UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
ý |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2002
OR
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-13627
APEX SILVER MINES LIMITED
(Exact Name of Registrant as Specified in its Charter)
|
Cayman Islands, British West Indies |
|
Not Applicable |
|
(State of Incorporation or Organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
Walker House |
|
Not Applicable |
|
(Address of principal executive office) |
|
(Zip Code) |
(345) 949-0050
(Registrant’s telephone number, including area code)
Securities registered pursuant 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 registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 28, 2002, was approximately $283,000,000, based on the closing price of the Ordinary Shares on the American Stock Exchange of $14.50 per share.
The number of Ordinary Shares outstanding as of March 26, 2003 was 36,393,547.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2003 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report on Form 10-K.
PART I
ITEMS 1 AND 2: BUSINESS AND PROPERTIES
Apex Silver Mines Limited, organized under the laws of the Cayman Islands in 1996, is engaged in the exploration and development of silver properties in South America, Mexico, Central America and central Asia. We have a large diversified portfolio of privately owned and controlled silver exploration properties. We have rights to or control over 100 silver and other mineral exploration holdings, divided into 34 property groups, located in or near the traditional silver producing regions of Bolivia, Mexico, Peru, El Salvador and Kyrgystan. Our exploration efforts have produced our first development property, our 100% owned San Cristobal Project located in southern Bolivia. San Cristobal’s proven and probable reserves total 219 million tonnes of ore grading 2.08 ounces per tonne of silver, 1.61% zinc and 0.59% lead, containing 454 million ounces of silver, 7.8 billion pounds of zinc and 2.9 billion pounds of lead. None of our properties is in production, and consequently we have no operating income or cash flow.
As used herein, Apex Limited, our company, we and our refer collectively to Apex Silver Mines Limited, its predecessors, subsidiaries and affiliates or to one or more of them as the context may require.
All currency references are to United States dollars, unless otherwise indicated.
AVAILABLE INFORMATION
We make available, free of charge through our Internet web site 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 filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
BUSINESS STRATEGY
Our company is one of a limited number of mining companies which focus on silver exploration, development and production. Our strategy is to capitalize on the San Cristobal Project and our sizeable portfolio of silver exploration properties in order to achieve long-term profits and growth and to enhance shareholder value.
Although our primary focus is on mining silver, we intend to produce other metals associated with our silver deposits if economically practicable, including zinc, lead, copper and gold. We are managed by a team of seasoned mining professionals with significant experience in the identification and exploration of mineral properties, as well as the construction, development and operation of large scale, open pit and underground, precious and base metals mining operations.
The principal elements of our business strategy are to:
• proceed to develop the San Cristobal Project into a large scale open pit mining operation when metals markets improve;
• continue to explore and develop those properties which we believe are most likely to contain significant amounts of silver and divesting those properties that are not of continuing interest; and
• identify and acquire additional mining and mineral properties that we believe contain significant amounts of silver or have exploration potential.
SAN CRISTOBAL PROJECT
Our 100% owned San Cristobal Project is located in the San Cristobal mining district of the Potosi Department in southern Bolivia, a region that has historically produced a significant portion of the world’s silver supply. San Cristobal is located in the Bolivian Altiplano in the Andes mountains, approximately 500 kilometers south of the capital city of La Paz. The project is accessible by a gravel road from the international railroad at Rio Grande, approximately 50 kilometers to the north, and from the town of Uyuni, a former railroad maintenance town,
approximately 100 kilometers to the northeast. The railroad begins at the Chilean port of Antofagasta, approximately 460 kilometers southwest of San Cristobal, and continues north to La Paz.
The San Cristobal property is comprised of certain mining concessions which are part of a large block of concessions covering approximately 480,000 acres which we own or control. In addition, we have acquired rights to approximately 200,000 acres for transportation and power lines. Under these mining concessions, our company has the right to carry out exploration, mining, processing and marketing of all mineral substances located within the concessions, and to use the water found on the concessions. In order to maintain our rights to these concessions, we must make annual mining patent payments to the Bolivian government.
Our San Cristobal property is largely unexploited. The relatively small, shut down Toldos mine, located approximately 1.5 kilometers from the proposed San Cristobal open pit mine, was mined by underground block caving and open pit mining between 1985 and 1995. At present, there is no significant mining or processing plant or equipment on the San Cristobal property.
