairman, a Board member and an employee |       | —                                                   |       |        | —     |            |       |        | 4,128       |                   |        |       | —      |   |   |   | — |   |   |   | 4,128 |   |   |
| Unrealized gain on marketable equity securites                                                              |       | —                                                   |       |        | —     |            |       |        | —      |                   |        |       | —      |   |   |   | 68 |   |   |   | 68 |   |   |
| Net loss                                                                                                    |       | —                                                   |       |        | —     |            |       |        | —      |                   |        |       | (18,845     | ) |   |   | — |   |   |   | (18,845 | ) |   |
| **Balance, December 31, 2004**                                                                         | ** ** | **47,679,797**                                           | ** ** |        | **$**      | **476.7**       | ** ** |        |        | **$**                  | **443,229** | ** ** |        |   | **$** | **(97,658** | **)** |   |   | **$** | **68** | ** ** |   |   | **$** | **346,116** | ** ** |   |

 

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

F-8

----

**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Expressed in United States dollars)**

 

| ** **                                                                      | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **  | ** ** | **Accumulated**        | ** **  | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|-----------------|------------|-------------|------------|------------------------|-------------|------------|------------|
| ** **                                                                      | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **  | ** ** | **Other**              | ** **  | ** ** | ** ** |
| ** **                                                                      | ** ** | ** **                                               | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** ** | **Comprehensive**      | ** **  | **Total**  | ** ** |
| ** **                                                                      | ** ** | **Ordinary Shares**                                 | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **income**  | ** ** | **Shareholders’** | ** **  |
| ** **                                                                      | ** ** | **Shares**                                               | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **(loss)**             | ** **  | **Equity** | ** ** |
| ** **                                                                      | ** ** | **(in thousands except share data)** | ** ** |
| **Balance, December 31, 2004**                                             | ** ** | **47,679,797**                                           | ** ** |        | **$**      | **476.7**       | ** ** |        |       | **$**                  | **443,229** | ** ** |       |   | **$** | **(97,658** | **)** |   |   | **$** | **68** | ** ** |   |   | **$** | **346,116** | ** ** |   |
| Stock options exercised ($9.37 per share)                                       |       | 31,118                                                   |       |        | 0.3        |            |       |        | 292        |                   |        |       | —     |   |   |   | — |   |   |   | 292 |   |   |
| Stock granted as compenstaion ($17.63 per share)                                |       | 82,500                                                   |       |        | 0.8        |            |       |        | 416        |                   |        |       | —     |   |   |   | — |   |   |   | 417 |   |   |
| Stock compensation accrued                                                      |       | —                                                   |       |        | —     |            |       |        | 175        |                   |        |       | —     |   |   |   | — |   |   |   | 175 |   |   |
| Fair value of stock options granted                                             |       | —                                                   |       |        | —     |            |       |        | 2,381      |                   |        |       | —     |   |   |   | — |   |   |   | 2,381 |   |   |
| Stock to consultants ($16.06 per share)                                         |       | 10,647                                                   |       |        | 0.1        |            |       |        | 171        |                   |        |       | —     |   |   |   | — |   |   |   | 171 |   |   |
| Stock to construct power line ($14.66 per share)                                |       | 1,134,799                                                |       |        | 11.4       |            |       |        | 16,629     |                   |        |       | —     |   |   |   | — |   |   |   | 16,640 |   |   |
| Shares issued to retire debt, ($15.59 per share)                                |       | 1,490,029                                                |       |        | 14.9       |            |       |        | 23,220     |                   |        |       | —     |   |   |   | — |   |   |   | 23,235 |   |   |
| Shares issued to purchase common stock of unrelated  entity, ($15.58 per share) |       | 16,000                                                   |       |        | 0.2        |            |       |        | 249        |                   |        |       | —     |   |   |   | — |   |   |   | —  249 |   |   |
| Unrealized loss on marketable equity securites                                  |       | —                                                   |       |        | —     |            |       |        | —     |                   |        |       | —     |   |   |   | (311 | ) |   |   | (311 | ) |   |
| Net loss (Restated)                                                             |       | —                                                   |       |        | —     |            |       |        | —     |                   |        |       | (162,136   | ) |   |   | — |   |   |   | (162,136 | ) |   |
| **Balance, December 31, 2005 (Restated)**                                  | ** ** | **50,444,890**                                           | ** ** |        | **$**      | **504.4**       | ** ** |        |       | **$**                  | **486,762** | ** ** |       |   | **$** | **(259,794** | **)** |   |   | **$** | **(243** | **)** |   |   | **$** | **227,229** | ** ** |   |
| Stock to construct power line ($15.09 per share)                                |       | 369,033                                                  |       |        | 3.7        |            |       |        | 5,724      |                   |        |       | —     |   |   |   | — |   |   |   | 5,728 |   |   |
| Shares issued to retire debt, ($15.77 per share)                                |       | 1,086,653                                                |       |        | 10.9       |            |       |        | 17,114     |                   |        |       | —     |   |   |   | — |   |   |   | 17,125 |   |   |
| Stock to consultants ($15.90 per share)                                         |       | 1,699                                                    |       |        | —     |            |       |        | 27         |                   |        |       | —     |   |   |   | — |   |   |   | 27 |   |   |
| Stock compensation accrued                                                      |       | —                                                   |       |        | —     |            |       |        | 5,451      |                   |        |       | —     |   |   |   | — |   |   |   | 5,451 |   |   |
| Stock options exercised ($12.52 per share)                                      |       | 283,425                                                  |       |        | 2.8        |            |       |        | 3,406      |                   |        |       | —     |   |   |   | — |   |   |   | 3,409 |   |   |
| Stock granted as compensation ($19.30 per share)                                |       | 17,000                                                   |       |        | 0.2        |            |       |        | —     |                   |        |       | —     |   |   |   | — |   |   |   | — |   |   |
| Sale of Ordinary Shares, net ($23.70 per share)                                 |       | 6,375,000                                                |       |        | 63.8       |            |       |        | 151,003    |                   |        |       | —     |   |   |   | — |   |   |   | 151,067 |   |   |
| Unrealized gain on marketable equity securities                                 |       | —                                                   |       |        | —     |            |       |        | —     |                   |        |       | —     |   |   |   | 219 |   |   |   | 219 |   |   |
| Net loss                                                                        |       | —                                                   |       |        | —     |            |       |        | —     |                   |        |       | (513,545   | ) |   |   | — |   |   |   | (513,545 | ) |   |
| **Balance,  December 31, 2006**                                            | ** ** | **58,577,700**                                           | ** ** |        | **$**      | **585.8**       | ** ** |        |       | **$**                  | **669,487** | ** ** |       |   | **$** | **(773,339** | **)** |   |   | **$** | **(24** | **)** |   |   | **$** | **(103,290** | **)** |   |

 

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

F-9

----

**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in United States dollars)**

| ** **                                                                                                                        | ** ** | **For the Years Ended December 31,** | ** ** | **For the period  from  December 22,  1994 (inception)  through ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | ** **                                                    | ** ** | **2005**                                                                                    | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                        | ** ** | **2006**                                                      | ** ** | **Restated**                                                                                | ** ** | **2004** | ** ** | **2006** | ** ** |
| ** **                                                                                                                        | ** ** | **(in thousands)**                                       | ** ** |
| **Cash flows from operating activities:**                                                                                         |       |                                                          |       |                                                                                        |       |   |   |   |   |   |   |
| Net cash used in  operating activities (Note 13)                                                                             |       | $                                                             | (70,727    | )                                                                                           | $          | (24,338 | ) | $ | (9,218 | ) |   | $ | (177,604 | ) |   |
| **Cash flows from investing activities:**                                                                                         |       |                                                          |       |                                                                                        |       |   |   |   |   |   |   |
| Purchase of  available-for-sale investments                                                                                       |       | (627,320                                                      | )          | (635,950                                                                                    | )          | (459,534 | ) |   | (1,820,512 | ) |   |
| Sale of  available-for-sale investments                                                                                           |       | 324,842                                                       |       | 811,990                                                                                     |       | 175,989 |   |   | 1,388,794 |   |   |
| Purchase of  held-to-maturity investments                                                                                         |       | (24,662                                                       | )          | (5,466                                                                                      | )          | (226,295 | ) |   | (263,869 | ) |   |
| Sale of held-to-maturity  investments                                                                                             |       | 35,613                                                        |       | 145,538                                                                                     |       | 35,069 |   |   | 222,620 |   |   |
| Purchase of available  for sale restricted investments                                                                            |       | (251,500                                                      | )          | —                                                                                      |       | (15,285 | ) |   | (266,450 | ) |   |
| Sale of available for  sale restricted investments                                                                                |       | 279,900                                                       |       | 335                                                                                         |       | — |   |   | 280,235 |   |   |
| Purchase of  held-to-maturity restricted investments                                                                              |       | (22,199                                                       | )          | (27,343                                                                                     | )          | — |   |   | (49,877 | ) |   |
| Sale of held-to-maturity  restricted investments                                                                                  |       | 66,676                                                        |       | 14,776                                                                                      |       | — |   |   | 81,452 |   |   |
| Payment of derivative  premiums (net)                                                                                             |       | (48,293                                                       | )          | (101                                                                                        | )          | — |   |   | (48,394 | ) |   |
| Advance for construction  of port facility                                                                                        |       | —                                                        |       | (2,000                                                                                      | )          | — |   |   | (2,000 | ) |   |
| Released from (transfer  to) restricted cash to collateralize credit facility, letters of credit and  interest payments, net      |       | 103,239                                                       |       | (135,036                                                                                    | )          | (26,562 | ) |   | (34,905 | ) |   |
| Procceds from sale of  interest in subsidiary                                                                                     |       | 224,000                                                       |       | —                                                                                      |       | — |   |   | 224,000 |   |   |
| Payment of selling costs  related to sale of interest in subsidiary                                                               |       | (6,384                                                        | )          | —                                                                                      |       | — |   |   | (6,384 | ) |   |
| Capitalized costs and  additions to property, plant and equipment                                                                 |       | (276,924                                                      | )          | (168,612                                                                                    | )          | (2,308 | ) |   | (563,729 | ) |   |
| Net cash used in  investing activities                                                                                            |       | (223,012                                                      | )          | (1,869                                                                                      | )          | (518,926 | ) |   | (859,019 | ) |   |
| **Cash flows from financing activities:**                                                                                         |       |                                                          |       |                                                                                        |       |   |   |   |   |   |   |
| Proceeds from issuance  of Ordinary Shares (net of issuance costs of $4,781, $0 and $9,803 for 2006, 2005  and 2004 respectively) |       | 156,794                                                       |       | 16,640                                                                                      |       | 208,612 |   |   | 580,357 |   |   |
| Proceeds from issuance  of convertible notes                                                                                      |       | —                                                        |       | —                                                                                      |       | 339,987 |   |   | 339,987 |   |   |
| Payment of debt issuance  costs                                                                                                   |       | (671                                                          | )          | (12,421                                                                                     | )          | (11,900 | ) |   | (24,992 | ) |   |
| Payment of notes and  long term debt                                                                                              |       | (2,176                                                        | )          | (1,236                                                                                      | )          | (91 | ) |   | (5,452 | ) |   |
| Proceeds from note to  power line contractor                                                                                      |       | 1,415                                                         |       | —                                                                                      |       | — |   |   | 1,415 |   |   |
| Borrowings under project  finance facility                                                                                        |       | 180,000                                                       |       | —                                                                                      |       | — |   |   | 180,000 |   |   |
| Proceeds from exercise  of stock options and warrants                                                                             |       | 3,409                                                         |       | 292                                                                                         |       | 1,762 |   |   | 15,148 |   |   |
| Net cash provided by  financing activities                                                                                        |       | 338,771                                                       |       | 3,275                                                                                       |       | 538,370 |   |   | 1,086,463 |   |   |
| Net increase (decrease)  in cash and cash equivalents                                                                             |       | 45,032                                                        |       | (22,932                                                                                     | )          | 10,226 |   |   | 49,840 |   |   |
| Cash and cash  equivalents, beginning of period                                                                                   |       | 4,808                                                         |       | 27,740                                                                                      |       | 17,514 |   |   | — |   |   |
| Cash and cash  equivalents, end of period                                                                                         |       | $                                                             | 49,840     |                                                                                        | $          | 4,808 |   | $ | 27,740 |   |   | $ | 49,840 |   |   |
| **Supplemental information:**                                                                                                     |       |                                                          |       |                                                                                        |       |   |   |   |   |   |   |
| Interest paid, net of  amounts capitalized                                                                                        |       | $                                                             | 774        |                                                                                        | $          | 10,883 |   | $ | 2,859 |   |   | $ | 14,516 |   |   |
| Income taxes paid                                                                                                                 |       | $                                                             | 541        |                                                                                        | $          | 261 |   | $ | — |   |   | $ | 802 |   |   |
| **Supplemental  non-cash transactions: (See Note 13)**                                                                       |       |                                                          |       |                                                                                        |       |   |   |   |   |   |   |

 

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

F-10

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

**1.**                 Incorporation,Recapitalization and Operations

Apex Silver Mines LDC (“ApexLDC”) was incorporated under the laws of the Cayman Islands on November 23,1994 as a 30-year limited duration company and was capitalized on December 22,1994. Apex Silver Mines Limited (“Apex Silver” or the “Company”) was formedunder the laws of the Cayman Islands in March 1996 for the sole purpose ofserving as a holding company for certain ownership interests in Apex LDC. Arecapitalization was affected on August 6, 1996 whereby approximately 8.8million or 55% of the then-outstanding shares of Apex LDC were exchanged on aone-for-one basis for identical equity instruments of Apex Silver (the “Recapitalization”).Apex Silver had no shares outstanding prior to the Recapitalization. Inconjunction with the Recapitalization, Apex Silver and the shareholders of ApexLDC entered into a Buy-Sell Agreement (the “Buy-Sell Agreement”) which wasdesigned to maintain the same beneficial interest in Apex LDC attributable toall shareholders of Apex LDC prior to the Recapitalization. Pursuant to theterms of the Buy-Sell Agreement, upon the request of the shareholders, ApexSilver was required to purchase the remaining outstanding shares of Apex LDC inexchange for cash, ordinary shares or a combination thereof, at the Company’soption. During 1996 and 1998, Apex Silver acquired the remaining outstandingshares of Apex LDC by exchanging on a one-for-one basis identical equityinstruments of Apex Silver. Upon completion of the purchase of 100% of theoutstanding shares of Apex LDC a total of approximately 20.2 million shares hadbeen exchanged with Apex LDC. The recapitalization was considered areorganization of entities under common control and consequently, for purposesof these financial statements, Apex Silver is considered the successor to ApexLDC and includes the carry over basis of all of the assets and liabilities ofApex LDC, from the inception date of December 22, 1994.

