Global X - Silver Miners ETF

In Q2, Apex reported income from operations of $204 million, including a $224 million mark-to-market gain on metal derivatives, and net income of $178 million, or $2.57 per diluted share. The quarter also included $53 million of deferred revenues not recognized because title and risk had not passed, plus a $63 million gain from the sale of the deferred payment obligation to Sumitomo. San Cristóbal averaged 34,000 tons per day in the quarter, about 85% of designed capacity, and produced 84,000 tons of zinc concentrates and 23,000 tons of lead concentrates, resulting in payable metal of 4.2 million ounces of silver, 42,000 tons of zinc, and 15,000 tons of lead. Management guided to about 15 million payable ounces of silver for 2008, 190,000 tons of zinc and 60,000 tons of lead, with full-year cash cost guidance of $0.50 to $0.75 per ounce of silver or $0.15 to $0.20 per pound of zinc. Cash, cash equivalents and investments were about $214 million to $215 million at June 30, with about $90 million to $92 million unrestricted and readily available.

Jeffrey Clevenger said the quarter showed continued positive ramp-up momentum at San Cristóbal, with tons mined and milled rising and the mill proving it can run above current levels during the 14-day throughput test. He emphasized that the main operational focus has shifted from throughput to recoveries, with a new control system for reagent additions expected to help. At the same time, his tone was cautious and urgent on financing, repeatedly stressing the short-term liquidity problem and the need to resolve 2008-2009 funding needs.

Gerald Malys said revenues were pressured by lower zinc and lead prices, with zinc down about 20% and lead down 40% versus Q1, plus about $11 million of negative price adjustments on prior shipments. He highlighted higher-than-expected costs from fuel, power, transportation, steel-based inputs, and local inflation in Bolivia, including a roughly 10% devaluation of the U.S. dollar against the boliviano and inflation running 12% to 15% annually. He also explained the balance sheet and funding picture: $214 million to $215 million of cash, cash equivalents and investments at June 30, only $92 million unrestricted, $112 million of hedge settlements paid through June, about $115 million of estimated derivative settlements still due for the rest of the year, and a new $50 million unsecured line of credit from a Sumitomo subsidiary with an initial $15 million draw.

Analysts focused first on the $53 million of deferred revenue, and management clarified that those shipments were not booked in Q2 because title and risk of loss had not yet passed, but they expect the sales to be recorded in Q3 as the cargoes arrive. Questions also centered on rising cash contributions, where Clevenger said the need was roughly three-quarters due to lower metal prices and one-quarter due to higher costs. On operations, management said the silica issue that forced one shipment to be rerouted was not material and believed it had been resolved, while also noting that pricing comparisons were distorted by prior-quarter settlement adjustments and that future realizations would depend on settlement-month prices.