We believe that our San Cristobal property contains one of the largest known open pit silver-lead-zinc deposits in the world. Additional drilling in 1998 doubled proven and probable reserves at San Cristobal, which total 219 million tonnes of ore grading 2.08 ounces per tonne of silver, 1.61% zinc and 0.59% lead. These reserves contain 454 million ounces of silver, 7.8 billion pounds of zinc and 2.9 billion pounds of lead. The full dimensions of the San Cristobal deposit have not yet been determined; mineralized material extends outward from the identified ore body in most directions as well as to depths below 260 meters.
In September 1999, we completed a detailed feasibility study on San Cristobal. The feasibility study was prepared by Kvaerner, E&C Metals Division, an independent engineering firm. Based on the feasibility study, we anticipate developing a low cost, open pit silver-zinc mine at San Cristobal with a low strip ratio of approximately 1.8:1 (tonnes of waste per tonne of ore), including pre-stripping. Under the study’s mine plan, we would mine the deposit at a rate of approximately 40,000 tonnes of ore per day and process the ore by flotation. We would transport mined ore to the primary crusher by truck and then convey the crushed ore to a mill and flotation plant. The ore would be ground in semi-autogenous (SAG) and ball mill circuits, and then processed by selective flotation to produce separate zinc-silver and lead-silver concentrates and lesser amounts of silver bulk concentrates. We expect to transport the filtered concentrates by road or railroad to a port in Chile, and then by ocean vessel to smelters and refineries in Asia, the Americas and Europe.
In September 2000, we announced that positive metallurgical and operational improvements occurring subsequent to completion of the San Cristobal feasibility study had further enhanced the project economics. Once commercial production is attained, we believe the operation should produce an annual average of approximately 21 million contained ounces of silver, 478 million contained pounds of zinc and 155 million contained pounds of lead over a mine life of approximately 16 years, with higher production anticipated in the first five years. Based on the geology of San Cristobal, and the drilling, analysis and proven and probable reserves identified to date, we believe that the San Cristobal Project could be extended in life or increased in scale.
Based on estimated revisions made during 2000 to the September 1999 feasibility study for the San Cristobal project, which assumes contract mining, we forecast capital costs for construction to total approximately $435 million, net of approximately $60 million in expected tax credits, including approximately $25 million which will be recovered against our future Bolivian income taxes after commencement of production. We have spent over $95 million in project capital at San Cristobal, including approximately $33 million in construction costs, through December 31, 2002. We have obtained operating permits for construction and operation of the mine and processing facilities. Unless there is an improvement in the metals markets in 2003, we expect to limit project spending during 2003 to approximately $2 million for continuing work on our transportation, port and power arrangements and payment of holding and permitting costs. When metals markets improve, we expect to complete detailed engineering and incorporate into our feasibility study any changes deriving from our ultimate infrastructure arrangements, which may result in an increase to our forecast construction capital and working capital requirements.
Since completion of the feasibility study, we have continued negotiations related to key infrastructure items including power for the project and the port facilities. In September 2001, we signed a letter of intent with Nor Oeste Pacifico Generacion de Energia Limitada (“NOPEL”) to provide power for San Cristobal, at a price consistent with
2
the feasibility study assumptions. NOPEL is the power generating and transmission subsidiary for the $750 million GasAtacama project, consisting of a natural gas pipeline and a 740-megawatt generating station at Mejillones, Chile. The acquisition of power from NOPEL is our preferred alternative. We are conferring with the various Bolivian government agencies responsible for executing power arrangements involving the import and export of energy. With large natural gas discoveries having taken place in Bolivia since completion of the feasibility study, energy is becoming a fast growing part of the Bolivian economy, and we continue to receive alternative proposals for the usage of domestic electricity. When power arrangements have been completed, we can proceed to obtain the necessary permits. We are also working on issues related to transportation of concentrates from the project by road or railroad to the Chilean ports of Tocopilla or Meijillones, respectively.
Geology
The San Cristobal Project occupies the central portion of a depression associated with volcanism of Miocene age. The 4 kilometer diameter depression is filled with fine to coarse grained volcanoclastic sedimentary rocks (including shale, conglomerate, sandstone, landslide debris and talus). During the late Miocene Period, after sedimentation had nearly filled the depression, a series of dacite and andesite porphyry sills and domes intruded the volcanoclastic rocks. Disseminated and stockwork silver-lead-zinc mineralization formed locally both within the volcanoclastic sediments and in the intrusions themselves. The disseminated mineralization was not mined in the past except at the nearby Toldos mine. Historic production on the San Cristobal property was from veins.