The Company’s principalactivities are the exploration and development of mineral properties. TheCompany is currently an “exploration and development stage company” as it hasnot yet realized revenues from planned operations. Activities since inceptionhave included acquisition of mineral interests, raising capital through debtand equity transactions and exploration and development activities. The Companyis in the process of developing its San Cristobal property located insouthwestern Bolivia and expects that development activities will be completeand commencement of operations will result in the first sale of concentrates inthe third quarter 2007. Although the Company’s senior corporate and operatingmanagement have significant experience in developing, constructing, financingand operating very large mining complexes in many countries, the Company hasnever developed or operated a mine or managed a mine development project andthere are certain risks associated with our ability to successfully completethe development of the San Cristobal project and commence productionactivities, including our ability to achieve anticipated production volumes,manage cost increases and operate the project in accordance with the terms andcovenants of our project finance facility as described in Note 7.

The Company conductsexploration activities in Central America and South America and currently holdsinterests in non-producing mineral properties in Bolivia, Mexico, Peru andArgentina.

**2.**                 Summary ofSignificant Accounting Policies

These consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”). Thepreparation of the Company's Consolidated Financial Statements requires theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and related disclosure of contingent assets andliabilities at 

F-11

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

the dateof the consolidated financial Statements and the reported amounts of revenuesand expenses during the reporting period. The more significant areas requiringthe use of management estimates and assumptions relate to mineral reserves thatare the basis for future cash flow estimates utilized in impairmentcalculations and units-of-production depreciation, depletion and amortizationcalculations: environmental reclamation and closure obligations; estimates ofrecoverable metals in stockpiles; valuation allowances for deferred tax assetsand the fair value of financial instruments. The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Accordingly, actual results may differsignificantly from these estimates under different assumptions or conditions. 

The policies adopted,considered by management to be significant, are summarized as follows: 

*a.**                Basisof consolidation*

These consolidated financialstatements include the accounts of the Company, its wholly-owned subsidiariesand San Cristobal Transportadora de Electricidad S.A. (“SC TESA”), a variableinterest entity consolidated in accordance with Financial Accounting StandardsBoard Interpretation No. 46R (“FIN 46”) (see Note 2o). All inter-companytransactions and balances have been eliminated at consolidation.

The Company consolidatesmore-than-50%-owned subsidiaries that it controls and entities over whichcontrol is achieved through means other than voting rights. In cases where theCompany does not own 100% of the interest in the consolidated subsidiary itrecognizes a minority interest in the subsidiary and a minority interest in thegains or losses recorded by the subsidiary. In cases in which losses applicableto the minority interest in a subsidiary exceed the minority interest in thesubsidiary, such excess and any further losses ordinarily applicable to theminority interest are charged against the Company’s interest, if the minorityinterest does not have any obligation to fund such losses. Future earnings, ifany, are credited to the Company to the extent that losses attributable to theminority interest were previously absorbed by the Company.

On September 25,2006 the Company sold 35% interests in the subsidiary holding its San Cristobalproject, the subsidiary that will market the San Cristobal concentrates and thesubsidiary that holds the derivative positions required by the project financefacility to Sumitomo Corporation (“Sumitomo”) for $224 million in cash andretention of certain interests in future silver and zinc production. Pursuantto the Company’s principles of consolidation, the Company fully consolidatesthe results of operations of its San Cristobal project and reports Sumitomo’sparticipation as a minority interest. (See Note 12 for further details of thetransaction.)

*b.**                Translationof foreign currencies*

Substantiallyall expenditures are made in United States dollars. Accordingly, the Companyuses the United States dollar as its functional and reporting currency.

*c.**                 Cashand cash equivalents*

TheCompany considers all highly liquid investments with a maturity of three monthsor less when purchased to be cash equivalents.

*d.**                Restrictedcash and investments*

The Company segregatescash and investments the use of which is restricted by contractual agreementand reports the amounts separately in the financial statements. Per the termsand conditions of the San 

F-12

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

Cristobalproject finance facility, the Company was required to deposit cash and/orinvestments in an account the use of which is restricted to the development ofthe San Cristobal project. In addition, at December 31, 2006 the Companyrecorded restricted cash and investments to collateralize certain letters ofcredit related to the development of the San Cristobal project and to providethe amounts necessary to pay interest payments on the 4.0% Convertible SeniorSubordinated Notes through 2007, per the terms of the notes.

*e.**                 Investments*

*Available for Sale—*Available for sale securities are recorded at fairvalue, with unrealized gains or losses recorded as a component of equity,unless the value of the security is considered impaired. Realized gains andlosses and non-temporary impairments in value are recorded in the statement ofoperations. No impairments were recorded for the years ended December 31,2006, 2005 and 2004.

*Held to Maturity—*Held to maturity investments are debt securitieswhich the Company has the ability and intent to hold until maturity and arerecorded at amortized cost. Income is recorded based upon the current yield ofthe security. Any non-temporary impairment in value will be recorded in thestatement of operations at the date of the impairment. No impairments wererecorded for the years ended December 31, 2006, 2005 and 2004.

*f.**                   Workin process inventories*

During March 2005, acommittee of the Emerging Issues Task Force (“EITF”) reached a consensus (EITFIssue No. 04-6) that stripping costs incurred during the productionphase of a mine are variable production costs that should be included in thecosts of inventory produced during the period that the stripping costs areincurred.  In January 2006, the EITFissued additional guidance defining the commencement of production as theperiod when saleable minerals are first extracted in greater than *de minimis* amounts. The EITF consensus is effective for thefirst reporting period in fiscal years beginning after December 15, 2005. During2006, the Company began mining oxide and sulfide ores at its San Cristobalproject, and placed the ore in stockpiles for future processing. The quantityand value of the minerals mined were sufficient to declare the start of oreproduction according to the EITF consensus. The Company has included theassociated costs of the ore placed in stockpiles as ore inventories on itsconsolidated balance sheets.

The Company records costsrelated to production activities as inventory held for sale in the ordinarycourse of business or work in process for such sale. Work-in-process inventoriesinclude ore produced and stockpiled for which further processing is necessarybefore a product is ready for sale. The Company uses the average cost method toassign costs to the units of ore stockpiled during the period. Inventories arecarried at the lower of cost or the current net realizable value. If costs heldin inventory exceed their net realizable value, the excess cost is recognizedas a loss in the current period. Net realizable value reflects the grossrealizable value (“estimated selling price”) reduced by estimated costs ofcompletion and disposal as of the balance sheet date. Gross realizable valuereflects the anticipated average realization that the inventory will generatewhen it is sold.

At December 31, 2006the Company had stockpiled approximately 1.3 million tonnes of sulfide ore and5.2 million tonnes of oxide ore in work-in-process ore inventories at its SanCristobal project at a carrying cost of approximately $24.5 million.

F-13

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

*g.**                 Miningproperties, exploration and development costs*

The Company expensesgeneral prospecting costs and the costs of acquiring and exploring unevaluatedmineral properties. When a mineral property is determined to have proven andprobable reserves, subsequent development costs are capitalized to mineral properties.When a mineral property is acquired that has proven and probable reserves,acquisition costs and subsequent development costs are capitalized to mineralproperties. When mineral properties are developed and operations commence,capitalized costs are charged to operations using the units-of-productionmethod over proven and probable reserves. Upon abandonment or sale of a mineralproperty, all capitalized costs relating to the specific property are writtenoff in the period abandoned or sold and a gain or loss is recognized.

Beginning September 1,1997, all costs associated with the Company’s San Cristobal project have beencapitalized. Capitalized costs at San Cristobal include all direct costsassociated with the project, certain interest, depreciation on assets beingused to construct the project and other internally allocated costs directlyassociated with the advancement of the project.

Noamounts related to other mineral properties have been capitalized.

*h.**                Property,plant and equipment*

Buildings are stated atcost and are depreciated using the straight-line method over useful lives ofthirty to forty years or the life of the mine whichever is shorter. Miningequipment and machinery are stated at cost and are depreciated using thestraight-line method over useful lives of three to eight years or the leaseperiod, which ever is shorter. Other furniture and equipment are stated at costand are depreciated using the straight-line method over estimated useful livesof three to five years. Depreciation on plant and equipment used in theconstruction of an asset is capitalized to the constructed asset.

TheCompany records leases as a capital lease if at the lease inception it meetsone or more of four criteria in accordance with Statement of Financial AccountingStandards No. 13, “Accounting for Leases” (“FAS No. 13”). The Companyrecords capital leases as an asset and an obligation at the lesser of an amountequal to the present value at the beginning of the lease term of minimum leasepayments during the lease term or fair value of the leased assets.

*i.**                    Assetretirement obligations*

The Company records assetretirement obligations in accordance with Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations” (“FAS No. 143”),which establishes a uniform methodology for accounting for estimatedreclamation and abandonment costs. According to FAS No. 143, the fairvalue of a liability for an asset retirement obligation (“ARO”) is recognizedin the period in which it is incurred if a reasonable estimate of fair valuecan be made.  An offsetting AssetRetirement Cost (“ARC”) is capitalized as part of the carrying value of theassets with which it is associated, and depreciated over the useful life of theasset. During the second half of 2005, the Company commenced certain activitiesat its San Cristobal property, primarily certain earth works and plantconstruction that will require future reclamation and closure expenditures.Prior to the second half of 2005 there were no activities that resulted in anARO (see Note 8).

*j.**                    Assetimpairment*

The Company evaluates itslong-lived assets for impairment when events or changes in circumstancesindicate that the related carrying amount may not be recoverable. If the sum ofestimated future net cash flows on an undiscounted basis is less than thecarrying amount of the related asset, an asset impairment is 

F-14

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

consideredto exist. The related impairment loss is measured by comparing estimated futurenet cash flows on a discounted basis to the carrying amount of the asset.Changes in significant assumptions underlying future cash flow estimates mayhave a material effect on the Company’s financial position and results ofoperations.

*k.**                Deferredfinancing costs*

The company defers directcosts incurred in connection with obtaining financing and amortizes the costsover life of the financing.

*l.**                    Stockcompensation*

Effective January 1,2004, the Company adopted the fair value based method of accounting for stockoptions as presented in Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (“FAS No. 123”), as amended byStatement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure” (“FAS No. 148”).

Effective January 1,2006, the Company adopted Financial Accounting Standards No. 123R, “Share-BasedPayment” (“FAS No. 123R”), using the modified prospective approach, whichrevised FAS No. 123 and superseded Accounting Principles Board (“APB”)Opinion 25, “Accounting for Stock Issued to Employees”. The Company alsoadopted the short-cut method for calculating the pool of windfall tax benefitsas allowed by FAS No. 123R-3 and determined it to be zero. Theadoption of FAS No. 123R did not have a material impact on the Company’sfinancial position or results of operations.

The Company recognizesstock based compensation costs using a graded vesting attribution methodwhereby costs are recognized over the requisite service period for eachseparately vesting portion of the award. The Company recognized stock basedcompensation costs of $5.4 million, $2.9 million and $10.1 million for theyears ended December 31, 2006, 2005 and 2004 respectively. The 2004 amountincludes $4.1 million associated with the extension of the expiration dates ofstock options previously granted to the retiring Chairman and a retiringemployee and a $2.5 million new grant to the retiring Chairman. Approximately$0.9 million, $0.7 million and $1.4 million of the costs for the years ended December 31,2006, 2005 and 2004 respectively were related to compensation paid to employeesdirectly working on the San Cristobal project and were capitalized, with theremaining costs charged to expense (see Note 11).

*m.**            Netearnings (loss) per Ordinary Share*

Basic earnings (loss) pershare is computed by dividing net earnings (loss) available to holders ofOrdinary Shares by the weighted average number of Ordinary Shares outstandingfor the period. Diluted earnings per share reflect the potential dilution thatwould occur if securities or other contracts to issue Ordinary Shares wereexercised or converted into Ordinary Shares.

Outstanding options topurchase 2,992,572, 2,859,781, and 2,437,071 Ordinary Shares were not includedin the computation of diluted earnings per share at December 31, 2006,2005 and 2004 respectively, because to do so would have been antidilutive. Also,warrants to purchase 450,000 Ordinary Shares for each of the years ended December 31,2006, 2005 and 2004 and notes convertible for 10,132,320, 10,831,132 and11,879,350 Ordinary Shares for the years ended December 31, 2006, 2005 and2004 respectively were not included in the computation of diluted earnings pershare at December 31, 2006, 2005 and 2004 respectively, because to do so wouldhave been antidilutive. Therefore, basic loss per share is the same as dilutiveloss per share.

F-15

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

*n.**                Derivativepositions*

The Company records all open derivative positions onits consolidated balance sheet at estimated fair value. Changes in the fairvalue of the open derivative positions are recorded each period in earnings orother comprehensive income, depending on whether a derivative is designated aspart of a hedge transaction and, if so, the type of hedge transaction. ThroughDecember 31, 2006 the Company had not accounted for any of its derivativesas hedge transactions. Therefore, all open derivative positions have beenadjusted to estimated fair value at the end of each reporting period with therelated change in value recorded to earnings.

The Companydetermines the fair value of its open derivative positions by applying marketvalues obtained from the counterparties holding the Company’s derivativepositions. The Company independently verifies that the values received from thecounterparties are based on major commodities price indices such as the LME andCOMEX and other available market data. (See Note 2s for discussion of therestated fair market value of the Company’s open derivatives liability for theperiods September 30, 2005 through September 30, 2006). As ofDecember 31, 2006, the fair market value of the Company’s open derivativesliability was a net $818.2 million (see Note 9).

*o.**                VariableInterest Entities*

During 2003, theFASB issued Interpretation No. 46R “Variable Interest Entities” (“FIN 46R”),which provides guidance on the identification and reporting for entities overwhich control is achieved through means other than voting rights. FIN 46Rdefines such entities as variable interest entities (“VIEs”). In April 2005the Company entered into a long-term contract with San Cristobal Transportadorade Electricidad, S.A. (“SC TESA”), a subsidiary of Ingelec, S.A., (“Ingelec”) acompany in the power line construction and transmission services industry, toconstruct a power line and transport power to the San Cristobal project fromthe Bolivian power grid. The Company has determined that the contractualarrangements result in the classification of SC TESA as a VIE. In addition,because of the restrictive requirements of the contract, effectively giving theCompany control of SC TESA, the Company is deemed to be the primary beneficiaryof SC TESA resulting in the full consolidation of SC TESA beginning in April 2005.At December 31, 2006 the consolidation of SC TESA results in theelimination of a $14.5 million note receivable from SC TESA, the recognition of$0.1 million of additional cash, $21.0 million of additional property, plantand equipment and $2.8 million of additional value added tax recoverable (seeNote 11).

*p.**                ComprehensiveIncome (Loss)*

Comprehensive income (loss) is defined as all changesin stockholders’ equity, exclusive of transactions with stockholders, such ascapital investments. Comprehensive income (loss) includes net income (loss) andchanges in certain assets and liabilities that are reported directly in equity.For the years ended December 31, 2006, 2005 and 2004 Comprehensive Lossincluded the change in the market value of available for sale securities and isreported on the Statements of Consolidated Operations and Comprehensive Loss.

