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Apex Sits on Buried Treasure

The company has delayed production at a giant silver mine for years, and some investors are getting antsy.

It seems that some investors may be getting tired of waiting around for

Apex Silver Mines


to do some actual mining.

For almost a decade the company has promised riches when full-blownproduction starts at its San Cristobal project in southwestern Bolivia -- the world's largest undeveloped silver reserve. But the production never starts.

Investors appear to be noticing. Or maybe they're simply happy with recent gains. George Soros, an early backer of the company, has sold more than 25% of his stake, or some 1.33 million shares, in recent weeks, leaving him with a 10% stake. Others have sold recently as well. Paul Soros, an Apex director, has sold almost 200,000 shares, also just over 25% of his stake. Apex Chief Executive Keith Hulley has sold 42,500 shares, and Chief Financial Officer Mark Lettes has sold 9,800 shares.

Founder Thomas Kaplan, meanwhile, has transferred ownership of morethan 3 million shares to two family trusts. It is unknown whether thesetrusts still own the stock, some of which may be restricted. Each of two large transfers was just under 5% of the total company's outstanding stock, and the two separate trusts don't have to be shown as 5% owners in company fillings. The total transfer represented about 50% of Kaplan's holdings.

While the company is sitting on what it says is one of thelowest-production-cost silver mines, it says it's delaying productionindefinitely until silver prices move higher. But how high? "Higher than they are today," said Igor Levental, vice president of investor relations and corporate development at Apex. Mr. Levental wouldn't provide a price range for when the company would pull the trigger on production, but he did say that the production could require more than $400 million in capital, much of which would have to be raised.

While Apex's self-inflicted production delay could be a shrewd tactic to "make a killing for shareholders," as the company said, it also raises questions. In early filings and press releases, the company said it expected production to begin in 2001. Soon the date was moved to 2002. Then 2003.

Silver prices, at around $5.15 an ounce today, are currently at the high end of a $4 to $5 range of the last three years. Zinc prices today are at historic lows. According to a 2001


news story, Kaplan said to an audience at a Managed Funds Association conference, "We have a tremendous margin for being able to profit with silver at the long-term price of $5."

In a

USA Today

article dating back to February 1998, Kaplan said that if silver was just $5 per ounce, he could produce a 20% annualized return on capital. This estimate assumed that the mine contained 220 million ounces of silver reserves. Since 1998, this number has been revised upward to as high as 509 million ounces. It has since been revised down to 455 million ounces.

While Apex couldn't confirm the target price for silver to commenceproduction, one number it could confirm was the amount a rogue employeerecently embezzled from the company: $1.6 million.

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The embezzlement, coupled with the drilling delays, would probably be enough to shake investors' confidence in Apex if the year were 1997 and the Bre-X Mineral scandal were fresh on investors' minds. In that now-legendary scam, Bre-X executives claimed to have discovered the world's largest gold reserve, one that was purchased for a pittance. A report in 1997 exposed the fraud as the greatest "salting" scam of all time. (Salting is the practice of placing precious metals in ground samples to delude investors.) An executive from the company escaped to the Caymen Islands with millions made selling Bre-X stock.

But times have changed and some investors are still holding out hope, even if Soros' interest in the project appears to be waning. Large institutional investors such as Royce and Moore Capital, for instance, appear to be hanging on to their shares.

Unlike Bre-X, where sampling procedures were highly questionable, the methodologies used by Apex to test the site were witnessed and managed by Aker Kvaerner, a leading global provider of engineering and construction services. A representative from Kvaerner, familiar with the San Cristobal project, detailed the steps taken that would have prevented any funny business.

Apex expects to produce up to 25 million ounces of silver a year after it starts production. Delaying production can raise profitability but leverages the natural risks of mining. Many mining companies hedge or selloff future production in the forward markets to lower risk from volatile metals prices. More aggressive miners such as



don't hedge and even hang on to some output to sell at hoped-for higher prices in the future.

But Apex stands alone -- it can profitably produce silver at current prices but chooses not to, instead holding out for a bigger score later. According to the company, it has a win/win plan: If silver prices fall, high-cost competitors will close shop, leaving more business for Apex when prices come back. If silver prices rise, then delaying production will result in more money.

A few large investors and executives are selling some of their equity now. In doing so, they are effectively lowering their risk and benefiting from investors' current optimism toward silver mining. Such optimism has carried Apex stock to over $600 million in market cap -- before one ounce of silver production has occurred at San Cristobal or at any Apex property. Still, while Apex stock has risen 14.2% over the past 12 months, it has underperformed silver miners that are in production.

Pan American Silver


is up 55.3%, and

Hecla Mining


is up 88.9%.

Apex currently has cash and equivalents of $41.4 million, about 50employees and 39 "highly prospective property groups," according to thecompany.

Also, it stands to reason that the company would want to startproduction when silver prices are high. A higher price can mean windfall profits until more production capacity hits the market. A lower price can spell ruin for miners, as production costs remain largely fixed.

It was just such lower prices in the early 1990s that led to a bustcycle for silver mines and an opportunity for Apex founder Thomas Kaplan to snap up silver properties for a song. According to a 1998 article in

The Financial Times

that reads like a Hollywood screenplay, geologist Larry Buchanan discovered the San Cristobal site while camping high in the Andes and scouting out potential purchases for Kaplan. According to the article, Buchanan noticed at sundown that the mountains turned a "glorious orange," a signal that the mountains might be injected with a mineral worth mining. The samples he later took showed substantial traces of silver and zinc deposits.

The total purchase price of the massive silver and zinc reserve was"less than $5 million," according to the company.

Jonas Max Ferris is co-founder of, a fund research and analysis company, and partner in an investment advisor offering managed accounts in mutual funds. He welcomes column critiques, comments or baseless accusations at