The two largest areas of mineralization, the Jayula and Tesorera deposits, initially were drilled separately. Our additional drilling in 1998, which more than doubled proven and probable reserves, merged the Jayula and Tesorera deposits into one large deposit, now called the San Cristobal orebody.
Mineralization at the Jayula portion of the San Cristobal orebody is dominated by stockwork consisting of iron oxides, clays, galena, barite, sphalerite, pyrite, tetrahedrite and acanthite. The veins of the stockwork are most abundant in the dacite sill, near its contact with the volcanoclastic sedimentary rocks. At the Tesorera portion of the orebody, mineralization is characterized by galena, sphalerite and acanthite, disseminated in the volcanoclastic sedimentary rocks. This mineralization is most prevalent in the coarser grained beds, usually conglomerates and coarse sandstones. To the extent that ore grade mineralization is confined to the sedimentary beds, the mineral zones are both stratiform and strata-bound, forming tabular bodies.
Oxidation of the mineralized zone at San Cristobal has occurred to depths averaging 40 to 75 meters and affects approximately 4% of the reserves. In this oxide zone, zinc has been almost completely leached out by groundwater; silver values, however, are locally enhanced due to secondary enrichment processes. In the oxide zone, the dominant minerals are iron oxides, galena, clays, native silver and secondary acanthite.
Reserves
We have completed approximately 169,400 meters of reverse circulation and approximately 20,100 meters of diamond drilling at San Cristobal. This drilling indicates that the mineralization is present over an area of 1,500 meters by 1,500 meters. The ore deposit defined by this drilling is open at depth and in several lateral directions.
Proven and probable reserves were recalculated in March 2003 using a $4.40 net smelter return per tonne cutoff value and reduced market price assumptions of $4.64 per ounce of silver, $0.42 per pound of zinc and $0.21 per pound of lead, reflecting the three year rolling average prices through December 2002. The following tables show our proven and probable reserves of silver, zinc and lead for sulfide ore and oxide ore at the San Cristobal Project, which were calculated by Mine Reserve Associates, Inc.
3
|
|
|
Proven and Probable Reserves—San Cristobal Project |
|
||||||||||||
|
|
|
|
|
Average Grade |
|
Contained Metals (1) |
|
||||||||
|
|
|
Tonnes |
|
Silver |
|
Zinc |
|
Lead |
|
Silver |
|
Zinc |
|
Lead |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sulfide Ore |
|
209,306 |
|
1.979 |
|
1.73 |
|
0.58 |
|
414,300 |
|
3,516 |
|
1,235 |
|
|
Oxide Ore |
|
9,413 |
|
4.268 |
|
0.10 |
|
0.61 |
|
41,500 |
|
9 |
|
58 |
|
(1) Amounts are shown as contained metals in ore and therefore do not reflect losses in the recovery process. Sulfide ore reserves are expected to have an approximate average recovery of 75% for silver, 92% for zinc and 87% for lead. Oxide ore reserves are expected to have an average recovery of 60% for silver and 50% for lead.
In addition to proven and probable reserves, Mine Reserves Associates has estimated 46 million tonnes of mineralized material at an average grade of 2.90 ounces of silver per tonne, 1.04% zinc, and 0.58% lead.
EXPLORATION
Other than San Cristobal, we have a portfolio of silver properties in Bolivia, Mexico, Peru, El Salvador and Central Asia totaling approximately 699,000 acres which contain potential for silver mineralization or other significant exploration potential. These mineral properties consist of:
• mining concessions which we have acquired, or applied for directly;
• mining concessions which we have leased, typically with an option to purchase; and
• mining concessions which we have agreed to explore and develop and, if feasible, bring into production, in concert with joint venture partners.
We generally seek to structure our acquisitions of mineral rights so that individual properties can be optioned for exploration and subsequently acquired at reasonable cost if justified by exploration results. Properties which we determine do not warrant further exploration or development expenditures are divested, typically without further financial obligation to us. Although we believe that our exploration properties may contain significant silver and/or other mineralization, our analysis of most of these properties is at a preliminary stage. The activities performed to date at these properties often have involved the analysis of data from previous exploration efforts by others, supplemented by our own exploration programs.
Our exploration holdings consist primarily of ownership interests, leases, options and joint ventures, all in varying percentages. The distribution of these holdings is summarized in the table below. Acreage amounts shown below represent a 100% interest.