F-16

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

*q.**                Reclassifications*

Certain revisionsin classification have been made to the 2005 and 2004 financial information toconform to the 2006 financial statements to ensure comparability.

*r.**                   NewAccounting Standards*

In March 2006 the EITF reached a tentativeconsensus (EITF Issue No. 05-1) that the issuance of equitysecurities to settle an instrument that becomes convertible upon the issuer’sexercise of a call option should be accounted for as a conversion (as opposedto an extinguishment) if, at issuance, the debt instrument contains asubstantive conversion feature other than the issuer’s call option. The EITFconcluded that if an instrument is deemed convertible at issuance, then asubsequent conversion of the instrument is in accordance with a “conversionprivilege that existed at issuance” and is, therefore, outside the scope of APBOpinion No. 26, “Early Extinguishment of Debt.”  Therefore, the issuance of shares to settledebt pursuant to the original terms of the debt instrument should be affordedconversion treatment. If the instrument does not contain a substantiveconversion feature at issuance, the issuance of equity securities to settle theinstrument should be recognized as a debt extinguishment. EITF Issue No. 05-1became effective for interim or annual reporting periods beginning after June 28,2006, following its ratification during June 2006. The Company previouslyaccounted for two transactions involving the buy-back of its convertible debtas an extinguishment under APB Opinion No. 26. Ratification of EITF Issue No. 05-1will require similar future transactions be accounted for as conversions.

Financial Accounting Standards No. 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3” (“FAS No. 154”), is effective for years beginningafter December 15, 2005.  FAS No. 154changes the requirements for the accounting and reporting of a change inaccounting principle. The statement, which applies to voluntary changes as wellas changes required by accounting pronouncements that do not otherwise providespecific transition provisions, requires retrospective application to priorperiod’s financial statements where practical. FAS No. 154 did not have animpact on the Company’s financial position or results of operations.

In June 2006, the FASB issued FinancialAccounting Standards Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes,” (“FIN 48”), an interpretation of Financial Accounting StandardsStatement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The Interpretation requires that the Company recognize in itsfinancial statements the impact of a tax position, if that position is more likelythan not of being sustained on audit, based on the technical merits of theposition. FIN 48 also provides guidance on de-recognition, classification,interest and penalties, accounting in interim periods and disclosure. Theprovisions of FIN 48 are effective beginning January 1, 2007 with thecumulative effect of the change in accounting principle recorded as anadjustment to the opening balance of retained earnings. The Company does notbelieve the adoption of FIN 48 will have a material impact on its financialposition or results of operations.

During September 2006 the FASB issued FinancialAccounting Standards No. 157 “Fair Value Measurements” (“FAS No. 157”).FAS No. 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. This Standard addresses howcompanies should measure fair value when they are required 

F-17

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

to use a fair valuemeasure for recognition or disclosure purposes under U.S. GAAP. Accordingly,this Standard does not require any new fair value measurements. FAS No. 157is effective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The Company does notexpect the adoption of FAS No. 157 to have a material impact on itsfinancial position or results of operations.

During September 2006the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) whichestablishes an approach to the quantification of unadjusted financial statementerrors based on the effects of the error on each of the company’s financialstatements and the related financial statement disclosures. This model iscommonly referred to as a “dual approach” because it essentially requiresquantification of unadjusted errors under both balance sheet and incomestatement approach. SAB 108 permits companies to record the cumulative effectof initially applying the “dual approach” in the first year ending after November 15,2006 by recording the necessary “correcting” adjustments to the carrying valuesof assets and liabilities as of the beginning of that year with the offsettingadjustment recorded to the opening balance of retained earnings. The Companyhas no unadjusted errors and the adoption of SAB 108 did not have an impact onits financial position or results of operations.

*s.**                  Correctionof an Error Related to the Valuation of Open Derivative positions*

Pursuant to the requirements of the lenders of its$225 million project finance facility, the Company was required to provideprice protection for a portion of its planned production from the San Cristobalproject. In the third quarter 2005, the Company entered into silver, zinc andlead derivative positions utilizing primarily forward sales, but also puts andcalls, to comply with this requirement. As discussed above, the Company recordsits open derivative positions at their estimated fair value on its balancesheet and records the change in estimated fair value in earnings at the end ofeach reporting.

The Company’s derivative positions mature or expire onvarious dates over an approximate six-year period commencing in July 2007.Many of the derivative positions mature or expire beyond the periods covered bythe major commodity price indices such as LME or COMEX, or expire in futureperiods covered by those indices with respect to which only limited tradingactivity has occurred. In instances where only limited market activity exists,the Company had historically used price projections to estimate a forward pricecurve provided by an independent third party employing statistical analysis andmodels to estimate the fair value of its open derivative positions. The modelsused by the independent third party relied on commodity price indices out tothree months and mean reversion statistical estimates beyond the three monthperiod. Recently, the Company reassessed the market information reflected inthe commodities prices indices out to twenty seven months and quoted prices fromthe counterparties holding our derivative positions and concluded that theadditional market information is a more reliable indicator of fair value thanthe independent third party price projections previously used. Accordingly, theCompany concluded the derivative liability related to its open derivativepositions was understated at December 31, 2005 by $95.1 million ($1.96 pershare).

Based on this reassessment, management concluded thatthe Company had understated its liability related to its open derivativepositions commencing with the quarter ended September 30, 2005.Additionally, correcting the error in the valuation of the open derivativepositions impacted the gain and minority interest the Company recognized on thesale of the 35% interests in the the subsidiary holding its San Cristobalproject, the subsidiary that will market the San Cristobal concentrates and thesubsidiary that 

F-18

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

holds the derivativepositions required by the project finance facility. The gain on the saleincreased from $119.8 million to $199.6 million and as a result, management hasconcluded that the Company’s financial statements for the quarter ended September 30,2005, the year ended December 31, 2005 and the first three quarters of2006 need to be restated. The restatements had no impact on the Company’s cashor investment balances or cash flows.

Theimpact of the restatement on the Company’s consolidated financial statementsfor the year ended December 31, 2005 is summarized in the following table:

| ** **                                           | ** ** | **As Previously Reported**                     | ** ** | ** **            | ** ** | **As Restated** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                           | ** ** | **Year to**                                         | ** ** | **Inception to** | ** ** | ** **           | ** ** | **Year to** | ** ** | **Inception to** | ** ** |
| ** **                                           | ** ** | **Date**                                                 | ** ** | **Date**              | ** ** | **Adjustments**      | ** ** | **Date** | ** ** | **Date** | ** ** |
| ** **                                           | ** ** | **(in thousands except share data)** | ** ** |
| **Operating  income and expenses:**                  |       |                                                     |       |                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Gain (loss)—commodity derivatives               |       | $                                                        | (56,417    | )                     |       | $                    | (55,450    | ) |   |   | $ | (95,098 | ) |   | $ | (151,515 | ) |   | $ | (150,548 | ) |   |
| Other operating expenses                             |       | (23,983                                                  | )          |                  | (143,957   | )                    |       |   |   |   |   | (23,983 | ) |   | (143,957 | ) |   |
| Total operating expenses                             |       | (80,400                                                  | )          |                  | (199,407   | )                    |       |   | (95,098 | ) |   | (175,498 | ) |   | (294,505 | ) |   |
| **Other  income and expenses**                       |       | 13,725                                                   |       |                  | 30,515     |                 |       |   |   |   |   | 13,725 |   |   | 30,515 |   |   |
| Loss before  minority interest and income taxes      |       | (66,675                                                  | )          |                  | (168,892   | )                    |       |   | (95,098 | ) |   | (161,773 | ) |   | (263,990 | ) |   |
| Income tax expense                                   |       | (379                                                     | )          |                  | (379       | )                    |       |   |   |   |   | (379 | ) |   | (379 | ) |   |
| Minority interest in loss of consolidated subsidiary |       | 16                                                       |       |                  | 4,575      |                 |       |   |   |   |   | 16 |   |   | 4,575 |   |   |
| **Net  loss**                                        |       | $                                                        | (67,038    | )                     |       | $                    | (164,696   | ) |   |   | $ | (95,098 | ) |   | $ | (162,136 | ) |   | $ | (259,794 | ) |   |
| Other comprehensive income (loss)                    |       | (311                                                     | )          |                  | (243       | )                    |       |   |   |   |   | (311 | ) |   | (243 | ) |   |
| Comprehensive  loss                                  |       | $                                                        | (67,349    | )                     |       | $                    | (164,939   | ) |   |   | $ | (95,098 | ) |   | $ | (162,447 | ) |   | $ | (260,037 | ) |   |
| Net loss per  Ordinary Share—basic and diluted  |       | $                                                   | (1.38      | )                     |       |                 |       |   |   | $  | (1.96 | ) |   | $  | (3.34 | ) |   |   |   |   |
| Weighted average  Ordinary Shares outstanding        |       | 48,615,586                                               |       |                  |       |                 |       |   |   |   |   | 48,615,586  |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**       |       |                                                     |       |                  |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                  |       | $                                                        | 85,505     |                  |       |                 |       |   |   |   |   |   | $ | 85,505 |   |   |   |   |   |
| Derivatives                                          |       | 50,621                                                   |       |                  |       |                 |       |   | 95,098 |   |   | 145,719 |   |   |   |   |   |
| Other long term liabilities                          |       | 322,024                                                  |       |                  |       |                 |       |   |   |   |   | 322,024 |   |   |   |   |   |
| Total liabilities                                    |       | 458,150                                                  |       |                  |       |                 |       |   | 95,098 |   |   | 553,248 |   |   |   |   |   |
| Minority interest in subsidiaries                    |       | 34                                                       |       |                  |       |                 |       |   |   |   |   | 34 |   |   |   |   |   |
| Accumulated deficit                                  |       | (164,696                                                 | )          |                  |       |                 |       |   | (95,098 | ) |   | (259,794 | ) |   |   |   |   |
| Total shareholders’ equity                      |       | 322,327                                                  |       |                  |       |                 |       |   | (95,098 | ) |   | 227,229 |   |   |   |   |   |
| Total liabilities  and shareholders’ equity     |       | $                                                        | 780,511    |                  |       |                 |       |   |   | $ | — |   |   | $ | 780,511 |   |   |   |   |   |

 

The impact of the restatement on the Company’sconsolidated financial statements for the interim quarterly periods September 30,2005 through September 30, 2006 is discussed in Note 19.

F-19

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

**3.**                 Investments

TheCompany invests only in government and corporate securities rated “investmentgrade” or better. The following table summarizes the Company’s investments at December 31,2006 and 2005:

| **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      |                    |       |
| Government bonds                |       | 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 |   |   |

 

F-20

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

 

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

 

Quoted market prices at December 31,2006 and 2005 respectively were used to determine the fair values of the aboveinvestments.

The Company maintains themajority of its investments in auction rate securities (“ARS”) which provideacceptable interest rates with high liquidity allowing the Company to convertthe securities to cash every 7 to 35 days depending on the terms of thespecific ARS. Auction rate securities are floating rate securities withlong-term nominal maturities of 25 to 30 years but are marketed by financialinstitutions with maturity and interest rate reset dates at 7, 28, or 35 dayintervals. The result is that the market always has large quantities ofsecurities resetting their interest rates every week resulting in highliquidity. Most of the Company’s ARS at December 31, 2006 have maturitiesand reset dates of either 7 days or 28 days and annual yields ranging from5.22% to 5.80%.

To fulfill therequirements of the San Cristobal project finance facility which was enteredinto in December 2005, the Company liquidated prior to maturityapproximately $34.0 million of investments in the fourth quarter of 2005 and $12.0million of investments in the first quarter of 2006, which were previouslyrecorded as held-to-maturity (“HTM”) securities. The Company recognized lossesof $0.2 million and $0.1 million on the liquidations during 2005 and 2006,respectively. The liquidations were necessitated by the terms of the projectfinance facility which required the Company to transfer 

F-21

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

substantiallyall of its cash and/or investments to collateral accounts to restrict fundsnecessary to complete the San Cristobal project. Certain covenants related tothe project finance facility restricted the maturity dates of investments heldin the collateral accounts to less than one year. A portion of the Company’sHTM portfolio had maturity dates slightly beyond the one year limitation. As aresult, prior to transferring the securities to the project finance collateralaccounts, those HTM securities with maturities greater than one year wereliquidated and reinvested in instruments with maturities less than one year. TheCompany recorded as investing cash inflow an additional $126.3 million and$90.3 million during 2005 and 2006 respectively, related to HTM securities thatmatured on their maturity dates. The Company believes the project financingfacility requirements which caused the Company to liquidate a portion of itsHTM investments prior to their maturity represented an isolated, unanticipatedevent that did not change the Company’s ability or intent to hold its remainingHTM investments to maturity.

*Credit Risk*

**Creditrisk is the risk that a third party might fail to fulfill its performanceobligations under the terms of a financial instrument. For cash and equivalentsand investments, credit risk represents the carrying amount on the balancesheet. We mitigate credit risk for cash and equivalents and investments byplacing our funds and investments with high credit-quality financialinstitutions, limiting the amount of exposure to each of the financialinstitutions, and monitoring the financial condition of the financialinstitutions.**

**TheCompany invests with financial institutions that maintain a net worth of notless than $1 billion and are members in good standing of the SecuritiesInvestor Protection Corporation (“SPIC”). Of the Company’s $514.9 million total of cash and cash equivalents,restricted cash, short and long term investments and restricted investments(the Funds”) at December 31, 2006, $510.6 million was held at nine largemultinational banks. The bank holding the largest amount of the Funds held$175.1 million. The bank holding the second largest amount of the Company’sFunds at $149.6 million is also the bank holding the restricted funds fordevelopment of the San Cristobal project per the terms of the project financefacility. The seven other banks held $185.9 million in total with amountsranging from $5.0 million to $52.5 million per bank.**

**4. Prepaid Expenses and Other Assets**

Prepaidexpenses and other assets consist of the following:

| ** **                                  | ** ** | **December 31,**   | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| Prepaid insurance                           |       | $                       | 1,949      |   | $ | 824 |   |
| Accrued interest  receivable                |       | 1,348                   |       | 758 |   |
| Prepaid consulting and  contractor fees     |       | 3,507                   |       | 3,874 |   |
| Prepaid import taxes and  duties receivable |       | 1,637                   |       | — |   |
| Other                                       |       | 1,543                   |       | 368 |   |
|                                        |       | $                       | 9,984      |   | $ | 5,824 |   |

 

The prepaid consulting andcontractor fees at December 31, 2006 and 2005 consist primarily of advancepayments made to contractors for work being performed at the San Cristobalproject.

F-22

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

**5.**                 Value Added TaxRecoverable

The Company has recorded valueadded tax (“VAT”) paid in Bolivia and related to the San Cristobal project as arecoverable asset. Bolivian law states that VAT paid prior to production isrecoverable as a credit against Bolivian taxes arising from production,including income tax. The VAT is expected to be recovered through futureproduction from the San Cristobal project. Future changes to Bolivian tax lawcould have an adverse effect on the Company’s ability to recover the VAT paidin Bolivia. At December 31, 2006 and 2005, the VAT recoverable was $54.2million and $20.1 million, respectively. The VAT recoverable amounts include$5.3 million and $0.8 million of recoverable Bolivian import duties for theyears ended December 31, 2006 and 2005, respectively.

The Company has also paidVAT in Bolivia as well as other countries, primarily related to explorationprojects, which has been charged to expense as incurred because of theuncertainty of the recoverability.

**6.**                 Property, Plantand Equipment, net

Thecomponents of property, plant, and equipment, net were as follows:

| ** **                      | ** ** | **December 31,**   | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(in thousands)** | ** ** |
| Mineral properties              |       | $                       | 117,390    |   | $ | 117,103 |   |
| Construction in progress        |       | 482,979                 |       | 232,288 |   |
| Buildings                       |       | 13,590                  |       | 8,423 |   |
| Mining equipment and  machinery |       | 13,580                  |       | 10,127 |   |
| Other furniture and  equipment  |       | 3,166                   |       | 1,966 |   |
|                            |       | 630,705                 |       | 369,907 |   |
| Less: Accumulated  depreciation |       | (6,962                  | )          | (4,298 | ) |
|                            |       | 623,743                 |       | 365,609 |   |
| Equipment under capital  lease  |       | 22,183                  |       | 14,928 |   |
| Less: Accumulated  depreciation |       | (4,168                  | )          | (1,399 | ) |
|                            |       | 18,015                  |       | 13,529 |   |
|                            |       | $                       | 641,758    |   | $ | 379,138 |   |

 

Depreciation expense forthe years ended December 31, 2006, 2005 and 2004 totaled $403,000,$210,000, and $55,000 respectively. For the years ended December 31, 2006,2005 and 2004, depreciation associated with the San Cristobal project wascapitalized in the amounts of $5.2 million, $2.7 million, and $0.4 millionrespectively.

For the years ended December 31,2006 and 2005 respectively, the Company recorded capitalized interest of $26.1million and $6.9 million to the San Cristobal property. The capitalizedinterest amounts are related to the Convertible Senior Subordinated Notes, theproject finance facility and equipment under capital lease (see Note 7).

Under the terms of theproject finance facility (the “Facility” (see Note 7)) all of theCompany’s assets at its San Cristobal project are collateralized by theborrowings under the Facility.

At December 31, 2006the company recorded a lease obligation of $17.3 million related to outstandingcapital leases.

F-23

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

**7.**                 Debt

TheCompany’s debt consists of the following:

| ** **                                             | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Current**                     | ** ** | **Long term**              | ** ** | **Current** | ** ** | **Long term** | ** ** |
| ** **                                             | ** ** | **(in thousands)**         | ** ** |
| 2.875% Convertible  Senior Subordinated Notes due 2024 |       |                            | $          | —                          |       |   | $ | 180,000 |   |   | $ | — |   |   | $ | 180,000 |   |
| 4.0% Convertible Senior  Subordinated Notes due 2024   |       |                            | —     |                            |       | 109,987 |   |   | — |   |   | 129,987 |   |
| Project finance facility                               |       |                            | —     |                            |       | 180,000 |   |   | — |   |   | — |   |
| Note payable to Ingelec for  Power line                |       |                            | 1,415      |                            |       | — |   |   | — |   |   | — |   |
| Note assigned to  Sumitomo (see Note 12)               |       |                            | —     |                            |       | 7,853 |   |   | — |   |   | — |   |
| Capital lease  obligations                             |       |                            | 2,993      |                            |       | 14,355 |   |   | 2,270 |   |   | 10,034 |   |
|                                                   |       |                            | $          | 4,408                           |       |   | $ | 492,195 |   |   | $ | 2,270 |   |   | $ | 320,021 |   |

 

*2.875% Notes and 4.0% Notes*

In 2004, the Company sold$200.0 million of its 2.875% Convertible Senior Subordinated Notes (the “2.875%Notes”) due 2024 resulting in net proceeds of $193.0 million, after deductingunderwriters fees and related offering costs of $7.0 million. In 2004, theCompany also sold $140.0 million of its 4.0% Convertible Senior SubordinatedNotes (the “4.0% Notes”) due 2024 resulting in net proceeds of $135.1 million,after deducting underwriters fees and related offering costs of $4.9 million. Boththe 2.875% Notes and the 4.0% Notes (the “Notes”) are  convertible into the Company’s OrdinaryShares at a conversion rate of 34.9406 shares per $1,000 principal amount ofthe Notes (equal to an initial conversion price of approximately $28.62 pershare), subject to adjustment in certain circumstances. Holders may converttheir Notes only if: (i) the price of Apex Silver Ordinary Shares reachesa specified threshold; (ii) the trading price for the Notes falls belowcertain thresholds; (iii) the Notes have been called for redemption; or (iv) specifiedcorporate transactions occur. Full conversion of the Notes would result in theissuance of approximately 10.1 million of the Company’s Ordinary Shares. Accumulatedinterest on the Notes is paid twice a year in March and September.

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. During 2006, 2005 and 2004, the Company amortized approximately$1.6 million, $2.1 million and $0.7 million of the deferred costs, respectively.At December 31, 2006 the unamortized balance of deferred financing costsrelated to the Notes was approximately $7.6 million.

During 2006 the Companyissued 1,086,653 of its Ordinary Shares, valued at $17.1 million, andrepurchased $20.0 million of its outstanding 4.0% Notes. During 2005 theCompany issued 1,490,029 of its Ordinary Shares, valued at $23.2 million, andrepurchased $20.0 million of the 2.875% Notes and $10.0 million of the 4.0% Notes.The transactions represented early extinguishments of debt and the Companyrecorded related gains of $2.9 million and $6.8 million for the years ended December 31,2006 and 2005, respectively. The Company also recognized acceleratedamortization of deferred issuance costs of $0.5 million and $0.9 millionrelated to these extinguishments during 2006 and 2005, respectively. The Notespurchased in the transactions have been cancelled.

F-24

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

The indentures for the Noteshave financial and other covenants which, among other things, require theCompany to provide copies of its Annual Report on Form 10-K (the “Form 10-K”)  to the trustee within 30 days after suchreports are filed with the SEC. The Company did not file its 2006 Form 10-Kwithin the prescribed timeframe and on March 21, 2007, it received anotice of default from certain holders of the Notes. The Company does notbelieve that its failure to file its 2006 Form 10-K within theprescribed timeframe was a breach of covenant under the related indentures. TheCompany filed the Form 10-K within the 60 day cure period andtherefore, no event of default occurred.

The indenture relating tothe 4.0% Notes requires the Company to maintain restricted investments to coverthe payment of interest through 2007. The amount invested will at maturityequal the interest payments due. As of December 31, 2006, $5.5 million ofrestricted investments were designated for this purpose. Failure to comply withthe covenants contained in the indentures relating to the Notes or failure tocure any related violations within specified periods could result in an event ofdefault, pursuant to which the holders of the Notes could demand immediaterepayment of all amounts outstanding, including accrued and unpaid interest.

*San CristobalProject Finance Facility*

In December 2005 the Company entered into a $225million project finance facility (“the Facility”) for development of theCompany’s San Cristobal project. At December 31, 2006 the Company hadborrowed $180 million under the Facility. The Company borrowed an additional$20 million in February 2007, resulting in total outstanding borrowings of$200 million. The Company is required to pay a 1.0% annual commitment fee onthe undrawn amount of the Facility. Interest on the outstanding amounts drawnunder the Facility is based on LIBOR plus a credit spread, which at December 31,2006 was 3.3%. The first principal payment under the Facility is due in December 2008with final maturity in December 2012. In connection with the sale toSumitomo of a 35% interest in certain of the Company’s subsidiaries (seeNote 12), Sumitomo guaranteed the repayment of 35% of the Facility untilcompletion of the project with the Company guaranteeing repayment of theremaining 65% of the Facility until completion of the project. Projectcompletion must occur by December 31, 2008.

The Facility contains covenants that require theCompany to, among other things, maintain certain security interests, financialratios after project completion, insurance coverage, minimum sales contractsand metals price protection contracts as well as other requirements. Failure tocomply with these covenants or to cure related violations within specifiedperiods could result in an event of default, pursuant to which the projectlenders could require repayment of all amounts outstanding under the Facilityand cash settlement of any derivative liabilities associated with the SanCristobal project. (See Note 9).

As a result of the restatement referred to in Note 2,the Company breached certain representations and covenants regarding thepreparation of financial statements in accordance with U.S. GAAP. On March 15,2007, the Company obtained waivers from the project lenders for these breachesand any related events of default. The Company has also obtained waivers ofcompliance with certain technical covenant violations and confirmation that theeffects of the restatement on the Company and other affiliated obligors did notconstitute a material adverse effect, as defined.

F-25

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

Pursuant to the debt covenants contained in theFacility, the Company is also required annually to submit a revisedConstruction Budget, Operating Plan, and Financial Model (collectively the“Updated Plan”) for the San Cristobal project by November 1. The Companyis currently operating under the Construction Budget, Operating Plan andFinancial Model initially approved by the lenders when the Facility was enteredinto (the “Initial Plan”) which remains in effect until the Updated Plan isapproved. The Company submitted its Updated Plan for 2007 in a timely manner.The Updated Plan required prices of $5.25 per ounce for silver, $0.48 per poundfor zinc and $0.26 per pound for lead, compared to spot prices as of March 27,2007 of $13.27, $1.45 and $0.84, respectively. The Updated Plan also reflectedhigher operating costs than previously assumed primarily as a result of theimpact of record high commodity prices. A large portion of Apex’s operatingcosts are directly influenced by these high commodities prices, including costsfor diesel, reagents, and tires. The low metals prices required by the Facilitycoupled with higher current operating costs resulted in projected cash flowthat would be insufficient to meet certain other Facility requirements,including minimum cash flows and debt service coverage ratios required aftercompletion. As a result, the Company requested that the lenders approve certainwaivers and amendments to permit the use of higher metals prices. In early January 2007,the lenders rejected the Updated Plan.

As provided by the terms of the Facility, representativesof the lenders and the Company have since been engaged in discussions to agreeupon a mutually acceptable Updated Plan. The representatives of the lenders haveproposed higher metals prices than those contained in the agreement that willallow the Company to present an Updated Plan that will meet the Facility’sfinancial requirements. The representatives of the lenders have also proposedan adjustment to the Facility’s repayment schedule to require a largerpercentage of principal to be repaid in earlier years and an increase in themandatory cash flow sweep from 35% to 45% of excess cash flow. The Company andSumitomo have agreed to purchase zinc puts covering approximately 73 thousandtonnes of zinc production in 2008 and 2009. The Company will also fund a $91million margin account with the two banks holding the derivative positions andSumitomo will provide a post-completion guarantee of the derivative positionsin the amount of $49 million. This support will be decreased by 33% at the endof each of the years from 2008 through 2010.

The Company and Sumitomo have accepted these proposalsand amendments to the Facility agreements and an Updated Plan for submission tothe lenders are being drafted. Once the amendments to the agreements andUpdated Plan are complete, an affirmative vote by the lenders is required forfinal approval. At the date of this filing, formal approval of the amendmentsto the Facility agreements and the Updated Plan by the requisite majority oflenders has not yet been obtained. While there can be no assurances that lenderapproval will be obtained, management believes the necessary amendments and theUpdated Plan will be approved by the requisite majority of lenders.

If the amendments and the Updated Plan are notapproved by the lenders, until such time as approval is obtained, the Companywould be required to operate in all material respects, as defined by theFacility, in compliance with 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 derivatives liability. Because the Company’s currentprojections indicate that cash flows and operating ratios will exceed those inthe Initial Plan, the Company believes that operations will comply in allmaterial respects with the Initial Plan. However, the Company cannot predict 

F-26

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

what actions the lendersmight take if they deem that the Company is not in material compliance with theInitial Plan.

If an event of default occurs, the lenders couldrequire immediate payment of amounts outstanding under the Facility andsettlement of the derivatives liability. If such a demand were successfullymade, the Company would require additional debt or equity financing in order tosatisfy its obligations. There is no assurance that the Company would be ableto obtain additional financing on acceptable terms, or at all. The Company hadliabilities in excess of its assets at December 31, 2006 as the result of itsderivative liability.

Direct costs incurred inobtaining the Facility were deferred and will be amortized to interest expenseover the term of the Facility. During the year ended December 31, 2006,the Company amortized approximately $1.0 million of the deferred costs. The Facilitywas put in place in December 2005 and no related amortization wasrecognized in 2005. At December 31, 2006 the unamortized balance ofdeferred financing costs related to the Facility was approximately $11.9million.

| **Project finance facility payment  schedule  (in thousands)** | ** ** | **Total** | ** ** | **Less Than  1 Year** | ** ** | **2—3  Years** | ** ** | **4—5  Years** | ** ** | **Thereafter** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------|------------|---------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|
| As of  December 31, 2006                                                      |       | 180,000   |       |                            | —     |                |       | 64,620              |       | 95,220         |       |   | 20,160 |   |   |
|                                                                                    |            |           |            |                                 |            |                     |            |                     |            |                |            |  |  |  |  |

 

As provided in theproposed amendments to the Facility, as discussed above, the payment schedulefor the Facility may be modified to reflect total payments of$115.9 million in years two and three and $64.1 million in years fourand five.

*Capital Leases*

During 2006 and 2005 theCompany took delivery of certain leased mining equipment to be used instripping and future mine production, and recorded related capital leaseliabilities at December 31, 2006 and 2005 of $17.3 million and $12.3million, respectively. During 2006 and 2005 the Company made payments of $2.7million and $2.3 million related to the capital lease obligations,respectively. The Company will be required to make additional payments of $3.0million during each of 2007 and 2008, $2.4 million during 2009, $1.9 millionduring 2010, $1.8 million during 2011 and $5.2 million thereafter.

**8.**                 AssetRetirement Obligations

The Company developed an asset retirement plan for itsSan Cristobal project which is currently under construction and is expected tobegin production during 2007. The plan includes estimated reclamation,remediation and closure requirements based on government requirements, WorldBank financing requirements and the Company’s policies. Beginning in the thirdquarter of 2005 the Company has been conducting activities at its San Cristobalproject including earthworks, plant construction and mining activities thatfall within the scope of the asset retirement plan and as such, will requirefuture reclamation and closure expenditures.

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 

F-27

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

expected cash flows usinga discount factor that reflects the credit-adjusted risk-free rate of interest.The Company records the fair value of an ARO when it is incurred and changes inthe fair value of the ARO are recorded as an adjustment to the correspondingasset carrying amounts. The ARO is adjusted to reflect the passage of time(accretion cost) calculated by applying the discount factor implicit in theinitial fair-value measurement to the beginning-of-period carrying amount ofthe ARO. The company records accretion costs to expense as incurred.