Location and Distribution of Exploration Properties
|
Country |
|
Number of |
|
Acreage |
|
|
|
|
|
|
|
|
|
Mexico and Central America |
|
|
|
|
|
|
Mexico |
|
6 |
|
90,000 |
|
|
El Salvador |
|
1 |
|
10,000 |
|
|
Subtotal |
|
7 |
|
100,000 |
|
|
South America |
|
|
|
|
|
|
Bolivia |
|
12 |
|
375,000 |
|
|
Peru |
|
13 |
|
60,000 |
|
|
Subtotal |
|
25 |
|
435,000 |
|
|
Central Asia |
|
2 |
|
164,000 |
|
|
Total |
|
34 |
|
699,000 |
|
4
We are continuing to develop the structure of SilEx Limited, a subsidiary into which we may consolidate most of our exploration properties outside the San Cristobal District. If we elect to proceed with SilEx, SilEx may become an independently funded exploration subsidiary focused on silver, gold and precious metal deposits and polymetallic deposits containing precious metals.
Mexico and Central America
Platosa-Saltillera
In August 2002, our joint venture partners announced high grade mineralization at Platosa, based on 33 out of 62 diamond drill holes in the 35,000 acre Platosa-Saltillera property. The Platosa-Saltillerra property is located about 5 kilometers northwest of the town of Bermejillo in Durango State in northern Mexico. Drilling has identified three massive sulfide mantos at Platosa. The property is located approximately 1.5 kilometers from a paved highway, railroad and natural gas and powerlines. We have a 49% interest in the joint venture and we have the right to acquire an additional 2% interest in the joint venture and become the operator of the joint venture upon completion of a prefeasibility study.
To date, five diamond drill holes have been drilled on the Saltillera portion of the property. Drilling at Saltillera has found geologic indications that massive sulfides may exist at depths greater than those drilled. However, because mineralization is shallower at Platosa, our exploration efforts have been concentrated there.
El Zapote
We own 60% of the 10,400 acre El Zapote mining concession in El Salvador from Intrepid Minerals Corporation and have the right to acquire an additional 15% interest if we complete a bankable feasibility study for development of a mine on the property. To date, we have drilled nine reverse circulation and fourteen diamond holes at El Zapote and have identified two primary target areas for silver, zinc and gold bearing mineralization, Cerro Colorado III and San Casimiro, about 500 meters apart. Earlier drilling revealed that Cerro Colorado III had the potential for hosting a silver-lead-zinc deposit, and additional drilling completed in 2002 confirms the values and thickness of mineralization found in earlier drilling. Drilling in 2002 and continuing into 2003 is planned to test the ground north of Cerro Colorado III to determine if mineralization is continuous to San Casimiro, where surface and underground samples indicate good silver values are also present.
Other Mineral Properties
Mexico is the largest producer of silver in the world. In addition to the core properties described above, we have holdings in the historic Zacatecas mining district as well as a silver property in Guerrero State.
South America
Pulacayo
We are evaluating the 11,500 acre Pulacayo property located in the Potasi Department of Southern Bolivia approximately 140 kilometers northeast of the San Cristobal Project. We have leased the Pulacayo concessions from the Pulacayo Cooperatiave. To date, we have drilled thirteen core holes into a sheeted vein zone at the site of a former large underground silver mine, of which six encountered mineralization. We plan to continue our evaluation of the Pulacayo sheeted vein target in 2003. The collected data are being evaluated and we currently are continuing our metallurgical studies.
Other Mineral Properties
Our holdings, joint ventures and options in Bolivia, other than the San Cristobal Project, total approximately 370,000 acres, including the Pulacayo property in the historic Pulacayo silver mining district. We continue to seek additional silver exploration opportunities in Bolivia.
5
We have an exploration office in Lima and are actively exploring for silver in Peru, the world’s second largest silver producing country. We have acquired the mineral rights to several historic silver districts in the northeastern and southeastern parts of the country.
Central Asia
In 2002, we acquired two mineral prospecting licenses covering approximately 164,000 acres of exploration properties in Kyrghyzstan.
6
RISK FACTORS
Investors in our company should consider carefully, in addition to the other information contained in, or incorporated by reference into, this report, the following risk factors:
No Production History—we have not mined any silver or other metals.
Our company has no history of producing silver or other metals. The development of our economically feasible properties will require the construction or rehabilitation and operation of mines, processing plants and related infrastructure. As a result, we are subject to all of the risks associated with establishing new mining operations and business enterprises. There can be no assurance that we will successfully establish mining operations or profitably produce silver or other metals at any of our properties.
History of Losses—we expect losses to continue for at least the next three years.
As an exploration and development company that has no production history, we have incurred losses since our inception, and we expect to continue to incur additional losses for at least the next three years. As of December 31, 2002, we had an accumulated deficit of $72.8 million. There can be no assurance that we will achieve or sustain profitability in the future.