Thefollowing table summarizes activity in the Company’s asset retirementobligations:

| ** **                      | ** ** | **December 31,**   | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(in thousands)** | ** ** |
| Beginning balance               |       | $                       | 2,003      |   | — |   |
| ARO arising in the period       |       | 3,367                   |       | 1,988 |   |
| Changes in estimates, and other |       | —                  |       | — |   |
| Liabilities settled             |       | —                  |       | — |   |
| Accretion expense               |       | 391                     |       | 15 |   |
| Ending balance                  |       | $                       | 5,761      |   | 2,003 |   |

 

**9.**                 SalesContracts and Derivative Positions

Certain covenants related to the project financefacility required the Company to provide price protection for a portion of itsplanned production of metals from San Cristobal. 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 finance facilitycovenants. In order to maintain leverage to silver market prices, the Companyentered into proportionally more zinc and lead positions than silver positions.Non-cash mark-to-market gains and losses from the open derivative positions mayfluctuate substantially from period to period based on spot and forward pricesand option volatilities.

In addition, the Company made limited investments inshorter duration put and call options and other metals derivative positions notrequired by the project financing facility. During 2006, the Company made $48.3million of net cash payments and realized a $42.6 million loss to settle thesediscretionary derivative positions. At December 31, 2006 the Company didnot have any outstanding discretionary derivative positions.

The Company marks its open derivative positions toestimated fair value at the end of each accounting period with the relatedchange in estimated fair value recorded to earnings. For the year ended December 31,2006 the Company recorded a non-cash mark to market loss of $672.5 millionand  a realized loss of $42.6 millioncompared to a $151.5 million non-cash mark-to-market loss for the year ended December 31,2005 and a non-cash mark-to-market gain of $0.8 million recorded for the yearended December 31, 2004. The 2006 and 2005 losses are the result ofcontinuing high spot and forward prices for silver, zinc and lead. The actualfinancial impact of the required project financing facility derivativepositions will not be known until the positions are closed on their futuresettlement dates. The Company does not intend to settle the open derivativesposition contracts relating to the project financing facility prior to theirsettlement dates which begin during the second half of 2007. At the time offinal settlement, the gain or loss recorded will exclude previously recognizednon-cash mark-to-market gains or losses. The 

F-28

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

Company recently correctedan error in determining estimated fair value of its open derivative positionsleading to a restatement of prior period financial statements, as describedmore fully in Footnote 2s.

Thefollowing table sets forth the Company’s open derivative positions at December 31,2006. The contracts will be settled for cash based on monthly average pricesfor each metal in the period indicated.

| ** **                            | ** ** | **Current Maturity Date**             | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|
| ** **                            | ** ** | **Less Than**                              | ** ** | **2 to 3** | ** ** | **4 to 5** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **1 Year**                                 | ** ** | **Years** | ** ** | **Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | **(in thousands except prices)** | ** ** |
| **Forward Contracts**                 |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Silver (ounces)                       |       |                                            | 110        |   |   | 160 |   | 160 |   |   | 160 |   |   | 590 |   |
| Average price                         |       |                                            | $          | 7.40 |   |   | $ | 7.15 |   | $ | 7.15 |   |   | $ | 7.12 |   |   | $ | 7.19 |   |
| Zinc (pounds)                         |       |                                            | 18,906     |   |   | 451,553 |   | 305,338 |   |   | — |   |   | 775,797 |   |
| Average price                         |       |                                            | $          | 0.48 |   |   | $ | 0.48 |   | $ | 0.48 |   |   | $ | — |   |   | $ | 0.48 |   |
| Lead (pounds)                         |       |                                            | 35,273     |   |   | 244,488 |   | 43,210 |   |   | — |   |   | 322,971 |   |
| Average price                         |       |                                            | $          | 0.30 |   |   | $ | 0.30 |   | $ | 0.28 |   |   | $ | — |   |   | $ | 0.30 |   |
| **Put  Option Contracts Owned (net)** |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Silver (ounces)                       |       |                                            | 200        |   |   | 1,500 |   | 3,120 |   |   | 4,280 |   |   | 9,100 |   |
| Average price                         |       |                                            | $          | 5.25 |   |   | $ | 5.54 |   | $ | 5.72 |   |   | $ | 5.93 |   |   | $ | 5.78 |   |
| **Call  Option Contracts Written**    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Silver (ounces)                       |       |                                            | —     |   |   | 7,700 |   | 1,920 |   |   | 180 |   |   | 9,800 |   |
| Average price                         |       |                                            | $          | — |   |   | $ | 8.17 |   | $ | 8.86 |   |   | $ | 8.95 |   |   | $ | 8.32 |   |
| Zinc (pounds)                         |       |                                            | 551        |   |   | 13,228 |   | — |   |   | — |   |   | 13,779 |   |
| Average price                         |       |                                            | $          | 0.57 |   |   | $ | 0.57 |   | $ | — |   |   | $ | — |   |   | $ | 0.57 |   |
| Lead (pounds)                         |       |                                            | 1,102      |   |   | 26,455 |   | — |   |   | — |   |   | 27,557 |   |
| Average price                         |       |                                            | $          | 0.39 |   |   | $ | 0.39 |   | $ | — |   |   | $ | — |   |   | $ | 0.39 |   |

 

Thefollowing table sets forth the fair value of the Company’s open derivativepositions based on indices such as the LME and COMEX and valuations fromcounterparties holding the Company’s derivative positions at December 31,2006 and 2005 and the change for the year ended December 31, 2006.

| ** **            | ** ** | **Amount To Be Realized In** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|
| ** **            | ** ** | **Less Than**                               | ** ** | **2 to 3** | ** ** | **4 to 5** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Period Ended** | ** ** | ** **                                       | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **(in thousands)**                          | ** ** |
| 12/31/2005  Restated  |       |                                             | $          | 5,652 |   |   | $ | 62,268 |   | $ | 77,584 |   |   | $ | 5,867 |   |   | $ | 151,371 |   |
| 12/31/2006            |       |                                             | $          | 39,080 |   |   | $ | 570,982 |   | $ | 207,696 |   |   | $ | 439 |   |   | $ | 818,198 |   |
| 2006 Change           |       |                                             | $          | 33,428 |   |   | $ | 508,714 |   | $ | 130,112 |   |   | $ | (5,428 | ) |   | $ | 666,827 |   |
|                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During 2005, the Company recognized a $0.9 millionmark to market loss on a foreign currency collar transaction utilizing puts andcalls that were put in place during 2004 to hedge currency fluctuations relatedto payments required on certain long-lead equipment purchased for the SanCristobal project that 

F-29

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

was denominated in Euros. Thetransaction resulted in a realized gain of $0.5 million during the two years itwas in place. No such gains or loses were recognized during 2006 and at December 31,2006 the Company did not have any foreign currency derivative positions.

The Company’s 2.875% and4.0% Convertible Senior Subordinated Notes Due 2024 have several embeddedderivatives that have been determined to have no value.

*Credit Risk andRisks Relating to the Use of Derivatives*

**Credit risk is the risk that athird party might fail to fulfill its performance obligations under the termsof a financial instrument. For derivatives, when the fair value of a derivativeis negative, as in the Company’s case at December 31, 2006, we assume no creditrisk.  However, should the Company’sderivative positions become positive, the Company would become exposed tocredit risk.  All of the Company’sderivative positions at December 31, 2006 are required by the project financefacility and per the terms of the facility are concentrated with two counterparties.  The two counterparties are of highcredit-quality and the Company monitors their financial condition at regularintervals.  Under the terms of thederivative agreements, the counterparties cannot require the Company toimmediately settle outstanding derivatives, except upon the occurrence ofcustomary events of default such as covenant breaches, including financialcovenants, insolvency or bankruptcy.**

**10.  Income Taxes**

The Company accounts for income taxes in accordancewith the provisions of Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes” (“FAS No. 109”) on a tax jurisdictionalbasis. The Company and certain of its subsidiaries operating in the CaymanIslands do not file income tax returns as the Cayman Islands currently does notimpose any form of taxation. The Company files Bolivian, United States andcertain other foreign country income tax returns. These tax returns and theamount of taxable income or loss reported are subject to examination by therelevant taxing authorities. The Company and subsidiaries have not generatedtaxable income since inception, but did incur withholding taxes on investmentincome and inter-company fees in 2006 and 2005.

Income(loss) before income taxes consists of the following:

| ** **           | ** ** | **For the year ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------------------------|------------|
| ** **           | ** ** | ** **                                                   | ** ** | **2005** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **2006**                                                     | ** ** | **Restated** | ** ** | **2004** | ** ** |
| ** **           | ** ** | **(in thousands)**                                      | ** ** |
| Cayman Islands       |       | $                                                            | (489,775   | ) | $ | 1,134 |   | $ | (12,017 | ) |
| Bolivia              |       | $                                                            | 4,545      |   | $ | (14,530 | ) | $ | (2,860 | ) |
| United States        |       | $                                                            | (4,048     | ) | $ | 142 |   | $ | (1,685 | ) |
| Switzerland          |       | $                                                            | 145,338    |   | $ | (145,791 | ) | $ | — |   |
| Sweden               |       | $                                                            | 42,645     |   |   |   |   |   |
| Luxembourg           |       | $                                                            | (215,259   | ) |   |   |   |   |
| Other  International |       | $                                                            | (5,055     | ) | $ | (2,728 | ) | $ | (2,283 | ) |
|                 |       | $                                                            | (521,609   | ) | $ | (161,773 | ) | $ | (18,845 | ) |

 

F-30

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

The Company’s provision for income taxes ofapproximately $0.7 million and $0.4 million for the years endedDecember 31, 2006 and 2005, respectively, are related to withholding taxespaid in the United States and Bolivia.

Thecomponents of the deferred tax assets and deferred tax liabilities are asfollows:

| ** **                                         | ** ** | **For the year ended** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **December 31,**                 | ** ** |
| ** **                                         | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in thousands)**               | ** ** |
| Deferred tax assets:                               |       |                                  |       |   |   |
| Net operating loss  carryforwards                  |       | $                                     | 22,927     |   | $ | 9,830 |   |
| Stock-based compensation                           |       | 4,752                                 |       | 3,773 |   |
| Property, plant and  equipment                     |       | 1,730                                 |       | 1,730 |   |
| Other                                              |       | 273                                   |       | 6 |   |
| Total deferred tax  assets                         |       | 29,682                                |       | 14,525 |   |
| Deferred tax liabilities:                          |       |                                  |       |   |   |
| Property, plant and  equipment                     |       | 32                                    |       | 118 |   |
| Other                                              |       | —                                |       | — |   |
| Total deferred tax  liabilities                    |       | 32                                    |       | 118 |   |
| Net deferred tax asset  before valuation allowance |       | $                                     | 29,650     |   | $ | 14,407 |   |
| Less: Valuation  allowance                         |       | $                                     | (29,650    | ) | $ | (14,407 | ) |
| Net deferred tax asset                             |       | $                                     | —     |   | $ | — |   |

 

At December 31, 2006,the Company had net operating loss carryforwards in certain non-U.S. jurisdictions.Of these, $26.3 million of net operating losses in Bolivia have no expiration,and $57.5 million in other foreign jurisdictions will expire in future yearsthrough 2016. In the U.S., there are $7.9 million of net operating losscarryforwards which will expire in future years through 2026, of which $1.1million is excluded from the deferred tax calculation until the Company canreduce taxes payable. If realized, the deferred tax benefit and correspondingadjustment to paid in capital would be $0.4 million.

The valuation allowancefor deferred tax assets of $29.7 million and $14.4 million at December 31,2006 and 2005, respectively, relates principally to the uncertainty of theutilization of certain deferred tax assets, primarily net operating loss carryforwards in various tax jurisdictions. The Company continually assesses bothpositive and negative evidence to determine whether it is more likely than notthat the deferred tax assets can be realized prior to their expiration. Basedon the Company’s assessment it has determined the deferred tax assets are notcurrently realizable. However, the Company’s assessment may change as it movesfrom the development phase to the production phase of certain miningproperties. The Company will continue to monitor Company-specific, miningindustry and worldwide economic factors and will reassess the likelihood thatthe Company’s net operating loss carry forwards and other deferred taxattributes will be utilized prior to their expiration.

**11.**          Stockholder’sEquity

*Stock Option Plans—*The Company has established a plan to issue shareoptions and other awards of the Company’s shares to officers, employees,consultants and agents of the Company and its subsidiaries 

F-31

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

*(the‘‘Plan’’). Under the Plan, the total number of options and other awards grantedcannot exceed two million Ordinary Shares. Options and other awards under thePlan are not transferable unless otherwise provided for in a specific awardagreement. Options exist for a term, not to exceed ten years, as fixed by theCompensation Committee of the Board of Directors of the Company. Optionstypically vest ratably over periods of up to four years with the first tranchevesting on the date of grant or the first anniversary of the date of grant.*

The Company has also established a share option planfor its non-employee directors (the “Director Plan”).  Under the Director Plan, the total number ofoptions granted cannot exceed five percent of the Company’s outstandingOrdinary Shares. Pursuant to the Director Plan, non-employee directors receive (i) atthe effective date of their initial election to the Company’s Board ofDirectors, an option to purchase the number of Ordinary Shares equal to $50,000divided by the closing price of the Ordinary Shares on the American StockExchange (the “AMEX”) on such date, (ii) at the close of business of eachannual meeting of the Company’s shareholders, an option to purchase the numberof Ordinary Shares equal to $50,000 divided by the closing price of theOrdinary Shares on the AMEX on such date, and (iii) at the close ofbusiness of each meeting of the Company’s Board of Directors, options valued at$3,000 calculated using the Black-Scholes option-pricing model to purchaseOrdinary Shares with an exercise price equal to the closing price of theOrdinary Shares on the AMEX on such date. Options granted under the DirectorPlan vest on the date of the grant and expire ten years after the date of thegrant or three years after the date that such non-employee director ceases tobe a director of the Company. Options granted under the Director Plan aretransferable only in limited circumstances.

Asummary of the combined options of the Plan and the Director Plan at December 31,2006 and changes during the year then ended is presented in the followingtable:

| **Options**                               | ** ** | ** ** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Remaining Contractual Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2005    |       | 2,859,781  |       |                       | $          | 14.42                                                  |       |                                                        |       | 6.4 Years                       |       |   | $ | 6,664,178 |   |
| Granted during period                     |       | 465,367    |       |                       | $          | 16.29                                                  |       |                                                        |       | 9.8 Years                       |       |   | $ | — |   |
| Forfeited or expired  during period       |       | (49,151    | )          |                       | $          | 16.71                                                  |       |                                                        |       |                            |       |   | $ | 289,983 |   |
| Exercised during period                   |       | (283,425   | )          |                       | $          | 12.03                                                  |       |                                                        |       |                            |       |   | $ | 1,935,633 |   |
| Outstanding at  December 31, 2006    |       | 2,992,572  |       |                       | $          | 14.90                                                  |       |                                                        |       | 6.3 Years                       |       |   | $ | 5,657,246 |   |
| Exercisable at end of  period             |       | 2,192,191  |       |                       | $          | 14.14                                                  |       |                                                        |       | 5.2 Years                       |       |   | $ | 5,482,514 |   |
| Expected to vest at the end of the period |       | 800,381    |       |                       | $          | 16.98                                                  |       |                                                        |       | 9.1  Years                      |       |   | $ | 174,732 |   |

 

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes option-pricing model using the assumptions noted in the followingtable. Expected volatilities are based on historical volatility of the Company’sstock. The Company uses historical data to estimate option exercises andemployee terminations within the Black-Scholes model. The expected term ofoptions granted represents the period of time that options granted are expectedto be outstanding, based on past 

F-32

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

experience and future estimates and includes data fromboth the Employees Plan and the Directors Plan. The risk-free rate for periodswithin the expected term of the option is based on the U.S. Treasury yieldcurve in effect at the time of grant. The Company currently does not foreseethe payment of dividends in the near term.

| ** **                   | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected volatility          |       | 43.8% - 46.1%                              |       | 42.6% - 43.8% |   | 44.8% - 45.0% |   |
| Weighted average  volatility |       | 45.5%                                      |       | 43.6% |   | 44.9% |   |
| Expected dividend yield      |       | —                                     |       | — |   | — |   |
| Expected term (in years)     |       | 5.77                                       |       | 3.85 |   | 3.89 |   |
| Risk-free rate               |       | 4.62%                                      |       | 4.15% |   | 2.95% |   |

 

During the years ended December 31,2006, 2005 and 2004, the Company granted options with weighted average grantdate fair values of $3.6 million, $2.4 million and $2.2 million, respectively;options were exercised with total intrinsic values of $1.9 million, $0.3million and $1.6 million, respectively; and the total fair value of optionsvested was $2.7 million, $1.8 million and $1.1 million, respectively.

As of December 31,2006, unrecognized compensation cost related to the non-vested stock optionsgranted pursuant to the Plan was $3.7 million which the Company expects will berecognized over a weighted average period of 1.1 years.

From time to time the Company grants restricted sharesunder the Plan to certain key employees as a retention incentive. These grantstypically vest over four years either at 25% per year or at an escalating rateof 10% during the first year and 15%, 25% and 50% for the succeeding threeyears. During 2006, 2005 and 2004 the Company recorded $1.6 million, $0.4million and $nil, respectively, as compensation costs related to the restrictedshare grants.

Asummary of the status of the Company’s non-vested restricted stock grants at December 31,2006 and changes during the year then ended is presented in the followingtable:

| **Non-vested Shares**            | ** ** | ** ** | ** ** | **Number  of Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------|------------|---------------------------------------------------------------------------------|------------|
| Non-vested at  December 31, 2005 |       | 170,700    |       |                       | $          | 18.41                                                                           |       |   |
| Granted during period                 |       | 92,800     |       |                       | $          | 15.60                                                                           |       |   |
| Vested during period                  |       | (36,925    | )          |                       | $          | 18.24                                                                           |       |   |
| Forfeited during period               |       | (3,000     | )          |                       | $          | 16.03                                                                           |       |   |
| Non-vested at December 31, 2006  |       | 223,575    |       |                       | $          | 17.30                                                                           |       |   |

 

As of December 31, 2006, unrecognizedcompensation cost related to the non-vested restricted shares granted pursuantto the Plan was $2.2 million. The Company expects that the unrecognized costwill be recognized over a weighted average period of 1.0 year.

During2005 the Company granted stock-based performance bonuses under the Plan tocertain employees related to cost and completion date targets at the SanCristobal project. The following table is a 

F-33

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

summary of the status of the Company’s stock-basedperformance bonuses at December 31, 2006 and changes during the year thenended:

| **Non-vested Shares**            | ** ** | ** ** | ** ** | **Number   of Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Non-vested at  December 31, 2005 |       |       | 32,000     |                             |       |                                                                            | $          | 15.41 |   |   |
| Granted during period                 |       |       | —     |                             |       |                                                                            | $          | — |   |   |
| Vested during period                  |       |       | —     |                             |       |                                                                            | $          | — |   |   |
| Forfeited during period               |       |       | (6,000     | )                                |       |                                                                            | $          | 16.25 |   |   |
| Non-vested at December 31, 2006  |       |       | 26,000     |                             |       |                                                                            | $          | 15.21 |   |   |

 

As of December 31,2006, unrecognized compensation cost related to the non-vested performancebonuses granted pursuant to the Plan was $0.1 million. The Company expects thatthe unrecognized cost will be recognized over a weighted average period of 0.6years.

Total compensation costsrecognized for stock-based employee compensation awards was $5.4 million, $2.9million and $10.1 million for the years ended December 31, 2006, 2005 and2004, respectively, and included amounts capitalized of $0.9 million, $0.7million and $1.4 million for the respective years. The 2004 amount includes$4.1 million associated with the extension of the expiration dates of stockoptions previously granted to the retiring Chairman and a retiring employee and$2.5 million related to a new grant to the retiring Chairman.

*Warrants—*AtDecember 31, 2006, 450,000 warrants to purchase Ordinary Shares wereoutstanding. The warrants are exercisable at prices ranging from $12.92 to$20.79 with a weighted average exercise price of $19.29 and have expirationdates ranging from April 1, 2008 to September 27, 2009.

*ConvertibleDebt—*In connection with the Convertible Senior SubordinatedNotes, the Company may be required to issue up to 10,132,320 of its OrdinaryShares should the Note holders convert, per the terms of the notes, at aconversion rate of 34.9406 shares per $1,000 principal amount of notes (equalto an initial conversion price of $28.62 per Ordinary Share). The Notes are duein 2024.

During 2006 and 2005, theCompany issued Ordinary Shares to repurchase a portion of its outstandingConvertible Senior Subordinated Notes due 2024.          (See Note 7 fordetails of the transaction).

*CommonStock Issuances*—During 2006, the Company completed a publicoffering of 6,375,000 of its Ordinary Shares at $24.45 per share ($23.70 pershare, net of commissions) resulting in net proceeds of $151.1 million.

Per a loan agreementbetween the Company and SC TESA, the Company issued 369,033 and 1,134,799 ofits Ordinary Shares, valued at $5.7 million and $16.6 million during 2006 and2005 respectively, to SC TESA for the construction of the power line to the SanCristobal project. The $22.3 million advanced to SC TESA will be repaid to theCompany with interest through credits against electric transmission operating costs.The Company has determined that SC TESA is a variable interest entity of whichthe Company is the primary beneficiary and consequently, the financialstatements of SC TESA are fully consolidated with the Company’s financialstatements for the 2006 and 2005 periods presented (see Note 2o).

F-34

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

During 2005 the Companyinvested in Mariana Resources Limited, an Australian based exploration companywith properties in South America, exchanging 16,000 of the Company’s OrdinaryShares valued at $249,000 for 1,689,000 common shares of Mariana also valued at$249,000. The Company acquired approximately 9% of the outstanding shares ofMariana.

In 2006, 2005 and 2004,the Company granted 1,699, 10,647, and 23,681 Ordinary Shares to consultantsfor services rendered and recorded costs of $nil, $0.2 million and $0.5 millionrespectively.

**12.**          Minority Interests

On September 25,2006, pursuant to a purchase and sale agreement among the Company, certain ofits wholly owned subsidiaries and Sumitomo Corporation (“Sumitomo”), theCompany  sold to Sumitomo  35% interests in three subsidiaries that ownthe San Cristobal project, market San Cristobal project concentrates and holdthe metals derivative positions required by the San Cristobal project lenders,in exchange for $224 million in cash and certain deferred payments based onsilver and zinc production from the Project. The Company continues to own theremaining 65% of these three subsidiaries (“majority interest”) and continuesto fully consolidate their financial statements and recognizes a minorityinterest for Sumitomo’s 35% interest (“minority interest”). The Company alsoagreed to assign Sumitomo a 35% interest in the $22.3 million note receivable ($7.8 million;see Note 7) the Company holds from the San Cristobal project power lineconstruction and transmission contractor.

Pursuant to the purchaseand sale agreement, the Company agreed to indemnify Sumitomo generally forbreaches of representations and warranties discovered within one year ofclosing resulting in damages to Sumitomo exceeding $3 million, up to a cap of$40 million, provided that for breaches related to title to shares of theacquired companies, subordinated debt, certain transferred agreements and realand personal property required for the San Cristobal project discovered withinsix years of closing, the cap is $224 million. Sumitomo agreed to indemnify theCompany generally for breaches of representations and warranties that arediscovered within one year of closing, resulting in damages to the Company exceeding$3 million, up to a cap of $40 million.

Pursuant to a deferredpayments agreement dated September 25, 2006 Sumitomo will make thefollowing deferred payments to the Company in respect of production from theSan Cristobal project and future expansions: (i) quarterly payments equal to 22.86% of Sumitomo’s share ofpayable silver production from the San Cristobal project, or approximately 8%of total payable silver production, payable in cash or silver at Sumitomo’soption, and (ii) quarterly cash payments equal to 20% of Sumitomo’s shareof payable zinc production from the San Cristobal project, or approximately 7%of total payable zinc production, multiplied by the zinc price in excess of$1,800 per tonne.

The Minera San Cristobal (“MSC”)Shareholders Agreement dated September 25, 2006 provides that the majorityshareholder will control the MSC board and appoint the board chairman. MSC isthe subsidiary that owns and operates the San Cristobal project. As long as theminority shareholder holds more than 25% of MSC, certain significant mattersrequire the approval of the minority shareholder director including approval ofannual programs and budgets, increases of 15% or more over budgeted capitalexpenditures or operating expenses (with customary exceptions for emergenciesand compliance), merger or liquidation, permanent cessation or suspension formore than 180 days of mining at or abandonment of the San Cristobal project. Ifa deadlock with respect to adoption or amendment in excess 

F-35

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

of 15%of a program and budget continues for 180 days, the majority shareholder’sdirectors are then entitled to approve the program and budget.

Under the MSC shareholderagreement, the Company and Sumitomo are required to provide their respectiveproportionate shares of shareholder debt or equity funding required for MSC toachieve commercial operations, or be diluted on a two for one basis.  Following commercial operations, the Companyand Sumitomo may choose to provide their proportionate share of requiredexternal funding or dilute on a one for one basis. Dilution by the Company orSumitomo of its ownership interest in MSC will result in transfers of shares inthe other two subsidiaries, so that the parties’ ownership interests in thethree companies remain identical. If Sumitomo were to dilute below 25% solelyas a result of its failure to provide future funding, and were to refuse toapprove a program and budget proposed by the Company for more than 180 days,Sumitomo would have the right to sell to the Company all (but not less thanall) of its remaining interest in MSC for $224 million, reduced pro rata by thepercentage of year-end 2005 reserves produced from the San Cristobal project(the “Put Right”). Management has determined that the probability of Sumitomoexercising the Put Right is remote and accordingly has not assigned a value tothe Put Right at December 31, 2006.

Each of the Company andSumitomo has a right of first refusal to acquire any interests in MSC that theother wishes to sell or, if the party wishing to sell has less than a 25%interest in MSC, a right of first offer. In the event of a change of control ofthe Company, Sumitomo would be relieved of its right of first refusal and firstoffer obligations for two years. Any party that acquires an interest in MSCmust acquire a pro rata interest in the other two subsidiaries.

The MSC Shareholders Agreement provides that availablecash will be distributed quarterly, first to pay the $5.4 million annualmanagement fee due from MSC to the Company, then to shareholders that haveadvanced loans on behalf of a non-funding shareholder, then to shareholders whohave advanced shareholder loans pro rata to their ownership interests, and thenas cash dividends. An additional aggregate $0.3 million annual management feeis jointly payable to the Company by the other two jointly owned subsidiaries.

The Company and Sumitomo have also entered into a twoyear Option Agreement dated September 25, 2006, pursuant to which Sumitomomay acquire a 20 percent to 35 percent interest in each of certain activeexploration properties at historical cost, and in each of certain of theCompany’s inactive exploration properties at historical cost once the Companyhas spent $200,000 in exploration costs on the property. Sumitomo must exerciseits option on each active property within 60 days of receiving completeinformation regarding the property and on each inactive property within 60 daysof the Company spending $200,000 on the property. At December 31, 2006Sumitomo had not exercised its options to acquire any exploration properties.

F-36

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**APEX SILVER MINES LIMITED  An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

The Company also amended the San Cristobal projectfinance facility in connection with the sale to Sumitomo, as follows:  (i) the Company and Sumitomo provideseverally pro rata to their respective 65% and 35% ownership interests in MSC,and not jointly, San Cristobal project completion and cost overrun support; (ii) theCompany and Sumitomo guarantee severally pro rata to their MSC ownershipinterests, and not jointly, the performance of the metals derivative positions;(iii) the Company was permitted to withdraw from accounts controlled bythe lenders $70 million of contingent overrun financing previously required bythe project lenders; (iv) Sumitomo guarantees up to $45.5 million ofoverrun funding by the Company; (v) the Company was permitted to remove fromescrow approximately $5.7 million previously deposited to meet interestpayments on its subordinated notes, and was no longer required to escrow anadditional $10.4 million; and (vi) additional cure periods for certainrepresentation and covenant defaults and certain defaults related to completionof the project are permitted, as is the substitution of a replacement sponsorin the event of certain defaults, bankruptcy or expropriation events.

The Company recorded a minority interest in the assetsand liabilities sold of $8.8 million and recognized a gain of $199.6 millionrelated to the transaction. The gain is net of approximately $6.4 million ofselling costs incurred by the Company related to the transaction. (See Note 2sabove for a discussion of the revised valuations of our open derivativepositions which impacted the gain and minority interest the Company recognizedon the sale to Sumitomo.) The revised valuation of the derivative positionsresulted in the gain on the sale being increased from $119.8 million to $199.6million. The $199.6 million gain is calculated as the difference between thecash proceeds (net of selling costs) and the book value of the interests sold.The book value includes the mark-to-market liability on the open metals derivativepositions required by the project finance facility, excludes pre-feasibilityexploration and other costs previously expensed, and was reduced by the bookvalue allocated to the retained interests in future silver and zinc production.The payments related to the retained interests in future production will berecorded as a reduction of minority interest as they become receivable by theCompany.

The Company may be required to pay up to an estimated$4.0 million bonus to the project construction management contractor contingentupon certain project completion parameters. Sumitomo is deemed to have alreadypaid its 35% share of the bonus as part of the initial cash payment. Therefore,Apex Silver has agreed to reimburse Sumitomo its $1.4 million share of thebonus if it is paid. Apex Silver will defer $1.4 million of the gain until suchtime as the payment is made or determined not to be payable and has recordedthe amount to the current portion of long term debt at December 31, 2006.