Potential Inaccuracy of the Reserves and Other Mineralization Estimates.
Unless otherwise indicated, reserves and other mineralization figures presented in our filings with the Securities and Exchange Commission, press releases and other public statements that may be made from time to time are based on estimates of contained silver and other metals made by independent geologists or our own personnel. These estimates are imprecise and depend on geological interpretation and statistical inferences drawn from drilling and sampling which may prove to be unreliable. There can be no assurance that:
• these estimates will be accurate;
• reserves and other mineralization figures will be accurate; or
• reserves or mineralization could be mined and processed profitably.
Since we have not commenced production on any of our properties, reserves and other mineralization estimates may require adjustments or downward revisions based on actual production experience. Extended declines in market prices for silver, zinc and lead may render portions of our reserves uneconomic and result in reduced reported reserves. Any material reductions in estimates of our reserves and other mineralization, or of our ability to extract these reserves or mineralization, could have a material adverse effect on our results of operations and financial condition.
We have not established the presence of any proven or probable reserves at any of our mineral properties other than the San Cristobal Project. There can be no assurance that subsequent testing or future feasibility studies will establish additional reserves at our properties. The failure to establish additional reserves could restrict our ability to successfully implement our strategies for long term growth beyond the San Cristobal Project.
San Cristobal Project Risks—the San Cristobal Project is subject to delays in commencement and completion and we may be unable to achieve anticipated production volume or manage cost increases.
Completion of the development of the San Cristobal Project is subject to various factors, including improvement in silver and zinc prices, the availability and timing of acceptable arrangements for financing, power, transportation, construction, contract mining and smelting, or the availability, terms, conditions and timing of required government approvals, including approvals required for the importation of power from a Chilean provider, our preferred alternative. Currently, silver and zinc prices are the primary factor delaying the development of San Cristobal. The lack of availability on acceptable terms or the delay in any one or more of the other items listed above could also delay or prevent the development of San Cristobal. There can be no assurance:
7
• when or whether the development of the San Cristobal Project will be commenced or completed;
• whether the resulting operations will achieve the anticipated production volume; or
• that the construction costs and ongoing operating costs associated with the development of the San Cristobal Project will not be higher than anticipated.
If the actual cost to complete the development of the San Cristobal Project is significantly higher than expected, there can be no assurance that we will have enough funds to cover these costs or that we would be able to obtain alternative sources of financing to cover these costs. Unexpected cost increases, continued low silver and zinc prices or the failure to obtain necessary project financing on acceptable terms to commence or complete the development of the San Cristobal Project on a timely basis, or to achieve anticipated production capacity, could have a material adverse effect on our future results of operations and financial condition.
The successful development of the San Cristobal Project is also subject to the other risk factors described herein.
Dependence on a Single Mining Project—our principal asset is the San Cristobal Project.
We anticipate that the majority, if not all, of any revenues for the next few years and beyond will be derived from the sale of metals mined at the San Cristobal Project. Therefore, if we are unable to complete and successfully mine the San Cristobal Project, our ability to generate revenue and profits would be materially adversely affected.
Management of Growth—our success will depend on our ability to manage our growth.
We anticipate that as we bring our mineral properties into production and as we acquire additional mineral rights, we will experience significant growth in our operations. We expect this growth to create new positions and responsibilities for management personnel and increase demands on our operating and financial systems. There can be no assurance that we will successfully meet these demands and manage our anticipated growth.
Volatility of Metals Prices—our profitability will be affected by changes in the prices of metals.
Our profitability and 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 volatile and are affected by numerous factors beyond our control, including:
• global or regional consumption patterns;
• supply of, and demand for, silver, zinc, lead and other metals;
• speculative activities;
• expectations for inflation; and
• political and economic conditions.
The aggregate effect of these factors on metals prices is impossible for our company to predict. Decreases in metals prices have delayed, and could in the future adversely affect, our ability to finance the development of the San Cristobal Project and the exploration and development of our other properties, which would have a material adverse effect on our financial condition and results of operations. There can be no assurance that metals prices will improve.
The following table sets forth for the periods indicated (1) the Comex nearby active silver futures contract’s high and low price of silver in U.S. dollars per troy ounce and (2) the London Metals Exchange’s high and low settlement prices of zinc and lead in U.S. dollars per pound.
8
|
|
|
Silver |
|
Zinc |
|
Lead |
|
||||||
|
Year |
|
High |
|
Low |
|||||||||