Subsequent to the close ofthe transaction with Sumitomo, the Company incurred certain losses primarilyrelated to marking to market its open derivative positions entered into inconnection with the project finance facility. Such losses would normally beshared by Sumitomo in proportion to its 35% interest in the subsidiaryrecording the losses. However, generally accepted accounting principles do notpermit the allocation of losses to the minority interest in excess of theminority owner’s interest in the subsidiary, unless the minority interest has aprimary obligation to fund such losses. The Company and Sumitomo have eachguaranteed their respective share of the project finance obligations and therelated metals derivative positions through the completion of the San Cristobalproject at which time the guarantees will terminate and the lenders’ recoursewill be solely to the project. Since the derivative positions are expected tobe funded through future earnings from the San Cristobal project, the Companydoes not anticipate that Sumitomo will be required to fund their proportionateinterest in the mark-to-

F-37

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**APEX SILVER MINES LIMITED  An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

marketlosses prior to the completion of the San Cristobal project. Although Sumitomo’sshare of the subsidiary’s losses for the year ended December 31, 2006, was$107.7, the Company only recognized an $8.8 million minority interest benefitand absorbed the remaining $98.8 million loss. The $8.8 million minorityinterest benefit reduced the minority interest balance on the Company’sconsolidated balance sheets to $0 at December 31, 2006. The Companyanticipates recovering the $98.8 million it absorbed, and any additionalminority interest losses it may absorb, from future earnings prior todistribution to the minority interest.

F-38

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**APEX SILVER MINES LIMITED  An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

**13.**          CashFlow Information

Thefollowing table reconciles net loss for the period to cash from operations:

| ** **                                                                                  | ** ** | ** **                                                    | ** ** | ** **   | ** ** | ** ** | ** ** | **For the period  from  December 22,  1994 (inception)** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **For the years ended December 31,** | ** ** | **through**  | ** ** |
| ** **                                                                                  | ** ** | ** **                                                    | ** ** | **2005**     | ** ** | ** ** | ** ** | **December 31,**                                                        | ** ** |
| ** **                                                                                  | ** ** | **2006**                                                      | ** ** | **Restated** | ** ** | **2004**   | ** ** | **2006**                                                                     | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                                       | ** ** |
| Cash flows from  operating activities:                                                      |       |                                                          |       |         |       |       |       |                                                                         |       |   |   |
| Net loss                                                                                    |       | $                                                             | (513,545   | )            | $          | (162,136   | )          | $                                                                            | (18,845    | ) |   | $ | (773,339 | ) |   |
| Adjustments to  reconcile net loss to net cash used in operating activities:                |       |                                                          |       |         |       |       |       |                                                                         |       |   |   |
| Amortization and depreciation                                                               |       | 403                                                           |       | 210          |       | 55         |       |                                                                         | 1,799      |   |   |
| Amortization of deferred financing costs                                                    |       | 552                                                           |       | 1,944        |       | 638        |       |                                                                         | 3,134      |   |   |
| Accretion of asset retirement obligation                                                    |       | 391                                                           |       | 15           |       | —     |       |                                                                         | 406        |   |   |
| Amortization of premiums and discounts                                                      |       | (2,122                                                        | )          | 69           |       | —     |       |                                                                         | (2,053     | ) |   |
| Mark-to-market loss on derivative positions                                                 |       | 715,120                                                       |       | 151,515      |       | 491        |       |                                                                         | 867,126    |   |   |
| Loss (gain) on Euro hedge                                                                   |       | —                                                        |       | 872          |       | (1,406     | )          |                                                                         | (534       | ) |   |
| Gain on extingushment of debt                                                               |       | (2,875                                                        | )          | (6,765       | )          | —     |       |                                                                         | (9,640     | ) |   |
| Gross gain on sale of interest in subsidiary                                                |       | (199,600                                                      | )          | —       |       | —     |       |                                                                         | (199,600   | ) |   |
| Minority interest in loss of consolidated subsidiary                                        |       | (8,813                                                        | )          | 34           |       | —     |       |                                                                         | (13,338    | ) |   |
| Stock compensation                                                                          |       | 4,508                                                         |       | 2,281        |       | 8,651      |       |                                                                         | 19,177     |   |   |
| Shares issued in consideration for services                                                 |       | —                                                        |       | —       |       | 60         |       |                                                                         | 8,585      |   |   |
| Shares issued to purchase mineral rights                                                    |       | —                                                        |       | —       |       | —     |       |                                                                         | 1,799      |   |   |
| Changes in  operating assets and liabilities:                                               |       |                                                          |       |         |       |       |       |                                                                         |       |   |   |
| (Increase) decrease in accrued interest receivable                                          |       | (650                                                          | )          | 344          |       | (1,074     | )          |                                                                         | (1,408     | ) |   |
| (Increase) decrease in prepaid expenses and other  assets net of amounts capitalized        |       | (3,142                                                        | )          | 1,592        |       | (961       | )          |                                                                         | (4,334     | ) |   |
| (Increase) in inventories                                                                   |       | (27,672                                                       | )          | —       |       | —     |       |                                                                         | (27,672    | ) |   |
| Increase in value added tax recoverable (net)                                               |       | (34,106                                                       | )          | (13,656      | )          | (1,157     | )          |                                                                         | (54,158    | ) |   |
| Increase in accrued interest payable net of amounts capitalized                             |       | 55                                                            |       | 21           |       | 1,604      |       |                                                                         | 1,680      |   |   |
| Increase (decrease) in accounts payable and accrued liabilities  net of amounts capitalized |       | 1,068                                                         |       | (657         | )          | 2,735      |       |                                                                         | 4,637      |   |   |
| Other increase (decrease)                                                                   |       | (299                                                          | )          | (21          | )          | (9         | )          |                                                                         | 129        |   |   |
| Net cash used in  operating activities                                                      |       | $                                                             | (70,727    | )            | $          | (24,338    | )          | $                                                                            | (9,218     | ) |   | $ | (177,604 | ) |   |

 

F-39

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**APEX SILVER MINES LIMITED  An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

Thefollowing table details supplemental non-cash transactions:

| ** **                                                                                                                          | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                          | ** ** | **(in thousand except per share)**        | ** ** |
| Capitalized stock  based compensation costs                                                                                         |       | $                                                             | 943        |   | $ | 693 |   | $ | 1,417 |   |
| Payment of debt with Ordinary Shares at an average  of $15.77 in 2006 and $15.59 in 2005 per share respectively                     |       | $                                                             | 17,125     |   | $ | 23,235 |   | $ | — |   |
| Capitalized consulting services paid with Ordinary  Shares at an average value of $15.90, $16.06 and $19.64 per share  respectively |       | $                                                        | 27         |   | $  | 171 |   | $  | 465 |   |
| Purchase of common stock of unrelated entity with Ordinary  Shares at an average value per share of $15.58 in 2005                  |       | $                                                        | —     |   | $  | 249 |   | $  | — |   |
| Depreciation expense capitalized                                                                                                    |       | $                                                             | 5,168      |   | $ | 2,733 |   | $ | 412 |   |
| Debt and equity offering costs incurred                                                                                             |       | $                                                             | 4,781      |   | $ | — |   | $ | 21,703 |   |
| Initial measurement of asset retirement obligation                                                                                  |       | $                                                             | 3,367      |   | $ | 1,988 |   | $ | — |   |
| Equipment  acquired through capital lease                                                                                           |       | $                                                             | 7,255      |   | $ | 13,539 |   | $ | — |   |

 

**14.**          Commitmentsand Contingencies

*Leases—*TheCompany has non-cancelable operating lease commitments as follows:

| ** **                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| San Cristobal  mining lease payments |       | $        | 400,000    |     | $          | 400,000  |       | $        | 400,000    |     | $          | 400,000 |   | $ | 400,000 |   |
| Corporate headquarters  office lease |       | $        | 375,000    |     | $          | 378,000  |       | $        | 126,000    |     | $          | — |   | $ | — |   |

 

The Company is required to make mining patent leasepayments to the Bolivian government to maintain its rights to the San Cristobalmining concessions. The Company has made such payments totaling approximately$400,000 for the year ended December 31, 2006 and $360,000 per year forthe years ending December 31, 2005 and 2004.

The lease for the corporate headquarters office spaceexpires in 2009. Payments associated with this lease were recorded to rentexpense by the Company in the amounts of $380,000, $338,000 and $271,000 forthe years ended December 31, 2006, 2005 and 2004 respectively.

*Letters of Credit—*At December 31, 2006, the Company had outstandingirrevocable standby letters of credit related to the San Cristobal project inthe aggregate amount of $6.5 million. Theletters of credit include $4.5 million associated with the rail contract totransport metal concentrates to the port facilities and $2.0 million associatedwith the construction management contract. At December 31, 2006 theCompany deposited $8.0 million to collateralize the letters of credit and hasrecorded that amount to restricted investments.

*Escrow Amounts—*At December 31, 2006 the Company placed $4.0million in an escrow account to provide for certain requirements related to thedevelopment of the port facility for the San Cristobal project and recorded theamount as restricted cash.

F-40

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**APEX SILVER MINES LIMITED  An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

*Project Financing*—Per the termsand conditions of the San Cristobal project finance facility the Company wasrequired to deposit cash and investments in an account the use of which isrestricted to the development of the San Cristobal project. At December 31,2006 the remaining balance in the account was $79.7 million of which $27.9million was recorded to restricted cash and $51.8 million recorded torestricted investments.

*Capital Commitments*—The Companyentered into agreements with certain service providers and placed orders forcertain long-lead equipment and construction materials for its San Cristobalproject resulting in open commitments totaling approximately $49.7 million at December 31,2006. If the Company cancelled all of these agreements or orders at December 31,2006, it would incur cancellation fees totaling approximately $32.2 million. Inaddition the Company would be required to pay the rail contractor at the SanCristobal project a diminishing termination fee during the life of the contract.The rail termination fee begins at $35.6 million during the first full year ofoperations and diminishes to $nil at the end of the contract. In addition tothe $49.7 million of open commitments at December 31, 2006, theCompany intends to commit to an approximately additional $60 million ofpurchase obligations in the future to complete the San Cristobal Project.

*Taxes—*The Company is receivingcertain tax and duty benefits on a portion of the equipment it is importing forits San Cristobal project. The benefits are contingent upon fulfilling certainexpenditure commitments within a specified period of time and returning certainequipment off shore within a specified period of time. Failing to comply withthese commitments would obligate the Company to refund the benefits received.

*Performance Bonus—*The Company maybe required to pay up to an estimated $4.0 million bonus to the San CristobalProject construction management contractor contingent upon certain projectcompletion parameters and a $2.3 million bonus to the company constructing theport facilities for early completion of the facilities. Based on the currentproject status the company does not consider either payment probable and at December 31,2006 no amounts have been accrued.

*Political Contingencies—*TheCompany continues to monitor the political uncertainties in Bolivia resultingfrom the Bolivian government’s renegotiation of agreements with oil and gasproducers and statements regarding possible changes in current policiesaffecting the mining industry (see Item 1A, Risk Factors). If the San Cristobalproject were nationalized, or if taxes were substantially increased orsignificant royalty payments imposed, the Company might be unable to recoverits investment in the project and could have substantial liabilities includingliabilities to the lenders under the project finance facility and liabilitiesto counterparties holding the derivative positions required by the projectlenders. In addition, changes in Bolivian law may have an adverse effect on theCompany’s ability to recover VAT receivable (see Note 5).

In May 2006, the Constitutional Court of Boliviaissued a ruling declaring certain articles of the 1997 Mining Codeunconstitutional. The Court’s ruling is not effective until May 2008 andthe Court urged the Bolivian Congress to enact legislation during that timewhich may supersede the ruling. Although the Court’s ruling is not expected toimpact our ability to operate the San Cristobal project, the ruling may limitthe transferability of our mining concessions and restrict our ability tomortgage our San Cristobal mining concessions as collateral to the lendersproviding financing for the project.

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**APEX SILVER MINES LIMITED  An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

*OtherContingencies—*As previously disclosed, the company hasconcluded, based on the results of an internal investigation conducted underthe direction of our Audit Committee, that certain senior employees of one of ourSouth American subsidiaries were involved in making impermissible payments ofapproximately $125,000 to government officials in 2003 and 2004 in connectionwith an inactive, early stage exploration property that is not related to anyof our active exploration or development properties. Based on findings to date,no changes to our previously filed financial statements are warranted as aresult of these matters. We have contacted the Department of Justice (“DOJ”)and SEC and reported the results of our internal investigation. We have beeninformed that the SEC and DOJ have commenced an investigation with respect tothese matters, including possible violations of the Foreign Corrupt PracticesAct. We are cooperating fully with the SEC and DOJ investigations. We cannotpredict with any certainty the final outcome of the investigations, includingany fines or penalties that may be imposed.

**15.**          Royalty Income

During 2004 the Companysold to Excellon Resources Inc. (“Excellon”) the mineral rights on a section ofthe Company’s Platosa property in Mexico and retained a 5% net smelter return(“NSR”) royalty interest that decreases to a 2% NSR after the Company hasreceived $4.0 million of royalty payments. The Company separately entered intoa joint venture agreement for the future development of the remaining propertyat Platosa whereby it retained a 49% interest to Excellon’s 51% interest. TheCompany can buy back a controlling interest in the development property of upto 51%, with a payment to Excellon of $1.0 million. During 2006 Excellon begantest mining on the royalty section of the property and produced silver, zincand lead with a net smelter value of approximately $32.4 million on which theCompany recorded royalty income of $1.6 million.

**16.**          Foreign Currency

Gainsand losses on foreign currency derivatives and translation consist of thefollowing:

| ** **                                                                             | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                             | ** ** | **(in thousands)** | ** ** |
| Gain (loss) on  Euro derivatives                                                       |       | $                       | —     |     | $          | (872     | )          | $ | 1,406 |   |
| Gain (loss) on  re-measurement of monetary assets denominated in other than US dollars |       | 885                     |       | 194      |       | —   |       |
| Total                                                                                  |       | $                       | 885        |     | $          | (678     | )          | $ | 1,406 |   |

 

The re-measurement of monetary assets is related tocertain taxes receivable and other accounts denominated in Bolivia’s localcurrency.

The Euro derivatives loss during 2005 and gain during2004 is related to the marking to market of open Euro derivative positions heldby the Company related to certain capital equipment purchased for San Cristobalfor which the price was denominated in Euros. The Company held no suchderivative positions during 2006.

F-42

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

 

**17.**          Fair Value of Financial Instruments

The Company’s financial instruments consist of cashand cash equivalents, investments, receivables, VAT recoverable, accountspayable, other current liabilities, derivative positions and long-term debt.Except for the VAT and long-term debt, the carrying amounts of these financialinstruments approximate fair value due to their short maturities.

Theestimated fair values of the Company’s long-term financial instruments asmeasured on December 31, 2006 and 2005 are as follows:

| ** **                                             | ** ** | **2006**                   | ** ** | **2005**        | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|-----------------|------------|
| ** **                                             | ** ** | **Carrying   Amount** | ** ** | **Fair  Value** | ** ** | **Carrying   Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                                             | ** ** | **(in thousands)**    | ** ** |
| Value added tax  recoverable                           |       | $                          | 54,158     |            | $          | 51,492 |   | $ | 20,052 |   | $ | 17,000 |   |
| 2.875%  Convertible Senior Subordinated Notes due 2024 |       | 180,000                    |       | 145,800         |       | 180,000 |   | 135,000 |   |
| 4.00% Convertible  Senior Subordinated Notes due 2024  |       | 109,987                    |       | 97,000          |       | 129,987 |   | 107,000 |   |
| Project finance  facility                              |       | 180,000                    |       | 180,000         |       | — |   | — |   |
| Capital lease  obligations                             |       | 17,348                     |       | 17,348          |       | 12,304 |   | 12,304 |   |
| Derivative positions  (2005 Restated)                  |       | 818,198                    |       | 818,198         |       | 151,369 |   | 151,369 |   |
|                                                        |            |                            |            |                 |            |  |  |  |  |  |  |  |  |

 

The fair value of the VATrecoverable is estimated based on the expected timing of future cash flows andthe Company’s incremental borrowing rate of 4.67%. The fair value of theConvertible Senior Subordinated Notes is based on quoted market values. Thefair value of the project finance facility and capital lease obligations havemarket rates of interest and the fair value is equal to the carrying value.

**18.**          SegmentInformation

The Company’s soleactivity is exploration for and development of mineral properties containingsilver and substantially all of the Company’s long-lived assets are related tothe Company’s San Cristobal project in Bolivia. The Company’s other principalassets consist primarily of cash and short-term, long-term and restrictedinvestments held in US government and US corporate securities. As such, theCompany’s chief operating decision maker views the Company’s consolidatedfinancial information as one segment.

F-43

 

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

 

**19.**          QuarterlyResults of Operations (Unaudited)

Thefollowing table summarizes the Company’s restated quarterly results of operations for the years ended December 31,2006, 2005 and 2004:

| ** **                            | ** ** | **First**                                               | ** ** | **Second**   | ** ** | **Third**    | ** ** | **Fourth**   | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                            | ** ** | **Quarter**                                             | ** ** | **Quarter**  | ** ** | **Quarter**  | ** ** | **Quarter**  | ** ** |
| ** **                            | ** ** | **(in thousands except per share)** | ** ** |
| **2006**                              | ** ** | **Restated**                                            | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** **   | ** ** |
| Net income (loss)  for the period     |       | $                                                       | (174,412   | )            | $          | (80,502      | )          | $            | 67,756     |   | $ | (326,387 | ) |
| Net income (loss)  per Ordinary Share |       |                                                    |       |         | ** ** | ** **   | ** ** | ** **   | ** ** |
| —basic                           |       | $                                                       | (3.39      | )            | $          | (1.40        | )          | $            | 1.16       |   | $ | (5.58 | ) |
| —diluted                         |       | $                                                       | (3.39      | )            | $          | (1.40        | )          | $            | 1.15       |   | $ | (5.58 | ) |
| **2005**                              |       |                                                    |       |         | ** ** | **Restated** | ** ** | **Restated** | ** ** |
| Net loss for the  period .            |       | $                                                       | (4,853     | )            | $          | (2,823       | )          | $            | (82,145    | ) | $ | (72,315 | ) |
| Net loss per  Ordinary Share          |       |                                                    |       |         |       |         |       |         |       |
| —basic and diluted               |       | $                                                       | (0.10      | )            | $          | (0.06        | )          | $            | (1.68      | ) | $ | (1.44 | ) |
| **2004**                              |       |                                                    |       |         |       |         |       |         |       |
| Net loss for the  period              |       | $                                                       | (4,661     | )            | $          | (3,166       | )          | $            | (6,612     | ) | $ | (4,406 | ) |
| Net loss per Ordinary  Share          |       |                                                    |       |         |       |         |       |         |       |
| —basic and  diluted              |       | $                                                       | (0.11      | )            | $          | (0.07        | )          | $            | (0.14      | ) | $ | (0.09 | ) |

 

As discussed in Note 2s, the Company restated the fairmarket value of its open derivative positions which in turn affected the gainand minority interest recognized on the indirect sale of a 35% interest in theCompany’s San Cristobal project during September 2006. The restatementsaffected the quarterly periods ended September 30, 2005 through September 30,2006.

The first and second quarters of 2006 include restatedderivative position losses of $172.8 million and $78.1 million respectively. Thethird quarter 2006 includes a restated derivative position loss of $119.9million and a restated gain of $199.6 million related to the sale of a 35%interest in our San Cristobal project. The fourth quarter 2006 loss includes a$344.2 million derivative loss. (See Note 9 for a discussion of the metalsderivative positions)

The third and fourth quarters of 2005 include restatedderivative position losses of $79.7 million and $73.9 million respectively.

F-44

 

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

 

Thefollowing table summarizes the impact of the restatement on the historicalbalances reported on the Company’s consolidated balance sheets for the quartersended:

| ** **                         | ** ** | **September 30,  2005** | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **September 30,  2006** | ** ** |
|------------------------------------|------------|------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|
| Derivatives                        |       |                         |       |                     |       |                    |       |                         |       |   |   |   |   |
| As previously reported             |       |                         | $          | 7,179                    |       |                    | $          | 91,476                       |       | $ | 130,265 |   |   | $ | 177,224 |   |   |
| Adjustment                         |       |                         | 70,049     |                     |       | 208,937                 |       | 226,004                      |       |   | 300,506 |   |   |
| As restated                        |       |                         | 77,228     |                     |       | 300,413                 |       | 356,269                      |       |   | 477,730 |   |   |
| Total liabilities                  |       |                         |       |                     |       |                    |       |                         |       |   |   |   |   |
| As previously reported             |       |                         | $          | 415,701                  |       |                    | $          | 524,364                      |       | $ | 593,356 |   |   | $ | 692,992 |   |   |
| Adjustment                         |       |                         | 70,049     |                     |       | 208,937                 |       | 226,004                      |       |   | 300,506 |   |   |
| As restated                        |       |                         | 485,750    |                     |       | 733,301                 |       | 819,360                      |       |   | 993,498 |   |   |
| Minority interest in  subsidiaries |       |                         |       |                     |       |                    |       |                         |       |   |   |   |   |
| As previously reported             |       |                         | $          | 38                       |       |                    | $          | 41                           |       | $ | 41 |   |   | $ | 88,403 |   |   |
| Adjustment                         |       |                         | —     |                     |       | —                  |       | —                       |       |   | (69,527 | ) |   |
| As restated                        |       |                         | 38         |                     |       | 41                      |       | 41                           |       |   | 18,876 |   |   |
| Accumulated deficit                |       |                         |       |                     |       |                    |       |                         |       |   |   |   |   |
| As previously reported             |       |                         | $          | (117,430                 | )          |                    | $          | (225,269                     | )          | $ | (288,704 | ) |   | $ | (215,973 | ) |   |
| Adjustment                         |       |                         | (70,049    | )                        |       | (208,937                | )          | (226,004                     | )          |   | (230,979 | ) |   |
| As restated                        |       |                         | (187,479   | )                        |       | (434,206                | )          | (514,708                     | )          |   | (446,952 | ) |   |
| Total shareholders’  equity   |       |                         |       |                     |       |                    |       |                         |       |   |   |   |   |
| As previously reported             |       |                         | $          | 351,204                  |       |                    | $          | 288,003                      |       | $ | 377,278 |   |   | $ | 451,062 |   |   |
| Adjustment                         |       |                         | (70,049    | )                        |       | (208,937                | )          | (226,004                     | )          |   | (230,979 | ) |   |
| As restated                        |       |                         | 281,155    |                     |       | 79,066                  |       | 151,274                      |       |   | 220,083 |   |   |

 

F-45

 

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

 

Thefollowing table summarizes the impact of the restatement on the historicalamounts reported on the Company’s consolidated statement of operations:

| ** **                                              | ** ** | **For the Quarter**                                                  | ** ** | **For the Quarter** | ** ** | **For the Quarter** | ** ** | **For the Quarter** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **Ended Sept. 30,**                                                  | ** ** | **Ended March 31,** | ** ** | **Ended June 30,**  | ** ** | **Ended Sept. 30,** | ** ** |
| ** **                                              | ** ** | **2005**                                                                       | ** ** | **2006**                      | ** ** | **2006**                      | ** ** | **2006**                      | ** ** |
| ** **                                              | ** ** | **(amounts in thousands except per share data)** | ** ** |
| Gain (loss)—commodity  derivatives                 |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously reported                                  |       |                                                                           | $          | (9,640                        | )          |                          |       | $                             | (58,979    | ) |   |   | $ | (61,076 | ) |   |   | $ | (45,432 | ) |   |
| Adjustment                                              |       |                                                                           | (70,049    | )                             |       |                          | (113,839   | )                             |       |   | (17,067 | ) |   |   | (74,502 | ) |   |
| As restated                                             |       |                                                                           | (79,689    | )                             |       |                          | (172,818   | )                             |       |   | (78,143 | ) |   |   | (119,934 | ) |   |
| Total operating expenses                                |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously reported                                  |       |                                                                           | $          | (15,158                       | )          |                          |       | $                             | (65,772    | ) |   |   | $ | (68,391 | ) |   |   | $ | (51,741 | ) |   |
| Adjustment                                              |       |                                                                           | (70,049    | )                             |       |                          | (113,839   | )                             |       |   | (17,067 | ) |   |   | (74,502 | ) |   |
| As restated                                             |       |                                                                           | (85,207    | )                             |       |                          | (179,611   | )                             |       |   | (85,458 | ) |   |   | (126,243 | ) |   |
| Gain on sale of  interest in subsidiary                 |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously reported                                  |       |                                                                           | $          | —                        |       |                          |       | $                             | —     |   |   |   | $ | — |   |   |   | $ | 119,800 |   |   |
| Adjustment                                              |       |                                                                           | —     |                          |       |                          | —     |                          |       |   | — |   |   |   | 79,800 |   |   |
| As restated                                             |       |                                                                           | —     |                          |       |                          | —     |                          |       |   | — |   |   |   | 199,600 |   |   |
| Total other  income and expense                         |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously reported                                  |       |                                                                           | $          | 3,061                         |       |                          |       | $                             | 5,260      |   |   |   | $ | 5,009 |   |   |   | $ | 124,269 |   |   |
| Adjustment                                              |       |                                                                           | —     |                          |       |                          | —     |                          |       |   | — |   |   |   | 79,800 |   |   |
| As restated                                             |       |                                                                           | 3,061      |                          |       |                          | 5,260      |                          |       |   | 5,009 |   |   |   | 204,069 |   |   |
| Gain (loss)  before minority interest and income taxes  |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously reported                                  |       |                                                                           | $          | (12,097                       | )          |                          |       | $                             | (60,512    | ) |   |   | $ | (63,382 | ) |   |   | $ | 72,528 |   |   |
| Adjustment                                              |       |                                                                           | (70,049    | )                             |       |                          | (113,839   | )                             |       |   | (17,067 | ) |   |   | 5,298 |   |   |
| As restated                                             |       |                                                                           | (82,146    | )                             |       |                          | (174,351   | )                             |       |   | (80,449 | ) |   |   | 77,826 |   |   |
| Minority interest  in loss of consolidated subsidiaries |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously reported                                  |       |                                                                           | $          | 1                             |       |                          |       | $                             | (7         | ) |   |   | $ | — |   |   |   | $ | 257 |   |   |
| Adjustment                                              |       |                                                                           | —     |                          |       |                          | —     |                          |       |   | — |   |   |   | (10,273 | ) |   |
| As restated                                             |       |                                                                           | 1          |                          |       |                          | (7         | )                             |       |   | — |   |   |   | (10,016 | ) |   |
| Net income (loss)                                       |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously reported                                  |       |                                                                           | $          | (12,096                       | )          |                          |       | $                             | (60,573    | ) |   |   | $ | (63,435 | ) |   |   | $ | 72,731 |   |   |
| Adjustment                                              |       |                                                                           | (70,049    | )                             |       |                          | (113,839   | )                             |       |   | (17,067 | ) |   |   | (4,975 | ) |   |
| As restated                                             |       |                                                                           | (82,145    | )                             |       |                          | (174,412   | )                             |       |   | (80,502 | ) |   |   | 67,756 |   |   |
| Comprehensive income (loss)                             |       |                                                                           |       |                          |       |                          |       |                          |       |   |   |   |   |   |   |   |   |
| As previously  reported                                 |       |                                                                           | $          | (12,066                       | )          |                          |       | $                             | (59,688    | ) |   |   | $ | (63,358 | ) |   |   | $ | 72,171 |   |   |
| Adjustment                                              |       |                                                                           | (70,049    | )                             |       |                          | (113,839   | )                             |       |   | (17,067 | ) |   |   | (4,975 | ) |   |
| As restated                                             |       |                                                                           | (82,115    | )                             |       |                          | (173,527   | )                             |       |   | (80,425 | ) |   |   | 67,196 |   |   |

F-46

 

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**APEX SILVER MINES LIMITED An Exploration and Development Stage Company (Continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars)**

 

 

| Net income (loss) per  Ordinary Share—basic   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| As previously  reported                            |   |   | $      | (0.25  | )      |   |   | $      | (1.18  | )      |   |   | $      | (1.10  | )      |   |   | $ | 1.25 |   |   |
| Adjustment                                         |   |   | (1.43  | )      |   |   | (2.21  | )      |   |   | (0.30  | )      |   |   | (0.09  | )      |   |
| As restated                                        |   |   | (1.68  | )      |   |   | (3.39  | )      |   |   | (1.40  | )      |   |   | 1.16   |   |   |
| Net income (loss)  per Ordinary Share—diluted |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| As previously reported                             |   |   | $      | (0.25  | )      |   |   | $      | (1.18  | )      |   |   | $      | (1.10  | )      |   |   | $ | 1.23 |   |   |
| Adjustment                                         |   |   | (1.43  | )      |   |   | (2.21  | )      |   |   | (0.30  | )      |   |   | (0.08  | )      |   |
| As restated                                        |   |   | (1.68  | )      |   |   | (3.39  | )      |   |   | (1.40  | )      |   |   | 1.15   |   |   |

 

**20.**          SubsequentEvents

During February 2007 the Company borrowed anadditional $20 million against the $225 million San Cristobal project financefacility, bringing to $200 million the total borrowings against the facility.The funds are restricted to the development of the San Cristobal Project.

As a result of the restatement referred to in Note 2,the Company has breached certain representations and covenants regarding thepreparation of financial statements in accordance with U.S. GAAP as well ascertain minor technical covenants.  In March 2007the Company received waivers and confirmations from its lenders for thesepotential covenant violations and any related events of default.

During March 2007 the Company received a noticeof default by holders of at least 25% of the aggregate principal amount of eachof the 2.875% and 4.0% Convertible Notes Due 2024 because the Company did notfile its Form 10-K for the year ended 2006 on a timely basis. TheCompany does not believe that its failure to file its Form 10-Ktimely was in breach of a covenant. The Company filed the Form 10-Kwithin the 60 day cure period applicable to breaches of this covenant. Accordingly,without respect to whether there was a violation of covenant, no event ofdefault occurred.

F-47

 

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